We avoid trendy stocks to find unfashionable potential elsewhere. You can’t outperform if you do the same as everyone else. That’s why Orbis takes a contrarian approach. Ask your financial adviser for details or visit Orbis.com
As with all investing, your capital is at risk. Past performance is not a reliable indicator of future results. Orbis Investments (U.K.) Limited is authorised and regulated by the Financial Conduct Authority
EDITOR’S VIEW
Follow these golden rules when searching for income Understand the risks, how the income is generated and don’t simply pick based on yield and dividend frequency
I
nvestors continue to face obstacles in the search for income. In the past week alone, oil producer Tullow Oil (TLW) has suspended its dividend and troubled investment trust Hadrian’s Wall (HWSL) says its future dividend payments will depend on its ability to realise value from its portfolio. Vodafone (VOD), Centrica (CNA), Royal Mail (RMG) and Marks & Spencer (MKS) have cut their dividends this year and BT (BT.A) may well be the next to follow suit. Among savings accounts, fixed term bond rates have fallen throughout 2019 and are now at their lowest levels since 2017, according to research group Moneyfacts which also says one-year fixedterm ISA rates have been in decline this year. Low rates on cash accounts and dividend setbacks among large cap stocks have driven investors to look elsewhere for better returns. Unfortunately there is a danger they venture into high-risk areas of the market – particularly high-yield funds – without fully understanding how higher sources of income are generated. HIGH YIELD CHOICES There are currently 64 open-ended funds and 128 investment trusts and venture capital trusts yielding 5% or more. Many of these products generate a return greater than the market – for way of comparison, the FTSE All-Share yields 4.4% – by investing in higher-risk areas including aircraft leasing, emerging market debt, small business lending and retail property. Anyone reliant on their investments to generate income to help pay the bills would need to be comfortable owning funds with such exposure. They would need to accept that higher risks must generally be taken to obtain higher yields.
“Don’t forget to consider total return” investing for income. First, be diversified – make sure you aren’t reliant on a single or handful of stocks for dividends. People often refer to funds as offering instant diversification but this isn’t true for all of them. Some funds have a very concentrated portfolio of assets and when something goes wrong with one of their holdings, it can have a very bad effect on the whole product. So just remember to check the fact sheet to fully understand what’s inside the fund. The second rule is to understand how the income is generated and the risks involved. With shares, check to see if a high yield is the result of a falling share price as that is often a warning sign of troubles to come. The third rule is not selecting a fund or stock purely based on its dividend payment frequency. Finally don’t forget to consider total return – taking into account dividends AND changes to the value of your shares or funds. After all, what’s the point in investing in something that is generating good income if the value of your capital is being eroded?
GOLDEN RULES There are a few simple rules to follow if you are 12 December 2019 | SHARES |
3
Contents
CLICK ON PAGE NUMBERS TO JUMP TO THE START OF THE RELEVANT SECTION
EDITOR’S 03 VIEW
Follow these golden rules when searching for income
06 NEWS
Property sector crisis / Stock market winners and losers from climate change / Premier Oil becomes short-selling target
GREAT 10 IDEAS
New: Qinetiq / Aberdeen Japan Investment Trust Updates: Tesco / Computacenter
16 FEATURE
Best performing shares of 2019: why they soared
MAIN 20 FEATURE
2020 outlook: 10 big questions for the year ahead
30 RUSS MOULD
Don’t get caught out by investment bubbles
33 FEATURE
Fund managers’ best and worst stock calls in 2019
39 FEATURE
Learning the lessons from corporate disasters
42 FUNDS
Equitile Resilience: the quality-focused fund you’ve never heard of
44 ASK TOM
‘How much can I pay into a SIPP when I’ve also got a defined benefit pension?’
MONEY 46 MATTERS
Gifting stocks and shares to the family this Christmas
49 BOOKS
Investment book ideas for Christmas
51 INDEX
Shares, funds and investment trusts in this issue
DISCLAIMER IMPORTANT Shares publishes information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters. Comments published in Shares must not be relied upon by readers when they make their investment decisions. Investors who require advice should consult a properly qualified independent adviser. Shares, its staff and AJ Bell Media Limited do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions. Members of staff of Shares may hold shares in companies mentioned in the magazine. This could create a conflict of interests. Where such a conflict exists it will be disclosed. Shares adheres to a strict code of conduct for reporters, as set out below. 1. In keeping with the existing practice, reporters who intend to write about any
4
VIEWING SHARES AS A PDF?
| SHARES | 12 December 2019
securities, derivatives or positions with spread betting organisations that they have an interest in should first clear their writing with the editor. If the editor agrees that the reporter can write about the interest, it should be disclosed to Index of companies and funds in this issue readers at the end of the story. Holdings by third parties including families, trusts, self-select pension funds, self select ISAs and PEPs and nominee accounts are included in such interests. 2. Reporters will inform the editor on any occasion that they transact shares, derivatives or spread betting positions. This will overcome situations when the interests they are considering might conflict with reports by other writers in the magazine. This notification should be confirmed by e-mail. 3. Reporters are required to hold a full personal interest register. The whereabouts of this register should be revealed to the editor. 4. A reporter should not have made a transaction of shares, derivatives or spread betting positions for seven working days before the publication of an article that mentions such interest. Reporters who have an interest in a company they have written about should not transact the shares within seven working days after the on-sale date of the magazine.
We search widely. Murray International Trust ISA and Share Plan Plotting a path between defending your capital and generating a good income needs an expert sense of direction. At Murray International Trust, we know how to explore the world searching for those companies that may deliver the right combination of capital preservation and income generation. And because we insist on meeting every company in whose shares we look to invest, you can be confident we are guiding you to potentially the best investments we can find. Please remember, the value of shares and the income from them can go down as well as up and you may get back less than the amount invested. No recommendation is made, positive or otherwise, regarding the ISA and Share Plan. The value of tax benefits depends on individual circumstances and the favourable tax treatment for ISAs may not be maintained. We recommend you seek financial advice prior to making an investment decision.
Request a brochure: 0808 500 4000 murray-intl.co.uk
Issued by Aberdeen Asset Managers Limited, 10 Queen’s Terrace, Aberdeen AB10 1XL, which is authorised and regulated by the Financial Conduct Authority in the UK. Telephone calls may be recorded. aberdeenstandard.com
Please quote 2172
NEWS
Property sector faces new crisis as dealing in two funds suspended Bank of England is expected to reveal new plans to address problems among property funds
T
he risks associated with open-ended property funds have been brought home to investors again as trading in M&G Property Portfolio (B89X8P6) and Prudential M&G Property Portfolio (0537296) is suspended. These events provide an uncomfortable reminder of the immediate aftermath of the Brexit vote when several funds in the space had to be ‘gated’ thanks to a wave of panic selling and, more recently, the suspension and planned liquidation of Woodford Equity Income Fund (BLRZQ73). There are differences now in that the suspended funds are linked – they are both from the M&G stable and the Prudential fund itself invests directly in the M&G fund. Reports suggest the suspension of the latter was partly triggered by large selling by other managers within the wider M&G group. This raises questions over whether other investors who are now trapped in the fund should have been informed earlier on. The structure of open-ended funds means they are more likely to run into liquidity problems than closed-ended funds. When investors sell or redeem their holdings in an open-ended fund, managers have to sell assets to meet these redemptions. It’s important to be able to buy and sell funds whenever you want but daily liquidity with property funds doesn’t work like that. It can take months to sell a commercial property holding. Funds often hold back money as a buffer against redemptions, something which impacts performance due to the low returns from cash. The problem is becoming acute again due to the sheer level of outflows from property funds. According to Investment Association data the UK property sector recorded its 13th consecutive month of outflows in October with £1.8bn withdrawn.
6
| SHARES | 12 December 2019
1200 1140 1080
M&G PROPERTY PORTFOLIO 2018
2019
The problem is exacerbated by some funds’ exposure to retail assets where valuations are collapsing amid the shift to online retail. There looks to be something of a domino effect from the M&G suspension. Nearly £100m was taken out of other UK property funds in the two days immediately after trading was suspended on the M&G and Prudential products, according to funds transaction network Calastone. The Financial Conduct Authority is looking to address the issue with regulation, introducing improved oversight and forcing funds to explain the risks more clearly and come up with detailed plans to deal with liquidity issues. However, these changes aren’t currently set to be introduced until September 2020 and, with the situation becoming more and more pressing, the Bank of England is expected to reveal its own proposals in the coming days.
BIGNEWS NEWS
Stock market winners and losers from climate change Carmakers and utilities could do well if they play their cards right, but unsurprisingly fossil fuel firms may struggle
C
armakers switching to electric vehicles and utilities moving to renewable energy could see their market values double in the next five years. That’s according to a study by Vivid Economics, commissioned by the United Nationsbacked Principles for Responsible Investment (PRI). The research looked at how climate change could affect stock markets and in particular the average weighted change in the value of companies. For example, the report states that sales of new internal combustion engine vehicles are expected to ‘decline rapidly’, eventually hitting zero in 2050 with all new car sales by then being of ultra-low emission vehicles. It forecasts carmakers who quickly make the move into electric vehicles could see their market values increase by 108% on average, while those that are slowest or don’t go into electric vehicles at all could see their values fall by a third. While for utilities, by 2050 around 93% of total energy generation will be from low carbon sources and so those with the lowest emissions intensity stand to see their values increase by 104% on average, with those exhibiting the highest emissions intensity set to lose two thirds of their market value. Other sectors examined by the study include fossil fuel producers and miners. Unsurprisingly for the fossil fuel companies – mostly coal producers and oil and gas firms – there’s no likelihood their market values will rise, according to the study. Companies which have coal as the highest source of revenue are forecast to be hit the most, with a 64% decline in market value, while those in the oil and gas sectors could drop in value by 29%. Miners of so-called ‘green minerals’, i.e. metals crucial for the low carbon transition, could benefit the most.
The reports forecasts they will see a 54% uplift in their values on average, while those still digging out things like coal could halve in value.
New sustainable water and waste fund
FIDELITY HAS LAUNCHED an open-ended UK-domiciled Sustainable Water & Waste Fund after the Luxembourg-domiciled equivalent fund reached $1bn of assets in just a year. As manager Bertrand Lecourt explains: ‘companies in the sector remain relatively unexplored by investors and there are very few funds dedicated to this unique theme.’ The fund has a ongoing charge figure of 0.9% and is benchmarked against the MSCI AllCountries World Index in pounds.
12 December 2019 | SHARES |
7
NEWS
Premier Oil becomes major short-selling target This trade looks to be slightly different to normal short selling which preys on companies in distress
A
sia Research & Capital Management, a privately-owned asset management firm based in Hong Kong, has built up one of the largest ever short positions (£132m) in the UK market, targeting oil firm Premier Oil (PMO). Short-selling is betting that a share price will fall. It involves borrowing stock from institutional investors and then buying the shares back at a lower price in the market and pocketing the difference. According to shorttracker.co.uk, Premier Oil has 20.5% of its shares held short, with ARCM representing 16.9%. A high percentage of shares held short would usually be a signal that hedge funds were making 110 90
PREMIER OIL
70 50
2018
2019
a directional bet that the shares were likely to fall, but in the case of Premier Oil it seems that ARCM’s motive is to hedge its approximate $380m holding in the company’s debt which is repayable in May 2021. Bond holders are higher up the legal pecking order than equity investors, and so in the event of a company failing to meet its debt obligations, equity holders often get wiped out. If this happened ARCM would make a 100% profit on its short position. The difference in value between the bond and equity investment represents the estimated recovery value should Premier Oil default on its bonds.
