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1. In keeping with the existing practice, reporters who intend to write about any 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 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.
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18 August 2022 | SHARES | 3 Contents
3. Reporters are required to hold a full personal interest register. The whereabouts of this register should be revealed to the editor.
DISCLAIMER 04 VIEWEDITOR’S Rejoice!
and Just Eat Takeaway facing hard road to recover enormous losses / Thungela could be crowned the UK market’s dividend king / Cybersecurity firm Darktrace gains nearly 25% after buyout talks revealed 09 IDEASGREAT New: Xtrackers S&P 500 Equal Weight ETF / Morgan Sindall Updates: i3 Energy / Revolution Beauty 13 FEATURE 4imprint investors made 20 times their money in 10 years 14 FEATURE Why there won’t be relief from Zantac pain for GSK in the short term 16 FEATURE How to find the right fund for you 21 FEATURE Discover the biggest dividend yields in the FTSE 350 24 TRUSTSINVESTMENT Can investors rely on high-yield trusts to deliver on their promise? 30 FUNDS The funds that yield more than twice the best-buy cash savings account 32 HEWSONDANNI America’s commercial electric vehicle race is really beginning to heat up again 36 ASK TOM By following the 4% rule, do I risk running out of money? 37 FINANCEPERSONAL Want a guaranteed income for life? It’s worth noting annuity rates are going up 40 INDEX Shares, funds, ETFs and investment trusts in this issue
05 NEWS Dampening
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.
4. A reporter should not have made a transaction of shares, derivatives or spread betting positions for 30 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 30 days after the on-sale date of the magazine. The retail investor is no longer being ignored for share placings inflation helps drive rally in US and UK equity markets Watches of Switzerland sales soar despite cracks in timepiece market Deliveroo
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.
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4 | SHARES | 18 August 2022 EDITOR’S VIEW Daniel Coatsworth
A new service means big investors aren’t the only ones being offered stock on the cheap A t 4.36pm on 10 August, industrial thread manufacturer Coats (COA) announced its second acquisition in as many months. Not only was this unusual behaviour in that Coats rarely buys companies, but it also asked retail investors for financial Historicallyhelp.Coats has relied upon bank debt for financing and used that money, along with internally generated cash, for deals.
The fact retail investors were offered a chance to buy shares at a discount to the market price is important. It shows how Coats as a business has found new momentum and appetite for strategic acquisitions. Perhaps more significant is that it is one of a growing number of companies treating retail investors with more respect.
Letting retail investors take part in share placings means institutional investors are no longer getting preferred treatment. Having a level playing field has long been desired by smaller investors, and technology is helping to achieve this goal. Coats used the new REX fundraising platform which is owned by Peel Hunt (PEEL:AIM), the broker and corporate financier. It is very similar to the share placing facility offered by PrimaryBid.
The take-up of recent retail offers hasn’t been exceptional. For example, Coats only raised £433,103 from retail investors, and Zinc Media got £37,059 from this audience. That might be partially explained by the placings having happened during the quiet period when investors were on the beach. What should be applauded is the fact the placings were offered to retail investors in the first place. It aligns with a push by the Government to make retail investors a more important source of funding for companies, so it might be worth checking your messages just after 4.30pm each day, as you never know which opportunity has come knocking.
While this greater opportunity to take part in placings is a good step forward, it is by no means perfect. Most of the placings happen after the stock market is closed for the day, so any retail investor without cash in their ISA or SIPP cannot sell an existing position in a different stock to raise money to fund their share placing application.
Rejoice! The retail investor is no longer being ignored for share placings
There is the odd exception. Take TV producer Zinc Media (ZIN:AIM) which ran a placing including a retail investor component during market hours on 3 August. If you’re not paying attention to messages from your investment platform provider, or studying the stock market announcements like a hawk, it’s easy to miss the placing opportunity. No-one is going to proactively phone a retail investor like a broker might do with institutional clients to alert them.
Customers of various investment platforms including AJ Bell receive an alert when one of their portfolio holdings is doing a share placing open to retail investors. The recipient must decide if they want to buy more shares or have their stake in the businessInvestorsdiluted.typically have a short period – often just an hour – to apply for shares in the placing. They are either told the price in advance, or as we saw with the Coats deal, they place an order, and the price is agreed once the placing is done.
DISCLAIMER: AJ Bell referenced in this article owns Shares magazine. The author (Daniel Coatsworth) and editor (Tom Sieber) of this article own shares in AJ Bell.
Avast 43.5% RS Group 41.0% Scottish Mortgage Investment Trust 37.1% Auto Trader 32.4% Flutter Entertainment 30.9% Table: Shares magazine • Source: Sharepad, data to 15 August 2022 The
The table shows the magnitude of some of the gains made by individual US stocks since 16 June, some of which have also been supported by strong second quarter earnings reports.
Recent data suggests that US inflation may have peaked, prompting investors to anticipate the Fed will ease
Dampening inflation helps drive rally in US and UK equity markets implying less aggressive interest rate rises.
Top performing S&P 500 stocks since
The UK stock market has experienced more muted gains than its counterpart across the Atlantic. This is in part due to its bias towards areas like commodities and financials which typically trade on lower valuations. The FTSE 100 had also held up better than the S&P 500 in the first half of 2022. Growth orientated stocks are more sensitive to changes in interest rate expectations than so-called ‘value’However,stocks.several UK companies have performed particularly strongly. Avast (AVST) has risen 43.5% after the UK Competition & Markets Authority said it has provisionally cleared NortonLifeLock’s acquisition of the cybersecurity firm, following an in-depth probe of the deal. [MGar]
T he recent rally in US equity markets has been driven by figures showing the level of US inflation may have peaked. Since its most recent low on 16 June the S&P 500 index has rallied by 16.7%. The UK equity market has also risen during this period but to a far lesser extent with the FTSE 100 and the FTSE 250 rising by 6.7% and 8.6% respectively. US consumer prices jumped 8.5% in July compared with the same month a year earlier, down from the 9.1% year-on-year increase in June. As a result investors are now starting to factor in a shift in approach from the US Federal Reserve,The stocks moving higher 16 June Co 16 June stocks moving higher
NEWS 18 August 2022 | SHARES | 5
Shares in Amazon (AMZN:NASDAQ) have surged by 38.5% since 16 June. Its second quarter update showed 7% revenue growth, aided by an uptick in Amazon Web Services bookings, with total revenue coming in at $121.23 billion versus the $119.09 billion estimate. Electric vehicle maker Tesla (TSLA:NASDAQ) advanced 40.8% over the same time-frame. Its earnings in mid-July beat consensus estimates. Revenue came in at $16.9 billion and earnings per share at $2.27. Tesla shareholders also approved a three-for-one stock split which will take effect on 25 August. Shares in streaming platform Netflix (NFLX:NASDAQ) have also rallied, supported by results which were not as bad as feared.
Enphase Energy 76.5% Etsy 73.8% Netflix 43.8% Ford Motor
43.6% PayPal 41.9% Tesla 40.8% Amazon 38.5% Top performing FTSE 100 stocks since
Watches of Switzerland sales soar despite cracks in timepiece market
High-end seller shrugs off wider market worries as first quarter sales surge 31%
NEWS 6 | SHARES | 18 August 2022
S hares added luxury watches and jewellery seller Watches of Switzerland (WOSG) to its Great Ideas list at 792.4p on 16 June 2022. We argued the group’s global growth journey was just getting started and demand for luxury watches continued to outstrip supply. A trading update on 16 August was an important test for the share price given recent uncertainties over the state of the pandemicboosted watch market caused by surging inflation, the cryptocurrency collapse and concerns over a globalRecentrecession.reports suggested that luxury watch prices on the secondary market were falling, presenting a risk that trend spreads into the primary market where Watches of Switzerland operates.Reassuringly for our ‘buy ’ thesis on Watches of Switzerland, there are no signs of primary channels seeing a demand dip thus far, and the shares ticked up 3.3% to 913p as the company delivered a robust update for the 13 weeks ending 13 July. Watches of Switzerland also reiterated full-year guidance, albeit with the outlook factoring in a ‘potentially more challenging’ trading environment of Switzerland (p) Source: Refinitiv in the second half. Group sales were up 31% year-on-year to £391 million despite tough comparatives, while management highlighted a continuing strong luxury watch market in the UK and the US, where sales doubled year-on-year.
Affluent consumers are still spending money as inflation doesn’t massively impact their lifestyle, supporting strong sales of luxury goods. Bears may believe the luxury sector is at peak sales and profit, but BofA Securities has found that luxury demand accelerated in July compared with the second quarter and the month of June in Asia, the US and Europe, boosted by the return of international travel. China demand started to normalise in June and continued to do so in July, added BofA Securities. Premium watches are seen to be a good investment as editions are limited and there are plenty of people who want to own them. Yet if second-hand prices are falling, that dilutes their appeal from an investment perspective. It’s something to watch, particularly if secondhand prices for luxury watches fall below retail prices. Reports suggest we’re a long way off that happening. [JC]
Watches
‘The first quarter continued with strong momentum throughout, and we carry this positive momentum into the second quarter,’ insisted chief executive Brian Duffy, now expanding the business into Continental Europe. ‘Despite the wellpublicised concerns about the macro-environment, demand for our products remains robust with client registration of interest lists continuing to extend,’ he added.
2021Oct 2022Jan Apr JulChart:1,5001,000 Shares magazine •
Most growth stocks have declined this year as inflation and recession spooked equity investors. Yet the rot had set in on Deliveroo and Just Eat before the market’s de-rating, losing 74% and 84% respectively from their highs. Recovering those losses may be beyond both companies. [SF]
Deliveroo and Just Eat Takeaway facing hard road to recover enormous losses
Shareholders have been the big losers in the food delivery platforms fight F ood delivery volumes more than doubled through the pandemic, yet profits remain elusive for many popular platforms, including Just Eat Takeaway (JET) and Deliveroo (ROO), following a wave of a new investment chasing an expanded addressable market.
