Interactive Investor

20 years of investing: what I’ve learnt, and my best and worst investments

James Thomson of Rathbone Global Opportunities explains that ‘expensive doesn’t always mean overvalued’, credits his mother for one of his holdings, and explains that he's been looking more closely at the UK market.

28th March 2024 07:53

Kyle Caldwell from interactive investor

James Thomson has been managing Rathbone Global Opportunities for over 20 years. In an interview with interactive investor’s collectives editor Kyle Caldwell, he explains that one of the biggest investment lessons he's learnt is that “expensive doesn’t always mean overvalued”. He uses Nvidia as a recent example. It has seen its price-to-earnings (P/E) ratio fall from 70x earnings to 30x earnings due to the market “underestimating the earnings potential of the growth of this business".

Thomson also names his best and worst investments over the 20-year period, credits his mother for one of his holdings, and explains that he's been looking more closely at the UK market, as it is an area that he'll be increasing exposure to in the coming months.

Kyle Caldwell, collectives editor at interactive investor: Hello and welcome to our latest Insider Interview. Today in the studio I have with me James Thomson, fund manager of the Rathbone Global Opportunities fund. James, great to see you today.

James Thomson, fund manager of the Rathbone Global Opportunities: Thank you for having me, Kyle.

Kyle Caldwell: James, you've been managing the fund for over 20 years now. What are the key lessons that you've learned over that period? 

James Thomson: One of the greatest enemies in this business is overconfidence. It's important to have a little bit of insecurity, doubt and maybe even a touch of imposter syndrome, when you're doing videos, for instance. All those can be very useful, as long as they don't overwhelm you. Because what it does is it actually creates the oxygen to change your mind, and not [allow you to] believe that you're always right and that the market is wrong. I think some of the other things I've learned is that, particularly when it comes to investing in growth stocks, expensive doesn't always mean overvalued. And a lot of pure valuation-driven investors miss some of the best investments in the market because, optically, the valuation looks too rich. There could be a very good reason for that. It's because the estimates are wrong.

Look at NVIDIA Corp (NASDAQ:NVDA), for example. People said they refused to invest in Nvidia because it was on a P/E of 70x earnings, which admittedly looks expensive, but the earnings were wrong. It's now on a P/E below 30x because analysts and investors had underestimated the earnings potential of the growth of this business. I think believing that valuation is a science can be dangerous. It's much more of an art, and then combining that with patience and the healing power of time, that is an important ingredient in a multi-decade career.

The final thing I've learned is that many investors are very quick to declare victory. They are very keen to sell their winners and declare victory and move on to the next idea. And from looking at my contributors to performance over 20 years, it is those long-term investments that we have run that have made the greatest contribution to performance. So, running those winners, and not declaring victory too early can be a great driver of success over the long term. 

Kyle Caldwell: Over that 20-year period, what would you pick out as being your best and your worst investment? 

James Thomson: I sort of feel like we're on the therapist's sofa here. My worst investments, yeah, they're never far from my mind, and I think some of the scars from your worst investments can be very useful, so you don't make the same mistakes twice. My worst investment goes back quite a long time now, it was in 2007. I invested in an airline business that went bust on Christmas Eve, so that wasn't exactly the Christmas present that I was looking for.

Obviously it was a very painful moment, but we've learned from that episode and that type of business is now totally unsuitable, a business where one of the main drivers of success was outside their control, and that was eventually what sunk them. Some other [poor] investments, I would put in the category of earlier-stage, more speculative, businesses that didn't really have a deeply embedded, loyal, resilient business model. So, some of those earlier-stage businesses, which ended up proving quite vulnerable and making negative contributions to performance. But let's not dwell on totally on the negative.

We've had great success over many years at the hands of some great businesses, and great management teams running them. Some of our top performers over the last 20 years, one would be a business in the UK, Rightmove (LSE:RMV). Another would be Amazon.com Inc (NASDAQ:AMZN), and the third would be Visa Inc Class A (NYSE:V). All three of these companies we've owned for at least 15 years, and they've all generated more than 1,000% return. And so, those sorts of positive contributors to performance tend to swamp even the worst investments that inevitably we all make over our careers. I think they deserve their place in the portfolio and remain there to this day. 