FTSE 350 MOVERS OVER THE PAST WEEK BEST PERFORMERS STOCK
SHARE PRICE RISE
REASON
Dunelm
28.4%
Website revamp helps boost sales, expectations upgraded
Aston Martin Lagonda
15.5%
Bid speculation
Plus500
8.8%
Co-founder and strategy director buys £3.8m worth of stock
WORST PERFORMERS STOCK
SHARE PRICE FALL
REASON
Tullow Oil
-67.0%
Production guidance downgraded, dividend suspended, CEO departs
Glencore
-10.3%
Bribery probe launched by Serious Fraud Office
TUI
-7.4%
Negative market sentiment heading into results Source: Shares, SharePad. Data to 10 Dec 2019
8
| SHARES | 12 December 2019
Hidden in full view
FIDELITY JAPAN TRUST PLC This investment trust uses local know-how to spot Japan’s untapped potential.
portfolio manager Nicholas Price and our team of analysts hone in on stocks often not picked out by others.
Around 90% of Japanese small and mid-sized companies get little or no analyst coverage. As under-researched companies are more likely to be undervalued, that’s an opportunity.
The value of investments can go down as well as up and you may not get back the amount you invested. Overseas investments are subject to currency fluctuations. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand.
The trust looks to benefit from the more dynamic sectors of Japan’s economy, focusing on fast growing but attractively valued stocks. With an acute understanding of this unique region and economy, combined with our hands-on local research, PAST PERFORMANCE Aug 14 – Aug 15
Aug 15 – Aug 16
Aug 16 – Aug 17
Aug 17 – Aug 18
Aug 18 – Aug 19
Net Asset Value
12.9%
15.1%
32.0%
22.7%
-5.3%
Share Price
10.7%
22.6%
26.3%
21.4%
-1.3%
TSE Topix Total Return Index
13.2%
19.8%
20.8%
8.3%
-0.5%
Past performance is not a reliable indicator of future returns. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. The trust invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies. To find out more, go to fidelity.co.uk/japan or speak to your adviser.
Past performance is not a reliable indicator of future returns. Source: Morningstar as at 31.08.2019, bid-bid, net income reinvested. ©2019 Morningstar Inc. All rights reserved. The TSE Topix Total Return Index is a comparative index of the investment trust.
The latest annual reports and factsheets can be obtained from our website at www.fidelity.co.uk/its or by calling 0800 41 41 10. The full prospectus may also be obtained from Fidelity. Fidelity Investment Trusts are managed by FIL Investments International. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0919/24881/SSO/1219
Why QinetiQ is much more dynamic than the market thinks The company has transformed into an integrated global defence and security business with good growth opportunities
P
erceived as a sleepy and slightly secretive provider of innovative test and evaluation of military platforms to the Ministry of Defence, QinetiQ (QQ.) has transformed its commercial capabilities under chief executive Steve Wadey. Management implemented a new growth strategy three years ago with the goal of building an integrated global defence and security business. The prize being to gain a share of the estimated £8bn total addressable market. The vision is to take advantage the company’s leading position in providing generation and assurance of defence and security services by targeting select countries with a view to generating at least 50% of future revenues from outside Britain. The company is well on its way to achieving its strategic goals and overseas revenue now represents around 30% of the group, having doubled over the last three years. The recent first half results demonstrate the magnitude of change achieved with organic growth in orders up 30%, revenue up 10% and operating profit up 8%. Not only are international markets larger than the UK,
10
| SHARES | 12 December 2019
QINETIQ BUY
(QQ.) 341p Stop loss: 250p
360 340
QINETIQ
320
300 280
Market cap: £1.9bn
but there are organic growth opportunities too, with an estimated compound annual growth rate (CAGR) of more than 4% out to 2023 according to consultancy Jane’s Market Forecast. In addition to boosting organic growth the company is targeting select acquisitions and recently accelerated its US growth by agreeing to buy MTEQ, a US-based state-of-theart sensing technology company. This increases the US to 25% of group revenue. The acquisition creates a leader in advanced sensing, robotics and autonomy, seen as critical building blocks for modern warfare. The operation has around 750 employees and revenues of approximately $300m a year.
260
2018
2019
640 MTEQ is expected ABERDEEN JAPANto IT deliver 600 low-teens revenue growth 560 and operating margins of more than 7% in year to 31 520 March 2021 2018 with opportunities 2019 to expand profitability with increasing scale. Meanwhile in the UK, QinetiQ has initiated a twoyear transition programme to deliver new processes and ways of working, for example digitalising testing and evaluation to combine live, synthetic and virtual asset threats. QinetiQ is a high quality business that has achieved an average return on equity of 26.4% over the last five years with stable operating margins around 14%. The business transformation has put the company on a sustainable growth path which should reward shareholders over time. On that basis a price-toearnings ratio of 16.1 times March 2021 consensus forecast earnings does not look unreasonable.
SCOTTISH MORTGAGE INVESTMENT TRUST
SCOTTISH MORTGAGE ENTERED THE FTSE 100 INDEX IN MARCH 2017.
WANTED. DREAMERS, VISIONARIES AND REVOLUTIONARIES. Visionary entrepreneurs offer opportunities for great wealth creation. The Scottish Mortgage Investment Trust actively seeks them out. Our portfolio consists of around 80 of what we believe are the most exciting companies in the world today. Our vision is long term and we invest with no limits on geographical or sector exposure. Our track record as long-term, supportive shareholders makes us attractive to a new breed of capital-light businesses. And our committed approach means we can enjoy a better quality of dialogue with management teams at transformational organisations. Over the last five years the Scottish Mortgage Investment Trust has delivered a total return of 124.7% compared to 101.9% for the sector*. And Scottish Mortgage is low-cost with an ongoing charges figure of just 0.37%**. Standardised past performance to 30 September* 2015
2016
2017
2018
2019
Scottish Mortgage
4.2%
37.0%
30.3%
29.0%
-6.4%
AIC Global Sector Average
4.3%
29.0%
26.2%
19.2%
-0.2%
Past performance is not a guide to future returns. Please remember that changing stock market conditions and currency exchange rates will affect the value of the investment in the fund and any income from it. Investors may not get back the amount invested. For a farsighted approach call 0800 917 2112 or visit us at www.scottishmortgageit.com A Key Information Document is available by contacting us.
Long-term investment partners
*Source: Morningstar, share price, total return as at 30.09.19. **Ongoing charges as at 31.03.19 calculated in accordance with AIC recommendations. Details of other costs can be found in the Key Information Document. Your call may be recorded for training or monitoring purposes. Issued and approved by Baillie Gifford & Co Limited, whose registered address is at Calton Square, 1 Greenside Row, Edinburgh, EH1 3AN, United Kingdom. Baillie Gifford & Co Limited is the authorised Alternative Investment Fund Manager and Company Secretary of the Company. Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority (FCA). The investment trusts managed by Baillie Gifford & Co Limited are listed UK companies and are not authorised and regulated by the Financial Conduct Authority.
Why you should buy Aberdeen Japan Investment Trust now 360
QINETIQ
340
320
300
Performance pick-up at smaller company-focused trust should280see discount narrow
I
nvestors should buy Aberdeen Japan Investment Trust (AJIT) at an attractive 9.4% discount to net asset value (NAV). This has scope to narrow as performance improves and an enhanced dividend policy stimulates demand. Trade tensions between the US and China as well as Japan and South Korea are headwinds for the Japanese equity market, yet this fund’s exposure to mid and small caps with wide competitive moats and strong balance sheets should help it avoid the pitfalls and capture any upside Japan provides in 2020. Managed by Aberdeen Standard Investments, Aberdeen Japan targets capital growth by investing in companies with above-average growth prospects. After adopting a Japan-focused mandate back in 2013, the trust underperformed for some time, although it has outperformed more recently. Risks to weigh include the fact Aberdeen Japan is the least liquid Japanese investment trust and its portfolio is concentrated. Since the mandate change, the proportion of small cap companies has increased. This could prove positive in the year ahead, as small caps could be more immune to trade war
12
| SHARES | 12 December 2019
260
ABERDEEN JAPAN INVESTMENT TRUST BUY
(AJIT) 630p Stop loss: 504p
Total assets: £110m
tensions and the rising yen. For the six months to 30 September, Aberdeen Japan’s share price and NAV outperformed the Topix benchmark. And after several false dawns, corporate governance is improving and payout ratios are rising in Japan, making it a far more attractive market for investors. Admittedly, the ongoing trade tussle between the US and China has dampened Japan’s corporate earnings and October’s VAT hike has crimped household spending, yet the fund is invested in domestic firms whose growth potential could prove more resilient. They include skincare products maker Shiseido, ‘running a cost-cutting programme even
2018
640 600
2019
ABERDEEN JAPAN IT
560 520
2018
2019
as it expands’ according to Chern -Yeh Kwok, Aberdeen Standard Investment’s head of Japanese equities. The trust is also invested in firms that have diversified overseas to reduce dependence on the Japanese market such as baby products maker Pigeon, which is targeting a growing middle class population in China and South East Asia. Chern-Yeh Kwok believes market leaders with strong balance sheets are best able to drive their own growth, sustain dividend payments and capitalise on record low interest rates to complete earnings-enhancing acquisitions. Among names in the fund, nonlife insurer Tokio Marine bought a US-based peer to tap into the market for wealthy clients; and air con specialist Daikin bought a European freezer manufacturer. Other portfolio positions include Chugai Pharmaceutical, musical instrument maker Yamaha and car and motorbike parts maker Musashi Seimitsu.
Multi-Asset Value Investing
SENECA GLOBAL INCOME & GROWTH TRUST PLC Our aims are simple and ambitious: • A total return of at least CPI plus 6 percent per annum after costs, over a typical investment cycle* • Low volatility • Aggregate annual dividend growth at least in line with inflation If this sounds appealing, click here to find out more.
Find out more about Seneca Investment Managers at senecaim.com or call us on 0151 906 2450 The value of investments and any income may fluctuate and investors may not get back the full amount invested. Seneca Investment Managers Ltd defines a typical investment cycle as one which spans 5-10 years, and in which returns from various asset classes are generally in line with their very long term averages. There is no guarantee that a positive return will be achieved over this or any other period. There is no guarantee that the above aims will be achieved. Seneca Investment Managers Ltd does not offer advice to retail investors. If you are unsure of the suitability of this investment, take independent advice. Before investing you should refer to the Key Information Document (KID) for details of the principle risks and information on the trust’s fees and expenses. Net Asset Value (NAV) performance may not be linked to share price performance, and shareholders could realise returns that are lower or higher in performance. The annual investment management charge and other charges are deducted from income and capital. The KID, Investor Disclosure Document and latest Annual Report are available in English at www.senecaim.com. Seneca Investment Managers Limited is the Investment Manager of the Trust (0151 906 2450) and is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at Tenth Floor, Horton House, Exchange Flags, Liverpool, L2 3YL All calls are recorded. FP19 302 *
TESCO (TSCO) 243.2p
COMPUTACENTER (CCC) £16.52
Gain to date: 2.7%
Gain to date: 36.5%
Original entry point: Buy at 236.9p, 23 May 2019
Original entry point: Buy at £12.10, 2 May 2019
IN ANTICIPATION OF a tough summer compared with last year’s abnormally strong sales, in the spring Tesco (TSCO) reduced its number of product lines and put more resources into its own-brand offerings, but growth has remained elusive. UK like-for-like grocery sales were down 0.3% in the first half, although this was partly offset by strong growth at its wholesale business Booker. Since the summer the priority for chief executive Dave Lewis has been to streamline the business before handing the reins to Ken Murphy who joins from Walgreen Boots Alliance next year. In September, the mortgage business was sold to Lloyds (LLOY) for £3.8bn, a slight premium to its £3.7bn book value. The sale not only generated a healthy cash inflow, allowing Tesco to reinvest in prices to maintain market share, it also meant it no longer had to put capital behind a business with minimal profits. 1700 ThisCOMPUTACENTER week Tesco confirmed it is considering the 1500 sale of its Malaysian and Thai businesses after 1300 receiving an unsolicited approach. The Asian 1100 businesses should fetch a good price, allowing the grocer to continue focusing on its home market. 900 2018consumer confidence subdued 2019 With due to election uncertainty, Britain’s biggest retailer is in pole position to benefit once spending picks up again. 260 240
TESCO
OUR FAITH IN IT business Computacenter (CCC) continues to be rewarded. A trading update on 10 December revealed full year profit and earnings per share would be ‘well ahead’ of current market forecasts due to a strong showing from established businesses and its recent US acquisition, FusionStorm. The improvement at FusionStorm is encouraging after it endured a difficult first half. The group is also benefiting from the fact that a number of problem contracts, which involved material provisions in 2018, are now performing in line or slightly ahead of expectations. Computacenter says is still has plenty to do in December, typically its busiest month, but also says visibility is starting to improve. Investors don’t have too long to wait to hear how December went, with a pre-close trading update scheduled for 23 January. We still like the company’s three-pronged strategy of selling computer equipment, software and providing outsourced IT solutions. This approach has delivered steady growth, robust profit and cash flow and generous dividends over several years and that shows little sign of changing. 1700
220
1500
200
1300
180
1100 2018
2019
SHARES SAYS: We continue to back Tesco in the battle for shoppers’ wallets. Buy
900
| SHARES | 12 December 2019
2018
SHARES SAYS: Still a buy 260
14
COMPUTACENTER
240 220
TESCO
2019
LISTEN TO OUR WEEKLY PODCAST Recent episodes include: Investing in Coca-Cola, M&G’s fund problem, the changing world of property and giving money for Christmas Using a Lifetime ISA to help buy a house, the great fund liquidity debate and clampdown on mini bonds NHS pension breakthrough, best and worst performing retail shares, Fevertree’s ups and downs and the National Lottery’s big birthday
&
MONEY MARKETS
Listen on Shares’ website here
You can download and subscribe to ‘AJ Bell Money & Markets’ by visiting the Apple iTunes PodcastStore, Google Podcast or Spotify and searching for ‘AJ Bell’. The podcast is also available on Podbean.