NEWS 18 August 2022 | SHARES | 7
Data from Daxue Consulting and Bloomberg estimates the UK market was worth $6.7 billion in 2021, with $9.2 billion revenues across mainland Europe.While analysts agree that local scale remains paramount to network effects, global scale is proving a double-edged sword as battle lines are redrawn.Thisweek saw shares in meal kit provider HelloFresh (HFG:ETR) rally after strong interim results showing €89.5 million of net profit. With a reported €642 million of cash, it is also buying back its heavily discounted stock after plunging more than 50% in 10 months. Deliveroo and Just Eat have been successful in passing rising costs on to consumers, illustrated by revenue rising faster than overall orders, or GTV (gross transaction volume) as it is sometimes called. How far and for how long diners will be willing to stomach rising prices for home-delivered dinners remains to be seen, but investors should beware. Marketing costs continue to rise sharply too. In the six months to 30 June, Deliveroo’s marketing spend soared from £286.2 million a year ago, to £368.8 million, or from 8.6% of GTV to 10.4%, helping explain ballooning losses, up 261% to £68 million. Berenberg analysts estimate that Just Eat will run up nearly €800 million in net losses this year, and that’s presuming further cost control initiatives in the second half. The investment bank certainly isn’t buying management’s talk of positive-adjusted EBITDA in fiscal 2023. Berenberg forecasts net losses of €530 million and €378 million for 2023 and 2024, respectively. Just Eat is also tackling the aftermath of its Grubhub acquisition folly in the US, which it is trying to sell. Just Eat earlier in August booked a €3 billion loss on Grubhub, bought for $7.3 billion last year. That is arguably yet to fully reflect the financial millstone Grubhub will end up being, with some analysts predicting a final sale price of less than $1 billion. With Numis predicting that Just Eat’s cash forecasts need to come down by circa €280 million this year to around €608 million, it could result in ‘immediate liquidity concerns and potentially require a fire sale of assets at the expense of equity shareholders.’
In the long term, prospective investors would need to weigh the ethical dilemmas and potential risks of being exposed to a polluting fuel like coal as the world looks to move to net zero and the evidence of the impact of climate change continues to mount. [TS]
Thungela could be crowned the UK market’s dividend king
NEWS 8 | SHARES | 18 August 2022
The coal miner is benefiting from surging commodity prices with shares up tenfold in 14 months C oal producer Thungela Resources (TGA) is on a 2022 dividend yield of more than 40%, based on forecasts from Liberum. It is expected to pay above-average dividends for at least two more years.
Liberum forecasts 642.2p per share in dividends for 2022 versus 93.1p in 2021. That means it could pay out more than four times the initial cost of the shares in dividends this year alone. For 2023 the investment bank forecasts Thungela will pay out 357.8p which implies a 23.8% yield based on the current £15.06 share price; and 188p for 2024 which equates to a 12.5% yield.
The scramble for energy as the world emerged from the pandemic and Russia invaded Ukraine has seen thermal coal prices soar and Thungela’s shares gain nearly 10-fold on the 150p price at which they started trading after its demerger from Anglo American (AAL) last June.
It is possible the dividend could come in lower than Liberum’s expectations if Thungela decided to do an acquisition, thermal coal prices crash, or the production problems linked to the poor performance of South Africa’s state-owned rail operator Transnet continue.
Cybersecurity company Darktrace (DARK) is in talks over a possible takeover offer from Thoma Bravo, the private equity firm that has been busy consolidating the wider space in 2022.Earlier in August, Thoma Bravo struck a deal to buy US-listed Ping Identity for $2.4 billion, its 27th cybersecurity business. It also owns former UK FTSE 250 firm Sophos, plus names like McAfee, Proofpoint andAfterBarracuda.astring of upbeat trading updates and growth guidance hikes, Shares told readers to buy the stock at 375.13p on 21 April 2022. That the stock has jumped almost 25% since Thoma Bravo’s interest became known, suggests that the market sees any deal being struck at a significant premium to recent 400p levels. A stock market exit could suit all parties if the price is right. Investors might conclude that going into private ownership is the best way to avoid the uncertainty of this year’s market gyrations, with the potential to float the company once again in the coming years once market confidence is restored.Darktrace shares have seen wild swings since listing in London at 250p in April 2021. In October 2021, the stock hit a record 945p, before plunging. In July the shares were trading at 292.6p. Thoma Bravo has until 12 September to either make a firm offer or walk away. [SF]
Cybersecurity firm Darktrace gains nearly 25% after buyout talks revealed Investors have endured wild share price swings and may be happy to bank profits
. For an ongoing charge of 0.25% the Xtrackers ETF tracks an equal-weighted S&P 500 index which means each constituent has a fixed weight of 0.2%. This provides more genuine diversification for investors looking for exposure to US stocks. For example, while the S&P 500 has a 27.9% weighting to the technology sector, the S&P 500 Equal Weight index has a little more than half that allocation at 15.8%. Amid all the focus on the big US tech names, it is easy to forget just how diverse and vibrant the US stock market can be. The Xtrackers ETF has an equal weighting to all the companies in the S&P 500 index to play the rebound in US stocks? Try this fund which has an interesting twist BUY (XDWE) £65.86 Net assets: £2.9 billion Xtrackers S&P 500 Equal Weight Rebased to 100 2021 2022 140120100XDWE S&P 500
Want
18 August 2022 | SHARES | 9
T he latest readings of US inflation suggest inflationary pressures might have peaked and are prompting improved investor sentiment across the Atlantic, with many US stocks moving back up. There is a smart, low-cost way to play this improving picture through exchange-traded fund Xtrackers S&P 500 Equal Weight (XDWE). It provides exposure to US stocks with a twist. The S&P 500, along with the Dow Jones Industrial Average and Nasdaq Composite, is one of the benchmark US stock indices. Launched in its current form in 1957, it includes 500 of the largest businesses listed on US exchanges selected both on their size and on other criteria like how easy the shares are to trade and financial viability. Like most major indices the S&P 500 is market cap weighted, or in other words the stocks with the largest market valuations have the most influence on its Thisperformance.meanstheindex is heavily dominated by just a handful of companies. Its top 10 constituents have a weighting of nearly 30%. As a consequence its fortunes are heavily tied to the likes of Microsoft (MSFT:NASDAQ), Apple (APPL:NASDAQ) and Amazon (AMZN:NASDAQ)
WEIGHTS&PXTRACKERS500EQUALETF
Chart: Shares magazine • Source: Refinitiv Just look at Enphase Energy (ENPH:NASDAQ), which has seen its share price increase more than 350-fold in the last five years. It makes kit which converts direct current from solar modules into alternating current for use in the home and has nearly half the market for residential installations in theWhenUS. big tech was flying high the Xtrackers ETF’s performance struggled to keep pace but over the last two years it compares favourably. Its total return in sterling clocks in at 49% versus 39% for the vanilla S&P 500 index. [TS]
C onstruction and regeneration firm Morgan Sindall (MGNS) posted record profits for the first half of the year, showing further growth on last year which analysts already considered to be a ‘step-change in performance’. With the office fit-out market accelerating, an elevated order book and strong cash-flow generation, we think the market is undervaluing the group’s shares. Despite a tough operating environment, where material and labour costs have affected margins on some projects, Morgan Sindall reported record pretax earnings for the first six months of 2022 on the back of a solid 9% increase in revenue. The company also nudged up its full-year guidance, having already upgraded its forecasts in February when chief executive John Morgan described the group as ‘in its best shape ever’. Its strong balance sheet and substantial net cash position allows the firm to pursue a disciplined approach to contract selection, giving it a secured workload of £8.5 billion of high-quality orders at the end of ConstructionJune.and infrastructure made up just under half of the £1.7 billion of first-half revenue. The aim is to grow that part of the business to £1 billion of annual revenue with a combined 3%-plus operating margin. Fit-out revenue jumped 20% in the first six months, accounting for just over a quarter of revenue thanks to a surge in demand as firms revamped their workspaces in order to attract staff back to the Partnershipoffice.housing and urban regeneration, where the group works alongside housing associations and local authorities, made up the balance of revenue, with an increase in the size of housing projects and healthy growth in margins. Most of the contracts in this division are longMorgan Sindall is racking up record profits due to its high-quality contracts
MORGAN SINDALL BUY (MGNS) £18.40 Market Cap: £867 million Morgan Sindall (p) 2018 2019 2020 2021 2022
Chart:2,5002,0001,5001,000
Shares magazine • Source: Refinitiv term with around 60% of secured work only scheduled to commence from 2024 onwards. It should be noted that on top of the £7 million provision for partnership housing taken under the Developer Pledge to address building safety measures, the Government has requested the firm commit to the pledge as a mixed-used developer which would involve a £40 million to £50 million charge before recoveries. Margins in the construction business are expected to be around the top end of the company’s range of estimates, while profits in the fit-out division are seen ‘materially ahead’ of the top end of the target range for the full year. Analysts at Numis see profits growing 40% in the medium term, supported by strong organic momentum and an order book equivalent to 2.5 times revenues. [IC]
10 | SHARES | 18 August 2022
Construction firm offers steady growth with a strong balance sheet
WH Ireland has i3 paying a 1.7p per year dividend based on its Canadian output which at the current share price equates to a yield of 5.8%. Investors therefore have the option of holding on for the steady stream of monthly dividends. However, given the big increase on our entry point and a potential dampening of commodity prices against a weaker economic backdrop, taking some profit might be sensible at this point. [TS] I3 ENERGY (I3E:AIM) 29.4 p
When we flagged the appeal of Canadian oil and gas producer i3 Energy (I3E:AIM) at 11p in July 2021 we couldn’t have foreseen Russia’s invasion of Ukraine and the resulting surge in oil and gas prices.Wesimply liked the potential for generous dividends, the business model of acquiring lowcost conventional assets and an attractive equity valuation. WHAT’S HAPPENED SINCE WE SAID TO BUY? At the macro level a combination of pentup demand and the impact on supply of the conflict in Ukraine have helped drive energy prices muchThishigher.hascombined with rising production from Canada to significantly boost i3’s cash flow and has enabled it to pay a monthly dividend since MarchMore2022.recently the company agreed to a farm-out deal on its Serenity prospect in the UK North Sea, with Europa Oil & Gas (EOG:AIM) taking a 25% stake in return for paying 46.25% of the costs of an appraisal well up to £15 million. Anything beyond that would be shared based on the companies’ respective stakes. WH Ireland analyst Brendan Long says: ‘Big picture, i3 Energy is significantly ahead of the game, in a game where that is absolutely critical. This has become one of the key characteristics of the company and what we are seeing in the North Sea is reminiscent of what led to the company’s exceptional shareholder value creation in Canada, albeit we appreciate that the risk/reward profiles of these jurisdictions are different.’
