Rathbone's Carl Stick: How I'm navigating choppy Brexit waters, August 2018

Rathbone Income, which is on the Chelsea Core Selection list, has a concentrated portfolio of high-quality UK stocks. They have been hand-picked by manager Carl Stick for their conservative management teams, straightforward business models, low levels of debt and ability to grow their income. We talk to Carl about where he is finding opportunities amid Brexit uncertainty.

GlaxoSmithKline and AstraZeneca are two of your largest holdings. Both have announced that they are 'stockpiling' their products in the event of a hard Brexit. Why is this?

A vast number of European pharmaceutical companies are mindful that, in the case of a hard Brexit, there could be some short-term implications. Legislation regarding which drugs are passed is currently down to EU authorities and, if the UK were to leave, our regulatory system will become different to the one used in Europe. GlaxoSmithKline and AstraZeneca are simply being mindful of this situation and building up inventories of stock, to ensure that every potential outcome is covered.

I actually don't think that this is the biggest issue investors should be focusing on when it comes to these companies. To my mind, I am keeping a keen eye on the strength of the dollar, and whether or not any new products get approved by the Food and Drug Administration. A hard Brexit is one risk among many. If we don't end up striking a deal, there are other sectors in the forefront of my mind ahead of the pharmaceutical sector which are likely to feel more of an impact. In fact, every business is going to be affected one way or another.

Which sectors are most likely to be affected?

It is mostly likely to be the UK domestic plays, of which we have allocated around 13% of the portfolio. For us, this includes consumer-facing businesses such as pubs and restaurants. A recent report from the International Monetary Fund suggests that, if we don't get a deal, 4% could be wiped off of our GDP over the next five to 10 years. Investors simply don't like UK stocks at the moment and that's why they're cheap. But are we at a point where prices reflect the current risks? Not necessarily – I don't think we're pricing in a hard Brexit. Even Bank of England governor Mark Carney's inflation predictions are based on an orderly exit, but that's not a 'no deal'.

Given this backdrop, how cautiously positioned are you compared to previous years?

It's a challenging environment at the moment. In market environments like we had at the start of the year – when investors were incredibly comfortable, volatility was low and markets had been moving gently higher – we tend to underperform because I do err on the side of caution – it is my nature and what investors expect from the fund. When investors are more worried and there is more volatility, we have tended to outperform; and the latter is the sort of environment we are in at the moment. We believe we will continue to outperform if volatility remains or increases; indeed, we have seen improvement in the relative performance of the fund over the last six months. This is great news, because the fund is doing what I expect and intend it to do.

If investors hold a similar view, they may well find the fund attractive. If they have a very optimistic view on the world, perhaps we are too defensive for them. But for me it's about generating an income, maintaining capital and growing dividends – and generally sticking to safety first.

Which area of the market do you find most attractive at the moment?

Notwithstanding global economic concerns, one area we find interesting is the domestic US economy, which we're trying to target through our underlying revenue exposure.

Trump is not exactly flavour of the month, nor is he my favourite person either, but we do believe that some domestic US stocks could benefit from some of his policies. Examples of UK stocks which have exposure to the US economy include insurance provider Hiscox, which is benefiting from a terrific stream of growth from the US. Software business Sage is in a similar boat, as it sells a lot of its products to small and medium-sized businesses in the US.

There are opportunities, but I think it pays to tread carefully and, of course, carry out due diligence.

It has been proposed that Rathbone Blue Chip Income and Growth fund is merged into your Rathbone Income fund. Can you tell us more?

We’ve always taken a pragmatic approach to our offering and regularly review our funds to ensure they meet the requirements of investors. While the Rathbone Income fund has always been attractive to a broad investor base, the Rathbone Blue Chip Income and Growth fund has failed to resonate, in our view, because there has been too little differentiation between the two funds.

By merging both funds, which have similar investment objectives, investors should see benefits in terms of economies of scale, lower expenses and greater opportunity for objectives to be achieved through access to a wider asset class.

Alan Dobbie, fund manager of the Rathbone Blue Chip Income and Growth fund, will join myself as a co-manager on the Rathbone Income fund.

Alan and I have worked together on the income team for over 10 years. Alan will now bring his expertise in stock selection and portfolio construction to our largest income fund.

Published on 07/08/2018