Rathbones Global Opportunities manager James Thomson and Rathbones UK Opportunities manager Alexandra Jackson have had a strong year so far, but their performance goes on longer than just 2021.
Rathbone UK Opportunities has made a top-quartile return so far this year in the IA UK All Companies sector, building on a top 25% showing last year. The Rathbone Global Opportunities meanwhile is second quartile among its IA Global peers in 2021, but was among the top of the charts in both 2020 and 2019.
This excellent recent run has propelled both funds into the top quartile of their respective sectors over three years and five years. Both also have exemplary 10-year returns.
Both funds rely on stockpicking to beat their peers, so Trustnet asked each manager for the stock pick they were most excited about for the future.
FE fundinfo Alpha Manager Thomson, said one company was as close as it gets to a “forever stock” – something he would hold indefinitely.
“This is a company that I think really has incredible long-term potential and protection – a fortress like business model,” he said. “It's not in my top 10, but I think it will get there. It's been in the portfolio for several years, but it doesn't have a lot of razzmatazz.
“It rarely appears in our top performers, and I don't think it ever really appears in our bottom performers - it just quietly grinds out excellent returns.”
The company he is referring to is Costco Wholesale – the $200bn (£146bn) US-based membership warehousing retailer.
Performance of Costco over 5 years
Source: Google Finance
Some investors may be worried about Amazon’s competitive threat to Costco’s brick & mortar business model, which is opposite to Amazon’s online retail strategy.
The US tech giant benefits from a virtuous cycle created by its “flywheel effect” – where the lower the prices are for potential Amazon customers on its online platform, the more attractive it becomes to third-party sellers. This brings more products and competition to Amazon, which then in turn brings more customers, etc.
However, Thomson – who also holds a position in Amazon – argued that Costco has benefited from that same flywheel effect long before Amazon.
He said: “When you become a member of Costco, you want to get your money's worth - so you end up being drawn back into it. Then once you're there, you realise how incredible the value and quality is.”
Although Amazon sells millions of items and Costco only stocks about 2,000 individual items, Thomson said their narrower range of items combined with their “eyewatering scale”, allows for economies of scale and price discounts.
“It's a rare business – particularly in retail – that actually has a ceiling on the markup of any item,” he added. “Reportedly, 15% is the most they'll ever mark-up anything, which is very unusual.
“Retail normally tries to charge as much as they can, and then they put it on promotion - but Costco wants to be famous for its value and its quality. So when you combine that scale with their willingness to limit their mark-up on it – it just creates incredible value for the customer.”
Another reason for his bullish stance was Costco’s potential for international expansion.
“We're really just getting started in their international expansion, and it's one of the few examples of an American store and concept that travels very well,” he said. “In a market like China, which is obviously very price sensitive, Costco can deliver incredible value.”
Indeed, Costco was a massive hit in China when it first opened in 2019. The store had to close early due to massive crowds, which created some chaotic scenes as shoppers clamoured to get into the store.
Alexandra Jackson, who manages the FE fundinfo four-crown rated Rathbone UK Opportunities fund, revealed that one of her current high conviction stock ideas is FDM Group.
The £138bn FTSE 250 professional services company trains university graduates, returners to work and ex-military personnel, and places them in companies who are clients of FDM Group.
Despite the reopening trade generally being quite soft recently on the back of rising cases of the delta coronavirus variant, Jackson said that FDM Group has bucked that trend and remained very strong.
“That is one thing that we love about mid-caps,” she said. “In this space, it is the fundamentals of the company that drive the price.”
FDM Group share price over 2 years
Source: FE Analytics
FDM Group give their cohorts of clients intensive training in skills such as Phyton, data processing and cloud management – essentially whatever the most scarce and useful IT skills are in the market at any moment.
Once the training is complete, FDM Group places people into their client companies – which include financial services firms like Barclays, FTSE 100 oil giants such as Shell, or government departments such as the Home Office.
Jackson said the reason why FDM Group was so appealing to these companies was because of the diversity of the people they brought into their client businesses.
She said: “FDM Group work really hard on the diversity – across all the measurements of diversity – of their cohorts, and they have a negative gender pay gap.
“So companies get really well-trained IT staff, and they also get a diverse and representative group – that's why supposedly clients go to them first.”
Jackson added that FDM Group’s chief executive officer Rod Flavell and Mike McLaren hold a large portion of shares in the company, which she deemed a positive as there was an alignment between the management team and shareholders.
“What we love to see in the UK particularly, is companies that slightly hide their light under a bushel,” she added.
She said that FDM Group essentially “hid” how strong the business was in its latest update by re-investing extra earnings into paying people during the training process – something that is not required by UK law.
“It could have put out quite a big earnings upgrade to the market,” she explained. “That's a bit of a hit to its margins, but because the business is so strong and it has managed to save costs with remote training and things like that, actually it didn't have to guide the market down.
“So, to my mind the firm hid how strong the businesses was in this reinvestment. Reinvesting to make the business stronger while still generating market expectation levels of profit and cash is incredible.”