Rathbone's UK income fund turns stateside

Investors in the fund were badly burnt during the financial crisis of 2008 - the fund posted a 34 per cent loss for that year and the following year had to cut its dividend. However, the fund has since returned to stellar form, delivering a total return of 78 per cent in five years, above the average 67 per cent for the IA UK Equity Income sector. Mr Stick has also increased the dividend year on year since 2009.

But that performance is not coming easy. He says the UK equity income sector is now riddled with "compromises" and picking a path through shares that are cheap for a reason and those that are expensive is getting harder.

That might explain why the shares exciting him most today come from the US, rather than the UK. He has been investing in cruise company Carnival (CCL) and telecoms giant Verizon (VZN). Not classic UK equity income stocks, maybe, but two companies that he believes will give him an edge over the competition and allow him to continue avoiding the UK giants he is not as keen on.

With a mandate to invest no less than 80 per cent in the UK and only 20 per cent in both overseas stocks and cash, Mr Stick's ability to flirt with overseas companies is limited. However, he is making full use of that with his recent acquisitions.

Carnival is a US cruise business with 50 per cent of the global cruise market and the major competitor to cruise giant Royal Caribbean. Mr Stick says: "It's a good business and a very good market with only two major players." The company is cheap at the moment for a tragic reason - it is the company behind the Costa Concordia ship which ran aground off the coast of Isola del Giglio in Italy on 13 January 2012. But Mr Stick thinks the company has a solid business model with a good chance of tapping into overseas demand for cruises and changing demographics.

His other big US bet is Verizon. He says: "It yields about 4.5 per cent and it's on about 13/14 times earnings. It's a way of diversifying the portfolio. If I didn't own that I might need to own more Royal Dutch Shell (RDSA) or GlaxoSmithKline (GSK)."

That point of difference to other UK equity income managers is key. While Mr Stick says he "doesn't spend time looking over competitors' shoulders, he does say there's "no point in being the same as everyone else". He does hold similar stocks to other managers in the field but has also stuck to his guns with companies like Unilever (ULVR), which others have criticised as being too expensive but to which he has a 2.95 per cent exposure.

To make healthy returns as well as achieving an above-average income the manager looks for three company types - high-quality businesses that reinvest and grow, companies Mr Stick thinks are bond proxies, "with a good yield but not necessarily the organic growth to grow that dividend" and finally value plays. But in the current climate it isn't easy to find any pure examples of those types of businesses.

"We're having to make compromises across the market," he says. "We just don't have stocks out there that are obviously cheap." Similarly it is hard to find companies that pay healthy incomes and sustainable dividends and that investors haven't already piled into and pushed up the price.

"The issue is that businesses haven't been investing," he says. "What might have started as a defensive move during the credit crunch has changed into returning capital to shareholders. You need to be investing in your business to get that organic earnings growth which will give us the dividend growth coming through."

One company where he does think yield is sustainable is HSBC (HSBA). A new purchase for the fund in 2014, the stock had climbed from nothing to the fund's top holding by the end of last year. The position is a marked difference to many rival UK equity income funds, where it does not rank in the top 10. It seems a surprising choice for Mr Stick, who foreswore many areas of the financial markets following the recession and the terrible time the fund endured as a result.

HSBC spent much of the past year mired in a tax avoidance scandal surrounding its Swiss division and was also hit with fines for forex rigging in 2014. By contrast, Mr Stick recently sold Barclays (BARC) in connection with the forex scandal, for which it was fined £1.53bn for colluding to manipulate rates at its business in London.

He says: "We did start buying HSBC on valuation, because we felt it was too cheap, and we felt management was doing the right thing in terms of risk and also exiting from businesses and markets where they didn't have a good position. It has a high dividend yield of over 5 per cent and I believe they could grow it by 10 per cent a year," he says.

But that doesn't mean HSBC hasn't caused him some sleepless nights, or that he thinks the banking sector is risk-free. He refers to a nail-biting meeting at the beginning of the year as a "dog's dinner", where spiralling concerns over the costs of regulatory compliance were sending shivers down the spines of HSBC management as well as Mr Stick's team. Shares were hitting a low then, but have since recovered. He says HSBC is a different risk to many of his other holdings but says: "We're being compensated for that risk."

One area he will not venture back into, though, is the specialist financial sector. Mr Stick is still beating himself up for the fund's losses in 2008. "Everyone did badly, but we did worse," he says. The experience changed both him and his investment methods.

"Anyone who invested in the fund knows we've been clear that we had got a bit complacent. We failed to recognise that certain business models might break and that some businesses were too expensive and that some held too much debt. Any presentation we have done since then has been focused on risk."

He says: "I think if you go back 10 years, there was a great complacency about balance sheets and debt and a great complacency about leverage and being aggressive." That certainly isn't something he plans to repeat, and not something he will let his shares get away with either.