Why I have sold tech shares and bought banks

James Thomson, manager of the Rathbone Global Opportunities fund, thinks the one-sided dominance of tech and growth shares is starting to fade. In response, he has reduced exposure to tech and has been buying companies that will benefit from the post-pandemic economic recovery – including buying banks for the first time in five years.

Kyle Caldwell, collectives editor at interactive investor: Hello. Today I'm joined by James Thomson, fund manager of the Rathbone Global Opportunities fund. The fund has outperformed the average fund in the global fund sector over three and five years. What would you say have been the main drivers of that outperformance?

James Thomson, fund manager of Rathbone Global Opportunities: Well, growth investing has been in the vanguard really for the last 15 years, and growth investing does well when widespread, reliable economic growth is hard to find. Twenty years ago, almost half of the S&P 500 was growing their revenues consistently more than 15% a year. Today, only 70 companies out of 500 are doing that. And so during those periods of scarce growth, investors flocked to the companies that provides it. So I think this concludes a lot of companies in technology, businesses like Amazon (NASDAQ:AMZN), Adobe (NASDAQ:ADBE), Intuit (NASDAQ:INTU), which is the maker of QuickBooks. Those have been some of our top performers within technology over the last few years. But we've also, you know, have a broad spread of exposure in this fund. We've had success from a healthcare business called Sartorius Stedim Biotech (EURONEXT:DIM), which makes equipment for drug and vaccine production. Align (NASDAQ:ALGN), which makes Invisalign braces. And Match Group (NASDAQ:MTCH), which is the company that might help you find the love of your life because they own Tinder. So the combination of all of these businesses in different parts of growth investing have driven real success over the last three to five years.

Kyle Caldwell: Some fund managers argue that US shares are now looking very expensive, but given that the fund has two-thirds invested in the US, I'm assuming that you would argue the opposite and that it's a price worth paying?

James Thomson: Yes, in the long term, but actually it might not be in the short term. The US market is dominated by high-quality, resilient, recurring revenue businesses, particularly in tech that deserve a higher valuation. If you're looking for a market with a cheap valuation, I'd point you to the Russian market, which is on a P of four. Now why? Because it's filled with highly volatile, commodity sensitive businesses that have little predictability. So if you really want to focus on quality that will put you on a premium and the market will give you a discount for cyclicality. So my view is that the US is expensive but not overvalued.

But in the short term, the market is punishing quality and it wants cyclicality and earnings that are geared into rising commodity prices. And I think the reason that they're looking for, the markets looking for cyclicality at the moment is because we're coming out of a period of extraordinary stimulus. Covid has triggered more stimulus spending than the entire inflation-adjusted budget of the Second World War. And so growth is not hard to find at the moment.

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More generally, I think that probably the pendulum has swung too far. A lot of these commodity industries have been starved of investment for many years due to low commodity prices and, to a certain extent, the green agenda. So we're now probably in a period of catch-up. Now, I still wouldn't advise buying Russian equities, I'll probably be poisoned for saying that, but I think many European markets have heavier weightings to these value-oriented sectors, including energy, mining, industrials and some of the rate-sensitive banks. So you could see actually European outperformance in the short term.

Kyle Caldwell: As you've just mentioned since the start of 2022, we are only a couple of weeks in, but there has been a bit of a wobble for growth shares, particularly technology shares. Does this change your view at all on tech in light of the high levels of inflation and the potential interest rate rises to come?

James Thomson: Well, this probably sounds like a turkey voting for Christmas, but yes, I think the one-sided dominance of tech and growth strategies is starting to fade. And growth has outperformed almost without challenge for the past 15 years. And I think some parts of the market have been so starved that a period of catch-up has been likely for some time. So I think we're really getting back to an investing world that isn't so binary anymore, and we actually started to see that shift last year.

Some parts of tech, early stage, unprofitable speculative tech stocks, I think, look dangerous. Some of these stocks are up four-fold since the beginning of the pandemic, and so I would certainly avoid those parts of the market and we have in this fund. But I don't think that all of tech is in a bubble like in the dot.com mania. You know, if you look back to 2000, tech represented about 46% of the market, but just 23% of profits. Today, tech is 39% of the market, but a much higher 34% of total profits. So in my view, that's a much more balanced contribution and I think really worthy of the mission critical role a lot of these companies play in our lives.

Kyle Caldwell:And I wanted to ask you about recent portfolio activity. What have been the most recent changes you've made to the fund?

James Thomson: Well, I'll have to be a little bit coy on this because we can't talk about specific stocks where I haven't finished the trading. But I think in sort of a general strategic shift on this fund, we have been pivoting away from some of our technology names, some of the stay home, some of the work-from-home stocks that did so well during the pandemic. And we've taken our technology weighting from 29% down to 20%, and then really redeploying that money into some of the areas that will benefit from reflation and reopening and some areas that we haven't had exposure to for a long period of time.

We've been buying some banks for the first time in five years, US regional banks that are growing quickly and not just pure plays on the rate cycle. We've been buying some sort of picks and shovels, old economy, industrial businesses that will really benefit from this period of high levels of cap-ex as a lot of these industries have underinvested and we're now entering a period of higher than normal demand. That's meeting businesses that have been cut very lean. So you could see significant gearing into an improving environment for a lot of these industrial businesses.

And some retailers that we think, both in the US and some luxury goods businesses in Europe, that we really think will benefit as we emerge from this socialising recession and sort of refresh our wardrobe. So we've probably moved about 15% of the fund over the last year, trying to achieve more balance in the fund and moving away from some of these more pure growth techniques that did so well for us historically.

Kyle Caldwell: And is this part of a move to position the fund towards the potential winners of a post-pandemic economic recovery?

James Thomson: Yes, I think we're just trying to create a healthy balance between reopening reflation stocks like retail and banks, industrials and transports, and then traditional growth stocks. You know, many actually pulled forward some of their growth during the pandemic in technology and healthcare. I think where we don't want to go is we don't want to value wash this fund. This is still an independent growth fund, companies that are doing something different, shaking up their industries, growing quickly but sustainably. And so we still don't have exposure to deep value stocks, earnings turnaround, special situations, deeply wounded businesses in sunset industries, or businesses where the main variable is outside their control, like many commodity stocks. So we're trying to get that balance right, sticking to our growth credentials, but being able to pivot and rebalance the fund to take advantage of some of these reopening and reflation realities. 

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Kyle Caldwell: And finally, a question that we ask all fund managers that we interview. Do you personally invest in the Rathbone Global Opportunities fund?

James Thomson: Yes, I do. It's my largest personal investment.

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

James Thomson: Great pleasure. Kyle, thank you.