Best performing shares of 2019: why they soared We reveal the top risers across four different segments of the market
JD Sports Fashion Apparel retailers
117
Aveva
Software
87
Next
Diversified retailers
65
Investment services
65
Aveva is bringing disruptive technology to an engineering industry that is finally starting to embrace digitisation because of the obvious creativity and cost efficiency benefits. No-one wants to risk spending millions building a potentially flawed ship, oil rig, power plant or plane when the design can be tested in virtual reality in almost every way beforehand.
Investment services
64
INTERMEDIATE CAPITAL (ICP) +64%
Halma
Electronic equipment
55
Avast
Computer services
53
£4BN+ MARKET CAP Name
London Stock Exchange Intermediate Capital
Ocado Polymetal Rightmove
Sector
Food retailers and wholesalers Gold mining Consumer digital services
Year to date change (%)
1200
45
1000
44
Source: SharePad. Data as of 4 Dec 2019 Excludes investment trusts
AVEVA (AVV) +87% This was the year when investors really embraced the compelling power of Aveva’s (AVV) industrial engineering software potential and stopped quibbling about the value of the shares. | SHARES | 12 December 2019
1400
51
JD SPORTS FASHION (JD.) +117% Retail sector darling JD Sports Fashion (JD.) sprinted higher once again in 2019. The branded sports and casual wear purveyor stormed into the FTSE 100 on record results and consistent earnings upgrades. Like-for-like growth in the core sports fashion business was driven by the savvy mining of an athleisure boom among youthful gym-goers. Investors also grew increasingly excited about the acquired Finish Line business which provides a platform for growth in the US. The year also saw JD Sports acquire ailing smaller rival Footasylum, although the deal is being probed by the Competition and Markets Authority.
16
1600
INTERMEDIATE CAPITAL 2018
2019
The specialist asset manager is focused on debt 700 and private finance for corporate SILENCEequity THERAPEUTICS 500 investments. It manages over €40bn of assets mainly in closed-end funds. 300 Results for the six months to 30 September 100 showed group pre-tax profit up 24% to £153m 2018 2019strong investment thanks to €4.6bn of net inflows, performance and increased fees. The firm raised its interim dividend by 50% 1600 FUTURE its operating margin target from and increased 1200 43% to 50% based on its positive outlook for the full800year. Chairman Kevin Parry described the business as ‘more robust than at any time in the 400 company’s history’. 2018 2019 POLYMETAL (POLY) +45% 350 Russian gold miner Polymetal (POLY) has hitched FARON PHARMACEUTICALS a ride 250 from a rising gold price in 2019. It has also beaten production guidance numbers and kept 150 costs down. 50 Unlike a lot of other miners this year, the 2018 hasn’t been plagued 2019by the operational company problems commonly seen across the sector
as it repositioned itself to focus on larger, low-cost assets. A third quarter update (24 Oct) revealed full year production is likely to exceed previous guidance, while revenue jumped 43% on the back of higher commodity prices. £1BN - £4BN MARKET CAP Name
Sector
Year to date change (%)
Future
Publishing
165
Pets at Home
Specialty retailers
109
GlobalData 1600
Publishing
97
Dart Group
Airlines
91
IWG 1200
Professional business support services
91
Boohoo 1000
Apparel retailers
90
Softcat 2018
Computer services 2019
89
1400
INTERMEDIATE CAPITAL
Games Workshop Toys
86
700
Spirent Telecommunications SILENCE THERAPEUTICS Communications equipment 500 Gamma Telecommunications 300 Communications services 100
82 74
Source: SharePad. Data as of 4 Dec 2019 2018
FUTURE (FUTR) +165%
2019
1600 1200
FUTURE
800 400
2018
2019
Media group Future (FUTR) has had yet another 350 good year. Chief executive Zillah Byng-Thorne FARON PHARMACEUTICALS 250 has transformed the business, buying up titles which 150 operate in niche areas and fully exploiting their content through a mix of digital advertising, 50 e-commerce, events and getting readers to click 2018 2019 through to partnered retailers. On 31 October the market responded positively to the £140m acquisition of Ti Media, publisher of titles including Marie Claire UK and Country Life, and to record full year results which beat market expectations and saw upgrades to earnings guidance for the current financial year (15 Nov).
GLOBALDATA (DATA:AIM) +97% Data analytics and consulting firm GlobalData (DATA:AIM) had a breakthrough year in 2019 building on its £90m acquisition of Research Views in April 2018. The strategy is to create a genuinely differentiated product which is embedded in the working processes of the world’s largest industries. This includes sectors such as retail, finance, oil and gas and technology. All these areas have been unified under a single platform, creating benefits in terms of margin performance. The company swung to a profit of £5.2m in the six months to 30 June from a loss of £4.2m in the same period a year earlier. BOOHOO (BOO:AIM) +90% Shares in pure-play online fashion retailer Boohoo (BOO:AIM) put smiles on investors’ faces in 2019, surging 90% higher as positive earnings momentum fostered bumper appetite for the stock. Boohoo’s delivery of rapid growth in the UK and overseas drove earnings upgrades and was all the more impressive given the dire backdrop for apparel retailers and the downgrades suffered by closest quoted peer ASOS (ASC:AIM). During the year, sales surpassed the £1bn mark, Boohoo’s net cash pile fattened up and the firm also added to its Boohoo, PrettyLittleThing and Nasty Gal brands by acquiring the Karen Millen, Coast and MissPap labels. Boohoo recently hailed ‘a record performance’ across the Black Friday weekend with CEO John 12 December 2019 | SHARES |
17
1600
Lyttle highlighting strong operational performances from its warehouses in Burnley and Sheffield.
1400
SOFTCAT (SCT) +89% If you believe that technology is now in the very knitting of almost every organisation, then you’ll have a feel for why Softcat (SCT) has performed so well in 2019. The Marlow-based company is what’s called a value-added reseller. It sells a wide selection of third party software to small and medium-sized companies and public sector organisations, and provides PCs, smartphones and other devices. It offers deep technology expertise and advice, effectively removing the burden of customers managing multiple IT products and service relationships by using it as a trusted point of contact. What’s changed this past year is that the penny has finally dropped with investors regarding the scope of growth open to the company. With just 6% UK market share, analysts already forecast 50% growth through to 2021, but the company is much more ambitious, aiming for 11% or 12% market share over the next few years, implying a £2bn revenue opportunity.
1000
£200M - £1BN MARKET CAP Name Silence Therapeutics Shield Therapeutics Rockrose Energy ITM Power Ienergizer
Sector Biotechnology
933
Pharmaceuticals
521
Offshore drilling and other services Renewable energy equipment Professional business support services
214 156 145
Judges Scientific
Electronic equipment
120
Jadestone Energy
Offshore drilling and other services
108
Alpha FX
Investment services
97
Rank
Casinos and gambling Professional business support services
82
Knights
18
Year to date change (%)
| SHARES | 12 December 2019
80
Source: SharePad. Data as of 4 Dec 2019
1200
INTERMEDIATE CAPITAL
2018 2019 SILENCE THERAPEUTICS (SLN:AIM) +933%
700 500
SILENCE THERAPEUTICS
300 100 2018
2019
Silence Therapeutics (SLN:AIM) is developing a 1600 new generation FUTURE of medicines by harnessing the 1200 body’s natural mechanism within its cells to target treatment of serious diseases. 800 The shares shot up an astonishing 933% to 600p 400year on the back of a steady stream of positive this 2018 2019 trial announcements and a commercial tie-up to monetise its unique technology. 350 In July the firm announced collaboration with FARON PHARMACEUTICALS US250 biotechnology firm Mallinckrodt regarding the commercialisation of its key SLN500 treatment. 150 Silence received an upfront payment of $20m as 50 well as royalties on net sales. In addition, the deal provides 2018 2019 for potential added clinical and regulatory milestone payments of up to $100m for SLN500, as well as commercial milestone payments of up to $563m. ROCKROSE ENERGY (RRE) +214% Formed in 2016 to take advantage of opportunities to acquire assets in the North Sea more cheaply in the wake of a collapse in the oil price, RockRose Energy (RRE) has seen its share price increase by several multiples in the interim. A series of deals have helped build production to 20,000 barrels of oil equivalent per day. The most high profile is the £107m purchase of assets from Marathon Oil which completed in July 2019. Alongside first half results (24 Sep) the company announced its first dividend payment of 25p, underpinned by a 429% increase in operating cash flow to £51.9m. ALPHA FX (AFX:AIM) +97% The AIM-quoted group helps businesses to manage their foreign exchange exposure and liabilities. Clients include retailers such as ASOS and
Halfords (HFD), which buy goods in euros or other currencies and sell them to UK customers in pounds, and energy companies whose products are bought and sold on world markets primarily in US dollars. At its half year results the firm posted a 60% increase in revenue and a 70% increase in operating profit thanks to new customers in the UK and new operations overseas. A trading update in October saw Alpha say full year results would beat market expectations. £50M - £200M MARKET CAP 1600 1400
Name
Sector
Year to date change (%)
Faron 1200 Pharmaceuticals
Biotechnology
Futura Medical
Pharmaceuticals
400
Eurasia Mining
Platinum and precious metals
400
AFC Energy Alternative fuels SILENCE THERAPEUTICS
334
1000
2018
700 500
Proton Power Systems 300
Zoltav Resources 100 2018
Luceco 1600 GAN
FUTURE
Ten 1200Lifestyle Renalytix AI 800 400
2019
Electronic equipment Integrated oil and gas Electronic 2019 components
240 225 216
Software
177
Travel and tourism Medical equipment
167 157
2018
410
INTERMEDIATE CAPITAL
Source: SharePad. Data as of 4 Dec 2019
FARON (FARN:AIM) +410%
2019
350 250
FARON PHARMACEUTICALS
150 50 2018
2019
Clinical stage biotechnology company Faron (FARN:AIM) has seen its shares rise by 410% this year on increasing hopes around its key drug Clevegen, a novel precision cancer immunotherapy targeting inoperable solid tumours. The market’s enthusiasm was justified in
November with the announcement that the US Food and Drug Administration had approved an expansion of the original trial. Faron plans to open new study sites in the US to facilitate a rapid expansion of the study, investigating the safety and efficacy of Clevegen in various cancer cohorts. GAN (GAN:AIM) +177% The company provides a technology platform which helps clients convert their marketing dollars into more first-time gamblers. GAN has seen a stark change of fortune after putting itself up for sale in a strategic review announced on 29 March. That turned out to be close to the lows for the year for the shares, which have since responded to a string of positive developments in the key US market, leaving the stock up 177% so far this year. GAN subsequently decided against a business sale and opted for an additional stock market listing in the US. A trading update for the four months to 31 October saw operator revenue jump 269% to $40.6m. TEN LIFESTYLE +167% Tech-led personal concierge service Ten Lifestyle (TENG:AIM) has more than doubled its value this year after consistently winning new contracts. The company, which mainly partners with banks to offer perks to their high net worth clients, gained and retained customers in several parts of the world, giving it a bigger global reach than it has had in previous years. It has also improved its digital platform, which along with the contract wins helped drive a 23% increase in revenue in its full-year results (26 Nov). Going forward, the firm has said it is not significantly affected by macroeconomic conditions, because when the going gets bad, the last thing big banks want to do is lose valuable clients, and so offering Ten Lifestyle’s perks helps keep those customers. By The Shares team
12 December 2019 | SHARES |
19
10 BIG
QUESTIONS FOR THE YEAR AHEAD By The Shares Team
I
t feels like we are at a major turning point for markets. This year has been dominated by concerns about the US/China trade war, a slowdown in the global economy, Brexit and whether equity markets have peaked. Next year it feels like we could get more clarity over the trade war and Brexit which in
U
S stock markets have posted unusually strong returns so far this year. The S&P 500 Composite index is up 26% compared to an average annual return of 8% since the index started in 1957 up to the end of last year. The biggest driver has been the change in attitude
20
| SHARES | 12 December 2018
turn might help to provide some answers over the direction of the global economy and how investors could best make positive returns. In this article we’ve pulled together some of the most important questions on investors’ minds concerning these topics and added a few more questions which we think people will be asking in 2020.
