Stock pickers were busy at the tail end of 2018 as the global market sell-off provided plenty of buying opportunities.
Buy-and-hold funds, such as Troy Trojan Global Equity, saw their turnover during the period spike, and others saw the slump as an opportunity to ‘buy the dip’.
For James Thomson, manager of the Morningstar Silver Rated Rathbone Global Opportunities fund, this was most certainly the case.
He sold down some of his positions in more economic-sensitive areas like industrials, where he owned a few German names; as well as some video games makers like Activision and Electronic Arts as the likes of Fortnite disrupt the traditional industry.
Thomson says the market went too far in the final three months of 2018. “It took that bearishness too far and on the ground we weren’t seeing that kind of fundamental deterioration to support the sell-off.”
As a result, he says he used the dip to selectively start buying – topping up existing positions and adding some new holdings.
The buying was mainly concentrated on US firms, with exposure to the States up to around 63%. Technology is still a fruitful area, too, with the weighting to that sector now at around 20%.
“The sustainability of economic growth in the US is underestimated,” he says. “I think it still looks one of the most resilient economies anywhere in the world and that is a good backdrop for stock picking.”
True, there’s the potential for 2019’s rally to be a dead-cat bounce, in which case the market will retreat again. But if the data hold up, “the US will power ahead again”.
There are concerns about the global economy, though. Things seem to be slowing and we’re now very much late-cycle. With that in mind, the portfolio has become more defensive and Thomson’s ideas are focused on companies with “growth and recession-resistant qualities”.
Below, Thomson talks Morningstar.co.uk through a quintet of names the Rathbone Global Opportunities fund bought, or added to, through October, November and December.
McCormick (MKC)
A company that has been in the UK investment press recently as it was made the latest addition to Terry Smith’s Fundsmith Equity portfolio, McCormick has been held by Thomson’s offering for almost eight years.
He’s been adding to his position in recent months, as the stock fell around 25% from an all-time high $157 to a five-month low $120. It’s recovered since to trade today at $134. The stock accounts for 1.8% of the fund’s assets.
McCormick makes products that “fill our kitchen cabinets”, with Schwartz herbs, spices and seasonings its most known brand to UK consumers. It also makes Frank’s Red Hot Sauce, which is extremely popular with US eaters.
Hitherto a coating for the ever-popular US staple food that is buffalo wings, it’s become something people now use with pretty much everything. McCormick shares: “It’s quite an addictive sauce and you end up putting it on everything.”
Lamb Weston (LW)
There has been a flurry of interest recently in chip makers, as demand for semi-conductors continues to grow. But Lamb Weston makes a different kind of chip – French Fries. “You don’t get much more sustainable, reliable demand than demand for chips,” says Thomson.
Thomson first bought Lamb Weston in April 2018 at a price of around $60 and it’s grown quickly to be a 1.7% position in the fund. Today, the share price has climbed to $70, albeit that’s 15% below its November peak.
Chips are the second most-profitable thing on a restaurant’s menu. As a result, every restaurant finds a way to put chips on their menus, even the likes of Mexican chain Taco Bell.
“Mexican people don’t eat a huge amount of French fries but somehow they’ve managed to weasel it into their menu. This is evidence of the demand for this product,” notes Thomson.
“It’s very reliable demand and capacity is about 100% utilised. Ultimately you are reliable on the potato crop for this product, but it’s the most wonderful crop because they’re almost impossible to kill.”
That said, one thing that could cause a “chip crisis” would be another extremely hot summer. In Europe, 2018’s scorching weather proved to be “one of those very rare times where potatoes were killed”.
It’s a worry, but the larger restaurants such as McDonalds and KFC should be fine because they have good supply chains, says the manager. It is more likely to hit the smaller chippies.
Campari (CPR)
While chips are the second highest margin item on a restaurant, alcoholic drinks are the most profitable. Italian firm Campari makes a number of popular drinks brands including liqeur Grand Marnier and its eponymous spirit Campari.
While many fund managers will own the likes of Budweiser maker AB InBev or Guinness brewer Diageo, Thomson says he’s looking for under-the-radar ideas. “I’m trying to find the companies that are doing something a little bit different.”
The benefit of making something like Campari, rather than whisky or scotch, Thomson adds, is that it is much less capital-intensive. Whereas the latter have to be distilled in barrels for years, Aperol takes just 10 days to make.
“That is great because it doesn’t take up a lot of capital in the business,” explains Thomson. “In the meantime, the demand for it seems to be off the charts, and hasn’t even entered the US in any meaningful way. That is all potentially to come.”
Estee Lauder (EL)
The Troy Trojan Equity Income fund manager has recently added L’Oreal (OR) to its portfolio and that is one Thomson says he’s also been looking at. However, for not he has bought rival Estee Lauder.
The cosmetics behemoth owns the likes of DKNY, Clinique and Tommy Hilfiger brands. It tends to be more higher-end than L’Oreal, with prestige brands that command higher prices points with a more targeted audience.
Barriers to entry in the beauty products industry are coming down, with Instagram and other platforms offering a free, or cheap, way to market brands. But many times these start-up brands can achieve success quickly, but then they plateau, Thomson says.
At that point, they need a company like Estee Lauder to come and acquire them in order to take them to the next level. “That’s exactly what Estee Lauder do. They don’t see it as a threat; they see it as a potential buying opportunity.”
It does have big exposure to China through its recent deal with Tmall, which Thomson says is likely the reason for its weakness in the latter part of 2018. The stock fell from an all-time high $158 in June to a 14-month low of $122 by Christmas.
Thomson bought a little earlier than that, in November, but has seen the share price re-rate quickly after some “great results recently”. It’s back up at its record high level today.
Microsoft (MSFT)
Microsoft is a popular stock for most global or US-focused equity funds, but it’s one that Thomson has never owned in Rathbone Global Opportunities. That is, until November when it was added at around $105.
Despite its 18% fall between the start of October and Christmas, the firm remains high-quality, particularly in the cloud space.
Thomson said he’s hitherto been unconvinced about the firm’s realistic growth ambitions under former boss Steve Ballmer. However, their pivot towards the cloud under current CEO Satya Nadella has proven that “Microsoft has successfully reinvented itself”.
The two big players in the cloud computing business are Amazon and Microsoft. Luckily for Thomson, he now owns both with Amazon his largest holding at 3% of assets. Microsoft accounts for 1.5%.
The manager says Amazon is very good at tackling small and medium enterprises, while Microsoft serves medium and larger companies well. That’s because it can offer a hybrid solution, where less sensitive data can be stored in the public cloud, but other more sensitive data can closely guarded and stored on-premise.
Further, he adds, while cloud computing is growing rapidly – at around 40-50% per year – “the penetration of that is still very low, so there is a significant runway for growth”.
