This is an audio transcript of the Money Clinic podcast episode: ‘Investment Masterclass — The hunt for global growth stocks’
Claer Barrett
Hello, it’s Claer. Before we begin, I’d love to hear a bit more about you and what you like about Money Clinic. We’re running a short survey, and anyone who takes part before the 29th of August will be entered into a prize draw for a pair of Bose QuietComfort 35 wireless headphones. Spiffing! You can find a link to the survey and the terms and conditions for the prize draw in today’s show notes.
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The huge rally in tech stocks means that global markets are trading near all-time highs, despite the backdrop of political change and uncertainty. As an investor, you could be forgiven for feeling that stock markets are looking expensive. So is the recent growth spurt overdone? My guest on today’s investment masterclass has forged his fund management career picking future winners and large global companies are his stock in trade. He’s here to tell us some of the secrets of his success and, crucially, where he thinks growth is coming from in the future.
James Thomson
Growth companies often don’t look cheap. You get what you pay for. You’re paying for quality, you’re paying for resilience, reliability and recurring revenue.
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Claer Barrett
Welcome to Money Clinic, the weekly podcast from the Financial Times about personal finance and investing. I’m Claer Barrett, the FT’s consumer editor.
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My guest today has managed the Global Opportunities Fund at Rathbones for over 20 years, selecting stocks that have seen it grow into a £4bn fund. One of the top performers in its sector, it’s one of the most widely held actively-managed funds on investment platforms today. Fund manager James Thomson has steered the ship through many financial storms, and today he’s popped in to the FT studio to talk to me about where the next phase of growth could be coming from, as well as the lessons he’s learned along his long investment journey. Well, James Thomson, welcome to Money Clinic.
James Thomson
Well, thank you so much for having me.
Claer Barrett
Well, could we start by unpacking what that term, Global Opportunities Fund, actually means? You’re not the only fund house who offers a fund of this type.
James Thomson
I started running this fund 20 years ago. It’s a global stockpicking fund, trying to find our best ideas from around the world. These companies are industry champions. They’re overlooked and under-the-radar opportunities for growth. Companies are doing something a little bit different. Growing quickly but sustainably, while also at the same time trying to avoid fashions or fads or sunset industries. The fund is £4bn, mostly invested on behalf of British savers and investors, and I’m proud it’s one of the top performing funds in the country, in its sector, but also a bit nervous because this is people’s financial future and I want to do a good job for them as you would expect. You know, I think it’s important for a fund manager to eat their own cooking.
Claer Barrett
Mmm. So, this is your own personal portfolio?
James Thomson
Yes, my own personal portfolio, and my children’s as well. So they’re watching very closely and certainly sharpens my focus.
Claer Barrett
Well, we like to see a bit of humility exhibited in the FT studio when we have fund managers in for a masterclass. But tell us a little bit more about what growth investing means for you, the kinds of companies that you’re targeting. It’s not just about tech stocks.
James Thomson
Well, I grew up in Bermuda, but I was educated in the US. And in America, they love a secret sauce, so I thought I should bring one here, too, a secret sauce of investing, qualities that tend to make successful investments. And qualities that I avoid. A recipe, if you will. It’s not so secret, my secret sauce, because I’m going to tell you what it is.
Claer Barrett
Oh, great.
James Thomson
You know, I’m looking for companies that are easy to understand. Growth companies often don’t look cheap. You get what you pay for. You’re paying for quality. You’re paying for resilience, reliability and recurring revenue. They tend to be pure play businesses rather than conglomerates. They have a scalable and repeatable strategy. So it’s, the business can be grown without having to inject significant amounts of new capital in order to do it.
They’re shaking up their industry, but it’s difficult to copy exactly what they do. They have this idea of pricing power. So even in a difficult economy, they can maintain or put up prices in the face of it, which keeps the growth going. And then they under-promise and overdeliver. So they are prudent managing expectations and they consistently beat it.