Kyle Caldwell: Moving back to the present day, last year, the stock market was heavily influenced by a small number of companies, and that's the US stock market and the global stock market, and those companies are [those making up] the Magnificent Seven. If those companies continue to dominate in the same way they did last year, is that really dangerous for stock markets? 

James Thomson: Yes, I think that concentration of market returns, which last year was the highest ever, has been a source of great angst for investors, and perhaps another reason why they are not putting their money into many global stock markets. In my eyes, it makes sense. We've now gone through two years of rising interest rates. That undoubtedly is dampening global demand. Growth is hard to find, and when growth is hard to find, investors tend to gravitate towards the few companies that are providing it. Which is why I think you're seeing that concentration, that lion's share of returns, coming from a fairly small number of companies.

But I think we shouldn't overplay it. If I look at my top performers over the last six months, there's a broader story to tell here, and there are different companies making a significant positive contribution. Yes, Nvidia was at the top of the list, but we also had businesses such as Costco Wholesale Corp (NASDAQ:COST), the warehouse club; Microsoft Corp (NASDAQ:MSFT), which is in The Magnificent Seven; Intuit Inc (NASDAQ:INTU), the business that owns both TurboTax, a means of filing your tax returns in the United States, and QuickBooks, which is used by small businesses to do their accounting.

Then there's Cintas Corp (NASDAQ:CTAS), a US company that does uniform rentals; ASML Holding NV (EURONEXT:ASML), a semiconductor equipment company; Broadridge Financial Solutions Inc (NYSE:BR), a back-office IT services provider for financial services businesses, and Amphenol Corp Class A (NYSE:APH), an industrial business that makes connectors.

You can see from that list that we have a pretty broad spread of different demand drivers making a significant contribution to the portfolio's performance. So the idea that it's completely concentrated in just those small number of companies might be taking it a bit too far. 

Kyle Caldwell: When I last interviewed you, around two years ago, you mentioned that you had been increasing exposure to US banks. Do you still have those positions? Since then we've seen interest rates rise, but there was a mini-banking crisis that played out in the US. I also wanted to ask you, given that interest rates now look like they've peaked, and there may be some cuts this year in the US and also potentially in the UK, are you looking to reposition the portfolio to sectors and companies that may benefit from lower interest rates? 

James Thomson: It was a mistake to buy those banks. As you'll remember, last year we had a regional bank crisis in the United States. Some of the banks that I owned were caught up in that crisis. Luckily, due to the expert network of analysts that we have around us, we were alerted to some potential problems there, some of the flight of deposits that they were starting to see, and some of the key indicators some of these banks were starting to come out with were starting to raise red flags with some of our best and brightest analysts. So, fortunately we sold our banks five months before the banking crisis and avoided a pretty calamitous turn in that area of the market. 

I think it highlights a problem where you shouldn't base an investment case solely around a macroeconomic forecast. That's one of the great dangers. When we invested in those banks, it wasn't solely on an interest-rate view, but that did play a role in it and we thought created, potentially, a following wind. But we've learned our lesson there. It's important not to make the same mistake twice from the other angle. So, even though it looks like we're entering a period where rates are falling, it's dangerous to potentially presume the winners that will [emerge] in that environment.

What we've done is create a portfolio with balance. We don't want to bet the outcome on a single macroeconomic development, and so we've built the portfolio in a way that's balanced to withstand a number of different economic environments that these companies can thrive in, no matter what is thrown at them. I think that's probably the best way to position the portfolio.

More recently, we've certainly noticed a move from a lot of corporates from defence to offence. A lot of budgets were very tight last year and we're now starting to see the purse strings being loosened. We think it's right to pivot away from defence into some more offence as well as we go into this year in what has been probably one of the most-hated bull markets in history. We think there's opportunities for more offensive positions, exciting growth names to go into the portfolio in the months ahead. 

