Valuation is a 'terrible predictor of stock market performance'

"[The US is] where you find the incredible innovation, differentiation and growth – that's where the money is," explains James Thomson, manager of Rathbone Global Opportunities. "You can't find another Amazon (US:AMZN), Adobe (US:ADBE), Paypal (US:PYPL), Visa (US:V) or MasterCard (US:MA) outside the US. These are world-leading, world-beating companies. But my geographic weightings aren't rigid: five years ago I had 35 per cent in the US. It is my stock picking – finding great companies – that drives my geographic allocation."

And he is not concerned about what are considered to be high valuations.

"That's exactly what people said to me about Amazon five years and 500 per cent ago," says Mr Thomson. "The dirty little secret is that valuation is a terrible predictor of stock market performance. It doesn't mean ignore but use in moderation. However, I am concerned about deteriorating economic growth in the US. Potentially, some leading indicators rolling over would lead to more stormy conditions in global stock markets."

So Mr Thomson likes companies that have predictable and reliable earnings streams that are less reliant on the economic cycle. One of the themes he is investing in at the moment is digital transformation.

"I think this is an unstoppable trend in the market," he says. "Companies that are racing to modernise their systems, digital transformation to improve IT operational efficiency and customer experience, new products or faster services, and [trying to] make life better for employees."

Technology is the fund's largest sector exposure accounting for over a quarter of its assets, and its top 10 holdings include online retailer Amazon, software company Adobe, and online advertising and service company Tencent (700:HKG).

An industry that doesn’t have such great prospects in the near future is tobacco, according to Mr Thomson. "We've sold all of our tobacco exposure in the fund," he says. "I think this is an industry that is undergoing its own transformation at the moment. As traditional combustible cigarette volumes decline they're trying to make up for that with their next generation reduced risk products, and often when companies are undergoing a transformation there can be some awkward moments as growth rates stutter or plateau. So I think for the time being it's better to stay on the sidelines."

But he argues that the greatest risk to this fund is a booming economy. "If we are entering a period of booming economic growth then you don’t necessarily want to be in growth stocks. In that sort of environment you probably want to be in value stocks. And value stocks are different to the ones we remember from many years ago – boring plod along companies. Value stocks today sit in some of the most economically sensitive parts of the market, for example, commodities, rate sensitive banks and economically sensitive industrial companies. These are the businesses that are on value multiples and would benefit the most from a booming economic growth picture around the world.

"But that's not where I think we are – I don't think we are in a period of above trend economic growth. In fact, I think growth is quite fragile. And if you believe that, growth stocks are the place to be because investors wrap their arms around them when economic growth is hard to find."

Mr Thomson also has about a quarter of the fund's assets in what he calls the 'defensive bucket' – holdings that are less economically sensitive, with slower and steadier growth prospects. His allocation to these ranges between 15 per cent and 25 per cent.

"I'm at the top end of that range reflecting my nervousness about the business cycle," he says. "I have them because I messed up so badly in 2008 by not having them. Pre-2008 this portfolio was too adrenaline filled – not enough balance and diversity – and I need a part of the portfolio to be less economically sensitive to provide a buffer during more difficult times. They're there almost as an insurance policy – a buffer for more difficult times in the economic cycle when you want businesses where there isn't a direct link between their growth rate and the economic growth rate."

The defensive bucket companies are in sectors such as healthcare, food, beverage, staple services, care homes and medical devices. They include US-listed Abiomed (US:ABMD) which makes heart pumps. "The device is implanted into your left ventricle if you are suffering from a certain type of heart attack," explains Mr Thomson. "And it improves survival rates from about 50 per cent to 80 per cent. So my advice would be if you are going to have a heart attack try and have it in the US."