The Analyst: Pursue the new industrial revolutions
Saturday 23 February 2008
Great Britain began the process of industrialisation in the 18th century, turning what had been a subsistence economy into a fully developed economy through technological innovation. This is the position in which some emerging nations, such as China and India, are today.
Industrialisation increases living standards, which in turn increases the demand for basic necessities. When the United States went through this period of change, the country's electricity consumption increased 124-fold, oil consumption rose 35-fold, and meat consumption rose by about 80 per cent as real incomes grew from $5,000 to $20,000. This rapid pace of advancement brings opportunity for investment.
There is now a race to meet the electricity, oil and food demands of China, India, Russia, Brazil and other emerging economies.
James Thomson, the manager of the Rathbone Global Opportunities Fund, has positioned the portfolio into companies likely to benefit from this 21st-century industrial revolution.
It is not an average global growth fund; it is a spicy portfolio containing 50 to 60 of Mr Thomson's best ideas. Ultimately, he is looking for companies he believes can grow significantly, but where this potential has not yet been recognised by the wider market.
Some of these may be companies that many investors haven't heard of, but this is precisely what he likes – to identify undiscovered growth companies across the world. This style often leads him into small and medium-sized companies, so it's not surprising to find that the fund has only 26 per cent invested in larger companies.
He typically invests in companies that are at an early stage of growth, preferring innovative businesses with entrepreneurial management and simple products. This is not a "recovery" fund; instead, he likes to invest in proven businesses that are already firing on all cylinders.
A classic example of a stock he likes is Accsys Technologies. It treats softwoods chemically to give them all the benefits and longevity of hardwood. The beauty of it is that the treated softwood should be significantly cheaper than hardwood once in full production. This is a simple and effective idea, and one that has yielded excellent returns for the fund so far.
Rather than investing directly in, for example, a big oil company, or agricultural produce such as wheat or corn, Mr Thomson harnesses these growth opportunities indirectly through mining equipment, agricultural equipment, oil services and fertiliser. He believes these companies are less dependent on the movements of commodity prices and should withstand price volatility.
If companies are vulnerable, Mr Thomson is not afraid to cut the position. The fund's cash position is currently 14 per cent. This is purely a function of selling stocks that he believes are at most risk of being downgraded by analysts.
There are thematic elements to this portfolio, but it is ultimately a stock-picking fund with companies chosen primarily on their individual merits. Examples include a Bollywood film studio, an aircraft seat manufacturer and an online gambling stock – so there is healthy diversification.
The geographical weightings are also well spread; the portfolio is currently 26 per cent in Europe, 20 per cent in the US, 19 per cent in the UK, 13 per cent in Asia, 8 per cent in Canada, and the rest in cash.
The fund does not own companies listed in emerging markets, but gets the exposure through the UK AIM market and Canadian listed companies, for example. This is quite unusual in that the fund has delivered superb returns without directly investing in emerging markets.
Since Mr Thomson has had day-to-day management of the fund, it is up by 128 per cent, while the MSCI World Index is up 42 per cent (Source; Lipper: from 31 October 2003 to 15 February 2008). It ranks as the third-best performing fund in its peer group over this period (although note that past performance is not a guide to future returns).
It surprises me that, with this record, the fund is only a minnow, at £67m. The advantage of being small and nimble is that it can invest further down into smaller companies, where higher growth opportunities can exist, but there is still plenty of room for the fund to grow without its size becoming a problem.
This is a high-octane fund that can be volatile over shorter periods, but it is one that deserves greater recognition. You only have to look at the calibre of the individual managing this fund. James Thomson is a rising star, in my view, and has the ability to deliver superior long-term returns.
Meera Patel is a senior analyst at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information on the funds included in this column, visit www.h-l.co.uk/independent. Mark Dampier is away
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