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Rathbone’s Thomson: The US giants will keep getting stronger

07 June 2024

The Rathbone Global Opportunities fund manager explains why the gap between the strongest companies and the rest of the market will widen.

By Jean-Baptiste Andrieux,

Reporter, Trustnet

When FE fundinfo Alpha Manager James Thomson took over the Rathbone Global Opportunities fund in 2003, he wanted a simple but repeatable process that would enable him to scale up the fund over time.

This approach has proved successful, as the fund has returned 1,106.8% under Thomson’s 20-year tenure, ranking second out of 94 funds in the IA Global sector since November 2003.

The fund has amassed £3.9bn of assets and continues to be popular with investors. It was one of the top 10 funds for SIPPs on the Fidelity Personal Investing platform in May and was the tenth most-viewed fund on Trustnet during the three months to 20 May 2024.

Performance of fund under Thomson’s tenure and over 10yrs vs sector

Source: FE Analytics

Yet, Thomson believes that equity markets will generally be less rewarding going forward. However, he still sees glimmers of hope, for instance in artificial intelligence.

Below, he explains why the strong will get stronger, why the US is the ultimate growth market and why he avoids Japan and emerging markets.

Could you explain your investment process?

We want as many voices in the room as possible when we're generating investment ideas. We will use our internal analysts, but also a global network of external brokers and analysts. That's how we create a 360˚ view of the investment case. That feeds into our secret sauce analysis, which is a screen of qualities that we look for and qualities that we actively avoid.

The next step is to meet company management and try to understand the drivers of growth, the risks and the strategy and how they change over time. We want an ongoing relationship to understand where promises are being kept and where strategies are being changed and adapted.

Then we think about valuation, timing and suitability. Valuation has to be reasonable given the growth prospects. In terms of timing, we don't want an investment case that takes many years to come to fruition, we want a company that's firing on all cylinders now.

We also want to be able to manage risk effectively. That means having a defensive bucket of weatherproof equities. These are companies that have a more resilient defensive growth profile that's less linked to the economic cycle. That provides a buffer for the rest of the portfolio.


What differentiates you from your peers?

I think there are fewer than 100 UK-domiciled global equity funds that have been in existence for the past 20 years and I believe I am one of the few managers who have been in place for that time period.

Another thing that differentiates us is our willingness to admit that there are areas where we don't have skills and expertise. For example, we avoid investing in emerging markets or Japan. They are important parts of the equity market, but I don't have the skills nor the expertise to do it credibly. I think clients would be better off going to a dedicated emerging markets or a dedicated Japanese equity fund manager.


What have been your best-performing stocks over the past 12 months?

There's been a lot of market concentration around the Magnificent Seven, but I'm pleased that we've had a much broader contribution to our performance over the past 12 months. We own Nvidia and Amazon, but I would also point to businesses such as Costco, Boston Scientific and Amphenol.

Performance of stocks (in sterling) over 1yr

Source: FE Analytics

Outside the US, some of our best performers have been companies like Schneider Electric, which is a play on electrification, digitisation and upgrading electric networks, as well as Partners Group, which is a private equity business that has bounced back very strongly from the malaise in 2022 as rates were rising.

Next, the clothing and apparel retailer, has been a significant outperformer in a pretty soggy UK equity market.

Performance of stock over 1yr

Source: FE Analytics


And the worst-performing stocks?

It’s been primarily defensive, consumer-staple companies such as McDonald's, Coca-Cola, Mondelez and Heineken. It is not a surprise since the market has been looking for cyclicality, recovery in earnings potential and beneficiaries from falling inflation. 

Performance of stocks (in Pounds Sterling) over 1yr

Source: FE Analytics

I would also highlight some of our China-exposed businesses such as LVMH, which has really struggled, particularly in its spirits division, and cognac company Remy Cointreau, which we have sold.


What is your view on equity markets hitting all-time highs?

I hope that's a precursor to earnings moving higher to reflect that. Valuation is often a poor predictor of future performance and expensive doesn't necessarily mean overvalued. Often, valuation is reflective of the quality of the earnings you are getting.

The US market is admittedly expensive, but you're paying for resilience, repeatability, adaptability and higher growth. So you're paying a premium in the US because you're getting premium growth credentials. The US really is the home of the growth investor.


What are the main investment themes in your fund?

I would put AI right at the top of my list of investment themes. The computer is no longer just instruction-driven, it is now intention understanding. It’s still early but we are already seeing applications. AI is used for drug discovery and development. Shopify told me that 30% of its coding is being done by generative AI. Video games are going to be produced in record time thanks to AI.

We're all probably going to have some sort of personal digital assistant that helps us with mundane tasks through generative AI.

One of my analysts thinks that AI is going to drive half of incremental GDP over the next decade and will represent 20% of global GDP by 2032. If that's correct, then this is the start of a new industrial revolution.

We have a broader theme called ‘the strong getting stronger’, which is about the increasing concentration of dominance, particularly in technology.

There’s going to be $275bn worth of capital expenditure within technology over the next year, but $200bn is being done by four companies alone.

It’s probably the most important theme we are running. In a world of slower and more inconsistent growth, we think the strong will get stronger.

In 2022, we changed about 20% of the portfolio and repurposed it into the stronger players. We sold some of the earlier stage companies with more expensive financing and an unpredictable demand picture.

We feel they will struggle to outperform in the current market, which is probably leading us toward a two-speed economy.


What do you do outside of fund management?

I have two daughters, so I help my kids to be as well-rounded, stimulated, happy and successful as possible.

I enjoy sitting on the sidelines of sporting events and I like playing tennis. The golf clubs seem to be attracting quite a lot of cobwebs and dust, but hopefully they will come out of the basement when the girls are a bit older.


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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.