The other side of the recipe is things that I definitely have to avoid: recovery stories, turnaround, special situations. You know, I prefer unblemished growth companies. I avoid companies where there are the potential for high-impact binary events. So either total success or complete failure on a single outcome of a single event. And I also avoid those early-stage speculative businesses, where success is based on factors outside of their control. So that does imply a lot of the commodity industries, where some of their great success is really based on the price of a commodity, which I have a great deal of difficulty in predicting. And then finally, I would say I would avoid pure valuation calls. So a poor business, but one that apparently looks too cheap. And in my view, that isn’t a margin of safety.
Claer Barrett
I should say, James, before we go on, we are going to be talking about some individual stocks that you’ve selected in your portfolio and some others that you’ve thrown over the side. Now, just to remind listeners, Money Clinic podcast is a discussion about investment. Any stocks that we’re mentioning here, it’s not an inducement for you to buy them or for you to sell them. If you need investment advice, I stress: go and speak to a financial adviser. But moving on, James, you’re targeting companies that you think have got more to come. But you could look at the stock market at the moment, especially the big US tech companies, and think, well, how much more growth realistically can we see? Can it just keep coming and coming?
James Thomson
Yes, I think we’re probably at the start of a new computing era being driven by a lot of these technology companies. I mean, we own businesses like Microsoft and Google, ASML in Europe, which is a semiconductor equipment company.
Claer Barrett
OK. So that’s a bit different. It’s sort of feeding the (inaudible).
James Thomson
Yeah. I think it’s sort of the early building blocks of some of the GPUs and chips that go into this AI revolution. And of course we own Nvidia. It’s the largest holding in the fund, although I’ve sold 75 per cent of the position …
Claer Barrett
Wow.
James Thomson
. . . over the last 18 months, in order to manage risk.
Claer Barrett
And to bank some of these incredible gains.
James Thomson
Yes, and use some of that capital to recycle into other interesting ideas that potentially benefit from the halo effect that Nvidia has around AI in this next computing generation. We’ve put some money into a business called Amphenol, one of the least exciting businesses you would ever come across.
Claer Barrett
I was going to say, I’ll be honest with you, James, I haven’t heard of Amphenol.
James Thomson
Well, not many people have. But it’s two times larger than Barclays. It’s three times larger than Vodafone.
Claer Barrett
Wow.
James Thomson
This is a giant in the industry of connectors and electrical equipment. Connectors are in almost everything we see around us. But importantly, adaptors, connectors, jacks go into data centres. Data centres really are the building blocks of this AI-driven revolution.
Claer Barrett
Mmm. And certainly if listeners are interested in our recent investment masterclass about investing in AI with Ben Rogoff, the fund manager of Polar Capital Technology Trust, then look back in our previous episodes. Well, let’s talk about some of the areas of the market that your fund lacks exposure to. Because as you say, as an active fund manager, you can choose what you want in it, but you can also choose to leave some types of stocks on the shelves. Now, looking at your fund fact sheet, as any investor might do, there’s not much emerging markets in that. Is there? Why is that?
James Thomson
I think I realised very early in my career — you know, having spent quite a lot of time in emerging markets, China and India and other parts of the developing world — that I felt I was at an information disadvantage. I felt I didn’t have the skills or the expertise to do it properly, and I thought I’d lose my shirt. And so from those …
Claer Barrett
Many investors did.
James Thomson
Yeah, I think that’s right. And even more important to realise what you’re not good at. And so with that knowledge, I decided to build my global fund around developed markets where I would leave investing directly in emerging markets to dedicated EM fund managers who I think we’ll do a better job than me.
Claer Barrett
Mmm, mmm. Well said James, we’ve seen this huge change with the general election, the Labour party promising to get the British economy booming. I mean, you do have some investments in the UK, but you haven’t got much exposure to it. Do you think UK stocks a good value? Could we see a bit of an uptick in growth on these shores?
