Key Takeaways
- Rathbone Income was one of the best performers in the UK equity income category in 2025 as banks and defense stocks sent the FTSE to record highs.
- But 2024 was marred by ill-timed stock sales and external events, putting the fund among the worst performers.
- The fund’s managers have reduced exposure to financial stocks, with interest rates expected to fall further in 2026.
One of the UK’s best-performing equity income funds comfortably beat its category in 2025 after repositioning towards UK financial and defense stocks and making some timing calls on key holdings. But this turnaround came after the fund finished in the bottom 10% of funds in the year before. Its managers Alan Dobbie and Carl Stick explain how they managed to revive the fund’s performance, and reveal how they have repositioned their portfolio for 2026.
Key Morningstar Metrics for Rathbone Income
- Morningstar Medalist Rating: Under Review
- Morningstar Category: UK Equity Income
- Fund Size: £588 million
- Ongoing Charge: 0.52%
The Rathbone Income fund returned 23% on a total return basis in 2025 while the category average for UK equity income was 17%. Holding listed banks HSBC HSBA, NatWest NWG and Lloyds Banking Group LLOY paid off for the fund, as these were some of the strongest names in the FTSE 100 over 2025.
This exposure to financial stocks helped put Rathbone Income in the top 30% of performers in its Morningstar Category in 2025.
The fund also made some strongly timed investments over the year. After holding RELX RELX for over a decade, the fund reduced the holdings to 1% last summer due to its high valuation at 30 times price to earnings. Then, the stock was caught up in the autumn selloff caused by fears over an AI bubble, with shares down 20% in the second half of the year.
“We thought [the share price fall] was pretty compelling and we’ve increased that position back up to 2% of the fund. That’s exactly the kind of quality compounder that we’re really excited to be buying at the moment, and we are so happy that these kind of businesses are coming back into the price range that we want to be buying at,” Dobbie says.
Rathbone Managers Buffeted by Close Brothers Selloff
2025’s gains came after a year to forget in 2024 when the fund ended the year in the bottom 10% of the UK equity income Morningstar Category, growing only 3% while its peers rose 8%.
Alan Dobbie says the managers “made a lot of mistakes over the year,” including an ill-timed exit of car finance firm Close Brothers CBG, whose shares were hit by an industrywide mis-selling scandal.
For 2024, Carl Stick says a premature bet on lower interest rates made a negative impact in the first quarter but external events, in terms of the Autumn Budget 2024, affected returns in the final quarter. Still, the experience didn’t change the fund managers’ strategy.
“It didn’t create a massive change in what we were doing. But it certainly meant that we had to keep reassessing. We can’t always react to every bad day, we can’t react to every good day.”
Morningstar’s analyst Henry Ince says the underperformance was driven by several self-inflicted wounds: “The managers’ delayed exit from Close Brothers, whose share price collapsed, was a significant detractor. Additional underperformance stemmed from positions in B&M European Retail BME, an overweight to Legal & General LGEN, and Halfords HF.”
Carl Stick has one of the longest track records in the sector and has managed the fund since January 2000. He announced his retirement for 2026 on Jan. 16, after which Alan Dobbie, who joined as co-manager in 2018, will become the sole manager for the fund. Morningstar has placed the fund Under Review, from Silver.
Ince says: “While Dobbie’s experience offers continuity, Stick’s departure represents a significant loss of expertise for the strategy.”
What’s the Outlook for UK Stocks in 2026?
For 2026, manager Alan Dobbie wonders whether the UK’s recent outperformance represents the start of something new, or if the market has simply benefited from a move away from the narrative of US exceptionalism.
The managers are further positioning the fund for lower interest rates and a broadening market rally, reducing its allocation to banks, as well as defense stock BAE Systems BA., in favor of cheaper stocks further down the market cap scale, which are set to benefit from lower interest rates.
The UK market has started the year in a strong position for further growth, according to Dobbie. The FTSE 100 hit 10,000 points in the first trading week of the year, for example. Amid growing unease around US markets and AI investments, combined with the current high stock valuations, many investors are looking for protection and diversification elsewhere.
Dobbie says: “The good news is that we think the UK offers something genuinely different. It’s a low-beta, inherently defensive market that tends to outperform when global investors are nervous, when volatility rises. We saw that happen in 2022, we saw it happen again last spring, with the tariff tantrum.”
“If you look at the UK’s outperformance last year, it all really happened around that March-April-May period—the UK actually underperformed the S&P 500 in the second half the year. Combine the UK market’s resilience with the still-attractive valuation that it’s trading on, it’s easy to see why investors are waking up to the opportunities within the UK,” according to Dobbie.
Rathbone Income: Portfolio Changes
The FTSE 100 hit record highs in 2025, driving Rathbone Income back into above-average returns within its category. The index growth was largely driven by the biggest stocks in the index, but smaller constituents on average saw significantly lower returns. Dobbie and Stick are therefore looking away from mega-caps for the next opportunities.
“We’ve been taking profits from areas like banks and defense stocks, and recycling that into stocks that haven’t joined the party,” Dobbie says. “Excitingly, many of those stocks are exactly the kind of long-term, high-quality, compounding stocks that we love to own.”
Morningstar’s data shows that as of November 2025, the managers have reduced their exposure to eight of the largest 10 holdings in the fund. Its one defense holding, BAE Systems, has been reduced down to index weight. AstraZeneca AZN, National Grid NG. and British American Tobacco BATS remain the biggest holdings in Rathbone Income, with portfolio weightings between 3.79% to 3.89%.
For 2026, the fund is looking for quality companies and increased exposure to cyclicals and mid-caps. The managers also believe the macroeconomic outlook is aligning with valuation opportunities. Dobbie believes inflation and bond yields will continue to trend gradually lower, however, economic growth will remain relatively scarce.
“That creates a positive backdrop tailwind for two types of businesses: those quality compounders, and, mid-cap names that have struggled during this period of rising rates. At the moment, we are particularly attracted to sectors like REITs, regulated utilities, healthcare, some consumer staples, and some housebuilders,” Dobbie says.
The fund has also bought back into supply chain distributor Bunzl BNZL, a company the fund had previously sold out of. When the share price fell 25% in April, the fund reentered the stock, and the managers have continued to increase the weighting throughout the year. Another new holding to the fund is Whitbread WTB, which was also added in the second half 2025 for the first time. Improving economic conditions in Germany, where the owner of budget hotel chain Holiday Inn has expanded, and lower business taxes than first feared following the Autumn Budget should both aid the firm, according to Stick.
“It shows you, in a business like that, sometimes these things take time. We know we want to buy cheaply, we don’t necessarily know when the optimum time is. Every business that we invest in, there’s a version of that narrative,” he says.
Rathbone Income’s Long-Term Performance is Strong
The Rathbone Income fund has outperformed its category average every year between 2020 and 2023, and has a 10-year annualized return of 6.70% against a category average of 6.20% and a 15-year annualized return of 8.23% against a category average of 7.52%.
