Five of the Best: Stocks to preserve capital

Rathbone’s James Thomson, manager of the £129m Global Opportunities fund, picks five defensive stocks to help preserve capital in an uncertain economic environment.

The top quartile fund has returned 65.5% over three years against 37% average and 2.6% return over one year 5.5% peer group losses, according to Morningstar.

Back in May, Thomson ramped up his cash weighting to 16%, a move he said has helped protect the fund during the downturn. He reduced exposure to cyclical names and maintains zero exposure to banks, insurers, miners, and peripheral Europe. Thomson is now looking to redeploy his cash as opportunities arise.

Below he outlines five defensive picks he has bought recently to protect from increased volatility in financial markets and a weaker economic outlook.

1. Dignity - Thomson has chosen this funeral director as a stock that provides steady, reliable returns in an environment of low economic growth.

2. Intertek - This health and safety testing provider has benefitted from increased industry regulation. "The company carries out testing in consumer sectors, ensuring companies reach the increasingly high standards now required by law," he said.

3. Philip Morris International - This tobacco company, which produces the Marlboro cigarette brand, sells to countries outside the US and is a solid provider of relative growth in an uncertain world.

4. Dollar Tree - Similar in structure to the UK's Poundland, everything in store is sold for $1. "This business has boomed during the difficult period faced by the US consumer," he said.

5. Associated British Foods - The food and retail group owns bargain fashion house Primark. Thomson said the high street store's great value for money and fast fashion has allowed the company to take a huge chunk of market share during periods of depressed consumer growth.

"Right now, the market is a mine-field, whippy and unpredictable," Thomson warned. "We made a big move in May to go more defensive and invest in more defensive businesses with more predictable, reliable earnings streams."

Thomson is particularly cautious on emerging markets and has no direct exposure there. He has scaled back exposure from 5% to 2%, now only holding a few stocks in Hong Kong and Singapore for his Asia exposure.

"Certain businesses in China are not going to work," he said. "The high volume, low margin business models and style of manufacturing companies are under pressure due to 20% wage inflation."

Conversely, the manager recently upped his US exposure from 25% to 31%, to take advantage of a number of interesting stocks in this market.