WILL THE US STOCK MARKET DELIVER ANOTHER YEAR OF STELLAR RETURNS? of the Federal Reserve, which switched from raising rates in the first quarter to cutting rates and since then has been perceived as ‘having the market’s back’. Investors know that at the first sign of market stress the Fed will cut rates. That situation is likely to persist into 2020, but there are growing headwinds meaning gains next year are likely to be less spectacular. A key event in 2020 is the US presidential election. Even if Donald Trump wins a second term, the Democrats are still likely to control the Senate and will seek to raise corporate
taxes, denting profits. Rising labour costs are also likely to eat into earnings. Progress on a trade deal with China is another potential stumbling block. Economists at Goldman Sachs estimate that the impact of the trade war this year has been to knock 0.4% off US growth. While US voters support Trump taking on China over its ‘unfair’ trade practices, there is a fundamental difference at stake. As JP Morgan’s chief strategist Karen Ward says, China believes in industrial policy, the US doesn’t. The US consumer is also
likely to be in focus next year. Consumer spending is crucial to the health of the US economy. Happily the household savings rate of 8% is comfortably above the 20-year average of 6%, while the fall in mortgage rates thanks to Fed rate cuts has reinvigorated the housing market. However consumer confidence has slipped in the past few months and
a weak stock market risks creating a ‘doom loop’ of falling confidence and falling share prices. The final headwind is valuation. On a cyclicallyadjusted price-to-earnings (CAPE) basis, the US market has only been more expensive than it is currently on two occasions: before the 1929 Wall Street crash and before the 2000 tech bubble burst.
WILL CORPORATE EARNINGS CATCH UP WITH EQUITY MARKETS IN 2020?
T
he US tends to set the tone when it comes to equity markets, and so far 2019 earnings are setting a low bar to beat in 2020. The chart shows that reported earnings growth has been slowing since January 2017 if you ignore the oneoff tax break that boosted 2018 earnings. Investors are clearly eying the lush-green pastures of 2020 and resumption in
WE DON’T KNOW YET HOW THE REST OF 2019 WILL PAN OUT, BUT THE WEAKENING TRENDS ARE IN STARK CONTRAST TO THE OPTIMISM BUILT INTO PRICES
0.4
YOY% CHANGE IN QUARTERLY S&P REPORTED EPS
0.3 0.2 0.1 0 0.1 0.2
DEC- JUN- DEC- JUN- DEC- JUN- DEC- JUN- DEC- JUN- DEC- JUN- DEC- JUN- DEC- JUN- DEC- JUN10 11 11 12 12 13 13 14 14 15 15 16 16 17 17 18 18 19 Source: S&P
global growth once the USChina trade war abates. We don’t know yet how the rest of 2019 will pan out, but the weakening trends are in stark contrast to the optimism built into prices. Current consensus estimates have earnings per share growing around 10% for next year down from around 13% earlier in the year. Goldman Sachs thinks it will come down further to 6%, but doesn’t see it as a problem for stocks. However, one sign that
12 December 2018 | SHARES |
21
3250 3000
S&P 500 DIVIDENDS & BUYBACKS (trillion dollars, annualised)
2750
3.0
WHY IS THE MARKET RISING WHEN BUYBACKS ARE FALLING?
2.5
2500 2250
2.0
2000 1750
1.5
1500 1250 1.0
1000 750
0.5
500 250 0
1999
2000 2001
2002
2003
2004 2005
2006 2007
2008 2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020 2021
0.0
Source: Standard & Poor’s
should make investors ponder such rosy forecasts is the rough 30% reduction in share buybacks this year. In the first quarter of the
year companies purchased around $900bn worth of shares, double the amount of dividends paid out to investors. That has since fallen to $657bn.
Historically, falling buybacks have been accompanied by falling stock prices as the chart illustrates.
WILL THE TRADE WAR EVER GET RESOLVED?
T
he answer likely hinges on the unpredictable actions of Donald Trump. He said in early December 2019 that a trade agreement with China could wait until after November 2020’s presidential elections. This undermined hopes that the trade war which has dominated the market mood since early 2018 would be resolved soon. Investors, who had already seen the markets price in a so-called ‘phase one’ agreement between Washington and Beijing, will hope it is merely a negotiating tactic to
22
| SHARES | 12 December 2018
1 – 14 Aug 2017 – Trump orders probe into Chinese IP threat (first direct measure against China)
2 – Apr 2018 – US announces tariffs on steel and aluminium imports and Chinese goods, Beijing retaliates
3 – 23 Aug 2018 – First US and Chinese tariffs are implemented
5 – 8 May 2019 – US gives formal notice of intent to raise tariffs on Chinese goods
4 – 1 Dec 2018 – Ceasefire agreed with 90-day halt to new tariffs 6 – 29 Jun 2019 – Agreement to restart trade talks
7 – 13 Aug 2019 – Threatened new tariffs are delayed until 15 Dec 2019
2400 2200
MSCI WORLD U$
3
2 2000
4
1
5 6
7
1800 2017
2018
2019 Source: Shares
squeeze more concessions out of China. Tariffs scheduled to be
implemented on Chinese goods from 15 December will offer an early test of
Trump’s intentions. But if the US leader means what he says when he describes his country as doing ‘very well’ from the trade war, then there is a clear risk of an escalation. This could include
the $7.5bn worth of tariffs being readied on imports from Europe in response to illegal subsidies for European aircraft maker Airbus, as well as threatened retaliation to French taxes
on US tech companies. On the flip-side, the incentive for Trump in dialling down tensions is to keep the economy on course, thereby boosting his re-election hopes at the end of the year.
CAN GOVERNMENTS PICK UP THE SLACK FROM CENTRAL BANKS?
I
n the wake of the financial crisis the world’s central bankers have looked to keep growth on track through the availability of cheap cash, pursuing loose monetary policies. They have busily lowered interest rates and introduced so-called quantitative easing, increasing money supply by buying bonds. Now they want governments to do their part through fiscal interventions. This means increasing state spending in areas like infrastructure to help give the economy a boost. Christine Lagarde, the newly installed chief of the
European Central Bank, recently called for Eurozone countries with the necessary capacity, such as Germany and the Netherlands, to invest more in infrastructure, education and innovation. In some respects central bank policy has set the stage for this increase in spending. Investment bank JPMorgan observes: ‘Low interest
rates are an enormous cash windfall for governments, and could encourage governments to turn on the fiscal taps.’ If this happens there is the potential for a double dividend as jobs are created and productivity is improved through the extra investment. Increased borrowing would be likely to play a big part but higher government spending raises the possibility of increased corporate taxation down the line to help foot the bill. This could undermine business confidence and act as a constraint on growth longer term.
CAN BOND PRICES CONTINUE TO RISE AFTER SUCH A GREAT 2019?
B
onds normally act as a safety zone for investors and tend to do well when equities enter a down phase. However bond strength in response to an equity market wobble last autumn continued
into the beginning of this year resulting in strong returns across the fixed income spectrum, from government bonds to corporate and high yield. Continuing US-China trade tensions and Brexit
wrangling has had a dampening effect on global trade and consequently most economists are now predicting slower growth. Meanwhile inflation expectations remain subdued, resulting in little or
12 December 2018 | SHARES |
23
LOOK HOW WELL BONDS HAVE PERFORMED THIS YEAR KEY: 12.00%
US Corporate bond return Emerging markets aggregate bond return Global aggregate corporate bond return UK Gilts Global aggregate bond return
10.00% 8.00% 6.00% 4.00% 2.00% O.00%
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
NOV
no pressure on bond yields. Some investors see a constructive resolution of these risks as a catalyst for the resumption of global growth which would see bond yields rise and prices fall. But some bond fund managers are less optimistic about growth. Mike Riddell of Allianz Global Investors thinks the risks are rising. He tells Shares: ‘we continue to believe that we are at, or approaching, the end of the economic cycle and the risk of a US/global recession next
year is still very real.’ In terms of what to avoid, it’s all about what’s priced in and for Riddell the extra yield on a corporate bond over a government bond is now very close to the historically tight levels seen in June 2007, immediately before the last crisis began. ‘In light of this, near record low levels of credit spreads makes no sense and we’re avoiding corporate debt at the moment,’ he says. Chris Bowie, a bond fund manager at TwentyFour Asset Management, concurs and
DEC
Source: Bloomberg
says now is not the time to reach for risk in high yield, emerging markets, nor private credit fixed income. He adds: ‘Roughly one-fifth of our portfolios are in government bonds to protect capital and lower volatility.’ Clearly it will be more important for bond fund managers to be selective in 2020, with government bonds again reverting to their traditional ‘haven’ status, while corporate and high yield will face more challenging conditions.
WILL IT BE HARDER TO FIND DECENT SOURCES OF INCOME IN 2020?
Y
ield scarcity will be one major challenge facing investors in 2020. The sustainability of UK equity income streams has been called into question, with underlying
24
| SHARES | 12 December 2018
dividends across the market falling by almost 3% on a constant currency basis during the third quarter of 2019 – the worst quarterly performance for three years. While the latest Link
Group UK Dividend Monitor revealed overall UK dividend growth of 6.9% over the third quarter, this was driven by special dividends and exchange rate gains due to the depreciation of sterling. Brendan Gulston, comanager of the Gresham House UK Multi Cap Income Fund (BYXVGS7), points out that with more than half the FTSE 100’s dividends coming from just 10 companies, ‘most UK equity income strategies are disproportionately invested in a relatively small number of mega-cap stocks’. Don’t assume that
very large companies are dependable dividend payers. Their dividends can still be volatile, as highlighted by the 40% dividend cut for Vodafone (VOD) earlier this year. Investors seeking dividend diversification may want to look to the small and mid-cap market, where Gulston says he is witnessing ‘numerous under-researched and under-the-radar companies displaying considerable
dividend generation potential over the coming years’. Calum Bruce, investment manager at Ediston Property Investment Company (EPIC), believes real estate should remain appealing to investors as a way to access strong, sustainable income. ‘With many property investment trusts trading at discounts in the region of 10% to 20%, and with yields in the region of 5% to 7%, one has to question at what point sentiment towards Brexit and retail has been more than fully reflected in the share price of select investment trusts.’
