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Rathbone Income Fund research update

Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if unsure you should seek advice.

Carl Stick, manager of the Rathbone Income Fund, thinks 2015 will be a year characterised by uncertainty in markets.

As an income fund manager he seeks to generate a good dividend for investors in the short term. However, he also aims to increase the income paid in future years, and grow the capital of the fund. To achieve all these aims in the context of uncertain markets, Carl Stick is looking to base the portfolio around three different types of stocks possessing different characteristics.

Quality Stocks

These companies consistently generate strong earnings and offer a steady and reliable stream of income to investors through dividend payments. Holding these companies allows the fund to pay a good income in the present and may offer a growing income in the future.

However, with interest rates at record lows, stocks like these have proved popular with income-seeking investors. This increased demand means prices have been pushed up, and Carl Stick considers many to be overvalued at the moment. He is prepared to hold some of these companies for the steady income they offer. However, he is wary an increase in interest rates could send investors back to other assets, causing prices to fall. He is mindful of this risk, and will seek to reposition the portfolio when he feels the time is appropriate. Imperial Tobacco has been a strong contributor in this category but the manager has begun to trim the holding in recent months.

High Yield Stocks

These companies pay a higher than average dividend, but are of lower quality than those described above. This is because there is more risk of the dividend they pay being reduced, or cut altogether. GlaxoSmithKline is one of the fund's larger holdings. It contributes strongly to the fund's income with a yield over 5%, but Carl Stick has concerns over whether it can sustain such a high dividend in future.

With these companies, the high yield typically results from a low share price and so they usually offer greater value than quality stocks. The manager holds them for the dividends they pay now, but recognises they may not help to grow the fund's income over the long term.

Growth Stocks

The combination of quality and high yield stocks generates a good dividend for investors in the short-term. This gives Carl Stick the flexibility to invest part of the portfolio in companies he believes have good growth potential but do not pay much income currently.

These holdings will hopefully increase their earnings and their dividends over time. This can help the fund increase its income in the future, as well as growing its capital. Senior is a holding that yields only 1.4% at present but the manager expects its continued growth to be a boost to the fund over the long term. Its dividend has increased by an average of 15.2% per annum over the past five years and Carl Stick hopes this will continue, but as with all yields this is variable and not guaranteed.

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Our view on this fund

Carl Stick took over management of the Rathbone Income Fund on 1 January 2000, since when it has outperformed every other fund in the IA UK Equity Income sector. He has generated a total return of 261% compared to a sector average of 118%*. Please note past performance is not necessarily a guide to future returns.

Annual percentage growth
Feb 10 -
Feb 11
Feb 11 -
Feb 12
Feb 12 -
Feb 13
Feb 13 -
Feb 14
Feb 14 -
Feb 15
Rathbone Income 16.74% 4.02% 18.07% 16.76% 10.99%
IA UK Equity Income 16.36% 0.22% 16.19% 15.56% 7.71%
FTSE All-Share TR 18.67% 0.11% 15.45% 8.03% 8.34%

Source: Lipper IM. *Figures to 02/02/2015.

Carl Stick can invest in smaller companies and runs a concentrated portfolio of 46 stocks, both of which can increase risk. We remain confident in Carl Stick's ability to outperform over the long term and this fund currently features on the Wealth 150+ list of our favourite funds across the major sectors.

Please note the fund's charges can be taken from capital, which can increase the yield but reduce the potential for capital growth.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.

The value of investments can go down as well as up, this means you could get back less than you invested. Therefore all investments should be regarded with a long term view. No news or research item is a personal recommendation to deal. If you are unsure about the suitability of an investment please contact us for advice.
Important information - Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. No news or research item is a personal recommendation to deal.

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