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Super-sizing the US for sustainable growth

James Thomson won't hear a word said against the US and is bullish on pharma - just don't offer him Chinese equities
April 29, 2015

For James Thomson, manager of Rathbone Global Opportunities Fund (GB0030349095), all roads point to the US. The growth-focused manager is as bullish as can be on the region, believes you can "bank on" US growth and says valuations will have to go much further than their already soaring highs before he calls it expensive.

"I think America deserves higher price-earnings ratios. America deserves to look more expensive," he says. The fund is currently 59 per cent invested in the US and Mr Thomson derides those who say the market peak must be approaching. "The US is on a sustainable growth trajectory," he says.

Other analysts argue that US valuations might not be sustainable. US equities are entering their seventh bull year and rate rises on the horizon could have a dampening impact, particularly if earnings growth fails to materialise.

But Mr Thomson says his pro-US stance is down to more than just domestic data. It is directly connected to his pessimistic outlook on China, where he believes the transition from an investment-led to a consumption-led economy is floundering, a trend he thinks will hand gains to US equities.

"The Chinese growth miracle was founded on investment spending and that represents 48 per cent of their economy, with India it's in the 30s. For 1 million dollars of investment spend 12 jobs are created and for the same million dollars of consumption spend only four jobs are created.

"Now China wants to switch off investment spending in favour of consumption but it's not that easy when you are having to create unemployment to do that," he says. He argues that a Chinese slowdown will mean "lower prices for Americans and a direct benefit to the US consumer".

 

James Thomson CV

James Thomson is manager of Rathbone Global Opportunities Fund. He joined Rathbones in 2000 and between November 2003 and June 2005 assumed responsibility for the day-to-day management of the portfolio, under co-manager Julian Chillingworth, before being named sole manager in 2005. He has a BA from Cornell University and holds the Investment Management Certificate and the Securities Institute Diploma.

 

So far US consumer spending has not risen in the way Mr Tomson expected but he is optimistic that it is only a matter of time. "We haven't really seen the evidence coming through yet," he admits. "About 25 per cent of American savings is being spent, 25 per cent is being used to pay down debt and 50 per cent is being saved."

But he says once enough money trickles in to those savings accounts - which have also received a boost from lower oil prices - US equities could receive another boost.

It's not all gung-ho for the US, though. Last year the strong dollar exposed flaws with luxury jewellery brand Tiffany (US: TIFs) which meant he decided to sell.

"For the most part I try to get out of the game of predicting currency but it exposed a vulnerability in their business that's out of their control. I don't know when it will turn around, so while that's going on I would rather be somewhere else," he says, as evidence of his "pretty punchy sell discipline".

That somewhere else appears to be biotech and pharmaceuticals, which he bought into for the first time last summer. After a decade of shunning the sector he is all guns blazing, believing that finally "we're getting innovation back".

He puts that down to a wave of new drugs coming to market with no competitors. He also cites the impact of the mapping of the human genome, which has boosted the creation of genetically tailored drugs and streamlined the manufacturing process.

"It's taken 10 years to create drugs that are much better than the last generation," he says. "Mapping the human genome improves the chance of success and allows you to discontinue drug trials earlier than before and make big savings."

He has thrown his weight behind Amgen (0R0T), which is working on a 'super statin' that he predicts "will be a multi-million dollar drug" if it gains approval. He also bought a holding in Perrigo (US: PRGO) in 2014, a US-based manufacturer of private label pharmaceuticals, and has a 13 per cent exposure to healthcare in total.

Another of Mr Thomson's long-time favourite stocks is Rightmove (RMV). This company "has so many of the things I look for. It has scaleability, it has pricing power and has an 80 per cent market share."

However, he spent a nail-biting year worrying about it in the run-up to new competitor Onthemarket.com's entry to market in 2015. "The worst ghost to fight is one you don't know much about," he says.

Share underperformance in 2014 prompted Mr Thomson to sell down his position and the holding slid from the largest position in the fund on 31 January 2014 (2.8 per cent) to not even breaking into the top 10 a year later.

But in February 2015 Rightmove's results revealed it had lost only 260 customers to Onthemarket.com out of almost 20,000 and that average revenue per agent was still over 13 per cent and set to increase again in 2015. Mr Thomson bought more shares and is firmly back on board.

Despite his strong convictions, Mr Thomson does not believe that 2015 will be plain sailing. In 2014 the fund returned just under 9 per cent, following 26 per cent in 2013, and in the year to date has returned 8 per cent.

He says: "In the last year we've seen very inconsistent performance and that will increase because the market is falling in love and out of love with things very, very quickly. It's the cowboy nature of a lot of investors. 2015 will be a more volatile year and there could be corrections," he says.

He remains an out-and-out stock-picker, more focused on solid track records and company fundamentals than spotting underdogs, but since the finanical crisis he has paid more attention to macro and risk factors too.

Mr Thomson took over the fund in 2003 and "ripped up the rule book". "I wanted it to be a global stock-picking fund looking for the growth companies. At the time there were a lot of value orientated managers so growth was more interesting. I was looking for businesses not in other managers' portfolios," he says.

"But the crisis taught us that we need to think about all parts of the puzzle, not just stock selection. We got a pasting in 2008 and that underlined the importance of macroeconomics, portfolio balance and risk management. Now we've added a 'weatherproofed' part of the portfolio, a less economically-sensitive defensive bucket that hopefully can provide some buffer during periods of economic crisis."