HOW BIG COULD ESG INVESTING GET?
T
he answer is very big. The growing consensus in investment fund circles is that environmental, social and governance (ESG) investing will be the norm within five years, that is to say part of mainstream investing. The drivers are regulatory changes from governments around the world and, far more crucially, rapidly increasing demand particularly from women, millennials and high net worth individuals. A Bank of America report predicts a ‘tsunami of assets’ is poised to flow into ESG investments, with over $20trn of growth in ESG funds in the US alone over the next two decades,
equivalent to the size of the S&P 500 today. Exchange-traded funds (ETFs) are expected to flourish as more ESGspecific indices are created. Rebecca Healy, head of market structure at brokerage Liquidnet, says ESG can no longer be seen as an investment ‘fad’ and is now the way investors determine if a company’s business model is sustainable. She explains: ‘Whether
that is the automotive company that is investing in the latest active safety technology or a technology company that offers the largest database of academic research at free or low cost to developing nations, or companies investing in electric charging infrastructure to make cities more efficient. ‘This isn’t about hugging trees. It’s about identifying the economic success stories of the future.’
12 December 2018 | SHARES |
25
SHOULD OILS, BANKS AND INSURERS TRADE ON PERMANENTLY LOW MULTIPLES? 30
BP: TREND PE 1994 - 2019
TREND PE
25 20 15 10 5
NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
TPE
I
AVERAGE
n recent weeks we have discussed the possibility of ‘value’ stocks re-rating at the expense of ‘growth’ stocks, and market trends would suggest there is life in the value strategy yet. However, some sectors look to be so structurally challenged that despite their lowly price-to-earnings (PE) multiples, the chances of them reverting to their former ratings are slim to put it mildly. Two sectors which have undergone a major de-rating in the past decade are oils and banks. Just as the days of Brent crude trading at $100 a barrel look unlikely to return, significantly higher interest rates seem improbable for now. For oil companies there is the added problem that their reserves may no
26
| SHARES | 12 December 2018
+ 1 SD
- 1 SD
+ 0.5 SD
- 0.5 SD
TPE = Trend PE, SD = Standard deviation. Source: M23 Research
longer be worth what they were previously. Spanish producer Repsol recently wrote down the value of its assets in line with a ‘lower oil and gas price scenario consistent with the Paris Agreement’s climate goals’. Pressure for others to do the same will surely grow. On a cyclically-adjusted price-to-earnings (CAPE) basis, shares in FTSE 100 heavyweight BP (BP.) have traded between 10 and 15 times earnings at best over the past 10 years and look like staying there compared with 20 to 25 times or more a decade earlier. It’s a similar story for HSBC (HSBA), another major FTSE stock, which has spent most of the past decade trading just above 10 times cyclically-adjusted earnings with rare forays to 15 times
30
HSBC: TREND PE 1994 - 2019 25
TREND PE
20 15 10 5
NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV- NOV94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
TPE
AVERAGE
+ 1 SD
- 1 SD
+ 0.5 SD
- 0.5 SD
TPE = Trend PE, SD = Standard deviation. Source: M23 Research
compared with previous highs of 25 times earnings. Given the growing frequency of climate-related disasters and bigger than expected catastrophe claims, it is worth asking whether insurers such as Beazley (BEZ) and Hiscox (HSX) will be able to sustain their former rating of 15 to 20 times cyclically-adjusted earnings in the years to come or whether theirs too is now a structurallychallenged business.
12 December 2018 | SHARES |
27
WHERE’S THE COMMENT ON BREXIT? We haven’t forgotten about Brexit in our 2020 outlook. We’re simply waiting for the UK general election result in order to have a better handle on how Brexit might play out. We will provide commentary in next week’s issue of Shares (19 Dec) alongside information on how the party or parties which prevail in the election could impact markets over the coming months.
WILL VALUE INVESTING MOUNT A BIG COMEBACK IN 2020?
F
or a long time value investing – looking to buy shares in companies which trade on lowly valuations – has been out of fashion as investors have focused instead on buying companies which can deliver growth, no matter how expensive they are. There are signs that could change in 2020, with the performance of value stocks picking up in recent months. The chief executive of value investment specialist Oldfield Partners, Jamie Carter, sums up the situation: ‘The recent decade-long underperformance by value has been the worst since the Great Depression, but value outperformed
28
| SHARES | 12 December 2018
superbly in the years that followed that period.’ There have been false dawns before in 2016 and late 2018 when value held sway for a short period before growth stocks recovered their dominance. Contrarian fund manager Alastair Mundy, who steers Investec UK Special Situations (B61JXN1), says: ‘The biggest boost for longterm value recovery will be bond yields going up and bond yields are clearly at very low levels so I think the odds are on my side there.’ He believes rising inflation and the flood of government debt in the fixed income market could be a catalyst for yields going up.
WILL THIS BE THE YEAR WHEN MULTIPLE INVESTMENT TRUST BOARDS LOSE PATIENCE AND SACK UNDERPERFORMING MANAGERS?
T
he setbacks involving Neil Woodford’s various funds in 2019 have been an eye-opener for the funds world and have also been a reminder that investment trusts have the power to sack the fund manager if they are not meeting expectations. Active funds are already facing competitive pressure from passive exchange-traded funds and now they’ve also got reputational issues to address. It seems highly likely that a large number of investment trust boards will no longer put up with underperforming managers and so we could see quite a few changes in 2020. Ones to watch include
420
PERPETUAL INC.& GW.
380 340 300
2017
Mark Barnett-managed Perpetual Income & Growth (PLI) whose chairman Richard Laing last month said the board was ‘very sensitive to shareholder concerns about continued weak results’ and that it was closely monitoring efforts by Invesco to improve performance. Aberdeen Standard Equity Income Trust (ASEI) has described its 2019 performance as ‘a considerable disappointment’.
2018
2019
Despite saying a -15.1% share price total return versus 2.7% gain from the FTSE All-Share ‘a very poor result and there is no point in pretending otherwise’, the board is giving manager Thomas Moore another go at getting the fund back on track. He’s probably got one chance to improve performance before more serious thoughts are given to the future management of the trust.
WHERE COULD YOU MAKE MONEY IN THE COMING YEARS? Financial data specialist Morningstar believes the best place to make money in the coming years could be UK, Korean, German and Japanese stocks. In contrast it believes the US market has already had its strong run and could deliver much lower returns going forward. Looking at the valuationimplied returns for the next 10 years, Morningstar believes you could get approximately 7% a year from UK equities, 6% a year
from German equities and less than 1% from US equities. ‘The German stock market has been hurt by auto tariffs and Brexit, but we’ve seen good changes with cost savings and think some of the price action has been overdone,’ says Emma Morgan, a portfolio manager at Morningstar. ‘You would normally expect to make 6% to 8% from the US market but it looks so overvalued at the moment that you are unlikely to get
that return going forward. UK equities are supported by a large dividend yield and you’re getting some growth and inflation as well.’ Lyxor Asset Management favours European equities for 2020, saying there is an improved economic backdrop and valuations are lower than the US. Investors can get exposure to the aforementioned regions through exchange-traded funds or actively-managed funds.
12 December 2018 | SHARES |
29
RUSS MOULD
Don’t get caught out by investment bubbles Learn from the patterns of previous manias
O
ne theory held by some market strategists is that a tidal wave of cheap cash, provided by central banks’ interest rate and quantitative easing policies, means we are witnessing ‘The Bubble of Everything’ as prices surge across a range of assets, ranging from equities to bonds to property to art, wine, sports cars, thoroughbreds, you name it. It’s a beguiling theory but spotting a bubble is not as easy as it sounds. Former Federal Reserve chair Ben Bernanke flatly denied that the US housing market was in a bubble in the middle of the last decade, only for it to blow up in his face shortly afterwards. Perhaps most famously of all, economist Irving Fisher argued in mid-October 1929 that ‘Stock prices have reached what looks like a permanently high plateau,’ only for the Black Monday crash to follow just a fortnight later. It may be therefore worth revisiting this column’s preferred text on the topic of bubbles, Charles Kindleberger’s Manias, Panics & Crashes, to identify the sequence of events that can be seen through the history of previous market crazes, ranging from the South Sea Bubble of 1720 through to British canals (1790s), Latin American mines (1820s), US equities (1920s), Japanese equities and property (1980s) and global technology stocks (1990s), to name but a few. BEEN THERE, SEEN THAT Technology stocks were the first really big bubble of this column’s financial market career, which began in 1991, as can be seen from the chart of the NASDAQ Composite, which went parabolic in 1998 to 2000 but then fell so heavily that it wiped out four years of gains in half that time and then took more than a decade to reach its prior highs. This decade has seen a sequence of such
30
| SHARES | 12 December 2019
By Russ Mould AJ Bell Investment Director THE TECH BUBBLE AND THE SLOW RECOVERY AFTER IT BURST 10,000 8,000 6,000 4,000 2,000
2019
0
1995
2000
2005
2010
2015
NASDAQ Composite index Source: Refinitiv, AJ Bell
episodes in quick succession as, flushed by cheap liquidity and driven by the search for yield and returns superior to those offered by cash, markets have proved increasingly bubbly. A long list includes Chinese equities in 2014-15, Bitcoin 2017-18 and Cannabis and marijuana stocks in 2019, a fad which is already leaving many portfolio builders with burnt fingers.
RUSS MOULD BITCOIN'S DRAMATIC RISE AND FALL 20,000 16,000 12,000 8,000 2,000 0
2015
2016
2017
2018
2019
Bitcoin / US$ Source: Refinitiv, AJ Bell
BUBBLE CHECKLIST Looking at the patterns of past bubbles may help investors duck the next disaster which will, inevitably, unfold at some stage. This is because the details may change from bubble to bubble but human behaviour clearly does not and the running order is pretty consistent. The starting point for a bubble is a new investment opportunity, one that may be genuine or even one with just a big enough grain of truth to be irresistible to those looking for a quick financial killing. It could be anything from railways to cryptocurrencies and the more disruptive or revolutionary it seems, the better, as everyone likes to get in on a ‘new paradigm,’ don’t they? The initial price rise catches the attention of newcomers as ‘fear of missing out’ (FOMO) starts to gather. Investing (and operational) profits go into orbit ETFS TRACKING CANNABIS SHARES HAVE BEEN FALLING IN RECENT MONTHS 30 25 20 15 10
May
July
Innovation Shares Cannabis ETF ($) Global X Cannabis ETF ($) AdvisorShare Pure Cannabis ETF ($) Source: Refinitiv, AJ Bell
Sept
Nov
and fresh cash is attracted, often in the form of borrowed cash. One oddity of the current passion for firms like Uber, Lyft and Peloton is they don’t make a profit themselves. More copycats and imitators spring up and more credit is made available as asset prices keep running and the profits keep flowing. Then the trouble starts. Insiders start to lock in their profits by selling to the unwary at elevated prices and leave investors holding the bag. Prices initially correct but then rally as loyal supporters buy on the dips. Initial signs of distress then start to sow real seeds of doubt. A new offering goes wrong, a firm runs out of cash and asset prices fail to reach their previous peaks. The queue of copycat flotations and management teams looking to sell their stock on a secondary basis gets longer by the minute and supply of paper begins to outstrip demand. THE BIG CATALYST A good, old-fashioned scandal then happens. Someone goes bust or accounts prove to be crooked or someone runs off with the money and investors realise they have been had. Fear and revulsion replace greed, asset prices collapse as investors scramble to cut their losses and the recriminations begin as scapegoats are sought and publicly pilloried (or worse). Investors can now judge for themselves where they feel they stand across any asset class they care to consider. Perhaps the easiest signal to follow is the emergence of copycat flotations or multiple versions of the same fund, active or passive, promising access to a hot new theme. The experiences of cannabis stocks in 2019 certainly suggest as much and with that in mind, this column will be interested to see how many environmental, social and governance (ESG)themed products and collectives launch in the coming months, alongside any which specialise in electric vehicles, even if it is still very early days for both. 12 December 2019 | SHARES |
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Fund managers’ best and worst stock calls in 2019 Investment experts reflect on their best and worst stock picking decisions this year
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t is always fascinating to get insight into fund managers’ views on their stock picking decisions and so we’ve spoken to range of managers about their best and worst calls in 2019. The managers in this article discuss a range of stocks on both the UK market and ones listed overseas.
