Risk in the Income World

Rathbone Income Fund

Citywire New Model Adviser Retreat

Brighton, September 2013

Carl Stick, Fund Manager

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Agenda

Introduction

What Does Equity Income Mean To Us?

A Risk Based Approach

Portfolio Construction

Historic Performance

Appendix

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A Little Bit About The Manager......

Fund Manager Carl Stick

Fund size £587.63m (mid-market value, as at 31.08.13)

“Best Income Wealth Manager 2013”

As Announced At The Financial Times, Investors Chronicle Awards

12 years of continuity, expertise and depth of the income team.

Second best performing manager in this sector over his tenure (to 31 August 2013).

Plays a key role in the development of Rathbone's investment process and business strategy.

‘Proven investment expertise’

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What Does Equity Income Mean To Us?

An equity vehicle, with long term investment aims:

Our input: Our investment process, a risk based approach – ‘winning without losing’.

Our output: Progressive distributions, generating strong total returns.

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‘Approximately 4.6% annual

outperformance’

‘A record of attractive and rising dividend increases in

19 out of the last 20 calendar years’

“The most powerful force in the universe is compound interest”

Albert Einstein

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A Risk Based Approach Investment process - summary

Screen investable universe Rank 5000 companies >$200m by ROIC and Earnings Yield

Risk

Management

Portfolio Construction

Quality Companies

High returns on capital.

Durable.

Balance sheet strength.

Understandable.

Honest and competent

management.

Focussed portfolio.

Low turnover.

Cash flexes with opportunity.

Value prices

Naturally contrarian.

Wide margin of safety.

Sell when:

Prices rise.

Fundamentals worsen.

Better opportunities emerge.

‘Our investment process is our competitive advantage’

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A Risk Based Approach

Principles

Risk is the threat of a permanent loss of capital.

Not volatility, illiquidity, deviation from a

benchmark, underperformance.

Process

Quality companies (low business & financial

risk) at value prices (low price risk).

Establish a margin of safety in case of bad

outcomes.

‘Winning without losing’

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A Risk Based Approach Case Study 1: Restaurant Group

High quality business, with robust, repeatable

business model. A classic cash flow and

compounding machine.

Top class, proven management.

Balance sheet is very strong, and potential for

future returns of excess capital to shareholders.

However, shares are assuming that the future

promises even greater returns on invested capital,

as management makes further investment in the

estate.

This may well be the case – we have every

confidence in the management – but there is little

margin of safety at the current price.

We are holders of the stock, but are very watchful

on price risk.

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 ∞

Cashflow Return on Capital (%) Cost of Capital (%)

Price

Business Financial

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A Risk Based Approach Case Study 2: Rio Tinto

The mining industry is a poor one, with a terrible

history of capital allocation decisions.

Rio Tinto is a prime example of this – $38bn write

down of Alcan acquisition.

Management change across the industry.

Furthermore, industry is also promising greater

discipline, although we will believe it when we see

it.

If capex is reined back, Rio becomes a very cash

generative business, but the shares are pricing in a

future of dire returns. Is that too pessimistic?

Business risk remains high, but price risk is low –

we have initiated positions.

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 ∞

Cashflow Return on Capital (%) Cost of Capital (%)

Price

Business Financial

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Portfolio Construction Diversification Of Risk Across The Portfolio

‘Differentiated stock list’

Source: Rathbones as at 31.08.13

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Historic Performance The Rathbone Income Fund

Source: Financial Express. Data as at 31.08.13 net income reinvested. R class units. *Data since January 2000.

Past performance should not be seen as an indication of future performance.

Performance (%) 6 months 1 year 3 years 5 years Mngrs

Tenure*

Rathbone Income Fund 10.87% 24.79% 60.13% 51.69% 216.20%

IMA UK Equity Income Sector 8.07% 21.61% 47.50% 48.09% 111.04%

Quartile 1 2 1 2 1

Rank 18/98 27/97 11/88 29/72 3/44

FTSE All Share Index 4.13% 18.90% 40.51% 42.62% 65.56%

‘Consistent outperformance…’

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Historic Performance Risk v Return

‘…Without higher volatility’

Three years

One year

Source: Financial Express. Data as at 31.08.13

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Three year annualised volatility (%)

Sector Average

Rathbone Income Fund

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One year annualised volatility (%)

Sector Average

Rathbone Income Fund

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Summary

Risk based investment approach.

Diversified portfolio.

Consistent outperformance at lower volatility.

Proven investment management expertise.

‘Winning without losing’

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Appendix

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The Rathbone Income Team Biographies

Carl Stick

Fund Manager, Executive Director

Elizabeth Davis

Fund Manager and Quantitative Analyst

Alan Dobbie

Fund Manager

Kate Pettem

Investment Analyst

Carl is a Board Director of Rathbone Unit Trust

Management and plays a key role in the

development of Rathbone’s investment process.

He is the manager of the Rathbone Income

Fund, which he has been running since January

2000.

He is I.I.M.R. qualified and a Fellow of the

Securities Institute.

Elizabeth supports fund managers through

quantitative stock-screening and

fundamental research on companies. She

also profiles relative and absolute risk

analysis across the funds. She holds the

Investment Management Certificate and is a

CFA (Chartered Financial Analyst) charter-

holder.