James Thomson
Well, I think the UK is at its most attractive since 2016.
Claer Barrett
OK.
James Thomson
But I’m unlikely to increase my weighting much beyond the current 6 per cent. The FTSE 100 is dominated by international companies without many having a significant exposure to the UK economy. It’s a defensive risk-off market. The more exciting part of the UK is in the FTSE 250. Those are the mid-cap companies.
Claer Barrett
So, the next 250 biggest after the top 100.
James Thomson
Precisely. But given my typical position size that I would build in my fund, it’s quite difficult to get the liquidity to get in, or more importantly, to get out if I make a mistake.
Claer Barrett
What is your typical position size with your fund? How much money you’re looking to deploy?
James Thomson
Typically, we invest about 1.5 per cent of the fund into a new position. So you’re talking about £50mn-£60mn going into these new holdings. And so for a medium sized company, you own a significant part of the business. You’d probably be a top ten shareholder. And so if you are going to make that call, and you get it wrong, you’re probably going to wear it.
Claer Barrett
Mmm, mmm. Well, if things do turn out to be tougher than the optimists are assuming, what companies do you think stand the best chance of growing than a defensive growth stock, if you like.
James Thomson
Well, growth investing for me also means durability and resilience of growth. We have a lower-risk, weatherproof part of the portfolio that has, OK, greater defensiveness and recession resistance. I’d point to a garbage collection company in the United States called Waste Connections.
Claer Barrett
Not the most glamorous of industries, but it keeps on coming.
James Thomson
Agreed. They’re often de facto monopolies, pricing is linked to inflation, and whether your bin is full or three-quarters full, you pay the same price. Customers tend to pay, and it’s an offer that most consumers can’t refuse, which is probably why Tony Soprano was a waste management consultant.
Claer Barrett
Oh, right. OK.
James Thomson
But today, a highly regulated, legitimate, and attractive business.
Claer Barrett
Give me some more examples.
James Thomson
We own a pest control company.
Claer Barrett
Oh, right.
James Thomson
The pest control business is called Rollins, which is not a brand that people have heard of. But the main pest control part of their business is Orkin, which is a 100-year-old brand. Good economy, bad economy, the bugs don’t care. In the southern United States, pest control is considered the fourth emergency service. Seventy-five per cent of customers are on rolling contracts, visiting on average four times a year.
Claer Barrett
Wow. And what kinds of curses are they doing away with?
James Thomson
It’s everything you really don’t ever want to see: termites to ants, mice and rats. And given the hot, sticky climate with the potential to get worse. I mean, I’m no man of the cloth, but I’ve got faith in these defensive growth businesses. Now, over 20 per cent of the fund. And I suppose when the mighty have fallen, these stocks will stand tall.
Claer Barrett
OK. Well, garbage collection and pest control. Who knew it could be so exciting?
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Now, I mean, of course, as they say on all the adverts, past performance is no guide to future performance. But the benchmarks that you measure your performance against — tell us a little bit about those. How the wider market has done compared to your fund?
James Thomson
Well, we’ve . . . It’s been about double the performance of the benchmark over that time period. And that would be the sector in the UK. Professional investors will look at indices like the FTSE World Index or the MSCI World Index, which is not a perfect comparison because, of course, a lot of those indices have exposure to emerging markets and I don’t. But it gives a sensible alternative option for a potential investor who has a global lens.
Claer Barrett
OK. Now obviously that’s a great track record. What would you say within that have been the best investments of your career so far? And tell us a little bit about how they came about.
James Thomson
I thought my three best investments had been Amazon, Rightmove and Visa.
Claer Barrett
OK, I’ve heard of all of those.
James Thomson
Indeed, indeed. They are industry champions. But I think in 2009 when I invested in most of those, they were not necessarily the mainstream companies that they are today. In fact, some of them were hated by investors. Amazon was a source of great controversy during those years.
