“One of the great enemies in the investment business is overconfidence – not being willing to admit you’re wrong. I think I have always been quite good at not being overly convinced of anything, and staying as adaptable as possible,” Rathbones’ James Thomson (pictured) tells Portfolio Adviser. “I think, as long as it doesn’t master you, a little bit of insecurity and doubt can be very useful in this business, because it means you don’t fall prey to overconfidence and just running investments into the ground.
“I have always felt that, even a little bit of impostor syndrome is no bad thing. So long as it isn’t overwhelming.”
It is hard to imagine that fund manager Thomson would suffer from imposter syndrome. Last month marked his 20-year anniversary running the £3.6bn Rathbone Global Opportunities fund. Over the last two decades, it has returned just shy of 1,000% to investors, more than doubling the 381% average return of its peers in the IA Global sector, and marking it as the single best performer out of 87 funds, according to FE Fundinfo data.
It hasn’t always been plain-sailing for Thomson, however. He first took over the helm of Rathbone Global Opportunities after three years of experience in the industry, when the mandate had just £5m in assets under management. Then, less than three years later, the global financial crisis hit.
The fund struggled, falling by 20.9% between the start of 2007 and the start of 2009 in total return terms. It was during this period that Thomson recalls some of his lowest moments in the industry.
“One of the worst investments I have made was in an airline stock, which went out of business on Christmas Eve in 2007,” he says. “You always try to learn from your mistakes. They never repeat themselves precisely, but there is an element of rhyming. I have never invested in an airline since, because one of the big drivers of profitability for the sector is something outside of its control – which is jet fuel prices.
“It means you end up trying to predict things that are impossible to predict. For the most part, this has kept me out of all commodity stocks – I don’t want to hold companies where the main driver of their success is out of their control.
“This means my fund hardly ever has any oil and gas, or mining stocks – it has therefore always had quite a big divergence from the benchmark.”
Alongside commodities, Thomson also steers clear of emerging market equities, on the basis that they lie outside of his knowledge sphere.
“I think the right thing to do is to stick with your principles – but it can bite us as well,” the manager reasons. “In 2022 the oil and gas sector was up 60% and we didn’t hold any. That was a very hard mountain to climb, but it is a health warning I give to all of my investors – there are certain areas of the market where we just don’t think we should invest, from a quality and growth perspective.
“That can mean, at times, we underperform as a result.”
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Despite falling by 20.6% in 2022, the fund went on to achieve a top-quartile total return of 18% in 2023. It has also still managed to achieve a top-quartile total return of 77% over five years and a second-quartile Sharpe ratio (which measures risk-adjusted returns), despite the challenging year.
“There are always career lowlights and stock mistakes, but with the healing power of time you can use that to your advantage further down the road and learn from those mistakes. They probably make you a better manager of money, ultimately.”
‘Cheap’ doesn’t mean ‘attractive’
Alongside the importance of humility, Thomson has also learned that stocks can be expensive but not overvalued – a concept he describes as “almost anathema” to value fund managers.
The fund retains a strict quality and growth bias, which has resulted in a current 69.2% weighting to US stocks, and 21.6% in European names. It also has significant allocations to consumer discretionary and technology names at 22.5% and 16.3%, respectively, with its list of top 10 holdings populated by stereotypically ‘expensive’ names such as Nvidia, Microsoft, Visa, Alphabet and L’oreal.
“This has been the source of a lot of my returns over the last 20 years,” he explains. “I think the confusion here is that, often, the companies that offer better growth and greater resilience actually deserve a higher multiple. And the types of companies in the index are changing as well, which is why the US market is now on a quite a high valuation multiple, while the Russian market is trading on an average price-to-earnings ratio of 2x, for example.
“It is because one market offers very mission-critical, resilient businesses where demand is predictable, while the other has very unpredictable outcomes. So, the market gives a much higher multiple to those types of businesses. And those are the kinds of businesses that tend to live in the US – the Microsofts and Nvidias of this world.”
In fact, Thomson says the three best investments of his career so far have been Amazon, Rightmove and Visa – all of which were added to the portfolio following the doldrums of the global financial crisis in 2009. Since the beginning of 2009, the three companies have returned a respective 5,919.2%, 2,975%, and 1,966.4%, according to Yahoo Finance.
“I remember meeting [Amazon’s] management team in 2009,” the manager continues. “Fund managers are used to being spoonfed at manager meetings. A meeting with Amazon is totally different – they don’t tell you anything.
“You could almost see the steam coming out of the other fund managers’ ears. But Amazon don’t have an interest in spoonfeeding fund managers; if they have the customer experience right, the shareholders will be taken care of.”
Thomson explains that, at the time of the meeting, Amazon was investing in launching Amazon Web Services, which is now the largest cloud business in the world.
“Thank goodness they did not telegraph their intentions, because that would have allowed their competitors to catch up quicker and would have eroded the lead time that they had.
“I’m proud of myself in that I was able to look through the typical checklist of requirements that most fund managers had. Many fund managers after that meeting would have said that Amazon was uninvestable. Because we weren’t given an easy way out, we had to dig around for the answers and really build the investment case ourselves.”
Holding any stock for 15 years requires a significant amount of conviction. How does Thomson weather the storms of volatility, or avoid temptation to sell after a company has already achieved stellar gains?
“Often, investors declare victory too early,” he answers. “If they get something right, they will be tempted to overtrade, sell out and then hope they can come back in again at a favourable price. The justification for this is often some sort of scientific analysis, but I have never really thought of this business as scientific. I think it is mostly art, combined with common sense, some adaptability, and ultimately the healing power of time.”
Inconsistency is key
Looking ahead over the next 20 years, Thomson believes there will be a “scarcity of certainty”, and that investors will have to adapt their return – and volatility – expectations.
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“Investment returns will probably be lower and more inconsistent, but that doesn’t mean people shouldn’t invest. I think a lot of people are on the sidelines at the moment.
“A few months ago, my own mother became very nervous. She asked me whether she should sell all of her investments until things become clearer and calm down. Which was upsetting to me, because my fund is her largest investment,” he jokes.
“I calmly told her that investors have to think over at least five-year time horizons and, if you don’t need that pot of money for the next five years and you still think equities are a good place to invest, you should see it through.
“People wait for the perfect moment to come. That is what investors are implicitly trying to do – but it will never come and it will never be clear. Usually, the best returns come when you least expect them.”
