The fund’s value tilt should mean the manager avoids overpaying for quality, and provides a measure of downside protection. This aspect of safety should be further reinforced by the fund’s low three-year beta of 0.68. A low turnover of about 20 per cent also indicates a measured approach.
Rathbone Income fell significantly during the financial crisis. Mr Stick explains: “Business models that worked well before the crisis didn’t work well in it. Some of the stocks we had bought had become over-valued, or had taken on debt.”
Subsequently, the fund has performed strongly, with Mr Stick having learned from the experience and tightened up risk management. He stresses three risk factors at the stock level:
• Business risk, or the robustness of the company’s business model, the quality of its management, and so on.
• Price risk, or how much a stock is trading at relative to the team’s estimation of its intrinsic value.
• Financial risk, or how leveraged a business is.
[Mr Stick says he conceives risk as being that of permanent capital loss rather than volatility. I like this: volatility is a statistician’s measure. What matters to investors is losing their cash for good. Indeed, volatility can just give an active fund manager good entry and exit options.]
An additional risk factor is the fund’s high smid (small- and mid-cap) exposure. According to Rathbone’s data for October, smids are 27.8 per cent of the portfolio. Morningstar puts this as high as 45 per cent. Mr Stick says the team is aware of the increased price risk from smids, and the portfolio is monitored for liquidity.
[“We always ask ‘Where’s the exit?’ when we buy a stock lower down the cap spectrum,” Mr Stick adds. “Back in 2009, we bought a new issuance from Telford Homes at about 0.5 to 0.6 of book value. It came back to the market three years later, with an issuance at 1.6 times. We still think it’s a fantastic company, but we didn’t participate that time, on valuation grounds.”]
With 45 stocks, all positions should count. There is little room for a tail. That, of course, can be good or bad: the impact of a single stock blow-up will be far more pronounced.
Fund Mole will be writing once a month on particular funds. He can be contacted at firstname.lastname@example.org.