Gain to date: 167% The oil and gas producer has benefited from rising energy prices i3 Energy shares nearly three-fold in 12 months (p)
How
i3Energy
WHAT SHOULD INVESTORS DO NEXT?
18 August 2022 | SHARES | 11
increased
2021 2022Chart:3020100 Shares magazine • Source: Refinitiv
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12 | SHARES | 18 August 2022
Revolution
Last September we were attracted to Revolution Beauty (REVB:AIM) for the make-up, skincare and haircare brand’s global growth potential in a cosmetics market that has historically exhibited resilience during downturns. In a decision that has left us red-faced, we kept faith with the stock and failed to cut our losses as the share price continued to plummet long after we said to buy the shares at 160p. Our optimistic view was that cost-of-living pressures had put consumer-facing stocks like Revolution Beauty on the back foot and the company appeared to be executing well. With hindsight, the collapsing share price and unexpected news on 12 May that finance director Andrew Clark was leaving less than a year after the stock market flotation were major red flags.
2021Oct
WHAT SHOULD INVESTORS DO NOW? Given the lack of earnings visibility and accounting issues coming to light, Revolution Beauty is in a mess. The Boohoo news has helped to narrow some of the share price losses which means now is a good time to cut our losses and get out. There is still a risk of bad news concerning the accounting issues which could hurt the share price again. We got this one wrong and should have heeded what the market was telling us all along. [JC] BEAUTY (REVB:AIM) 28.6 p Loss to date: 82.1%
Time
WHAT’S HAPPENED SINCE THEN?
REVOLUTION
The company’s share price has collapsed after a series of setbacks got it wrong with Revolution Beauty. to cut our losses Beauty (p) 2022Jan Apr JulChart:1000 magazine Source: Refinitiv
We
Shares
On 2 August, Revolution Beauty delayed its results with auditors poring over the books and issued a massive profit warning pinned on cost inflation, retailer destocking, the halt to trading in Russia and Ukraine following the invasion, as well as a slowdown in direct-to-consumer sales as consumers returned to physical stores. On 11 August came the bombshell news that auditors had raised accounting issues with management regarding the figures for full year 2022. If material adjustments are required, Revolution Beauty’s profits could be ‘materially reduced across a number of potential adjustments including stock and bad debt provisioning and revenue recognition’, warned theSixcompany.dayslater, Boohoo (BOO:AIM) announced it had taken a 7.1% stake in Revolution Beauty, triggering a big share price recovery in the makeup seller.
products in North America, the UK and Ireland to help customers build their brands and ‘make lasting connections’ with their own clients. In mid-July, 4imprint raised its full year revenue target well beyond market expectations.Thecompany revealed total orders for its primary North American business in the first half of this year were running around 14% above the level of 2019, the last ‘normal year’ of operations pre-Covid, thanks to market share gains and strong demand from new and existing customers.
Moreover, the value of its average order was also 14% higher than three years ago, meaning overall revenues were in the region of 30% above 2019 as customers spent more on promoting their goods andAsservices.aresult, 4Imprint said it would likely hit its long-held target of $1 billion of revenues this year, almost double what it made in 2020 and 16% more than it made at its previous peak in 2019. Analysts scrambled to revise up their estimates and the shares, which were languishing at £24, below their closing level of 2020, rocketed skyward.
18 August 2022 | SHARES | 13 FEATURE
I t’s not often we get to write about UK companies which have seen their shares multiply in value by a factor of 20, especially when the company concerned makes what might be considered ‘disposable’ or discretionary goods.
4imprint (p) 2014 2016 2018 2020 2022Chart:3,0002,0001,0000 Shares magazine • Source: Refinitiv
Also, the acquisition of a small screen-printing business will give the firm the capability and capacity to service untapped demand for apparel and support continued market share growth. As Liberum analyst Joe Brent points out, operational leverage is coming through and the firm is getting more bang for its buck on each marketing dollar. He believes the case for a special dividend has increased.
The promotional products group has been a surprise success 10theirmadeinvestors4imprint20timesmoneyinyears
Yet, given the sudden contraction during the pandemic in corporate advertising – one of the quickest and easiest areas of spending most firms can cut – the success of 4Imprint (FOUR) in not just bouncing back but setting new sales records is quiteThephenomenal.firmsellspromotional
By Ian Conway Companies Editor
Having struggled to break above their prepandemic close, the shares were drifting when last week the company issued another trading update to say it had posted record sales and orders and was even more confident of hitting its $1 billion revenue target. That pushed the shares to new highs just shy of £40, meaning investors who bought the shares back in 2012 at approximately 200p have made 20 times their money even before accounting for dividends.Withsupply chain challenges easing and product cost inflation ‘stabilising’, margin pressure should be less acute in the second half while pre-agreed price increases will boost earnings.
reacted to concerns about
Uncertainty over the outcome could still weigh on the stock in the interim and prevent a meaningful recovery in the share price. Zantac became an over-the-counter drug in the mid-1990s and while it was GSK which launched the treatment on prescription in the early 1980s, others which subsequently sold Zantac and its generic equivalents are tied to the scandal including Pfizer (PFE:NYSE) and Sanofi (SAN:EPA)
14 | SHARES | 18 August 2022 FEATURE
‘Assuming a potential $150,000 settlement per claimant, the share price moves imply over 330,000 claimants, significantly above the 3,450 personal injury cases filed and around 100,000 unfiled claims on the Litigationregistry.’analysts working for Bloomberg believe a settlement value could instead fall between $5 billion and $7 billion with GSK potentially liable for 30% of that amount, or $2 billion. For its part GSK strongly denies the claims, arguing there is no reliable evidence of a link with any form of cancer. Clearly there is potential for a significant share price relief rally for the affected stocks if the settlement comes in at the lower level anticipated by Bloomberg’s experts or if the cases fail to make any progress. But we won’t know in the short term.
Sanofi
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The drug’s sale was banned after the discovery of a ‘probable’ carcinogen in the treatment in 2019. Also dragged into the affair is consumer health specialist Haleon (HLN) which recently demerged from GSK. Though it is not party to any claims over sales of Zantac it may still face liabilities under contractual provisions agreed with its former owners. This threat is compounding a miserable start to life as a public company for Haleon. Its shares began trading on 18 July at 330p after the demerger but as we write, less than a month on, they are down at Berenberg260.8p. analysts estimate the market has priced in a potential legal settlement for all the parties involved of $40 billion regarding Zantac. They add: ‘We believe the share price risk has been overstated based on current evidence levels and the number of claimants. However, the litigious environment of the US can be difficult to predict.
T he stock market is forward-looking and has already priced in a significant financial hit for GSK (GSK) from US litigation associated with claims its Zantac heartburn treatment might have links to cancer. The first court case, due to start next week, was withdrawn ahead of trial by the plaintiff. However, this is only one of thousands and it could be some time before a line is drawn under the issue given the first ‘bellwether trial’, as Shore Capital describes it, isn’t scheduled to begin until February 2023.
Why thepainfromwon’ttherebereliefZantacforGSKinshortterm
A big settlement has already been priced into its valuation but uncertainty will hang over the stock
By Tom Sieber Deputy Editor share prices Zantac GSK −15.0% Haleon −12.6% −11.5% Pfizer −2.9%
Company Share price performance* *From close on 9 August to close on 11 August Table: Shares magazine • Source: SharePad, 15 August 2022
How
© Janus Henderson Group plc. Sat Duhra, Portfolio Manager of Henderson Far East Income, discusses the key findings from the latest edition of the Henderson Far East Income Dividend Index report - highlighting how resilient dividends and profits in Asia-Pacific ex-Japan were compared to the rest of the world.
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Important information References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe, or purchase the security. Janus Henderson Investors, one of its affiliated advisors, or its employees, may have a position mentioned in the securities mentioned in the report. Not for onward distribution. Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions. Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes. Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Henderson Investors International Limited (reg no. 3594615), Janus Henderson Investors UK Limited (reg. no. 906355), Janus Henderson Fund Management UK Limited (reg. no. 2678531), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).
Don’t be put off by the fact there are thousands of funds on the market. It’s easy to sift through the list as they will be split into different categories including investment styles, sectors, themes and geographies. It’s just a case of following a simple path to find the best ones forJustyou.remember that as part of your fund selection journey, you need to make sure that each fund’s target market, style and goals fit with your own investment strategy, time horizon and risk tolerance.
I
By James Crux Funds and Investment Trusts Editor
HOW TO FIND FORRIGHTTHEFUNDYOU:
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f you want to build up a pot of money for the future, be it retirement or paying for some of life’s expenses including children’s university fees or a loft conversion, investment funds can be a great way to grow your savings. They enable you to quickly build a portfolio which could save you a lot of time and money. You don’t have to spend hours researching the market for which stocks to buy, and you won’t incur anywhere near the level of dealing fees that come with building a portfolio of 20 or more stocks from scratch. Finding the right fund for you is easier than you might think. This article is a step-by-step guide to navigating the world of funds so you can go straight to the type of product that fits your needs.
Follow these simple steps to save time and money
STEP ONE: ACTIVE OR PASSIVE?
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Fundsmith Equity Fund (B41YBW7) is one of the most popular growth funds with UK investors and nearly all investor returns come from growth in the value of its portfolio. Income funds prioritise investing in companies that pay good dividends or bonds with attractive coupons. Some income funds will offer an element of capital growth alongside the income stream but with others the only way you’ll make money is through dividends as capital gains could be minimal. That’s fine if you understand what to expect from an investment.
