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Emma Wall: Hello, and welcome to the Morningstar series, 'Why Should I Invest with you?' I'm Emma Wall, and here with me today is Alan Dobbie, Manager of the Rathbone Blue Chip Income and Growth Fund.
Hello, Alan.
Alan Dobbie: Hi, Emma.
Wall: So, we are here today to talk about your fund. It has the word growth in it, which implies that you are looking for sort of good value stocks. How difficult is that considering developed markets have rallied so spectacularly over the last five, six years?
Dobbie: Yeah, well, markets have rallied very strongly over the last few years. We have seen a number of equity indices hitting new highs, but of course what's important is not so much the level of the index. It is how that relates to the fundamentals, the earnings power of the cash flow generated by the constituent companies. So, in terms of valuation, we tend to look at absolute valuation, relative valuation and also sentiment.
On absolute valuation, I think it is quite difficult to get too bullish from where we are at the moment if you look at something like the cyclically adjusted P/E ratio in the U.S. Also looking at prices compared to average 10-year earnings, markets have only been more expensive back in the 1920s and the late 1990s. So I think it is quite difficult to be bullish in absolute terms.
In relative terms, it tells an entirely opposite story. Markets – equities have never been cheaper relative to bonds, so it's very mixed messages there.
Also in sentiment, it would be hard to say that markets or investors have become euphoric. You would normally associate with markets hitting new highs, but there is U.S. value investor, Howard Marks, he has got this phrase that although investors may not be thinking bullish, they are acting bullish. We have seen central banks pushing bond yields lower, forcing investors further up the yield curve, taking on more risk.
So, I think it's quite mixed messages in valuation. Finding value is getting harder, I would say, but we are still seeing interesting opportunities out there.
Wall: When looking at the other half of your mandate because it is income and growth, that's quite unusual to find together. I mean, how do you marry the two? Does one prioritise over the other?
Dobbie: Well, there is always the risk that with quite broad mandate that you try and be all things to all people. So, the way that we manage to deal with that in our fund is we set ourselves a series of objectives, but they are quite importantly they are sequential objectives.
Our first objective would always be capital preservation. We recognize investors are putting a lot of trust in us by giving us their money, so our first rule is always don't lose investors' money. After we are confident that we have achieved that objective, then we start to think about income generation.
We pay quite an attractive dividend yield, it's about 3.6% at the moment, not as attractive as it has been relative to history but then relative to bonds, it's looking pretty good. Once we are happy with that objective that we have satisfied that then we start thinking about income growth. We have a good track record of income growth in our fund. And then once we have done all that then we finally start thinking about capital growth. So it's really a series of objectives that we have to think about.
Wall: You mentioned that the first priority is capital preservation. Does that mean in a market like this you are just not considering certain sectors either because they have become quite expensive or because the macro backdrop, for example, oil stocks, is just not supportive to the concept of capital preservation?
Dobbie: Yeah. I mean, we are not worried about any kind of benchmark risk thing in our funds. It is a very concentrated fund. We only own 30 stocks. We are quite happy to zero weight a sector. We currently don't own anything in banks. We are quite wary of oil stocks. We are very underweight the sector.
We are concerned about dividends actually in some of the big oil majors. They are not generally covered by free cash flow, which would be our first metric that we look at when looking at dividend sustainability. So they are some sectors we worry about.
Wall: Alan, thank you very much.
Dobbie: Thank you, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