bank and drive growth, and pay a high, sustainable and growing dividend, allowed Mediobanca to fly high in 2019.’ UMICORE – BAD CALL
WILL JAMES Deputy head of European Equities at Aberdeen Standard Investments MEDIOBANCA – GOOD CALL ‘EUROPEAN BANKS IN aggregate have not had a good time in 2019 given the uncertain growth outlook and continued pressure on interest rates. Our view has been that the odd phoenix should be able to rise from the ashes of an industry that suffers from overcapacity, regulatory headwinds and lack of revenue growth. ‘Mediobanca is one such ‘scarce’ asset. It is ironic and some would say remarkable that an Italian bank has managed to make it into the top performers’ list. However, excess capital, relative interest rate insensitivity, ability to reposition the
‘WE WERE CAUGHT out by the profit warning from chemicals group Umicore earlier in 2019. ‘Having been proved right around Umicore’s technological prowess with regards to the nascent hybrid and electric vehicle industry and enjoying great performance from the shares, we failed to properly appreciate how much the market had extrapolated the growth.’ 12 December 2019 | SHARES |
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CHARLES LUKE Fund manager of ASI UK Income Equity (B0XWNB4)
SIMON GERGEL Portfolio manager of Merchants Trust (MRCH)
AVEVA – GOOD CALL
GREENE KING – GOOD CALL Green King
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‘THE MERGER OF industrial software company Aveva (AVV) with Schneider’s software business provided the enlarged company with a larger product set, broader industrial vertical targets and wider geographic exposure. ‘Given the strong revenue and cost synergies, together with a supportive end-market backdrop, Aveva’s trading updates were generally accompanied by earnings upgrades together with a re-rating which resulted in a strong share price performance over the year.’ SAGA – BAD CALL 130
SAGA 100 70 40 JAN
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‘WE OWNED a small holding in Saga (SAGA) given its attractive dividend yield, strong brand and the potential to replace its capital intensive underwriting earnings with earnings from broking and its cruise operations. ‘Unfortunately, we were wrong about the strength of the company’s brand and its resonance with its customer base and the impact of the highly competitive and commoditised UK home and car insurance market. ‘Given a stretched balance sheet, a dividend cut and a very significant change to the original investment case, we sold the holding immediately after it issued a profit warning in April.’ 34
| SHARES | 12 December 2019
‘GREENE KING IS one of the UK’s largest pub companies with nearly 3,000 pubs. Like many UK consumer-related companies, the shares were attractively valued at the start of the year, as investors were concerned about the economic risks to the UK from the Brexit uncertainty. ‘There were also some concerns about a more competitive trading environment in the food and beverages industry. ‘We were particularly attracted to Greene King’s strong asset base, with brands such as Chef & Brewer and Hungry Horse, and beer brands like Green King IPA and Old Speckled Hen. The company also has a strong management team and a solid long term record of growth. ‘The low valuation of the shares prompted a takeover offer from the private company of one of Hong Kong’s richest men. This led to the shares rising sharply.’ SENIOR – BAD CALL 240
SENIOR 210
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‘Senior (SNR) is a manufacturer of aerospace and industrial equipment with a high exposure to the large civil aerospace manufacturers. The company
has a long order book with greater sales per plane on most of the new and growing Boeing and Airbus programmes. ‘The company has been hit by a number of different issues this year. Most notable has been the grounding of Boeing’s 737 Max aircraft after two tragic accidents. But there has also been an impact from a slowdown in certain industrial markets and a non-renewal of some historic contracts. ‘In combination, these factors have had a significant impact on the company’s profit expectations, and this has led to the shares being one of the weakest performers in our portfolio this year.’ JASON PIDCOCK Fund manager of Jupiter Asian Income (BZ2YMT7) EMBASSY OFFICE PARKS REIT – GOOD CALL
HONG KONG STOCK EXCHANGE – BAD CALL
‘WE CONSIDERED BUYING shares in Hong Kong Stock Exchange at the end of September after it had made an indicative bid for London Stock Exchange (LSE). ‘We met the management and were impressed but thought they might raise their bid and waited to see if we could get a better entry price. It didn’t happen. ‘HKEX abandoned its bid for LSE and the shares have rallied from HK$222.60 on 25 September to HK$247.60.’ MIKE KERLEY Fund manager of Henderson Far East Income (HFEL) ANTA SPORTS – GOOD CALL
‘WE BOUGHT INTO office landlord Embassy Office Parks REIT earlier this year – the first REIT to list in India (and the only one to date). We liked the opportunity so much we became anchor investors and bought in the aftermarket until we’d established a significant (for us) position. ‘It floated in April at 300 rupees and the shares now trade at 442 rupees. We’ve also had two dividend payments. Embassy has so far outperformed the Indian market by 45%.’ 460
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‘CHINA BRANDED sportswear Anta Sports – which has the rights to the Fila brand in parts of Asia – is a stock we owned through 2019 on the basis of three key themes – government support for leisure, exercise and heathier lifestyles; aspirational purchases as incomes rise; and finally, that local brands would take market share from foreign brands as quality improves and pricing remains competitive. ‘Anta has the third largest market share in sports apparel and has taken market share from the leaders, Nike and Adidas.’ 12 December 2019 | SHARES |
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LEND LEASE – BAD CALL ‘WE INVESTED IN Australian property development and engineering contractor Lend Lease for its urban regeneration projects in Australia, Europe and the UK and for its exposure to increased infrastructure spending, primarily in Australia but also worldwide. ‘Unfortunately, some ill-conceived legacy engineering projects in Australia led to a series of provisions which were unexpected and badly communicated to the market which saw the stock underperform.’ LAURA FOLL Co-fund manager of Lowland (LWI) XP POWER – GOOD CALL ‘WE INVESTED IN XP Power (XPP) at the beginning of this year for around £20 a share; they now trade around the £29 level. XP makes power converters for a range of industries – healthcare, semi-conductors as well as more general industrial applications. ‘It has always generated good operating margins and in our view the management team are excellent, but it had de-rated hugely towards the end of 2018 because of concerns about the semi-conductor cycle and the possible earnings downgrades that would result. ‘In our view the long-term quality of the business was such that this looked like an interesting entry point and we built a position.’
KIER – BAD CALL 550
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‘OUR WORST NEW position in 2019 was a small stake in Kier (KIE) at the start of the year, following the rights issue. ‘We felt that the balance sheet issues were being addressed, and under a new CEO who wanted to simplify the business and take costs out that Kier could be well positioned for a recovery from a low valuation. ‘What I underappreciated was the scale of working capital outflow for this type of business when customers and suppliers lose trust. What that meant was the rights issue proceeds were quickly offset by the working capital outflow that occurred, leaving ongoing balance sheet stretch.’ TREVOR GREEN Head of UK equities and a senior portfolio manager at Aviva Investors AVEVA – GOOD CALL ‘AVEVA IS A GLOBAL leader in engineering and industrial sector software which merged with Schneider Electric Software in 2018. In this case bigger seems to be better, with the firm delivering very strong earnings this year, assisted by the ongoing move by its customers to embrace digitalisation. ‘Recurring revenue has increased for the business and investors have rewarded the company in 2019 with a higher rating.’ IOMART – BAD CALL ‘WEB HOSTING CLOUD computing company Iomart (IOM:AIM) has strong end market growth drivers as the ever-increasing demand for more computer power, storage and connectivity gives it an ever larger market to play for.
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‘Despite this situation, the share price has struggled since I invested in late January, with earnings forecasts drifting in 2019 as the business has made increased investment towards targeting larger and more complex contracts. ‘This year will go down as one of consolidation and investment, with investors looking to next year and beyond for this investment to pay off.’
UNITED INTERNET – BAD CALL 42
UNITED INTERNET 36
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LUCY MACDONALD Portfolio manager of Brunner Investment Trust (BUT) TAIWAN SEMICONDUCTOR MANUFACTURING – GOOD CALL
‘THE GROWTH PROSPECTS for Taiwan Semiconductor Manufacturing are driven by increasing demand for smaller, faster processors across a widening range of industries, in particular 5G smartphones and artificial intelligence computing. ‘It has a leading market position in advanced-node fabrication driving high sustainable returns and a broadening customer base, supplemented by an increase in outsourcing, from Intel in particular. ‘The competitive landscape has improved for TSM with the announcement from Globalfoundries of its suspension of 7-nanometer development. ‘This competitive strength is reflected in gross profit margins around 40%, with a target of 50%. Long term growth forecasts are being revised upwards. ‘At the beginning of 2019, the stock was attractively valued due to short term cyclical factors and offered a yield close to 4%. Over the year the earnings have recovered, surprising on the upside against overly conservative estimates and the stock has seen a rerating, resulting in a 39% return.’
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‘UNITED INTERNET PROVIDES internet access services to homes and small and medium-sized companies in Germany. ‘The original investment case was based on low capital intensity growth in a relatively concentrated market, with a regulatory background supportive to new entrants. The company demonstrated market share gains and high returns. ‘There was also attraction in the potential stock market flotation of the Business Applications segment of the business, which was seeing strong growth. ‘This core thesis, which worked for a year or two, was broken with the decision of the company to pursue 5G licences at scale, raising concerns about a shifting business model and a lower return on investment. ‘The change in strategy raised questions about the corporate governance and our engagement with the company on the issues were unsatisfactory. We therefore made the decision to sell after collecting a dividend payment. The dividend has subsequently been reduced.’
