JEFF PRESTRIDGE: Cash or equities? It’s a one horse race in the long term

With interest rates at 5.25 percent, it has become increasingly difficult to make the case for investing instead of cash. Many people consider saving to be risk-free, even if that is not due to the erosive force of inflation, which is currently stuck at 6.7 percent. On the other hand, they view equities as inherently risky.

It’s an understandable mindset, especially given the challenging economic backdrop and the ongoing cost of living crisis. Financial preservation is the order of the day.

But when it comes to building long-term wealth – through a pension or an individual savings account – the argument for (regularly) investing in shares remains as strong as ever.

I was reminded of this a few days ago when I spoke to James Thomson, who has just completed 20 years as manager of Rathbone Global Opportunities, a £3.4 billion fund whose origins date back to the 1720s. Rathbones, founded as a timber merchant in Liverpool by the Rathbone family, still has a large presence in the city and an office in the iconic Liverpool Port building, pictured.

Thomson is a rare breed within the fund management community. He has remained loyal to this one fund and its investors through thick and thin. In return, asset manager Rathbones, his employer, has supported him when the fund’s performance has occasionally collapsed.

Along the way, the 47-year-old admits he has made investment mistakes, but he has learned from them and adjusted the way he manages the fund. “It’s my baby,” he says. “I am committed to it and to the customers who have invested money. The fund represents my largest personal investment and my two girls, aged eight and ten, are also investors. All this sharpens my focus.’

Thomson says the case for investing remains compelling, despite higher interest rates, talk of a global recession and increased geopolitical risks. But it requires a long-term mindset. “There will always be times when investors suffer paper losses,” he adds, “but the key is to stay invested and keep your investments locked up for when they are really needed.”

The fund’s performance figures support his argument. Since Thomson took over management in November 2003, it has made a profit of 880 percent. The fund’s ‘global’ peer group – the benchmark – has achieved an average return of 358 percent.

It has not been an easy journey, far from it. In 2008 and 2022, the fund posted huge losses of 39 and 20 percent, but it has delivered positive returns in 16 of the past 20 years (including the year to date) – and outperformed its peers 17 out of 20 times. Thomson has refined its investment approach over the years – and will continue to tinker with it. Still, the rules he adheres to are worth knowing because they can be used by investors to help them manage their own portfolios.

For starters, he’s a big believer in diversification – one of the cornerstones of wise long-term investing. No holding company may therefore account for more than four percent of the portfolio. Once a bet approaches this limit, it is sold.

That is what he has done with the fund’s position in American AI (Artificial Intelligence) specialist Nvidia, its largest position of 3.2 percent.

“We’ve owned it for five years,” he says. ‘It was our worst performing stock last year, but our best this year. So we have sold a third of the position in recent months. That doesn’t mean we’re any less excited about the company’s prospects, but taking profits isn’t a bad thing. And more importantly, I don’t want a portfolio that’s too reliant on stocks that are sensitive to all the frothy AI surrounding it.”

The companies Thomson likes should be easy to understand; focused (no conglomerates); have pricing power (important if inflation is a problem); and sustainable.

This draws him to companies that he believes will grow stronger regardless of the prevailing economic backdrop – such as tech giants Amazon, Microsoft and Nvidia.

It also means holdings in ‘weatherproof’ companies such as US retailer Costco and US waste company Waste Connections, whose products and services are always needed – rain or shine, recession or economic growth.

Equally interesting are the companies he avoids – including privately held companies (too risky) and companies whose performance depends on events outside their control (such as the price of raw materials).

He also won’t invest in markets where he thinks specialist managers are better equipped to do their job better – emerging markets, for example. In short: diversify, buy shares in companies you know, don’t be afraid of bank profits and use funds to gain exposure to specialist investment areas such as emerging markets. And most importantly: think long term. Don’t let short-term turbulence scare you out of the market.

It’s a strategy (thinking long term) that the best fund managers use – for example Terry Smith of Fundsmith Equity and Nick Train of Lindsell Train. They buy good companies and hold them. As for Thomson, he is keen to remain at the helm of Rathbone Global Opportunities for as long as his clients want him to. Another twenty years? I wouldn’t rule it out.

It’s a shame that the banks are spreading their money across the hubs

It appears that the banks are refusing to support the introduction of banking centers in cities where the only remaining deposit and mortgage provider is Nationwide.

This is despite the fact that such cities no longer provide small businesses and independent retailers (the lifeblood of our economy) with a bank willing to accept their cash withdrawals – or allow them to withdraw cash. This is because Nationwide does not do small business banking. This is hardly a community-friendly approach to banking, I would say, although banks have long since lost any personal connection with the customers they seek to serve.

Hubs are shared branches that customers of all major banks can use for basic banking, such as depositing and withdrawing money. Founded by Cash Access UK, an organization funded by the banks, they have been slowly introduced in towns where the last bank branch (including the local Nationwide) has closed. But if a national branch remains, a hub cannot be installed.

Yet banking experts believed this barrier had been removed last month when Nationwide quietly announced it was withdrawing from Cash Access UK to focus efforts on its national branch network.

Unlike its banking rivals, Nationwide views branches as places to do business, not financial millstones.

Understandably, she now sees no reason to support Cash Access UK if all the benefits from the banking centers (cost savings) go to the banks.

Instead of paying for the maintenance of its own branch, a major bank now only has to make a financial contribution to a hub in a city where all bank branches have disappeared.

Nationwide’s exit from Cash Access UK was seen as a way to introduce hubs into some of the cities now served solely by the building society. These include communities such as Harpenden in Hertfordshire and Whitstable in Kent – ​​two of the 27 I identified in Money Mail a month ago.

What I’m hearing through the banking community is that the banks are unwilling to give Cash Access UK the money to fund hubs in these cities, which were initially overlooked due to Nationwide’s presence.

If I’m right, it’s so wrong. Closing their own branches is bad enough, but cutting back on hubs is reprehensible.

You decide on allegations of profiteering in insurance

Investors in insurer Direct Line were delighted last week to see the company’s share price respond favorably to a sharp rise in premiums in the third quarter of this year. An increase of 68 percent compared to last year’s comparable figures.

The company, the acting CEO said, was well set up for “better performance in the future.” It’s just a shame that motorists have paid a high price: the average insurance premium has risen 37 percent year over year. On the other hand, the increase in damage costs is in ‘high single figures’. Taking advantage? I’ll leave it to you to answer that question.