The next decision you’ll need to make is whether to invest in a ‘growth’ fund or an ‘income’ fund, or one that offers both. This could be influenced by your investment goals, risk tolerance and yourGrowthage. funds hold shares in companies that are expected to increase in value over time, so the value of your capital should also rise. Some growth funds might pay dividends, but the income stream is likely to be small.
In contrast, BlackRock Income & Growth Investment Trust (BRIG) has a 3.7% dividend yield and its share price also increased by 6.6% over the past 12 months. So, you’re getting a blend of income and capital growth.
There are two main types of fund – active and passive. Active funds are run by a fund manager who selects which assets go into the portfolio and they are paid a fee by investors with the aim of beating the fund’s benchmark index. Passive funds aim to mirror the performance of a key benchmark or index such as the FTSE 100. You’ll find these are also called tracker funds or exchange-traded funds (ETFs). The fees associated with these products are typically much lower than active funds. Annoyingly, the funds industry isn’t very good at labelling which products are active or passive. You’ll need to read the description for each fund to find out. Yet as a short-cut, most products from Vanguard are passive funds in the UK, you can spot which one of Legal & General’s products are tracker funds as they tend to have the word ‘index’ in the name, and products from iShares and SPDR are all passive funds. Another way to find out is to use fund screening tools that offer you the ability to select
For example, Round Hill Music Royalty Fund (RHM) owns the rights to various hit songs and receives a royalty when they’re played on the radio or on stage, feature in films or adverts, or are streamed online. It passes on some of these royalties in the form of dividends to investors. While it pays an income yield in the region of 4.5%, its share price has barely moved since launch in November 2020.
STEP TWO: GROWTH OR INCOME?
The technology sector isn’t typically known for generous dividends so going down this path may be of more interest to someone who just wants capital growth rather than income. A key attraction of investing in property is to collect a regular income, but you may also see the value of your capital go up in time as well.
The Association of Investment Companies, also ACTIVE FUNDS: WHAT’S THE DIFFERENCE?
This is the point at which you can go down many different paths. One route is to consider if you want exposure to a broad range of geographies. The other is to think about choosing a specific sector such as technology or a certain asset class such as property.
STEP THREE: GEOGRAPHY OR SECTOR?
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Active funds involve a fund manager deciding what should go in and out of a portfolio. They fall into two categories – ‘funds’ which is the generic term to describe unit trusts and OEICs, also known as openended funds; and ‘investment trusts’ which are closed-ended funds.Itmay sound confusing but isn’t once you understand how theyOpen-endedwork. means funds create or cancel new shares depending on demand from investors. They only issue one price per day, and to deal you would usually have to place your investment instruction the day before, so you don’t know precisely what price you’re going to get. Some investors prefer investment trusts because there is a live price throughout the day, and you know exactly the price at which you’re buying or selling. That’s because investment trusts are closed-ended, which means the fund manager is investing a fixed pool of money. Investment trusts trade on the stock market like ordinary shares and their share prices can sometimes deviate from the value of the underlying portfolio or net asset value (NAV) depending on investor demand.Theexistence of discounts and premiums to NAV makes investment trusts more complex than open-ended funds. It also makes them more volatile, because as well as variation in the price of the underlying portfolio, there is movement in the discount or premium to InvestmentNAV.trusts can also borrow money to invest, which is known as taking on ‘gearing’ and can boost returns in the bull markets but exacerbate losses in bear markets. Funds are suited more to liquid investments such as listed shares and bonds, while investment trusts are better for investing in illiquid assets like commercial property, infrastructure or unquoted private universe.whichalsopeers,chargestendintosquirrelledtheirallowsinvestmentassetstime.theirtradingfundsThat’scompanies.becauseopen-endedmighthavetosuspendiflotsofinvestorswantmoneybackatthesameIt’shardtosellilliquidfast.Anadvantageofthetruststructureisitthesecompaniestouse‘revenuereserves’ofcashawayingoodtimesatleastmaintaindividendsbadtimes.Investmenttruststohavelowerannualthantheiropen-endedbutasignificantnumberlevyperformancefees,arerarerinthefund[JC]
known as the AIC, says the average yield on investment trusts that invest in UK commercial property is 4.6%. For example, Custodian REIT (CREI) yields approximately 5% and has seen its share price rise by 7.5% over the past 12 months, giving investors a blend of returns from income and capital
There are fantastic online sources of information on funds and investment trusts to help with the selection process. The Investment Association is a good place to find details on fund sectors and statistics, while the AIC does the same for investment trust data. AJ Bell’s website enables you to filter funds, investment trusts and exchange-traded funds and examine their performance. The AJ Bell and Shares Money & Markets podcast regularly features interviews with fund managers. Shares’ website is flush with fund-related articles and fund manager interviews and videos.Trustnet is a good resource for factsheets, fund performance data and topical articles, while investment trust fans should visit Kepler Trust Intelligence and QuotedData websites for in-depth research notes. JustETF is a useful resource for people seeking passive funds as it contains information and screening tools for ETFs.
For example, Momentum Multi-Asset Value Trust (MAVT) can invest in stocks, loans, bonds, property, infrastructure and gold. It varies the allocations depending on what’s happening in the world and where it sees opportunities.
STEP FOUR: REFINING THE SELECTION FURTHER
funds on offer include ones targeting renewable energy, infrastructure, biotechnology and healthcare, financials and naturalSomeresources.investorsprefer to focus on geography than sector as they want exposure to a broad range of industries. In this case, many funds are global portfolios that put money to work in companies listed on the main international markets, whereas others focus on the UK or other developed markets such as the US, Europe and Japan.Emerging markets funds invest in some of the GOOD SOURCE OF INFORMATION ON FUNDS, INVESTMENT TRUSTS AND ETFS
world’s fast-developing economies including China, India and Brazil, while there are also country specialist funds and trusts tapping into opportunities in these vast emerging markets as well as frontier markets such as Vietnam.
At this point, you may wish to think about the size of the company to whom you want exposure, or the sector they operate in as you may only want to invest in a specific theme. Some funds focus on smaller companies, medium-sized companies or large companies, known in the industry parlance as small caps, mid-caps and large caps respectively.
If you’ve got to this point in the fund search process and have come to conclusion that you’d simply like a bit of everything, the answer might be to look at multi-asset funds. These products own a mixture of shares, bonds, currencies and alternative assets such as property and infrastructure. An all-in-one solution, they take the guesswork out of spreading your money across different asset classes in the quest for performance.
Othergrowth.sector-specific
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– We select ‘Global’ to find companies listed on stock markets around the world.
● Distribution Status – there is a choice of ‘All’, ‘Inc’ and ‘Acc’. We select ‘Acc’ as this stands for ‘Accumulation’, meaning any dividends will be automatically reinvested. If you want to collect the dividends as cash, select ‘Inc’.
● Fund Company – the default setting is ‘All Companies’ and we’ll leave this untouched. If you wanted to find funds for a specific asset manager, you would select their name at this point.
20 | SHARES | 18 August 2022 PUTTING THE SEARCH INTO PRACTICE
● Morningstar Category –Morningstar is the research company that powers the fund data on AJ Bell’s website. We’ll also leave this one untouched as one of the subsequent filters (IMA Sector) does something similar and we don’t need to use both.
● Morningstar Rating – The research company has a ratings system, so we select four and five stars to find the top scoring funds.
● Total Net Assets – This shows the size of a fund. We select £1 billion as the ●minimum.MaxTotal Expense Ratio –This is where you can look for funds based on their fees. For our exercise, we select ‘1.00’ as the maximum, meaning we don’t want to pay more than 1% annual fee. This tool is very useful if you’re looking for the absolute cheapest fund for a particular area of the market.
DISCLAIMER: AJ Bell referenced in this article is the owner and publisher of Shares magazine. The author (James Crux) and editor (Daniel Coatsworth) own shares in AJ Bell. Daniel Coatsworth also owns units in Fundsmith Equity
● For the purposes of this search, we leave the Morningstar Analyst Rating, Morningstar Risk, 3 Year Standard Deviation, Return %, Minimum Initial Purchase and Max Initial Sales Charge fields untouched. However, feel free to include these in your searches as they can be useful ways to further narrow theOurpack.screen results in a list of 10 funds, covering both passive and active products. If we narrow it down to the highest Morningstar rating of five stars, there are two funds on the list: 1. Janus Henderson Global Sustainable Fund (B71DPP6) and 2. Vanguard FTSE Developed World ex-UK Equity Index Fund (B59G4Q7). The former is an active fund, and the latter is a passive fund.Asour original goal was to find a passive fund, the Vanguard product is therefore a good starting point for further research to ensure it meets our investment needs andIt’sgoals.worth noting that the AJ Bell fund screening tool doesn’t include investment trusts. For those types of fund you’ll need to use this screening tool. The approach is essentially the same.
● Currency – here we select ‘GBP’ so we’re using the UK ●currency.IMASector
Let’s run you through an example of how to use AJ Bell’s fund screener tool. We want to find a passive fund that invests in companies globally and where any dividends are automatically reinvested. We’re happy to look globally for opportunities.