12 December 2019 | SHARES |
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Learning the lessons from corporate disasters We take a closer look at some of the most damaging stock market gaffes of 2019
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n 2019 UK companies have issued more profit warnings than at any time since the financial crisis. Research from accountant EY found that until September, 235 firms had already sounded the alarm. This year has also seen household names like Thomas Cook and Debenhams depart the stock market in disgrace. It is not hard to see why businesses have become more accident-prone given Brexit uncertainty and global growth concerns, but some stock market gaffes are so shocking they are worth looking at in a bit more detail. By learning the lessons from these episodes investors might stand a better chance of running a successful portfolio. The Shares team has examined some key mis-steps over the past 12 months to determine what can be gleaned. A CAR CRASH AT ASTON MARTIN
over its financial position. The £120m bond issue in September 2019 at an eye-watering borrowing rate of 12% summed up the firm’s dire situation given how it only seemed to be able to get financial support by offering a very high yield. Recent speculation suggests a takeover bid from Canadian billionaire Lawrence Stroll might put shareholders out of their misery. Lessons learned: Don’t believe the hype with an IPO and always make sure you do your research. Investors drawn in by the prestige of the company’s name following its listing may have regretted backing the business. The fact that the company had already gone bust seven times in its 105 year history was a warning signal as was the extremely patchy cash flow performance and the need for significant investment in research and development. We also pointed out in an article in November 2018 that the company engaged in aggressive accounting practices, while the depressed state of the wider car industry was another reason to give the stock a swerve. 1400
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What happened? Luxury carmaker Aston Martin Lagonda (AML) may be the name behind suave spy James Bond’s vehicle of choice but it has endured anything but a smooth ride since joining the stock market in October 2018. The shares trade at a little over a quarter of the £19 IPO (initial public offering) price with the company beset by profit warnings and concerns
5 DEC – BID SPECULATION MOUNTS
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24 JULY – FULL YEAR TARGETS LOWERED 500
25 SEP – EXPENSIVE BOND ISSUE COMPLETES 2018
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12 December 2019 | SHARES |
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STAFFLINE SUNK BY RESULTS DELAY
SIRIUS MINE FINANCING DEBACLE
What happened? Staffline’s (STAF:AIM) problems began in January when it had to delay the release of its 2018 results due to allegations over payroll practices. After consulting with the tax authorities, the issue was identified as non-compliance with the national minimum wage, specifically payment for preparation time. In fairness, Staffline was simply following its end-customers’ procedures for clocking in and clocking out yet it had to provision for additional costs and raise over £40m in capital to avoid breaching its banking covenants.
What happened? Potash miner Sirius Minerals (SXX) stunned the market when it pulled a $500m bond offer in September. The bond was crucial to securing funding needed for its big mine in North Yorkshire, but Sirius couldn’t get investors on board. Its share price halved following the news, with its whole existence thrown into doubt. If Sirius is to get back on track, it needs to find a strategic partner – but this route will heavily dilute existing shareholders.
Lessons learned: There was nothing investors could have done to predict events at Staffline. Regarding noncompliance with the national minimum wage and specifically non-payment for preparation time, the firm was working in strict accordance with its contracts with end-employers. The delay in publishing its 2018 accounts impacted customer confidence during 2019 while weak consumer confidence reduced demand for contract staff from the same customers. The key takeaway is that when a company delays publication of its results, it is usually bad news. The right response would have been to sell the shares on the day news of the delay broke. As we write Staffline shares are still down over 90% from their January highs. 1400
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15 MAY – PROFIT WARNING
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2019
Lessons learned: Popular with retail investors, Sirius Minerals was meant to be a poster child for UK mining and engineering with myriad economic benefits. But this is a reminder of the very high risks of investing in mining, even in the UK, and the big risks of investing in a firm trying to clear a major financial hurdle. As Sirius prepared to launch the bond, commentary from analysts implied there was no reason to doubt the issuance and that Sirius shares could surge once the deal was done. However, this is a clear lesson not to get swept up in the hype and to fully consider a company’s history in raising finance, investors’ appetite for companies not generating revenue as well as the general risks of the sector. WEWORK DOESN’T WORK What happened? The aborted stock market listing of overhyped property firm WeWork will likely live long in the minds of investors, not least its chief backer, Masayoshi Son, the enigmatic founder of Japanese investment firm Softbank. The latter largely bankrolled the venture to startling valuations – $47bn at its last fundraising. From publication of a grand IPO prospectus to emergency rescue took two months and left WeWork valued at $8bn. Lessons learned: WeWork was never the type of next-generation, technology company it was made out to be, especially when there was a very similar sub-letting business listed on the London stock market. IWG (IWG) makes proper profits, throws off cash and pays dividends yet is valued at a tiny fraction of
WeWork’s venture capital-puffed peak at £3bn. Softbank’s job is to spot emerging businesses capable of using technology to disrupt and dominate, and it has had many successes such as the Chinese retail platform Alibaba. But calling the odd dud is par for the course in a high stakes game. The real winners from the WeWork debacle are stock market investors, who refused to accept fantasy in place of hard fundamentals. SPORTS DIRECT STUMBLES What happened? Sporting goods giant Sports Direct International (SPD) stumbled numerous times in 2019, its maverick moves further souring relations with the City. The Mike Ashley-controlled retailer spooked the market by delaying its full year results, a postponement that angered analysts and was later blamed on an unexpected bill from the Belgian taxman. Sports Direct also flagged that the problems facing acquired department store House of Fraser were ‘nothing short of terminal in nature’. Embarrassingly, Sports Direct also then struggled for some time to find a replacement auditor for Grant Thornton before RSM UK eventually stepped up to the plate. Lessons learned: This was a year in which the unorthodox corporate governance at Sports Direct came to a head, creating further negative sentiment towards the Shirebrook-headquartered shopkeeper and dealhungry billionaire owner Ashley. His insatiable appetite for acquisitions created additional management distractions at a time when the core business offered more than enough challenges to keep his team busy, with major rival JD Sports Fashion (JD.) gorging on market share. Investors will be hoping a change of name to Frasers begins a new chapter for the cut-price tennis rackets-totrainers seller.
TED BAKER UNRAVELS What happened? Quirky British fashion group Ted Baker (TED) had won a lot of fans on the stock market thanks to the strength of its brand, high margins and substantial cash flow. From mid-2018 onwards there were signs that all was not well as sales growth began to evaporate. The departure of founder and CEO Ray Kelvin amid misconduct claims in March 2019 was preceded and followed by major profit warnings. Arguably the biggest foul-up was yet to come as the company revealed on 2 December the value of stock on its balance sheet had been overstated by as much as £25m. It then issued another profit warning, saw the new CEO and chairman quit and the dividend was suspended (10 Dec). Lessons learned: Investors need to be wary of companies with overly dominant executives. Partly because this means decisions and behaviour might not be robustly challenged but also because it creates a key person risk, with one individual integral to a company’s fortunes. Kelvin was the one with control over Ted Baker’s design strategy and as such helped keep it ahead of the competition and his departure always looked likely when the allegations against him first emerged in 2018. 2200
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Equitile Resilience: the quality-focused fund you’ve never heard of It focuses on best-in-class firms which it believes are able to survive and thrive
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n today’s rapidly-evolving business world, companies are living faster and dying younger. For private investors, that means picking tomorrow’s big winners or long-term survivors is becoming increasingly tough. Just buying and holding the most profitable companies today is becoming a much less viable strategy for the long-term investor. However by adapting portfolios, you can ensure you aren’t left behind. Such thinking is at the heart of the Equitile Resilience Fund, a master fund which retail investors can access through the Equitile Resilience Feeder Fund (BDD1KW2). The latter invests 100% in the master fund and has a 0.89% ongoing charge.
TOP TEN HOLDINGS APPLE NVIDIA MICROSOFT LVMH LAM RESEARCH APPLIED MATERIALS ESTEE LAUDER ASML BROADCOM ACCENTURE
4.29% 3.80% 3.79% 3.62% 3.61% 3.48% 3.43% 3.43% 3.33% 3.02%
Source: Equitile Investments
“The portfolio aims to deliver capital growth by investing in large, growing companies”
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Managed by Equitile Investments’ co-founder and chief investment officer (CIO) George Cooper, Equitile Resilience has delivered three year annualised returns of 14.52%, according to fund research firm Morningstar. The portfolio aims to deliver capital growth by investing in large, growing companies in
developed markets. Cooper is focused on resilient, conservatively financed, well-managed companies with a proven track record of innovation and growth. A concentrated portfolio of 37 holdings, its characteristics reveal a fund with a large cap bias – the average market cap is $190.4bn – a low net debt-tooperating cash flow ratio of 0.44
and impressive five year earnings per share growth of 31%. DARWINIAN APPROACH The Equitile approach is designed to find the world’s highest-quality companies. The thesis is that because no company leads forever, the fund must have an adaptive process. Stock selection mistakes are dealt with swiftly in order to keep the fund resilient. Companies passing muster with Cooper, who has an optimistic world view given the innovation currently underway, must be able to achieve exceptional rates of profitable growth without using excessive leverage. Such companies are typically leaders within their respective fields and operate in industries that are expected to grow more rapidly than the wider economy and for an extended period too. Due to the rapid pace of innovation no company can be considered safe from changing competitive pressures. Hence the actively-managed portfolio adapts to ensure it remains at the vanguard of economic progress and resilient to an everchanging economic environment. And in contrast to the likes of the legendary investor Warren Buffett, Cooper and the Equitile team don’t believe in the ‘buy and hold’ mantra. While they like to minimise dealing costs, they see no merit in sitting on the same portfolio for years and years. ‘We have a brutal, survival of the fittest attitude,’ explains the cerebral Cooper, the author of The Origin of Financial Crises, Money, Blood and Revolution
and Fixing Economics. ‘If they aren’t performing, we take them out.’ AVOIDING EXCESSIVE DEBT Crucially, Equitile Resilience only puts money to work in companies with impressive track records of cash-generative growth and avoids companies that rely on excessive debt. By eschewing companies that have grown by over-stretching their balance sheets, the fund avoids the worst aspects of financial distress while also ensuring that the corporate names in the portfolio are growing because they have a genuinely good business franchise. ‘We look for companies with very sound balance sheets,’ continues Cooper. ‘And we are quite debt obsessive as a firm.’ Indeed, Equitile Investments’ chief executive Andrew McNally is the author of a book entitled Debtonator: How Debt Favours The Few and Equity Can Work For All of Us. ‘We look for companies with very sound finances and we look at interest service costs relative to their free cash flow,’ adds Cooper, who also screens for firms with a ‘high quality corporate culture’.
PORTFOLIO NAMES Investors are buying into names including tech titan Microsoft, US chipmaker Nvidia and consulting and outsourcing services provider Accenture. The strongest portfolio performers in November were iPhone maker Apple, software developer Adobe and Australian pharmaceutical behemoth CSL, all of which gained 10% in the month. ‘We are also heavily invested in luxury goods,’ enthuses Cooper, pointing out that LVMH, the luxury conglomerate buying US jeweller Tiffany & Co, is strategically positioned to sell into China. ‘We also own Estee Lauder and we are in medical technology including surgical robots maker Intuitive Surgical.’ 000'S 16 15 14 13
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‘How much can I pay into a SIPP when I’ve also got a defined benefit pension?’ AJ Bell pension expert Tom Selby explains the rules
I’m a civil servant and fortunate to have a defined benefit pension. I plan to retire prior to my scheme’s normal pension age and intend to leave this pension preserved as long as possible. I will be receiving a lump sum in the region of £60,000 from some investments and I’m considering adding this to a SIPP I have just opened. I plan to draw this pension down before I start to take my civil service pension. My current gross salary is £32,150. How much can I pay into my SIPP per year to gain benefit from the pension tax rebate? Colin Tom Selby AJ Bell Senior Analyst says:
The amount you can pay into your pension (or pensions) each year depends on your ‘relevant’ UK earnings and the annual allowance. For most people the maximum annual allowance in the current tax year is £40,000. If you have relevant UK earnings below the £40,000 annual allowance, your earnings will be the maximum you can put into a pension and receive tax relief in the current tax year. In your case, total relevant earnings of £32,150 means you can pay 44
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up to £25,720 into a pension in 2019/20, with tax relief boosting this by £6,430. If your earnings are more than £40,000 you might think the annual allowance is the limit. But you may still be able to pay in more than £40,000, by making use of something called ‘carry forward’. More information is available here. If you want to find out more about what counts as relevant earnings, this HMRC page is a good place to start. You should be aware that if you did set up a SIPP and took taxable income from it, either through drawdown or ad-hoc lump sums, the money purchase annual allowance (MPAA) would kick in, reducing what you could pay into
your SIPP to £4,000, regardless of your level of earnings. If you chose to take an income from your defined benefit scheme, on the other hand, this would not trigger the MPAA and you would retain a £40,000 maximum allowance. CALCULATING THE ANNUAL ALLOWANCE The amount of your annual allowance will be reduced by any part of it used up in your civil service pension. The following example illustrates how the annual allowance is calculated in defined benefit schemes. Take someone earning £30,000 who has been a member of a defined benefit scheme with a
1/60th accrual rate for 20 years, with CPI inflation running at 3%. There are three steps to figure out how much annual allowance this will use in the current tax year. First, you need a value for the start of the tax year. This is the value of the pension accrued up until that point in time, multiplied by your salary at that point and then increased in line with CPI inflation. So in this example, it’s 20/60ths x £30,000 x 1.03 x 16 = £164,800. Second, you need a value for the end of the year. To do this, just multiply the current year’s accruals by 16. We’ll assume the salary is the same, so in this example
it’s 21/60ths x £30,000 x 16 = £168,000. Finally, subtract the start of year number from the end of year number. In this example, that’s £168,000 - £164,800 = £3,200 annual allowance used. If you don’t want to do this calculation yourself, ask your administrator if they can figure it out for you or speak to a regulated adviser.
