Rathbones UK Opportunities Fund manager Alexandra Jackson explains that investor confidence in ‘American exceptionalism’ shouldn’t overshadow star quality this side of the pond.
The biggest US stocks which enjoyed such a magnificent 2024 weren’t letting up at the end of the year. Which has led to much hand-wringing this side of the pond about our lack of American-style superstars.
But the US isn’t the only country creating exceptional businesses. The UK has some spectacularly high-returning small and mid-cap companies that aren’t just world-class, but world-beating. Many of the global businesses we hold in the Rathbones UK Opportunities Fund enjoy financial metrics every bit as impressive as those of their much bigger US counterparts, while trading at significantly less lofty valuations.
Take global success story Games Workshop, the creator, manufacturer and retailer of the Warhammer 40,000 miniature fantasy games series. These games have legions of fans all around the world who vie with each other to try to win complex battles between its mini-figurines. Almost £4 of every £5 Games Workshop earns comes from outside the UK.
The firm’s newest computer game, Space Marine 2, only launched in September, but has already garnered around 4.5 million players, giving it a nice pre-Christmas sales boost. It’s also just sealed a deal that grants Amazon exclusive rights to develop films and TV shows based on the Warhammer 40,00 universe. Superman Henry Cavill (who is a big Warhammer fan!) is set to star. As well as providing fresh and potentially lucrative revenue streams, the deal should take the Warhammer brand and characters right into the mainstream. Games Workshop’s shares have enjoyed an exceptional run over many years and are currently hovering around a record high. That’s driven its market capitalisation up to well over £4.5bn and secured its recent elevation from the FTSE 250 to the FTSE 100.
We don’t tend to initiate new positions in stocks that sit within the FTSE 100, but we aren’t required to sell them when they join the index. For example, we still hold specialised components distributor Diploma almost two years after its promotion to the FTSE 100. Diploma is another exceptional UK business. It serves a wide range of industries, especially healthcare, laboratory research and industrial engineering. About half its revenues are now generated in the US and it also has a strong footprint in Canada and Australia alongside its operations in Continental Europe and the UK.
What makes Diploma really special is its punchy track record in acquiring complementary businesses that it adds to its network to drive consistent growth. Stripping out the dealmaking, Diploma’s performance has been excellent as it benefits from strong tailwinds in the energy, defence, aerospace and life sciences sectors. Its competitive position is difficult to dislodge and its acquisition prowess should give it scope to keep growing at a good rate in future.
A more recent pick for our fund is Raspberry Pi, a global leader in low-cost, high-performance computing hardware. This firm started life creating simple single board modular computers to ensure children were playing with computers rather than just on them (a battle to which I can relate). It’s morphed into selling to industrial companies and scientific projects that need cheap, small and efficient computing power.
Raspberry Pi lets its customers decide how best to use its credit card-sized power boards, which can be plugged into monitors and keyboards. This ‘build-it-and-they-will-come’ approach has grown the company into to a serious commercial enterprise with global reach. In fact, with sales of almost 30 million units since its launch in 2011, it’s now the best-selling UK computer of all time and about 40% of sales come from outside the UK. Raspberry Pi delivers the computing power behind, for example, Heathrow Airport’s departure and arrivals boards, the Kenya Wildlife Service’s observation cameras and Pittsburgh-based Velo AI’s smart bike lights. The firm first floated on the FTSE 250 in June and its shares have done well since.
Sound investment advice urges us not to hoard all our eggs in one basket. The US may look like the strongest and prettiest basket right now. But diversification is the cornerstone of long-term wealth creation. With Trumped-up valuations vulnerable to noise in the US, and economic disarray in much of Europe, some of our home-grown superstars look like very attractive diversifiers.
