Returning inflation could lead to a stormier time for global markets in 2018, according to Rathbones’ James Thomson, who noted the fragility of the bull market.
The FE Alpha Manager said while he has been left unconcerned by valuations as a predictor of future performance, there may be other challenges in the year ahead.
“Valuations are a very poor predictor of [short-term] performance, [which is] strange as we talk about it incessantly,” he said.
Thomson said global economic data had turned more positive recently, with markets “awash in bullishness” highlighting earnings upgrades, which drive share prices higher.
He noted that while economic growth should be running hot it was not, noting that economic data was not having the multiplier effect it has had in recent years.
As such, he noted that the bull equity market could be “fragile”, adding: “Even a moderation in leading indicators could signal risk-off.”
Thomson said higher inflation could impact businesses and lead to profit-taking in the equity markets, leading to a “stormier 2018”.
He said investors should seek out companies exhibiting stability, low earnings volatility, high margins, low leverage, and high returns on equity and assets. Indeed, Thomson said such companies inform his portfolio construction.
Thomson said 2017 had been a “very good year” for the £1.2bn five FE Crown-rated Rathbone Global Opportunities fund, rising by around 20 per cent compared with a 14 per cent rise in the IA Global sector.
Performance of fund vs sector & benchmark in 2017
Source: FE Analytics
However, while the fund turned in a top quartile performance last year, Thomson said the it had made several mistakes.
He explained: “We made a number of stockpicking mistakes in the consumer and retail space, operational performance has been patchy and of course, consumer spending habits have been changing."
“Amazon is one of our largest holdings but it shadows long across the entire retail ecosystem, so we win with Amazon but lose with other retailers,” said Thomson (pictured). 
“The weak US dollar was a headwind in 2017 as it dropped about 10 per cent against sterling but our US stocks were a blockbuster success and would have been more so if the dollar hadn’t weakened.”
In his view, not being in the emerging markets, one of last years’ outperformers, also dampened returns. Other stockpicking mistakes they made were in the UK market, where they decided to reduce their exposure.
He added: “We have dramatically reduced our exposure from 23 per cent to 6 per cent over the last 18 months, we have lots of high conviction ideas outside the UK, so why not use our global flexibility.”
However, positives for the fund “far outweighed” the negatives during 2017 with stockpicking key to positive performance.
Thomson also managed to avoid the underperforming banks and commodities sector, where he had close to 0 per cent exposure.
“Banks – particularly, big universal banks – underperformed materially until Q4,” he explained. “We don’t own any of the big banks.”
Thomson noted particular success in its US holdings, mainly from technology and healthcare holdings, two areas for growth investors.
“Our best performing stock in 2017 was the US company Align Technology, with 2.2 per cent contribution to return, followed by Tencent, with a 1.8 per cent contribution, and Paypal, which contributed a 1.2 per cent to returns,” he said.
Indeed, the fund benefited from a return to favour of the growth style in 2017 after the outperformance of value a year earlier.
“In the tug of war between growth and value, in 2017 growth was the winner as investors prized reliability, sustainability and less leverage to the economic cycle,” said the FE Alpha Manager.
“A complete role reversal to 2016 when [Donald] Trump was elected and investors geared up to value names as beneficiaries of a broad economic renaissance.”
He said: “Most of our selling in UK stocks has gone into Europe and USA. We like Internet and tech -which make about 25 per cent of the fund- food, beverage and tobacco and healthcare.”
The manager will continue to avoid commodities, highly economic sensitive industrials, small caps and big banks. Value stocks and emerging markets won’t be part of their portfolio either.
One of the key themes for the year ahead is stability, particularly as Thomson expects a stormier and a more volatile ride in 2018, but he believes it will drive alpha.
Such companies in the portfolio that demonstrate stability and low earnings volatility include their portfolio include US healthcare equipment company Abiomed; Orkin, the largest pest control business in the US; and, European care home provider Orpea.
Thomson has been involved in the management of the Rathbone Global Opportunities fund since its inception in 2001, assuming day-to-day management of the portfolio in 2003.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
Over ten years, the fund has returned 188.34 per cent compared to its average peers and FTSE World benchmark’s respective returns of 119.25 and 178.63 per cent.
Rathbone Global Opportunities yields 0.26 per cent and has an OCF of 0.79 per cent.