DO YOU HAVE A QUESTION ON RETIREMENT ISSUES? Send an email to editorial@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares. Please note, we only provide guidance and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.
Gifting stocks and shares to the family this Christmas We look at the process of handing over investments to your spouse, children or even charity
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his Christmas you might decide to shun the usual smellies, M&S jumper or cuddly toys and instead give investments to family. While they are trickier to wrap to go under the tree, you could be giving a present that lasts for years and is far more lucrative than many other gifts. One thing you need to bear in mind if you’re gifting shares is that you’ll be handing over a very concentrated investment – rather than it being spread around different assets – meaning the risk is higher as your returns are based on just one company. TAXING PROBLEMS When you gift shares to a spouse you wouldn’t need to pay capital gains tax but if you’re giving them to children you could be subject to the tax. You’ll pay
One thing you need to bear in mind if you’re gifting shares is that you’ll be handing over a very concentrated investment
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capital gains tax on the difference between the value of the shares when you bought them and the value when you pass them on. However, you wouldn’t need to pay tax if the gain is within the £12,000 annual limit, for the current tax year. Anything above this will be charged at 10% tax if you’re a basic-rate taxpayer or 20% tax if you’re a higher or additional rate taxpayer. If the gains are sizeable it may be worth gifting the shares over two tax years, to make the best use of allowances. So you could use £12,000 worth of gains now (assuming you haven’t used any of your capital gains tax allowance so far this year) and the remainder, up to £12,000 of gains, in April next year. Although you should factor in any other investments you may want to sell too. You also need to consider inheritance tax if you’re gifting
to your children. Everyone has a limit of £3,000 they can give away each tax year without it being considered in your estate were you to die. OTHER ALLOWANCES There are various other allowances too, such as if a child or grandchild is getting married. A particularly lucrative allowance is the ‘gifts out of income’ rule, which means if you’re gifting money from your income and can prove it’s not detrimental to your lifestyle, you can gift an unlimited amount. However, if that doesn’t apply and you exceed your annual gifting allowance then IHT may be due on the gift if you die within seven years, assuming your estate is worth more than the nil rate band for IHT. The tax works on a sliding scale, so if you die less than three years after gifting then
GIFTING SHARES TO CHARITY If you have a small number of shares that aren’t worth a large sum, you might find that it costs more to sell them than they are worth. Instead,
you can put them to good use and donate them to ShareGift, which groups shares together and sells them for charity.
GIVING TO YOUR PARTNER
OTHER FINANCIAL GIFTS Better than vouchers: While giving gift vouchers seems like a good idea for those tricky-to-buy-for people, they often go unused or expire before they can be used, meaning you’ve wasted your money. Instead, you could give someone a pre-paid card, it’s safer than handing over cash and saves the hassle of going to the bank to deposit a cheque. You load money on these cards, like a gift card, but then they work like a normal debit card and can be used to buy things in most shops. Millionaire potential: The minimum amount you can save into Premium Bonds was cut to £25 this year, down from £100, opening it up as a present option for more people. What’s more, while previously you had to be a parent or grandparent to gift Premium Bonds to children, other adults can now gift them too. While the effective interest rate on Premium Bonds is only 1.4% – based on the average prize payout – and the recipient could
40% IHT will be due but if you die between six and seven years after the gift then only 8% tax would be due. You also need to be aware of how much income is generated from the investments. While children can earn up to £100 in
win nothing, the lure is that you could win lots more. It means you could be the auntie or uncle that made someone a millionaire, even if this is a very unlikely scenario it would make for a pretty unbeatable present. Junior ISA gifts: If you ditch the plastic and instead put money into a Junior ISA it can add up by the time they turn 18. If you put £100 into a Junior ISA each Christmas from when the child is born you’d hand them £3,000 on their 18th birthday, or £50 each Christmas would give them just over £1,500, assuming 5% growth a year after fees. While parents will need to open the Junior ISA for their children, after that anyone can pay into the account – grandparents, friends or other family.
income a year free of income tax, anything above this is taxed at the parent’s marginal rate. One way around this is to use a Junior ISA account, which protects the money from tax. However, contributions to Junior ISAs must be made in cash, so
It can be really tax efficient to give investments to your partner. Any gift of investments to a spouse won’t be liable for CGT, which means that you can make use of your partner’s annual CGT allowance too. Alternatively you can use something called ‘Bed and Spouse’, which effectively means selling investments to realise gains up to the value of your annual CGT allowance and then buying them again in your spouse’s name.
you would need to sell the shares and then re-purchase them within the ISA. By Laura Suter AJ Bell Personal Finance Analyst
12 December 2019 | SHARES |
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BOOK REVIEW
Investment book ideas for Christmas Three ideas for presents and your chance to win a copy of Lord Lee’s new book
A
re you looking for Christmas ideas for family and friends? Here are three cracking books that will help anyone serious about investing and living a better life. They are thought-provoking and all-round fascinating books. ‘THE END OF INDEXING’ BY NIELS JENSEN
Fund manager Jensen argues that six megatrends will disrupt the status quo leading to decades of low economic growth and the demise of ‘passive’ investing.
‘THE JOY OF MISSING OUT’ BY SVEND BRINKMANN Danish philosopher and psychologist Brinkmann explains why restraint and a ‘less can be more’ attitude is good for our souls and for society as a whole.
‘THE MAN WHO SOLVED THE WORLD’ BY GREGORY ZUCKERMAN Award-winning Wall Street Journal reporter Zuckerman’s book discusses one of the most successful yet least-known investors of modern times, Jim Simons. Since 1982, Simons’ quantitative investment firm has returned almost 40% per year to clients after fees.
COMPETITION TIME: WIN A BOOK We’ve got three copies of ‘Yummi Yoghurt: a first taste of stock market investment’ by Lord Lee of Trafford to give away. Veteran investor John Lee’s ‘primer’ on investing tells the story of a West Country farming family whose homemade yoghurt business eventually floats on the stock market. As well as describing the journey from private to public ownership and the basics of the market, the book contains a glossary and tips to help first-time investors. TO WIN A COPY, ANSWER THIS QUESTION: IN WHAT YEAR WAS RETAILER-TO-TECHNOLOGY GIANT AMAZON FOUNDED? Send your answers by email to editorial@sharesmagazine.co.uk with ‘Book competition’ in the subject line. Please include your full name and postal address. All entries must be submitted by 31 December 2019. We will randomly pick three names and the winners will be announced in the 12 January 2020 edition of Shares.
12 December 2019 | SHARES |
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Growth and Innovation 11 February 2020 – Business Design Centre, London
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GUEST SPEAKERS: Daniel Coatsworth, Editor – Shares. Steven Frazer, News Editor – Shares. Richard Penny, Fund Manager – CRUX Asset Management. Gervais Williams, Senior Executive Director – Miton Group. www.sharesmagazine.co.uk/events Contact: lisa.f rankel@ajbell.co.uk or becca.smith@ajbell.co.uk In partnership with
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INDEX KEY • Main market • AIM • Investment trust • Fund • Overseas share
GlobalData (DATA:AIM)
17
Sirius Minerals (SXX)
40
Ted Baker (TED)
41
Gresham House UK Multi Cap Income Fund (BYXVGS7)
25
Softcat (SCT)
18
Ten Lifestyle (TENG:AIM)
19
Sports Direct International (SPD)
41
Tesco (TSCO)
14
Hadrian’s Wall (HWSL)
3
Staffline (STAF:AIM)
40
Taiwan Semiconductor Manufacturing
37
Halfords (HFD)
Aberdeen Japan Investment Trust (AJIT)
12
Aberdeen Standard Equity Income Trust (ASEI)
29
19
Henderson Far East Income (HFEL)
35
Hiscox (HSX)
27
Hong Kong Stock Exchange
35
HSBC (HSBA)
26
Intermediate Capital (ICP)
16 28
Alpha FX (AFX:AIM)
18
Anta Sports
35
ASI UK Income Equity (B0XWNB4)
34
Investec UK Special Situations (B61JXN1)
ASOS (ASC:AIM)
17
Iomart (IOM:AIM)
36
39
IWG (IWG)
40
Aston Martin Lagonda (AML) Aveva (AVV)
JD Sports Fashion (JD.) 16, 34, 36
Beazley (BEZ)
27
Boohoo (BOO:AIM)
17
BP (BP.)
26
Brunner Investment Trust (BUT)
37
BT (BT.A)
16, 41
Jupiter Asian Income (BZ2YMT7)
35
Kier (KIE)
36
Tullow Oil (TLW)
3
Umicore
33
United Internet
37
KEY ANNOUNCEMENTS OVER THE NEXT WEEK Full year results 13 December: Hollywood Bowl. 16 December: Chemring. 17 December: Pressure Technologies. Half year results 16 December: Fulham Shore, Sports Direct, Studio Retail. Trading statements
3
13 December: Balfour Beatty, Sthree.
Centrica (CNA)
3
Lend Lease
36
London Stock Exchange (LSE)
35
Lowland (LWI)
36
WHO WE ARE
M&G Property Portfolio (B89X8P6)
6
Marks & Spencer (MKS)
3
Computacenter (CCC)
14
Ediston Property Investment Company (EPIC)
25
Embassy Office Parks REIT
35
Equitile Resilience Feeder Fund (BDD1KW2)
42
Premier Oil (PMO)
8
Faron (FARN:AIM)
19
Prudential M&G Property Portfolio (0537296)
6
Future (FUTR)
17
Mediobanca Merchants Trust (MRCH)
34
Perpetual Income & Growth (PLI)
29
Polymetal (POLY)
16
Qinetiq (QQ.)
10
RockRose Energy (RRE)
18
Royal Mail (RMG)
GAN (GAN:AIM)
19
33
3
Saga (SAGA)
34
Senior (SNR)
34
Silence Therapeutics (SLN:AIM)
18
DEPUTY EDITOR:
NEWS EDITOR:
Tom Sieber @SharesMagTom
Steven Frazer @SharesMagSteve
EDITOR:
Daniel Coatsworth @Dan_Coatsworth FUNDS AND INVESTMENT TRUSTS EDITOR:
James Crux @SharesMagJames
SENIOR REPORTERS:
REPORTER:
Yoosof Farah @YoosofShares
Martin Gamble @Chilligg Ian Conway @SharesMagIan
ADVERTISING Senior Sales Executive Nick Frankland 020 7378 4592 nick.frankland@sharesmagazine.co.uk
CONTRIBUTORS
Russ Mould Tom Selby Laura Suter
PRODUCTION Head of Design Darren Rapley
Designer Matt Ely
CONTACT US: support@sharesmagazine.co.uk
Shares magazine is published weekly every Thursday (50 times per year) by AJ Bell Media Limited, 49 Southwark Bridge Road, London, SE1 9HH. Company Registration No: 3733852.
All chart data sourced by Refinitiv unless otherwise stated
Reproduction in whole or part is not permitted without written permission from the editor.
All Shares material is copyright.
12 December 2019 | SHARES |
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