Claer Barrett
What was the beef with Amazon at the time?
James Thomson
Well, they were investing very heavily into a new area of which they did not really know what sort of returns it would drive. And at . . . and now we know what they were doing. They were investing in AWS, Amazon Web Services, which is now the largest cloud computing business in the world.
Claer Barrett
But they’ve certainly come a long way from simply selling books, which is what they started out doing.
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Now, I’m quite addicted to browsing Rightmove in the middle of the night. My dream ideas of where I might move to next with money I can’t possibly afford to borrow. That’s not making them any money. But how is Rightmove made you and your investors money?
James Thomson
I mean, Rightmove is deeply ingrained into the psyche of the consumer who’s looking to buy or sell a property and remember that Rightmove’s customers are actually the estate agents. And with over 90 per cent market share in the property portal market in the UK, it’s pretty important that you do have exposure for your house or you’re flat on Rightmove. And that’s what gives Rightmove such incredible pricing power, the ability to put up prices consistently to the estate agents.
Claer Barrett
And what about Visa? Why was that such a good investment for you?
James Thomson
We bought Visa after the great financial crisis, and you’ll remember that everyone was concerned about anything linked to the financial services industry in 2008. Particularly if it had any link towards credit. But remember that Visa and Mastercard — I own both — aren’t a play on consumer credit. They are the rails. They are the payment network that your transactions run over. Over 85 per cent of transactions still took place in cash at that time, dominated by markets outside of the developed world, of course. And as people consistently moved away from cash to cards, that provided a very strong tailwind for businesses like Visa and also Mastercard.
Claer Barrett
Mmm. That was some of the investment highlights, if you like. But let’s look at some of the learning opportunities. Now, in the past year, what would you say one of your biggest mistakes has been?
James Thomson
Well, in the short term, actually it has been selling Nvidia. Not the entire holding. We’ve trimmed about 75 per cent of our position over the last 12 to 18 months. And that is a very conscious effort to try and reduce risk. And I don’t let any holding in my fund go over 4 per cent of the value of the fund. So as it goes over, I trim it back in order to recycle that capital into other potentially interesting ideas.
Claer Barrett
And diversified.
James Thomson
Indeed. So in the short term, that has actually held back our performance now. But most of my clients aren’t complaining. You know, we’re up 12 per cent year to date. We’re up over 20 per cent last year. So we’ve delivered healthy returns. But actually we’ve left some money on the table by taking some profits in a business like Nvidia.
Claer Barrett
Well, I mean, that’s something that investors have to wrestle with all the time. And listeners, if you want to hear more about investment strategy, check out the link in the show notes today. Because our recent series, The Five Minute Investor, unpacked the Magnificent Seven. So you can have an extra lesson if you need one.
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Tell us about some of the tough times in investing. Getting started, I always say this is the easy part. It’s only when you see these big periods of volatility in markets, like we saw during the pandemic, that investors really earn their stripes. How do you weather the storm?
James Thomson
I mean, I think the worst would be the 2008 financial crisis. And the fund performed very poorly that year. But in hindsight, I think it was probably one of the greatest learning opportunities of my career.
Claer Barrett
OK.
James Thomson
What I noticed, with hindsight, was that the fund was too adrenaline-filled. No focus on risk management. We needed to inject some weatherproofing, I call it, into the portfolio. Less economically sensitive businesses, a more defensive buffer during dislocations in markets. And then you can own businesses that can do quite well in a crisis. You know, it’s trying to own the best house in a bad neighbourhood so that you can weather the storm and be positioned to recover, you know, just when it seems at its darkest. And if you own some of these gold standard all-weather companies, you’ll be there for the dawn. To take a business like membership warehouse club Costco …
Claer Barrett
Oh, yes. Costco. We have that in the UK.