Discover the biggest dividend yields in the FTSE 350 FTSE 100 biggest dividend cover Amount of times forecast dividend covered by forecast earnings per share* JD NatWestHikmaAirtelHalmaEntainAshtead3iBarclaysCentricaShellPrudentialStandardBPFlutterSportsEntertainmentCharteredAfricaPharmaceuticals 19.2 15.8 3.13.33.43.53.74.04.14.24.95.45.75.75.8 A figure above 2 is considered good Chart: Shares magazine • Source: SharePad.
on estimates for the next financial year to be reported. Data as of 15 August 2022
Double-digit
FEATURE 18 August 2022 | SHARES | 21
B edevilled by soaring inflation, rising interest rates, possible recession and major disruption to global supply chains, global stock markets have fallen hard this year. A consequence of falling share prices is ballooning dividend yields, pushing double-digits in some cases in the UK. Is this a once in a lifetime opportunity to secure inflated income yields for the long haul, or a value trap for investors if shareholder payouts are pared back from current expectations? At the beginning of 2022, investors were worried mainly about inflation. Now, as we move into the second half, concerns are focused on inflation and recession.Latestdata show both the US and UK economies shrinking in the second quarter to 30 June, while the IMF has recently made another gloomy prognosis in its World Economic Outlook report as consumers reel in spending as pressure mounts on household budgets. By one well-used measure, the US has already fallen into recession after GDP – a broad measure of the price of goods and services – decreased at an annualised rate of 0.9% in the second quarter, having declined 1.6% in the first three months. Two quarters of negative GDP growth are widely regarded as a signal that the economy has gone into recession. But the US’s National Bureau of Economic Research is the official arbiter of when recessions begin and end, so while the GDP figures will play into the NBER’s final verdict, it also looks at a wider range of economic factors, including the jobs market, and is unlikely to give its decision soon. yields are on offer but not all income is equally reliable *Based
A SLOWDOWN COULD HURT DIVIDENDS
Pessimists will say that firms slashed payouts in 2020 as the impact of the pandemic became apparent, and they will do so again under pressure in Optimistsrecession.would argue that 2023 can’t be as bad as 2020, and that the risk of recession is already being priced into many of the more economically sensitive sectors, often called cyclicals.
HIGH YIELDING SECTORS
CAN IT LAST?
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While many dividend-paying stocks come from defensive and less growth-focused sectors of the economy, a wider slowdown will inevitably have an impact on earnings and the ability of some companies to pay dividends.
Support for this view includes concerns over an ongoing slide in economic activity while central banks continue to tighten monetary policy in response to inflation.
DIVIDEND FORECASTS Link’s latest quarterly Dividend Monitor, released on 27 July, forecasts a decent year for UK dividends in 2022 but looks ahead to a more challenging environment next year. ‘As we move into 2023, headwinds will strengthen,’ said Link’s Ian Stokes, managing director, corporate markets UK and Europe.
FTSE Russell data tells us that the FTSE 350 is currently on a yield of 3.4%, or 3.5% if we strip out investment companies. That’s in line with an average of 3.4% in the 25-year period between 1993 and 2018.
The headline total for Q2 2022 jumped 38.6% year-on-year to £37 billion bolstered by large one-off special payments, but the underlying picture was also good, according to the Link‘Underlyingdata. dividends, which exclude these volatile specials, jumped 27% to £32 billion, boosted by the weak pound. This was the secondlargest quarterly total on record, for both headline and underlying figures, just shy of the record reached in Q2 2019,’ said Stokes.
‘If that is the case, there may be grounds for renewed focus on dividend payers, which have often offered investors some refuge during recessionary bear markets of the past,’ said Kleintop.
One of the risks of dividend investing is sector concentration, an issue that has dogged UK income seekers for years. Companies in the utilities, consumer staples and resources sectors tend to pay much higher dividends than companies in other sectors.Seeking high-dividend payers without considering sector allocation can result in a lack of diversification, potentially making a portfolio more vulnerable during periods of high volatility.
‘In Japan, the MSCI Japan High Dividend index is up 13% this year compared with losses for the MSCI Japan index (as measured in yen).’
‘Nothing can be taken for granted, especially if recession hits,’ argues AJ Bell investment director Russ Mould. In July, we witnessed a major turnaround in the stock market despite aggressive rate hikes and mounting evidence of a recession. Stock markets around the world bounced back, posting the best month since 2020, led by cyclicals, like consumer discretionary, technology and industrials. In contrast, sectors that usually fare better in recessions (referred to as defensives), such as consumer staples and healthcare, lagged the overall ‘High-dividend-payingmarket.
It’s not clear that stock markets can sustain July’s upward momentum and may rotate back to the leadership we had seen in the first half of the year.
stocks have been outpacing the overall stock market this year in the US, Europe, and Japan, except during July,’ said Jeffrey Kleintop, managing director and chief global investment strategist at broker Charles Schwab. ‘Both the S&P 500 High Dividend index and MSCI Europe High Dividend index have delivered positive total returns for the year through the end of July, while the S&P 500 is down 13% (as at the start of August 2022) and MSCI Europe index is down 7% (as measured in euros).
Mining companies have been the engine of the post-pandemic recovery, paying generous ordinary and special dividends as commodity prices have soared. That boom is likely to have peaked, Link says, and will lead to a slowdown in UK dividend growth going forward – although banks are likely to make up some of that shortfall. Mining payouts are closely linked to the cyclical fluctuations in mining profits. They tend to rise and fall much more over that cycle than dividends from other industries. Concerns over global growth have pushed commodity prices sharply lower in recent weeks, though they remain high in historic terms.
One third (120) of the companies that make up the FTSE 350 index (which is made up of the FTSE 100 and FTSE 250 indices combined) are forecast to pay income yield above the average, yet most of UK’s forecast dividend payments this year come from a worryingly small band of stocks.
HIGHEST DIVIDENDS COME FROM A
‘The easy post-pandemic catch-up effects are soon to wash entirely out of the figures, and an recession will crimp ability and willingness of many to grow dividends.’
companies
economic
DISCLAIMER: AJ Bell owns Shares magazine. The author (Steven Frazer) and editor (Daniel Coatsworth) own shares in AJ Bell. FTSE 350 top 20 yielding stocks Ferrexpo FTSE 250 15.1% Persimmon FTSE 100 12.0% Capricorn Energy FTSE 250 12.0% Diversified Energy FTSE 250 10.7% Jupiter ManagementFund FTSE 250 10.6% Rio Tinto FTSE 100 10.4% Glencore FTSE 100 9.7% Direct Line FTSE 250 9.7% TBC Bank FTSE 250 9.1% M&G FTSE 100 8.8% Abrdn FTSE 100 8.5% Vistry FTSE 250 8.3% Bank of Georgia FTSE 250 8.1% DevelopmentsBarratt FTSE 100 8.1% Royal Mail FTSE 250 8.0% Taylor Wimpey FTSE 100 7.9% Hays FTSE 250 7.6% Imperial Brands FTSE 100 7.6% Phoenix FTSE 100 7.4% Dunelm FTSE 250 7.4% Stock Index yieldForecast Table: Shares magazine • Source: Sharepad, 12 August 2022. Excluding investment companies By Steven Frazer News Editor
HAVE MINING DIVIDENDS PEAKED?
FEATURE 18 August 2022 | SHARES | 23
SMALL GROUP
‘The sector has confounded expectations more than once before, bending their stated dividend policies at important moments, but if mining dividends have peaked, they will act as a brake on UK dividend growth in the next 12 months having provided the main engine over the last 24,’ said Link’sTheStokes.weakness of the pound is also proving a key swing factor this year. If it maintains its current level for the rest of 2022, sterling is set to have its worst ever year against the dollar, according to Link, with the translated value of dollar dividends getting a very big boost.
the
According to AJ Bell’s second quarter Dividend Dashboard data, just 10 companies are forecast to pay dividends worth £47.7 billion, or 56% of the forecast total for 2022. The top 20 payers are expected to generate 74% of the index’s payout at £62.5‘Anyonebillion.who believes the UK stock market is attractive on a yield basis, and looking to buy individual stocks, glean access via a passive index tracker or buy a UK equity income fund needs to have a good understanding of, and strong view on, those 20 names in particular,’ says AJ Bell.
We look at four investment trusts for answers Schroder European REIT (p) 201620182020202215010050Chart: Shares magazine • Source: Refinitiv
However, this year’s dividends may be an anomaly as the trust is using part of the €45 million proceeds from the forward-funded sale of a property in Paris last year to top up the regularInvestorsdividend.willhave to wait until the publication in December of the trust’s full-year results to know whether they are in with a chance of another special dividend next year to match this year’s exceptional payout. We think the current doubledigit yield is unsustainable as it is dependent on exceptional property deals which can be irregular. investors rely on high-yield trusts to deliver on their promise?
Can
The trust pays dividends once a quarter. It targets a dividend yield to investors of 5.5%, but earlier this month it paid a second interim dividend of 1.85 cents (1.56p) per share together with a special dividend of 4.75 cents (4p) per share. Added to the 1.85 cents (1.56p) first interim dividend paid in April, this takes the yield to 7% on a 102p share price. Assuming it pays two further interim dividends of 1.85 cents for the year to September, the prospective yield is 10%.
WINNING FORMULA
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The highest-yielding trust on our screen, Schroder European REIT (SERE), invests in commercial property in a few select continental European cities in order to generate ‘a regular and attractive level of income return together with the potential for long-term income and capital growth’. Its investments are focused on ‘winning cities’ such as Berlin, Paris and Seville which have higher than average levels of GDP, employment and population growth, attract higher-value companies, have a well-developed infrastructure and are attractive places to live and work.
W ith inflation eating away at investors’ income, high-yield trusts can look very appealing. However, the big question investors should ask before committing themselves is just how sustainable are the dividend streams? In this article we analyse four of the highestyielding trusts, with a diverse mix of income generation, from European real estate and specialist lending to solar assets and Far Eastern stocks.
18 August 2022 | SHARES | 25 SECURED INCOME Alternative finance firm VPC Specialty Lending (VSL) provides asset-backed lending solutions to emerging and established businesses with the goal of building long-term, sustainable income generation. The £220 million company focuses on providing capital to what it calls ‘vital segments of the economy’, which for regulatory and structural reasons are underserved by the traditional bankingTypicalindustry.examples of funding include small business lending, working capital products, consumer finance and real estate, with the firm relying on its ‘rigorous due diligence and credit monitoring’ to generate stable income and ‘significant downside protection’. The firm primarily lends against short-duration, cash-generating assets with predictable income, which in adverse circumstances can quickly be turned to cash to repay its investment. It says it has found a ‘significant opportunity to earn attractive risk-adjusted returns through its extensive sourcing relationships around the globe, Examples of dividend yields on high-yield trusts Schroder European Real Estate (SERE) 10.24p 10.0% VPC Specialty Lending (VSL) 8p 10.0% Henderson Far East Income (HFEL) 23.8p 8.7% NextEnergy Solar Fund (NESF) 7.52p 6.4% Name Estimated dividend for current year Dividend yield Table: Shares magazine • Source: Shares magazine, company websites. Data correct as of 11 August 2022 VPC Specialty Lending (p) 2016 2018 2020 2022Chart:10050 Shares magazine • Source: Refinitiv
Income (HFEL), which as of the end of June had £463 million of assets, describes itself as a ‘strong diversifier for income and growthseeking investors’. The trust uses a value-driven approach to invest both in companies with high and sustainable dividends and in companies with the potential to grow their dividends. ‘High dividends are for today, while rising dividends are for the future,’ says manager Mike Kerley, who has been at the helm since 2007. Companies which are growing their dividends tend to get rerated over time, generating capital gains for the trust, adds Kerley.
