Ride the highs and avoid the lows with this fund

The S&P 500 made a sterling total return of more than 24 per cent between January and mid-November, putting it comfortably ahead of regions such as Asia, even though the latter has had a strong few months.

But there are plenty of attendant problems. The Magnificent Seven stocks, which have enjoyed huge gains this year, spearheaded by Nvidia (US:NVDA), have a long way to fall if sentiment turns or hype around artificial intelligence dies down. Investors in the US market must also contend with plenty of unknowns, from the effects of Donald Trump’s second presidency to the trajectory of interest rates. Next year might be a rockier ride for equities in the US, and globally, than we have seen in 2024.

There are plenty of options out there for skittish investors. They could shut the doors and windows, sell their shares and move into something defensive such as bonds, gold or cash.

They could also cut back their US exposure, or limit their exposure to the market’s biggest constituents, by using an S&P 500 ‘equal weight’ fund, one of which features in this year’s IC Top 50 ETFs list. But the problem here is opportunity cost: investors can easily miss out on some huge gains if equity markets do stay strong.

Another approach is to use a global fund that manages to participate in market rallies when times are good but can be somewhat more flexible and defensive when difficulties occur. One of the more established global equity funds, Rathbone Global Opportunities (GB00B7FQLN12), has tended to do this well, even if it doesn’t have a totally unblemished record.

Unpicking the portfolio 

The fund ticks many of the boxes we associate with the more successful active global equity strategies of recent years.

The investment team has a big focus on companies in developed markets that score well by 'quality' metrics. The managers look for "innovative and scalable businesses that are growing fast and shaking up their industries", and those that possess some form of star quality. Elusive as such traits can be, the managers like businesses that are "easy to understand, different to their competitors, durable to change and difficult to imitate". They must also have a plan to grow rapidly without overstretching their resources.

The portfolio itself has many of the characteristics common to global equity funds. Rathbone Global Opportunities has around 70 per cent of its assets tied up in US shares, for example, putting it roughly in line with the widely followed MSCI World index.

The fund is also not one to shy away from the Magnificent Seven. James Thomson, lead manager on the fund since 2003, noted in a video update in September that the team has owned Nvidia, Alphabet (US:GOOG) and Microsoft (US:MSFT) for around five years, with Amazon (US:AMZN) having sat in the portfolio for a full 15 years. The team, meanwhile, initiated a position in Apple (US:AAPL) in the growth sell-off of 2022.

The appeal of the fund, however, lies in the fact that these market winners sit alongside less obvious names. Thomson noted in the September update, for example, that holdings such as med-tech company Boston Scientific (US:BSX), retail chain Walmart (US:WMT) and robotic surgery group Intuitive Surgical (US:ISRG) demonstrated the 'star quality' the team seeks out, thanks to their innovation, adaptability and scale. But he added that a "broad church of investment themes and drivers will protect us from the entire portfolio trading in lockstep".

In keeping with this approach, the team manages its level of exposure to stocks that represent a growing chunk of global equity indices. Thomson said in September that the team had been "managing portfolio positions to prepare for market tantrums", most notably by selling down 75 per cent of a position in Nvidia over the past 18 months to stop the company from dominating overall portfolio returns.

Nvidia remained the fund's biggest position at the end of September, though, accounting for 3.6 per cent of the portfolio. Microsoft had a weighting of 2.8 per cent and Alphabet was on 2.3 per cent.

A rainy day fund?

It's worth noting that Thomson has dismissed bearish noises about the state of markets and seems not to believe that equities will run into huge trouble in the near future.

But the fund, while backing market winners to a good degree, does build in some protection for more difficult times. Around a fifth of the portfolio is in what Thomson describes as “weatherproof stocks” – defensive names that should achieve slow and steady growth and prove less economically sensitive.

He notes that many of these have lagged in what has been a risk-on, tech-dominated market, but one recent success story from this bucket is Costco (US:COST), which has increased its market share and managed to lure in footfall using loss leaders such as cheap hotdogs and rotisserie chickens.

On a related note, the team has been keen on Walmart, which entered the fund last year.

"It’s gaining market share and has the scale, strength and flexibility to withstand highly seasonal stop-start consumer spending concentrated around holidays and events," Thomson said. "Its value offering, which includes growing private label and e-commerce sales, has warded off the threat from discounters like Aldi, Lidl and Amazon."

The fact that Thomson puts consumer discretionary stocks in a “defensive” bucket might strike investors as strange. If economies deteriorate, shopping is likely to suffer. However, Thomson seems confident that retailers such as Walmart, Costco and fellow top-10 holding TJX (US:TJX) are more resilient, as they offer customers value for money. 

“When consumers were flush with cash during the pandemic, Costco averaged 5 per cent growth in traffic. When the macro backdrop weakened in 2023, Costco continued to average 5 per cent growth in traffic,” he said.

The fund’s track record generally holds up well against global equity indices, but it has found itself in some sticky situations. It’s notable that Rathbone Global Opportunities suffered especially badly in the growth sell-off of 2022, losing 20.6 per cent versus a less painful 7.8 per cent drop for the MSCI World. Like some other prominent global funds, it is clearly still vulnerable to a growth sell-off.

Another gripe some might take with the fund relates to professed focus: its literature, which states the fund’s “sweet spot” is in mid-sized growth companies. More than 90 per cent of the portfolio is in large-cap companies (as defined by the management team), suggesting this is less of a focus than it once was. “The strong get stronger” is a new motto for the team. 

Having said that, Thomson has argued that established companies can still be under-the-radar winners, as he believes to be the case with Walmart.

Markets have stormed ahead for another year, but 2025 is filled with uncertainty. With that familiar dilemma in mind, it's worth considering this global fund, which backs market winners while staying light on its feet, as a core holding in a portfolio.