Kyle Caldwell: So, you no longer have exposure to US banks. Where have you been finding opportunities? What has been your newest purchase for the fund? 

James Thomson: Over the last six months, we've put some new holdings into the portfolio, a variety of businesses in different sectors with different demand drivers. The first one would be Novo Nordisk A/S ADR (NYSE:NVO), the Danish pharmaceutical company, which has a real pedigree in the diabetes franchise. You'll have seen Novo Nordisk in the headlines over the last year or two with their miracle drugs, Ozempic and Wegovy, which cause some pretty rapid weight loss, and improvements in all sorts of other related diseases that come from obesity and diabetes.

I must credit my mother, actually, with pointing out this investment opportunity to me. I wish I'd listened to her sooner, actually. She went on Ozempic about two years ago and has lost about 50lb. As a result, [she's] no longer diabetic, and has a whole new positive outlook on life, as well as all the health benefits that are coming through. I think it shows that you should always listen to your mother, even in the investment business. 

Another company we've been buying recently is Walmart Inc (NYSE:WMT), the supermarket and warehouse club, one of the largest retailers in the world. I think this shows the scale advantages that a retailer like Walmart can bring to the party. We're in a much more difficult environment for consumer spending. It's not coming in the linear way that it used to historically, it tends to be much more seasonally based now, and so you need a company with the scale and buying power in order to navigate an environment that isn't as close to trend throughout the year.

So, we've been buying Walmart and we bought another US company called Monster Beverage Corp (NASDAQ:MNST), which makes energy drinks. We're all aware of this health and wellness kick that we're going through globally, but not everybody is on board. I think there's a part of the population that really wants energy drinks, high caffeine, high levels of sugar, to keep them going throughout the day. And that's a category that is growing very quickly, despite some of those trends that might seem to be a headwind. So, all three of those companies bring interesting and different demand drivers. Sometimes resiliency in our weatherproof bucket, but then more pro-growth parts of the portfolio as well, companies that are innovating, shaking up their industry and growing quickly. 

Kyle Caldwell: The fund has around 6% in the UK. You've mentioned one of those holdings is Rightmove. Is it an area you've been looking at a bit more closely given how cheap the valuations are, particularly for the mid and small-cap parts of the market? 

James Thomson: Yes, the UK certainly does look cheap, but cheapness has never been a great guide to future performance. So, for me it has to be the quality of the business, that's the primary driver of putting a UK company into the fund. It's very competitive when you're competing with markets with such innovation like the US. But yes, we are on the cusp of adding a new name into the UK part of the portfolio, so that potentially could take our weighting higher over the coming months.

You have to look at the types of companies in the UK market. If you're looking at the FTSE 100, they tend to be more defensive types of companies in sectors like banks, commodities, pharmaceuticals and healthcare. If you're looking for growth companies, you probably have to go down the market-cap spectrum into the FTSE 250.

For a fund like mine, it's hard to invest in those sorts of companies because of the position size that we need to build. But at the top end of the FTSE 250, there are some interesting potential ideas that [could] go in. So, yes, I think it's back on the menu again. Names that we have in the UK would be Rightmove, Next (LSE:NXT), Compass Group (LSE:CPG), which is the catering business, and Howden Joinery Group (LSE:HWDN), the kitchen maker. I think we've got an interesting spread of companies there, but potentially more to come. Watch this space.

Kyle Caldwell: Finally, James, do you have skin in the game? 

James Thomson: Yes, I certainly do, and have for many years. Rathbone Global Opportunities is my largest personal investment by a country mile. And it's also my daughter's largest personal investment, so that certainly sharpens my focus. 

Kyle Caldwell: James, thank you for your time today. 

James Thomson: Thank you.

Kyle Caldwell: That's it for our latest Insider Interview. I hope you've enjoyed it. Let us know what you think. You can comment, and please do hit that like button and subscribe. Hopefully, I'll see you again next time. 

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