RATHBONE INCOME: £712m fund has ‘laser focus’ to deliver goods

Investment fund Rathbone Income is set up to deliver an attractive stream of dividends to investors. It hasn’t disappointed, producing income growth in 28 of the past 30 years – the two exceptions being in the aftermath of the financial crisis in 2009 and in the teeth of the pandemic in 2020.

It is a record that managers Carl Stick and Alan Dobbie are mighty proud of. ‘For us, our laser focus is on the end user, our investors,’ says Stick, who has had his hand on the fund’s tiller for more than 22 years.

‘Part of that focus is centred around delivering them a pay rise every year by way of a higher dividend payment. It’s what they want from the fund.’

The £708 million fund provides investors with an annual income equivalent to around 4.6 per cent. In the last financial year – to the end of September 2022 – it paid dividends totalling just short of 42p a unit.

In the current year, Dobbie expects a ‘low to mid-single digit increase’ in income – it has already paid an interim dividend of 15p. This follows increases in the previous two financial years of 18 (2021) and 10 per cent.

‘We are confident of providing our investors with dividend growth,’ says Dobbie. ‘This is despite headwinds in the shape of some companies being more cautious about dividend payments in light of the uncertain economic backdrop.’

The strength of the pound against the US dollar has also reduced the dividends of some companies listed on the UK stock market that pay them in dollars, not pounds.

The fund’s emphasis on income means the managers try to plan the stream of dividend payments they will receive over the next two years – not just how much but when the income will come in.

The portfolio comprises 42 stocks and is full of household names, most renowned for being dividend friendly. It is primarily built around UK-listed companies.

Among the fund’s biggest holdings are stakes in BP – which increased its quarterly dividend a few days ago despite a downturn in revenues – and insurer Legal & General.

The managers are keen to mitigate risk. This means they will only take positions in good businesses that are well financed – and will not overpay for a stock they like. ‘You can buy good businesses all the time,’ says Dobbie, ‘but the key is to buy at the right price.’

Recent new holdings have been taken in Unilever and healthcare company GSK – while disposals include a stake in Dechra Pharmaceuticals which it had held for more than 20 years.

The sale was made ahead of the company’s takeover by Swedish-based private equity giant EQT. Although the fund’s dividend record will be attractive for some investors, its overall return (the combination of income and capital gain) is not as compelling.

Over the past five years, it has slightly underperformed its benchmark, the FTSE All-Share Index, registering a total return of 17 per cent against 18 per cent for the market. Stick is confident, however, that outperformance will follow if sentiment in the UK market shifts from negative to positive. ‘The UK stock market is cheap in absolute terms,’ says Dobbie. ‘It is also cheap on a relative basis, especially when compared to the US market.’

Annual fund charges are reasonable at 0.78 per cent. Wealth platform Interactive Investor includes UK equity income funds City of London, Man Income Professional and Vanguard FTSE UK Equity Income Index on its list of preferred investments.