Rathbone Global Opportunities: August 2022 fund update

• James Thomson has managed this fund since 2003 and established a clear and effective investment process
• He is supported by deputy manager Sammy Dow and uses research from external company analysts
• Long-term performance has been strong, though a focus on growth stocks has been a headwind so far this year
• This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

Rathbone Global Opportunities aims to grow your investment over the long term by investing in companies from around the globe. The managers mainly focus on developed markets like the US, UK and Europe. Larger companies make up most of the fund, but the managers use their flexibility to invest in some higher-risk medium-sized companies too. The fund’s focus on growth means it could be a useful addition to an adventurous portfolio. It could also complement other funds investing in emerging markets or unloved value companies.

Manager

James Thomson has been lead manager of the fund since November 2003, though his involvement dates to its launch in 2001. Unlike many in the industry, he’s spent his entire fund management career working on this one fund. It receives his full attention, and we believe it fully reflects his investment philosophy. Over time he’s navigated the fund through a range of market conditions, including the 2008 global financial crisis. Although, like many, the fund didn’t come out unscathed, we think Thomson came away from the experience a better manager. He learnt valuable lessons and has shaped the fund differently as a result.

Thomson is supported by deputy manager Sammy Dow, who joined Rathbones from JP Morgan Cazenove in July 2014. Up until that point his experience was primarily in equity sales, but he’s taken well to life as a fund manager and has a great mentor in Thomson. Since November 2018 he’s also managed another fund investing globally for institutional clients.

The duo has access to internal analysts at Rathbones, but they prefer to use a combination of both in-house and external research. Thomson’s performance to date suggests it works to good effect. We believe he’s a skilled stock picker with a good long-term track record in the IA Global sector, although past performance is not a guide to the future.

Process

Thomson and Dow aim to invest in companies they consider to be under the radar or those that have been shunned by other investors but still have potential to grow over the long term. They may hold onto these companies as they get bigger or become recognised by more investors to benefit from the potential for longer-term success. Rather than using extensive quantitative tools, the managers use a combination of their experience and internal and external analysts to generate ideas. This helps build a 360 degree view of the company through a range of lenses.

Detailed company analysis is used to assess whether they have the ingredients for what Thomson calls ‘the secret sauce’ – a nod to his American heritage. Typically, these companies should be easy to understand with hard-to-replicate advantages and the ability to gain more customers over time. They also favour those with unblemished pasts, rather than companies that are waiting for a catalyst to recover. The managers have tended to avoid companies with lots of debt and those whose fate is tied to the health of the wider economy. Meetings with company management also play a big role, and they prefer visionary and flexible management teams that under promise and overdeliver.

Over the past year, the managers have increased the fund’s exposure to US companies. They believe some of the most interesting investment opportunities are based there, and the US currently accounts for 68.91% of the fund.

In terms of sectors, they have reduced investments in technology. The likes of digital payment provider PayPal, grocery delivery service Ocado, and Netflix have been sold. They used some of the proceeds to invest in companies that could benefit from rising inflation.

New investments this year include racing championship holding company Liberty Media Formula One, DIY retailer Home Depot, Dutch e-commerce and payments business Adyen, and confectionary and food conglomerate Mondelez.

While Thomson can invest in higher-risk emerging markets, he tends to invest little, and sometimes none of the fund, in this part of the world. The fund does not currently invest in any companies based in developing markets, though, given their global nature, some companies make part of their profits from emerging economies.

Culture

We have a positive view of Rathbones as a parent company. Having been founded in 1742 it’s got plenty of history and tradition behind it. But the company’s also moving with the times with an increased focus on responsible investment. Importantly for the fund, the company allows Thomson the freedom to run it his way without imposing any ‘house views’ on him, although of course challenge and risk management is provided.

The managers are a tight-knit duo which we believe plays to their strengths and operate in an environment where challenge and debate are encouraged. They’re incentivised to focus on the longer rather than short-term performance of the fund. This aligns interests with long-term investors, which we view as a good thing.

ESG integration

At firm-level, Rathbones recognises that governance and other non-financial risks can be material factors when analysing investment risk and returns. Rathbones fund managers have been encouraged to integrate ESG into their investment processes in recent years, but we think the quality of ESG integration varies from fund to fund. Rathbones does have a range of responsible products, where ESG issues are considered in a more structured way. Fund managers can benefit from this experience and knowledge.

Corporate governance is important to this fund’s managers. They may avoid companies they think are not responsibly run. It’s also a reason why Thomson doesn’t invest much in emerging markets, where he thinks corporate governance standards can be weaker.

Cost

The fund usually has an annual ongoing charge of 0.77%, but with a 0.26% saving it’s available to HL clients for 0.51%. This is one of the lowest charges among actively-managed global funds and we think it represents good value for Thomson’s best ideas. The HL platform fee of up to 0.45% per year also applies.

Performance

The fund has performed well since Thomson started managing it in November 2003. Over this time, he’s returned 879.09%* vs 520.15% for the FTSE World Index. He’s also outperformed the average fund in the IA Global sector. While the manager’s growth style has contributed to his performance, our analysis suggests his stock selection has been the primary driver of returns. As always, past performance is not a guide to future returns and there will be times the fund falls in value, so you could get back less than you invest.

Over the longer term, the fund has tended to grow faster than the global stock market when it’s rising, due to a focus on companies with strong growth potential. It’s also held up slightly better when markets fall as the manager invests in some companies with more defensive qualities. The fund won’t necessarily perform this way all the time though – for example, the fund has fallen more than the market so far this year.

This is partly due to the growth-focused investment style falling out of favour with investors. Companies expected to grow earnings faster in future performed particularly well following the Covid-induced market crash in early 2020. However, more recently companies that are seen to be lowly-valued or undergoing recovery have performed better. This has been a headwind for the fund.

The managers have also missed out on gains made in the oil & gas sector this year. They don’t tend to invest much here due to the unpredictability of commodity prices.

Aside from the growth style, some individual stock picking has hurt performance. Medical device company Align Technology and ecommerce company Shopify have been weak, for example. The managers have maintained their investment in Align Technology as they believe growth will pick up again.

We expect the fund to perform well over the long run. That said, the fund can be more volatile than others in the Global sector and is less likely to perform well when growth investing is out of favour or while inflation is rising.

Past performance isn't a guide to the future. Source: *Lipper IM to 31/07/2022.

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