Alanna Petroff: For those investors looking for growth opportunities, you are in luck. I’m joined now by Rathbones' fund manager, James Thomson, and he runs the Rathbone Global Opportunities Fund. We’re going to talk now about his top picks, which includes picks in the financial transaction space, the culinary space and the regulatory space.
So, James, thanks very much for coming in today.
James Thomson: Thank you for having me.
Petroff: Now, let's talk about this Global Opportunities Fund of yours and your investment strategy. You focus on growth, you look at global opportunities, tell me little bit more.
Thomson: I’ve been running the fund for the past 10 years. It's a global growth fund. So I’m looking to buy what I think are my best ideas from around the world, and I'm unconstrained in buying those best ideas. I am looking for undiscovered, under-the-radar or out-of-favour growth companies. And I'm really trying to target investments that aren't in the mainstream, that aren't in every other fund manager’s portfolio, so I can do something a little bit different for my investors and find exciting growth opportunities.
Petroff: Okay. So your top picks that we have today, we have Visa, that's in financial transactions; we have Intertek Group, which works in the regulatory space; and Rational, a German company that works in the culinary and cooking business. So I'm interested to hear about that. Let's start with Visa though, and a quick disclosure, I do own shares in Visa, so I’m a big fan. Let's go over that.
Thomson: And very wise you are to be invested, I believe. When you own Visa, the credit and debit card company, you’re really buying an electronic payment network, which is the network that transactions run across either getting approved or hopefully not declined. It’s obviously a huge business, about 150 million transactions go over the Visa network every single day.
But there is still a large potential growth opportunity for Visa, because, although we use plastic every day for our purchases, there are many parts of the world that are very much still cash-based societies. In fact, 85% of the world's transactions are still cash-based. So there is a long fairway of growth ahead for Visa, and that's why I think over the next 10 years that Visa can grow by at least 20% a year for the next 10 years. So that's an exciting growth opportunity.
Petroff: Now let's move on to Intertek. Why do you like Intertek, and also more specifically, what does it do in this regulation space?
Thomson: Intertek is a UK-listed business, but they operate globally. It plays into a theme I call “red tape”. Red tape is bureaucracy, health and safety, regulation, inspection, testing, certification. And if you think about all the things that need to be tested, inspected and certified in our lives - think about our mobile phones, they have to operate on so many different standards, 2G, 3G, 4G, and they have to work in all different parts of the world. If they produce a new toy, that toy has to be tested to make sure it's safe. If they produce a new hairdryer, they have to test it to make sure it doesn't electrocute you; thankfully not a problem that I face all that often. So testing and inspection is a very important part of new product development, and Intertek plays right into that.
Petroff: And why is that a growth opportunity in particular?
Thomson: Well, there’s increasing use of third-party outsourcing. People don't trust the people who actually produce the product to make sure it's safe and it’s been tested. So using third-parties is a much more identifiable and verifiable way of proving up a product.
Petroff: Okay. Now let's move on to your last top pick, which is Rational in the culinary space. It sounds like a very interesting company, tell me a bit more.
Thomson: Yes. Given my poor culinary skills, maybe I should shy away from these sorts of investments, but Rational makes ovens, commercial ovens, so not ovens that we can buy in our kitchens. So they are used in large restaurants, hospitals, prisons, for airlines, hotels. Really this is a one-stop shop oven. This can grill, steam, bake, roast; I think the only thing it can't do is deep fat fry. So it is an incredible machine that does it all consistently, all at the touch of a button, and it can be adjusted as well. So if you like your steaks a little bit more rare than medium, you can slightly adjust that.
The investment case for Rational is that it provides a very strong return on investment for the customer who buys it. If you buy one of these ovens you can replace about 50% of the equipment in your kitchen, you can save about 40% on your staff costs, and you can save about 30% on your energy. So, there is a very powerful return on investment argument to buy one of these machines.
Petroff: Okay. So it's an expensive upfront investment, but you save money in the long run.
Thomson: Yes, it’s an expensive upfront investment, and that's probably one of the risks of Rationale actually. If you look at previous periods, say in 2008 when the market turned down, people weren't willing to make that expensive one-time investment, even though it was a powerful long-term story. So we always have to think about those potential risks for a company like Rational.
Petroff: And let's go over the risks for the two other companies as well. What would be the key risk for Visa?
Thomson: The key risk for Visa is a macroeconomic downturn, where consumers spend less, cross-border transactions are down, and so people are using their cards less.
Petroff: And what about Intertek Group, what's the key risk there?
Thomson: I think the key risk for Intertek is management. I rate management of the company very highly. And if any of them left the company, which I don't think they will, but if they did leave the company, I would be concerned about that.
Petroff: Okay. I think that's it then. Thank you very much for coming in today. It was a pleasure.
Thomson: Thank you, Alanna.
Petroff: That was James Thomson from Rathbones. I'm Alanna Petroff. Thank you for watching Morningstar.