James Thomson
One of the best businesses I’ve seen in my career. During the Covid years when consumers had a lot of stimulus cash, Costco averaged 5 per cent traffic growth. That’s 5 per cent growth in people coming through the door. When the macroeconomic backdrop weakened a bit in 2023, Costco continued to average 5 per cent growth in traffic.
Claer Barrett
Because people think bulk buying will gonna save money that’s …
James Thomson
A value offering.
Claer Barrett
Yeah.
James Thomson
And with consumer budgets now more stretched and people spending on staples rather than big-ticket items in 2024, they’ve grown traffic at an average of 5 per cent, year to date. A business of strength, consistency and market share gains. Those are the kinds of companies that can see you through a crisis.
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Claer Barrett
When it comes to attitudes towards investing, what do you think the biggest dangers are?
James Thomson
It’s probably acting too quickly and impulsively, and that’s why I think it’s so important to plan in advance so that you are mentally prepared for those moments, which always feel very different and scary as you’re going through them. But if you correctly put those correct buckets of five-year plus money into the right bucket of equities and shorter-term money into cash money market and lower-risk products, I think that’s the best way to navigate those sorts of environments.
Claer Barrett
So when it comes to the attitudes that different people take towards investing, what do you think the biggest dangers are?
James Thomson
I would say overconfidence. That sort of chest-thumping culture. I mean, I think it’s important not to be convinced of anything. You know, a touch of insecurity and doubt is important as an investor, as long as it doesn’t overwhelm you.
Claer Barrett
Yeah. I’m going to say why do you think a little bit of insecurity is a good thing? Because often I find myself battling with maybe a bit too much. (chuckles)
James Thomson
Well, I think, you know, overconfidence and not being able to admit that you’re wrong is perhaps the greatest enemy in this business. I think the other enemy is declaring victory too early. Our best contributors to returns have come from companies where we have run our winners for the long term.
Claer Barrett
So running your winners, you’ve picked a stock for its growth prospects, but then you’ve decided to hang on to it for a bit longer.
James Thomson
Exactly. We often think that the strong gets stronger, and that some of the best companies in your portfolio should stay there and they’ll continue to drive long-term returns. Avoiding the temptation to overtrade, of selling out, and hoping to come back in again at a more favourable price. I mean, some think that this job is all science. I think it’s mostly art.
Claer Barrett
Oh, that’s an interesting viewpoint.
James Thomson
Art combined with common sense and adaptability. But perhaps importantly, the healing power of time.
Claer Barrett
Yes, because even if you do make a mistake and you’ve been good enough to admit many of yours to us on the show today, in the grand scheme of things, as markets move on, what might feel like a big tragedy today might seem like a blip in five or 10 years’ time.
James Thomson
There are always problems to face, but I’m always impressed with the adaptability and the resilience of our businesses. You know, it’s true, economic growth is slowing, but the pace of change only gets quicker.
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Claer Barrett
Well, a great point on which to end our discussion today. James, it’s been an absolute pleasure having you in the studio today. Thank you so much for joining us on Money Clinic.
James Thomson
Same for me. Thank you.
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Claer Barrett
That’s it for Money Clinic with me, Claer Barrett, this week. And we hope you like what you’ve heard. If you did, spread the word and leave us a review. We’re always looking to chat with people about their money issues for the show. So if you’re interested in being part of a future episode, then email us. Our address is money@ft.com. You could also take a peek at our website ft.com/money, grab a copy of the FT Weekend newspaper or follow me on Instagram and TikTok. I’m @ClaerB.
Money Clinic was produced in London by Tamara Kormornick. The sound design is by Breen Turner and our editor is Manuela Saragosa. You heard original tunes this week by Metaphor Music and Cheryl Brumley is the FT’s global head of audio. And finally, to repeat that disclaimer, the Money Clinic podcast is a general discussion around financial topics and does not constitute an investment recommendation or individual financial advice. For that, you’ll need to find an independent financial adviser. That’s all the small print for now. See you back here next week. Goodbye.