Top fund boss points the way to picking the winners

Nothing stays the same

You’ve got to position your portfolio today for what you think is going to happen tomorrow, tomorrow, tomorrow. We don’t know what’s going to happen in Britain, let alone the rest of the world.

Think global, invest local

Rotork is an engineering company based in Bath, but it makes some of the best actuators in the world. The devices control the valves used in oil and gas refineries, water treatment and power generation, so Rotork is a big beneficiary from any moves to improve infrastructure. It has five offices in China.

Look for the big shifts

Baby boomers are going to amount to a third of the US population, and the first of them reached 60 last year. Meanwhile, there are 2 billion people in China and India, and they are going to take up the baton of growth in world consumption. The trick is to get in on companies that are going to supply these massive numbers.

Play the cycles

If only we had known it at the time, 25 years ago we should have sold industrial, energy and mining-company shares and bought into technology — though, as the internet was still a decade away then, and mobile phones were the size of briefcases, that would have been quite a call.

Thomas now believes the cycles are changing again, however, and it is time to sell tech stocks and buy into the smokestack industries and hewers of precious metals. Hence his liking for Uruguay Minerals, which is unearthing gold at a cost of only $182 an ounce, giving it a potential profit of about $370 an ounce.

It is also conducting an aerial survey of an area that is showing deposits of something very heavy. But we won’t know for a few months whether that is gold, platinum — or granite.

But Thomas said the cyclical shift would bypass banks, which he reckons face rising bad debts among their customers — corporate as well as consumer.

Seek out pricing power

They are hard to find in increasingly competitive world markets, but investors should buy shares of companies that have a strong brand or protected products, creating barriers that would-be competitors will be deterred from trying to overcome. That will give those companies power to raise prices and therefore profits.

Thomas likes BOC, the gases giant, which is strongly placed in China and is part of a small group of global players in the specialist gas market. Last week, it received a hostile takeover bid from Linde of Germany.

Avoid regulated businesses

More than three-quarters of the firms in the FTSE 100 index are regulated in one way or another — as financials, utilities, drug makers, broadcasters, tobaccos or brewers. But only one in three shares in the Select Opportunities fund is regulated, apart from the laws of the lands in which they operate. This gives them greater freedom, from pricing to product innovation.

But Thomas is flexible: his fund includes the heavily regulated BT, Vodafone and Astra Zeneca because he believes they have market strengths that outweigh the regulatory drag.

Top-down, but no middle

Thomas likes to use the big picture of global trends to point him towards individual stocks, but he ignores the indicators in between, such as the FTSE 100 index. He argues that because the identities of the companies in the Footsie change every three months, it is impossible to predict it, so it is of little use.

“I believe in inefficient markets,” he said, “so I am looking for shares that are undervalued, whatever the index is doing.”

Don’t hold too many shares

Thomas’s fund is worth about £700m, but the number of holdings has stayed fairly constant at just 72. This is low compared with the several hundred some schemes hold. Since he took it over, Thomas has ditched many unexciting smaller companies, and put about 40% of the fund into blue chips. Another 25% is in medium-sized businesses listed on the FTSE 250 index.

Thomas took the 118 holdings he inherited down to 66, and then gradually increased the portfolio from there. “But I want to keep it down to a manageable number,” he said, “so that I can monitor them all on a regular basis.”

Do your homework

Fund managers divide into those that visit companies they might invest in, and those that don’t. Thomas likes to get out and about, whether to Montevideo or Manchester, and invites the management at many companies over to visit the Framlington offices.

That is a luxury beyond the reach of all but the very wealthiest private investors, but everyone can research companies on the internet, through trade publications, official figures and other public information.

Such digging by Thomas has unearthed Xaar, a Cambridge-based digital inkjet printing group. Its technology is in two-thirds of the world’s large- format graphic printers, and Thomas expects earnings per share to rise from 15p to 18p next year. At 313p that puts the shares on a not-too-demanding price-earnings ratio of 17.4.

“It’s a world-beating company,” said Thomas.

Cut your losses, let profits run

Thomas believes the best way to make money in the stock market is to lose as little as possible when you get it wrong — as all investors do. He said: “Admit the mistake, sell the holding and invest in something better.”

Sounds simple, but it is an approach most private investors find difficult to adopt, because they hate registering a loss.

However, Thomas chases profits, letting them run and adding to his holdings of rising shares. “I don’t trade,” he said. “I tend to invest on a two to three-year view. I look for markets where I can have a better idea of what a share price should be than the rest of the market. So I profit from the market coming round to my point of view.”