It is hard to say if the double-digit yield is sustainable – it might be if everything goes to plan, but there are plenty of examples of assetbacking lending not working out as expected.
EASTERN HendersonPROMISEFarEast
Meanwhile, the firm paid a first quarterly interim dividend of 2p per share in July for the three months to March, and assuming it follows the same pattern as the recent past it will pay 8p per share for the whole year which equates to a yield of 10% based on a current 79.6p share price.
26 | SHARES | 18 August 2022 largely focusing on emerging sectors of the digital economy where pricing margins have not yet compressed but risk can be properly underwritten’.
Henderson Far East Income (p) 2018 2019 2020 2021 2022Chart:400300200 Shares magazine • Source: Refinitiv
The trust pays quarterly dividends, and this year has so far distributed a total of 17.8p across three interimWhilepayments.ithasn’tconfirmed as much, the fourth
The firm primarily lends to privately-owned US companies, although its top five investments –which make up 45% of its net asset value – include asset-backed loans to a Latin American group and a Singapore-based group.
The trust invests in developed and emerging Asian markets, with a strong focus on cash flow as a measure of both sustainability and profitability as it is cash flow which ultimately finances dividends. Asia has the potential to increase payouts at a faster rate than other regions, argues Kerley, because dividend levels are currently low by international standards. The sector allocation at the end of June was heavily skewed towards financial and telecoms companies, which have a combined weighting of over 40%, although technology and energy stocks also had a significant presence at 13% and 12% of the portfolio respectively.
As of the end of March, the weighted average coupon rate on the asset-backed lending portfolio, excluding gearing, was 10.42% and the weighted average term to maturity was 24 months.
18 August 2022 | SHARES | 27 interim dividend to be paid in November is likely to be 6p in line to maintain the trust’s long history of risingThatpayouts.wouldequate to an annual yield of 8.7% based on a 275p share price, and while the discount to net asset value is towards the low end of its recent range, a yield of more than 8% looks very attractive. We think this level of dividend is sustainable.
2016 2018 2020 2022Chart:12010080
body Solar Energy says for the UK government to hit its net zero target by 2050 it will need to triple solar capacity by the end of this decade. As the leading operator in terms of assets, that puts NextEnergy Solar in prime position to benefit NextEnergy Solar (p)
BRIGHT FUTURE With the sharp rise in fossil fuel prices this year and a resurgence of interest in renewable energy it is no surprise that solar funds, which had been out of favour for quite a while, have come good. One of the largest UK-listed funds is NextEnergy Solar (NESF) which owns a portfolio of 100 solar assets – 92 in the UK and eight in Italy – with an installed capacity of 865 MW (megawatts). Solar power is the most powerful and plentiful available, with more energy hitting Earth in a single hour than the entire global population uses in a Moreover,year. thanks to a significant drop in the price of technology over the last decade it is also now one of the most cost-effective energy sources. According to the NextEnergy Solar, the levelised cost of energy for solar has declined by 90% in the past 10 years making it the cost leader over other powerHowever,technologies.industry
Shares magazine • Source: Refinitiv from this expansion. So far, for the year to March 2023, the firm has announced an interim dividend of 1.88p per share payable in September. The target dividend for the full year is 7.52p, which at a price of 118.2p means the shares are trading on a 6.4% yield, well above the market average.‘Thiswill mark eight years of consecutive dividend increases from NextEnergy Solar,’ said James Carthew, co-founder of research group QuotedData, in April. ‘Since launch, it has paid out over £250 million in dividends. Each year, these have been covered by earnings and the statement says that the company is aiming to maintain that record.’Unless solar prices plummet dramatically, we have confidence in NextEnergy’s dividend sustainability.By Ian Conway Companies Editor
• The triggers for the ongoing rotation in markets may be geopolitical events, but there are signs that the shift is enduring as inflation takes hold and interest rates rise
ADVERTISING FEATURE
The ‘new normal’ appears to have faded as lockdowns have ended. Streaming services have been losing subscribers, online retailers have been losing sales as consumers re-discover physical shops, while there remain questions over how companies are using data, threatening the business model of some social media companies.
• Growth investors were extrapolating a continuation in the ‘new normal’ but we are now seeing a return of the ‘old normal’
Thomas Moore, Investment Manager, abrdn Equity Income Trust plc
The ‘new normal’ proves elusive: time for the old normal?
Earnings momentum This environment provides a useful backdrop for the abrdn Equity Income Trust, allowing us to scour the entire UK equity market for attractively valued stocks with positive cash flows and earnings momentum, capable of thriving as inflation reasserts itself. Our quantitative model highlights companies across the portfolio screening well for positive earnings revisions and compelling valuations.
• The valuation gap between value and growth stocks is still wide, while investor positioning also favours value stocks, suggesting that this rotation could have legs Since the start of the year, markets have shifted dramatically. The growth stocks that performed so well over the past decade have sold off, while more traditional value stocks have started to revive. At first glance, this rotation is simply a knee-jerk response to external factors such as Covid-19 and the Russia-Ukraine war. However, on closer inspection, there is far more to the rotation than one-off events, strengthening our view that it could persist for some time. The build-up of inflationary pressures has driven up interest rate expectations, providing impetus to this rotation. Growth stocks tend to price in longdated cash flows that become worth far less when they are discounted back at higher interest rates. Conversely, stocks that offer strong short-term cash flows become more attractive. This has been a factor in the stronger performance of the cash-generative stocks that we hold in the abrdn Equity Income Trust in recent months.Geopolitical events may have been the initial triggers for this rotation, but it is now being supported by a growing gap in operational performance. Many traditional sectors, such as Oil & Gas, Mining and Financials, have had far stronger earnings momentum and cash flows than the growth stocks that were previously so fashionable. When Covid-19 first struck, investors extrapolated a ‘new normal’ in economic activity, resulting in a widening in the gap between growth and value stocks. The lofty valuations of growth stocks required a continuation of the benign conditions that had helped these companies during lockdown. Once the economy started to normalise, as lockdowns eased, investors became aware that operational performance was shifting back in favour of more traditional value sectors. The valuation gap was too big to ignore. The resulting rout in in some of the previously hot segments of the stock market has been significant. The sell-off started with concept stocks, with big ideas but little or no profitability, but has subsequently extended to more mainstream technology stocks such as Netflix, Amazon and Google. Part of the problem for many growth stocks is that investors extrapolated long-term growth trends from their short-term strength during the pandemic.
• The operational performance of traditional value sectors, such as Oil & Gas, Mining and Financials, is now far stronger than fashionable growth stocks
• The value of investments and the income from them can fall and investors may get back less than the amount invested.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
• Past performance is not a guide to future results.
• The Company may charge expenses to capital which may erode the capital value of the investment.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.
• The Company invests in the securities of smaller companies which are likely to carry a higher degree of risk than larger companies. Other important information: Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419. An investment trust should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in Findinvestments.outmoreat www.abrdnequityincome.com or by registering for updates. You can also follow us on social media: Twitter and GB-160622-176541-1LinkedIn
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Alternative Investment Market (AIM) is a flexible, international market that offers small and growing companies the benefits of trading on a world-class public market within a regulatory environment designed specifically for them. AIM is owned and operated by the London Stock Exchange. Companies that trade on AIM may be harder to buy and sell than larger companies and their share prices may move up and down very sharply because they have lower trading volumes and also because of the nature of the companies themselves. In times of economic difficulty, companies listed on AIM could fail altogether and you could lose all your money.
ADVERTISING FEATURE
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
Important Information Risk factors you should consider prior to investing:
• As with all stock exchange investments the value of the Trust shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
We see many traditional sectors coping well with the more challenging macro backdrop. The momentum behind the strong performance of the Oil & Gas and Mining sectors has come from a combination of recovering demand post Covid-19 and contracting supply due to the crisis in Ukraine. At the same time, the shift to electric vehicles has increased demand for raw materials such as lithium, copper and nickel, while ESG (Environmental, Social, Governance) pressures have constrained new capital expenditure. The shift from ‘new normal’ to ‘old normal’ is also noticeable in the changing political agenda, with increasing focus on the cost of living and energy security, underlining the importance of these traditional sectors. All of this has the potential to drive earnings and cash flows, justifying a significant overweight position in the portfolio.Thisenvironment also favours a heavy weighting in Financials. Higher inflation is driving up interest rates, with Financials the natural beneficiary, particularly those whose interest income will directly benefit. Banks have retained significant balance sheet provisions following Covid-19. As a result, we have been adding to our UK banks weighting. Equity income renewal? The resurgence in traditional sectors is helping the UK equity income sector
to regain momentum. Bemused by the rout in growth stocks, investors are asking ‘where next?’. In an uncertain environment, with many growth stocks having plummeted, investors can “touch and feel” dividends, providing an important and reassuring component of the total return investors aim for. Tastes may change, but the attraction of dividends apparent.
Income maximiser funds may look good but they come with a catch
Critics of income maximiser funds argue they sacrifice tomorrow’s growth to pay today’s income.
STANDING UP TO CRITICS
The funds that yield more than twice the best-buy cash savings account
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While you can now get more than 3% interest on a fixed-rate cash savings account, it is still possible to get a much bigger rate of income via dividends from investment products. In fact, you can get double the current best-buy savings account – which is 3.5% from Aldermore for a five-year term – via a type of investment fund that goes under the banner of ‘income maximiser’.
