'Why We're Still Cautious on Income'

VIDEO: Rathbones Income fund manager Carl Stick talks about investing for income through a pandemic

Holly Black 13 September, 2021 | 12:39PM
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Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Carl Stick. He's from the Rathbone Income Fund. Hello.

Carl Stick: Good afternoon. How are you doing?

Black: I'm good. I'm going to start with a really easy question for you and that is what does the fund do? 

Stick: The fund is, in the active income sector, we pride ourselves on a very, very strong track record of dividend growth year after year, 26 out of the last 28 years. We're seeking to generate that dividend return to feed through into maximising total return and our record over long term has been pretty strong. 

Black: And that all sounds like a pretty simple objective until you throw in a pandemic. So what's it been like to be an income investor over the past year or so?

Stick: It's been extraordinary. Last year was difficult. The dividend yield on the FTSE All Share was down 41%. The income you're getting from those shares, that is particularly hard. The headlines were poor. You had big, big sectors, like the oil sector, slashing their dividends, that has real ramifications for investors across the U.K. This year has been different, you know, there has been a recovery. Economically, things have picked up, prices have picked up, markets have remained remarkably strong. And the dividend story has certainly improved. We're looking at chalk and cheese this year, compared to last year, there's been quite a dramatic change in the field of investing for income in the U.K. market.

Black: How has that recovery been in regard to expectations? Has it bounced back better or not as strongly as you'd hoped?

Stick: I'm not sure what the expectations were, I think people were expecting a bounce back. I mean what's taken people by surprise is the big sectors that generate that income growth the miners, the oil sector, I think what surprise people is the strength of the underlying commodity prices. The oil sector last year, you had oil derivatives go into negative territory, the headlines were extraordinary. We had very ill-disciplined actions coming out of OPEC. So people were worried where the oil price was going, but this year the oil price has been up at $60, $70. And that has a direct feed through into profitability. In the mining sector, the iron ore price very, very high. So it's meant that profits this year have been so strong, that's fed through into some quite extraordinary gains in terms of cash earnings. And that feeds through into those strong gains in terms of dividend and when you transfer that across to the U.K. market as a whole. These are big increases in dividends.

Black: So what's the outlook from here? Are you expecting full steam ahead and more recovery? Or is it still a bit, you know, caution in the market?

Stick: I think we remain cautious. But there's definitely greater optimism in 2021 than there was in 2020. I mean, we've seen a recovery we've seen I mean, COVID is still with us. But there is sort of, there remains optimism that we'll get through this. We know life has changed. And we know we have to live with the variants. But you know, we are starting to see a pickup. As far as equity income is concerned. Yes, there's the massive benefit of these big dividend increases from those big sectors. That is a bonus for this year. It's going to reward investors this year in terms of the dividend they receive from funds like ours.

But then the flip side is looking ahead for every pound that gets returned to us in dividends. That's a pound that's not being invested in the business. And we are continually looking at our individual businesses and trying to work out where are they investing? What is the outlook like for them? And that's the real key at the moment. So we're rejoicing in the dividend pickups of this summer, and the economic benefits of the recovery out of the COVID environment. But we are very minded to look forward and think, what does it mean about future investment and the outlook is still difficult.

Black: Carl, thank you so much for your time. For Morningstar I'm Holly Black.

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Holly Black  is Senior Editor, Morningstar.co.uk


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