In addition to working on the Rathbone Income

Fund, Alan is co-manager of the Rathbone Blue Chip

Income and Growth Fund. Alan specialises in Pan-

European equities, and has assisted in the

management of various institutional and retail funds

within Rathbone Unit Trust Management. Alan holds

the Investment Management Certificate and is a CFA

(Chartered Financial Analyst) charter-holder.

Kate works within the team as an investment analyst.

She joined Rathbones in September 2012, having

worked as a senior analyst at UBS. Originally from

Canada, Kate has over twenty five years of investment

experience, both as a fund manager and an analyst,

focussing for much of that time on North American

equities. A graduate of the University of Toronto, Kate

holds the Securities and Investment Institute,

Certificate of Securities and is a CFA (Chartered

Financial Analyst) charter-holder.

Siyuan Lin

Investment Analyst

Siyuan works within the team as a global

equity analyst. She joined Rathbones in April

2013 having worked as an Investment Trainee/

Research Analyst for three years in Martin

Currie’s Emerging Market team . She holds the

Investment Management Certificate and has

passed all three levels of the CFA (Chartered

Financial Analyst) exams, pending CFA

charter status.

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Appendix Rathbone Income Fund - Raw Volatility Data

Source: Bloomberg, data as at 31.08.2013

Portfolio StatisticsPortfolio

(3 Months)

Benchmark

(3 Months)

Portfolio

(6 Months)

Benchmark

(6 Months)

Portfolio

(YTD)

Benchmark

(YTD)

Portfolio

(3 Year(s)

Benchmark

(3 Year(s)

Return

Total Return 1.77 -0.77 11.28 4.18 19.81 13.33 65.58 40.72

Maximum Return 1.99 2.96 1.99 2.96 1.99 2.96 2.43 3.85

Minimum Return -2.25 -2.88 -2.25 -2.88 -2.25 -2.88 -3.05 -4.51

Mean Return (Annualised) 11.40 -2.78 35.77 13.51 47.15 31.55 27.65 19.44

Mean Excess Return (Annualised) 14.58 19.61 11.86 6.88

Risk

Standard Deviation (Annualised) 13.67 17.56 12.59 15.89 11.99 15.35 13.48 19.20

Downside Risk (Annualised) 10.26 12.59 9.48 11.67 9.04 11.38 9.96 13.89

Skewness -0.54 -0.10 -0.60 -0.26 -0.60 -0.31 -0.38 -0.22

VaR 95% (ex-post) -1.35 -1.44 -0.98 -1.37 -0.92 -1.35 -1.19 -1.64

Tracking Error (Annualised) 5.95 5.75 5.96 8.18

Risk/Return

Sharpe Ratio 0.78 -0.20 2.78 0.81 3.87 2.01 1.97 0.96

Jensen Alpha 13.29 25.47 23.93 14.54

Information Ratio 2.45 3.41 1.99 0.84

Treynor Measure 0.14 0.47 0.64 0.41

Beta (ex-post) 0.75 0.75 0.73 0.66

Correlation 0.96 0.94 0.93 0.93

Portfolio Info:

Portfolio: Rathbone Income Fund

Benchmark: FTSE All-Share Index

Currency: GBP

As of: 30/08/2013

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Historic performance Calendar year returns

Source: Financial Express, bid to bid, net income reinvested.

Calendar year performance: 2003 2004 2005 2006 2007

Rathbone Income Fund 23.71% 18.55% 23.31% 21.24% -2.80%

IMA UK Equity Income Sector 21.57% 16.00% 19.93% 18.19% -1.21%

Quartile 2 1 1 1 3

Rank 17/66 18/69 16/75 11/79 60/84

FTSE All-Share Index 20.86% 12.84% 22.04% 16.75% 5.32%

2008 2009 2010 2011 2012

Rathbone Income Fund -34.49% 23.48% 18.71% -0.15% 14.94%

IMA UK Equity Income Sector -28.54% 22.88% 14.58% -2.90% 14.01%

Quartile 4 2 1 2 2

Rank 78/88 34/89 15/102 28/100 43/98

FTSE All-Share Index -29.93% 30.12% 14.51% -3.46% 12.30%

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Top 20 Holdings Holding Weight

GlaxoSmithKline 5.66%

British American Tobacco 5.14%

Royal Dutch Shell B 4.31%

Rio Tinto 4.03%

BAE Systems 3.93%

Restaurant Group 3.56%

Unilever 3.54%

Scottish & Southern Energy 3.44%

Imperial Tobacco 3.35%

Cineworld 3.16%

Pearson 3.05%

William Hill 2.96%

Lockheed Martin 2.95%

Neopost 2.81%

Astrazeneca 2.81%

Headlam 2.80%

Tarsus Group 2.54%

Dechra Pharmaceuticals 2.43%

Diageo 2.42%

BG Group 2.39%

% of portfolio 67.28%

Source: Rathbones as at 31.08.13

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Important Information

The information contained in this presentation is for use by investment

advisers and is not intended for circulation to private clients or the general

public

Past performance should not be seen as an indication of future performance. The

value of investments and the income from them may go down as well as up and you

may not get back your original investment.

Rathbone Unit Trust Management is authorised and regulated by the Financial Conduct Authority and Rathbone Unit Trust Management is a

member of the IMA.

Rathbone Unit Trust Management Limited : Registered Address 1 Curzon Street, London, W1J 5FB

Registered No. 02376568 - A Member of the Rathbone Group.