A merican business magnate John Rockefeller famously remarked: ‘Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.’
The use of options (a form of derivatives) creates immediate income for investors at a higher rate than the dividend income paid on the underlying shares, but it means some of the long-term growth is potentially given away. However, income maximiser funds are ideally suited to bear markets. According to Schroders, the investment strategy may underperform a similar portfolio without derivatives in periods when stock prices are rising and outperform when the underlying stock prices are falling.
A SECOND FUND WITH THE SAME APPROACH Fidelity Enhanced Income Fund (B87HPZ9) is another ‘income maximiser’-type investment product. It aims to deliver an income at least 50% more than the income generated from the FTSE AllShare index. Based on income payments over the past 12 months, the yield on the fund is 5.8%. On a five and 10-year basis the Fidelity fund has generated annualised returns of 3.2% and 5.3% respectively, below that of the Schroders fund (3.8% and 7.2% respectively), according to Morningstar data. Schroders currently has financials as its largest sector bet with a 25.7% allocation, followed by consumer products at 25.4% and basic materials (which covers the mining and packaging industries)
TARGETING 7% YIELD Fund managers Kevin Murphy and Nick Kirrage target a 7% yield from Schroder Income Maximiser Fund (B53FRD8), which was launched in November 2005 and has attracted over £723 million of assets under management. They invest in a concentrated portfolio of high yielding equities. The managers trade options on these stocks to top up the yield to something higher than you’d typically find on a traditional equity income fund. Options are contracts that give the buyer the right – but not the obligation – to buy or sell the underlying asset at a specific price on or before a certain date. Schroders’ contracts typically run for three months. Murphy explains: ‘Part of the process is to effectively sell the capital appreciation in stocks and switch it for income.’ The fund gets an upfront fee for writing the option, although if the share price finishes above the strike price the fund misses out on the excess gain.
18 August 2022 | SHARES | 31 at 19.9%. In contrast Fidelity has prioritised the consumer products sector with a 27.7% weighting. Financials account for 14.7% of the fund and basic materials at 13%.
ANOTHER ROUTE TO HIGH YIELD
Fidelity Enhanced Income Schroder Income
An alternative to income maximiser funds can be found in CQS New City High Yield (NCYF) which makes high-yield investments to generate a superior level of income. It yields 8.6% based on the four most recent quarterly dividend payments and the latest share price. Most of the investment trust’s portfolio is focused on fixed-interest securities, with a select few high yielding stocks on top. Financials and real assets currently account for a large part of theItsportfolio.ongoing charge at 1.26% is much higher than the two income maximiser funds discussed in this article – 0.85% from the Fidelity fund and 0.91% from the Schroders fund. CQS New City High Yield has achieved 4.4% annualised returns over five years and 6.3% over 10 years, according to Morningstar. Its current top holdings include debt security on Stonegate Pub which is yielding 8.25% and shares in natural gas producer Diversified Energy (DEC).
−20020406080100Schroder Income Maximiser CQS New
Chart: Shares magazine • Source: FE Fundinfo,
Stonegate is the UK’s largest pub company. It was originally formed in 2010 with 333 sites and now operates around 4,800 managed, leased and tenanted pubs. Diversified Energy operates natural gas and oil wells that are primarily located in the Appalachian Basin in the US, where it describes itself as being one of the largest independent conventional producers. The company has a low cost of production, which in theory means it is well positioned to withstand any fall in the oil price and still pay generous dividends, currently yielding 10.5% based on forecasts for 2022. By Mark Gardner Senior Reporter
2013 2014
CQS
Schroder Income Maximiser has delivered the best returns of the trio over 10 years 2015 2016 2017 2018 2019 2020 2021 2022 City High Yield Maximiser +100% New City High Yield +83% Fidelity Enhanced Income +67% total return in GB. Data as of 12 August 2022
Net income
DANNI HEWSON AJ Bell Financial Analyst 32 | SHARES | 18 August 2022
Table: Shares magazine • Source: Rivian
accounts
RIVIAN ACCELERATES The landmark climate and healthcare bill comes with a tangle of strings attached with regards to EV tax incentives. However, industry bosses are notably positive about its potential impact in the commercial space with Rivian Automotive (RIVN:NYSE) chief executive RJ Scaringe saying it could provide a ‘powerful tailwind’. Rivian desperately needs that tailwind having shed more than 60% of its value since its highly anticipated and initially successful stock market float in November 2021. The Jeff Bezos-backed business is still haemorrhaging cash and has been forced to cut staffing costs but it’s the revenue number that’s finally sending investor pulse rates rising and the share price ticking up by more than 20% in a month. It soundly beat analyst forecasts in the last quarter and its production numbers are finally reaching meaningful volumes which suggests it might just fulfil the promise of delivering 100,000 electric vans to shareholder Amazon (AMZN:NASDAQ) before the agreed 2024 due Rivian Q2 2022 $364 −$1.7 (million) (billion) company
Several manufacturers are duking it out as new legislation provides a tailwind America ’ s commercial electric vehicle race is beginning to heat up again T he last couple of years have been tough for the motor industry as a whole. While Covid only brought production lines to standstill for a limited period of time the following supply chain snarl-ups created a real headache for just-intime operators and the dearth of crucial parts like semiconductors sent prices skyrocketing.
The more established names were able to use their size to muscle their way to the front of the queue leaving start-ups and scale-ups wondering if the race to develop the next big EV (electric vehicle) evolution was over before it had even really begun. Investors watched warily as production time frames were lengthened, delivery dates were missed and share prices tumbled. But recent weeks have brought a slew of announcements that have piqued interest once again, particularly in US companies both big and small and in the commercial vehicle space. US inflation appears to be finally cooling off, the supply wheels have been lubricated and Joe Biden’s administration has made a big stride towards speeding up the transition to EVs.
Revenue
The appointment of the former Opel boss, due to start in January, was broadly welcomed by investors. But the business needs to show it can make good on its, currently very small, delivery targets and accelerate towards real numbers, real progress, real potential. To do that it will need continued investor support at a time when funds are getting harder to come by. No one understands that journey better than Elon Musk. It took 18 years for Tesla to report its first full year profit, but its latest quarterly numbers will have been eyed enviously by its less mature rivals.
Source: Ford company accounts Tesla Q2 2022 $16.9 $2.27 Revenue (billion) Net income (billion)
Tesla set the bar when it comes to taking on the legacy automakers like Ford (F:NYSE) and General Motors (GM:NYSE) and judging by Musk’s recent tweet it’s not prepared to settle for anything less than total EV domination. He used Twitter to reveal the long-awaited Tesla Semi will ship this year and his ‘Cybertruck’ electric pick-up will be available from next year.
Nikola Q2 2022 $18.1 −$173 Revenue (million) Net income (million) Table: Shares magazine
Source: Nikola company accounts Ford Q2 2022 $40.20 $667 Revenue (billion) Net income (million) Table: Shares magazine
Competitor Nikola (NKLA:NYSE) has even further to travel if it’s to emulate Tesla (TSLA:NASDAQ) and mass produce a vehicle that can dominate the ongoing transition to EVs. While Rivian is focusing on the last few delivery miles Nikola knows that long range, affordable, practical haulage will be a veritable gold mine for the companies that can grab market share ahead of the pack.
THE ESTABLISHED PLAYERS RESPOND
•
The company has had more than its fair share of challenges and its outgoing CEO Mark Russell has done a terrific job of dragging the company clear of previous scandal and to the precipice of solid production. But the next mile of the journey comes with new challenges, the kind a veteran of the auto sector like Michael Lohscheller should be more than equipped to deal with.
NIKOLA HAS FURTHER TO TRAVEL
Anyone who has driven America’s interstate highways will know the sheer scale of the challenge faced by hauliers and in turn the range required to make EVs a practical solution for this kind of commercial use. EV technology is developing at a blistering pace. And it has to if it’s going to become practical and affordable enough to completely replace combustion engines across the world. Companies like Ford and General Motors had been racing to
Table: Shares magazine
DANNI HEWSON AJ Bell Financial Analyst 18 August 2022 | SHARES | 33
•
• Source: Tesla company accounts date, with a second shift due to come online for vehicle assembly at its Illinois plant during the next quarter.
DANNI HEWSON AJ Bell Financial Analyst 34 | SHARES | 18 August 2022 keep up but the last few years has helped them gain ground. While pivoting traditional lines to electric has brought challenges, for some investors the safety of household names with solid revenue streams provides a less speculative opportunity to invest in the EV space. But both Ford and General Motors clearly understand the importance of start-ups; the former has a significant stake in Rivian, and the latter has created subsidiary BrightDrop to help it navigate the new world. There are plusses and minuses when it comes to scale, the larger the company the more challenging it is to shift direction but there is also some safety in being more established and more diversified. What’s certain is there will only be a finite period of time for both old and new brands to win over the market. General Motors Q2 2022 $35.76 $1.69 Revenue (billion) Net income (billion) Table: Shares magazine • Source: General Motors company accounts READ MORE STORIES ON OUR WEBSITE THE LATEST STORIES INCLUDE: Shares publishes news and features on its website in addition to content that appears in the weekly digital SHARESMAGAZINE.CO.UKmagazine.BANK OF GEORGIA SHARES RALLY ON EARNINGS UPGRADES AND NEW SHARE BUYBACK BHP FROMRECOVERINGANDRECORDREPORTSEARNINGSPOINTSTODEMANDCHINA SIGN UP FOR OUR DAILY EMAIL For the latest investment news delivered to your inbox
You can download and subscribe to ‘AJ Bell Money & Markets’ by visiting the Apple iTunes Podcast Store, Amazon Music, Google Podcast or Spotify and searching for ‘AJ Bell’. The podcast is also available on Podbean. Listen on RecentwebsiteShares’hereepisodesinclude: LISTEN TO OUR WEEKLY PODCAST MON£Y & MARKET$ It’s all about inflation as UK CPI hits another 40-year Earningshighseason winners and losers, bond market struggles, and how man stacks up against machine when picking investments BP, buybacks, banking results, bumper borrowing and big recession worries
The retirement withdrawal strategy raises a few questions when inflation is high If inflation averaged 5% over that 12-month period, in the second year of retirement they would withdraw an extra 5% to maintain their spending power (i.e. £4,000 + 5% of £4,000 = £4,200), and so on.
Send an email to asktom@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 information 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.
36 | SHARES | 18 August 2022
IS FOLLOWING THE 4% RULE A GOOD IDEA? It’s worth noting there is an active debate in financial planning circles about whether the 4% rule remains appropriate. Some have suggested a combination of rising life expectancy and stalling investment returns mean the figure should be between 3% and 4%. It is also really meant as a guide rather than a strict set of rules to follow. What is sustainable for each person will depend on a number of things, including your health and the investment returns you enjoy. If your fund delivers strong returns, for example, then a higher withdrawal rate may prove to be sustainable. This is one of the reasons regular reviews of your pension withdrawal strategy are so important.Spikinginflation will also potentially put pressure on anyone following the 4% rule to the letter. Indeed, this should be considered I’m 70 and have been following the ‘4% rule’ since I started taking an income in drawdown on my 65th birthday. However, if I keep to that plan, I’ll need to increase withdrawals by 10%+ in September this year. Is that sensible or will I risk running out of money in retirement? Paul Tom Selby, AJ Bell Head of Retirement Policy says: Let’s tackle the obvious question first: what is the ‘4% rule’? It’s a rule-of-thumb for people taking a flexible retirement income from their pension pot. It was first put forward by a well-known American financial planner called Bill AccordingBengen.tothe 4% rule, a healthy 65-year-old should be able to withdraw 4% of their initial capital value each year from their fund, rising annually in line with inflation, and be confident they won’t run out of money in retirement.Thisisprobably easiest to illustrate with an example. Take a healthy 65-year-old with a £100,000 pension pot. If they followed the Bengen rule, they would take £4,000 in the first year of retirement.
By following the 4% rule, do I risk running out of money? by anyone planning to hike withdrawals to maintain their spending power. The real risk to a sustainable withdrawal plan will come if large withdrawals in the early years of retirement are coupled with big falls in the value of your investments – something often referred to as ‘poundcostThisravaging’.doesn’t mean you shouldn’t increase withdrawals to keep pace with inflation. Indeed, many will feel they have little option given the scale of price increases we are seeing in the economy. The most important thing is to have sustainability in mind when making these decisions, stay engaged and review your withdrawal plans at least once a year. DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?
PERSONAL FINANCE 18 August 2022 | SHARES | 37
Annuities won’t suit everyone in retirement but some will like what’s on offer
IMPORTANT POINTS TO CONSIDER If you live a long time, an annuity might be an extremely good choice. But if you die early, you may not have received much of your money back before death, and unlike keeping your pension invested, there is no lump sum left to pass on to beneficiaries.Youcanbuild a spouse’s pension into an annuity, which continues to pay out to your spouse or civil partner after your death. A common option is a 50% spouse’s pension, which continues to pay out
Want a guaranteed income for life? It’s worth noting annuity rates are going up
For the uninitiated, an annuity is an insurance product, where you swap a lump sum from your pension for an income for life. Insurance companies base their annuity rates on bond yields, which have been hugely depressed for the last decade by loose monetary policy. That is now changing, and the Bank of England is hiking interest rates aggressively. As a result, annuity rates have increased by around 20% this year. Based on a £100,000 pension pot, a 65-yearold can now get an income of £5,970 a year, or almost 6%, according to the MoneyHelper service. A 6% income may sound attractive to many investors, who are perhaps used to a dividend yield from the stock market of around 3% to 4%. But there is a key difference between investment income and annuity income that means it’s not a like-for-like comparison. If you receive dividends from shares or funds, you still also have your capital invested. By contrast, with an annuity you are swapping your capital for income, so you’ll no longer have a pension fund to speak of, just an income stream. That means a 6% annuity rate includes your capital being fed back to you, for the rest of your life. And while we know death and taxes are certain, their timing is not.
T here was a time when 90% of retiring investors bought an annuity with their pension pot, but in 2015, that radically changed.Thepension freedoms swept away many restrictions and allowed retiring pension savers to access as much of their pension cash as they wanted. The result is that nowadays, only around 10% of people buy an annuity. The big question is whether that is about to change. The pension freedoms clearly had a huge impact on annuity purchases, but they also coincided with a period when interest rates were exceptionally low. With rates now going up, it’s worth taking another look at the annuities space.
WHAT IS AN ANNUITY?
It may also be possible for retiring investors with certain health or lifestyle conditions to lock into a higher income too, because statistically speaking, insurers expect them to die at younger ages. For instance, a regular smoker might be able to pick up a 10% uplift on standard annuity rates. If you’ve had a stroke or heart attack, you’ll likely get more.
It’s important to note the 6% annuity rate on offer today also stays level for life, so it will be eroded by inflation over time. At 2% inflation, an annual income of £5,970 would only be worth £4,900 in 10 years’ time, and £4,020 in 20 years’ time. Periods of high inflation like we are seeing today will do even more damage. You can opt for an annuity that rises in line with inflation, but again, this reduces the initial income you get. In our example of the 65-year-old with a £100,000 pension pot, they would initially get an annuity of just £3,220 a year, rising in line with RPI thereafter.
The good news is investors can split their pension fund if they want, using some of it to buy an annuity, and keeping the rest invested. That way they get a bit of income security, and a bit of growth and flexibility too. As annuity rates rise, more people might give this mix and match approach a proper look. Annuity rates are improving –they’ve gone up 20% this year alone They offer you a fixed income for life Your annuity ends when you die so you cannot pass on wealth this way like a pension By Laith Khalaf AJ Bell Head of Investment Analysis
WILL THE PAYMENT RATE CHANGE?
CAN WE EXPECT A BOOM IN ANNUITIES NOW? It would be remarkable for the 20% rise we have seen in annuity rates this year to have absolutely no effect on their popularity. But the increase in pension savers attracted to annuities is still likely to beEvenmarginal.when 90% of people bought an annuity, many of them did so begrudgingly. People really don’t like the fact that if you get hit by a bus the day after you buy your annuity, all the money you have saved up over the years might bite the dustKeepingtoo. your money invested in your pension is risky, but it also has benefits, like hopefully seeing your money continue to grow, passing what’s left of your pension savings on to your family after you die, and managing your income to keep your tax bill in check.
PERSONAL FINANCE 38 | SHARES | 18 August 2022 half the income you were receiving. But depending on the age of your spouse, this could reduce the annuity rate you get by 5% to 10%, maybe more if they are significantly younger than you.
UNDERAPPRECIATED ANNUITY BENEFIT
The one thing that people probably underestimate is the potential to live a very long life. More and more people are living into their nineties and even past their hundredth birthday. Seen from this perspective, a guaranteed income for life can be a very valuable thing, if the rate on offer is a good one. Most of us will get a guaranteed income in the form of the state pension, but at £185.15 a week, that’s not enough to live a particularly comfortable life. Some people may also be lucky enough to have defined benefit pensions, which also give them a guaranteed income for life. But many won’t, and so an annuity should at least be a consideration, especially if rates rise further from here.
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INDEX 40 | SHARES | 18 August 2022 KEY OVERANNOUNCEMENTSTHENEXTWEEK 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 Shares material is copyright. Reproduction in whole or part is not permitted without written permission from the editor. EDITOR: @Dan_CoatsworthCoatsworthDaniel EDITOR:DEPUTY Tom @SharesMagTomSieber EDITOR:NEWS Steven @SharesMagSteveFrazer WHO WE ARE PRODUCTION Head of Design Darren Rapley Designers Rebecca Bodi Kevin Sharpe ADVERTISING Senior Sales Executive Nick Frankland 020 7378 nick.frankland@sharesmagazine.co.uk4592 CONTACT US: support@sharesmagazine.co.ukWebsite:sharesmagazine.co.ukTwitter:@sharesmag FUNDS INVESTMENTANDTRUSTSEDITOR: James @SharesMagJamesCrux COMPANIES EDITOR Ian @SharesMagIanConway EDUCATION EDITOR Martin@ChilliggGamble SENIOR REPORTER: Mark Gardner CONTRIBUTORS Danni Hewson Laith Khalaf Russ Mould Tom LauraSelbySuter Funds Fidelity Enhanced Income Fund 30 Fundsmith Equity17 Janus Henderson Global Sustainable Fund 20 Schroder MaximiserIncome 30 Vanguard DevelopedFTSEWorld ex-UK Equity Index Fund 20 Full-year results: 25 August: Hays, Morses Club. Half-year results: 23 August: Aferian, 24 August: Anglo Pacific, 25 August: CRH, Faron Pharmaceuticals, Grafton, Hunting, Macfarlane, Puretech Health. Trading updates 25 August: Benchmark Holdings. AIM Boohoo 12 Europa Oil & Gas11 i3 Energy 11 Peel Hunt 4 Revolution Beauty12 Zinc Media 4 Main Market 4Imprint 13 Anglo American 8 Avast 7 Coats 4 Darktrace 8 Deliveroo 7 Diversified Energy31 GSK 14 Haleon 14 Just Eat Takeaway7 Morgan Sindall 10 Thungela Resources8 Watches of Switzerland6 Overseas shares Amazon 339,5, Apple 9 Enphase Energy 9 Ford 33 General Motors 33 HelloFresh 7 Microsoft 9 Netflix 7 Nikola 33 Pfizer 14 Rivian Automotive32 Sanofi 14 Tesla 335, ETFs Xtrackers S&P 500 Equal Weight 9 Investment Trusts BlackRock Income & Growth Investment Trust 17 CQS New City High Yield31 Custodian REIT 19 Henderson Far East Income 26 Momentum Multi-Asset Value Trust 19 NextEnergy Solar27 Round Hill Music Royalty Fund 17 Schroder European REIT24 VPC Specialty Lending25
