AJ Bell Shares magazine 26 October 2023 by Shares Magazine

VOL 25 / ISSUE 42 / 26 OCTOBER 2023 / £4.49

VALUE INVESTING IS

BACK Why the style is working and how to get involved

Mid Wynd International Investment Trust plc Quality that stands for generations

Learn more: 0800 374810

am.lazard.com/Mid-Wynd

Managed by

This is a marketing communication. The value of your investment may rise or fall and your capital is at risk. All opinions expressed herein are as of the published date and are subject to change. This information is provided for information purposes only. The value of investments and the income from them can fall as well as rise and you may not get back the amount you invested. Nothing herein constitutes investment advice or a recommendation relating to any security, commodity, derivative, investment management service or investment product. Investments in securities, derivatives and commodities involve risk, will fluctuate in price, and may result in losses. Certain assets held in Lazard’s investment portfolios, in particular alternative investment portfolios, can involve high degrees of risk and volatility when compared to other assets. Similarly, certain assets held in Lazard’s investment portfolios may trade in less liquid or efficient markets, which can affect investment performance. This information is intended only for persons residing in jurisdictions where its distribution or availability is consistent with local laws and Lazard’s local regulatory authorisations. The information is approved by Lazard Asset Management Limited, 50 Stratton Street, London W1J 8LL. Incorporated in England and Wales, registered number 525667. Lazard Asset Management Limited is authorised and regulated by the Financial Conduct Authority. There can be no assurance that the Company’s objectives or performance target will be achieved. Any investment is subject to fees, taxation and charges within the Trust and the investor will receive less than the gross yield. Investors should read and note the risk warnings in the Company’s Key Information Document (KID). Copies of the KID and Report & Accounts are available on Lazard Asset Management’s website or on request. The tax treatment of each client will vary and you should seek professional tax advice. The Trust is listed on the London Stock Exchange and is not authorized or regulated by the Financial Conduct Authority. This information has been issued and approved by Lazard Asset Management Limited and does not in any way constitute investment advice. The company currently conducts its affairs so that the ordinary and subscription shares in issue can be recommended by financial advisers to ordinary retail investors in accordance with the Financial Conduct Authority’s (“FAC’s”) rules in relation to non-mainstream investment products and intends to do so for the foreseeable future.

Contents 05 NEWS

• • • • • •

Why global bond yields continue to shoot up and what it means Tesla investors left sweating over scope for margins recovery Netflix ‘turnaround complete’ as cash flow soars in the third quarter ‘Writing on the wall’ for open-ended property funds as M&G closes once popular product Big medical breakthrough drives huge gains in Oxford Biodynamics shares Rightmove shares endure a big hit as US real estate giant CoStar agrees OnTheMarket deal

GREAT IDEAS

New: Rio Tinto / Schroder Recovery Fund

EDITOR’S VIEW

All change for ISAs at the Autumn Statement? This is what to expect

FEATURE

Value investing is back: Why the style is working and how to get involved

27 FEATURE

Three quick and easy ways to screen the market for value stocks

32 ETFS

ETFs can be a powerful tool in building your value investment strategy

EMERGING

34 MARKETS

The big South Korea emerging markets debate goes on

36 FUNDS

The fund that picks good companies which also do good for the planet

DANNI

39 HEWSON

Confidence is in short supply but that can create opportunities

42 ASK TOM

Might we see changes to the triple-lock state pension system in the future?

PERSONAL

45 FINANCE

The risks of investing in bonds: everything you need to know

48 INDEX

Shares, funds, ETFs and investment trusts in this issue

26 October 2023 | SHARES | 03

Contents

Three important things in this week’s magazine V INVE ALUE STING

THIS IS

BACK

AN AD VERTIS ING

Edito

PROM

OTION

Why th and ho e style is w to ge worki t invo ng lved

alue sto By Ma rtin Ga stocks cks have ou mble and Jam announby 12% since tperformed es Cru x vaccin ced the firs Pfizer (PFE:Ngrowth compa e t That the MS ring the MS on 9 Novem effective Co YSE) experi was the lar CI vid be CI We hav World GrowtWorld Value r 2020. That’-19 the enced by gest peak val Sec to ind e s h reason investi index. ex aga Asset ond World ue as an inv trough fall inst Mana esting War, acc outpe ng style cou to believe the gem sty rforman ld soo The ording le en from che n delive value to JPM since ce giv in 2020value invest t. organ me rates an ap mone en the shift r even bigger ma nt king it accord y the wo style lost ove Read on d how tha to more no in the backd French ing to data r 40% t has a rmalis rop to dis sou rst eve place of finan data library rced from r single yea in you cover why big impact ed interest r r portfo on value While Dartm ce at Tuck . Kenneth Fre the Kenne should equities. th Sch Covid value mightlio. have a differe outh College. ool of Bu nch is profes vaccin look siness in the e sor includ nt factors wh His database at contex was developlike a winne ing val value ue, size ich explain identifies underpet of the prior ed, it is sca r since a In a cumula nt rew 13 yea rform outpe broader con and risk. stock return rformed text pri s, Growt tively based growth by rs which saward 19 or to h indice 27. Pic growt mo on MS s. CI Wo re than 50 and val k any yea h in every 2007, value rld Val % r de ha ue at s cad ue and ran had a Value 65% cha dom durin e since g tha nce of some underperfo Value beating t period growt the gl margin in rmed Grow histor has return h. th ob MSCI

World

200

th by e 13 cial cr years afte isis r

al finan

Value

index

MSCI

100

World

Growth

index

27%

20%

d to 100

MSCI

World

Growth

index

2010

Rebase

Chart:

ed to

y of

outper its MSCI Wo formin long Growth rld Value g grow index index relative th to MS MSCI World CI Wo Value rld inde

2015

magazin

e • Sou

Value is back

15%

rce: LSE

2020 G

Rebase 2020 d to 100.

Pfizer

announ Chart: ced first 13 Oct Shares mag Covid azine 2023 vaccine market • Sou on 9 Nov rce: LSE close G. 6 Nov 2020 market close to

r’s View All ch : Dani el Co atswor th State ange for ISAs m e n t? Th at the There is Gove is a lot of ta A is wh rn utum saving ment wa lk that the a nts to s and n t to ex re inves tmen form the wealthy p e ct here is ts wrap chatte full £2 individuals per is r

open 0,0 that no inc 00 annual can afford accountsto reformingthe Governm en to mone tive for the allowance. max out the gains an which she ISAs, the sav ent y taxma lte n. allowa into UK sto average inv There would ir d Statem The chance income fro r capital ings cks nce est be There under cur if they still or to put mo shed lighent on 22 No llor’s Autumm the rent is als had an unuse re UK-listedo the matte levels. evolve t on how vember mi n d ISA the ght compa r that a lar is what. Ahead of tha y might nie ove ge chu s Sha t rse gen eve res be as nk might era lieves nt, here no play onand are not te their ea of might, rni a One of t, happen. the str ng or reform the key go A bette UK economyaightforward s invest r way to en . encou ing ISAs wo als for me uld rag be to remnt in UK stocourage mo and inv e more pe be to re achiev est for their ople to sav Main Ma ove stampcks would e needs e such a goal, future. To with AIM rket shares duty on , in line have lesto streamline the Gover Mergi stocks. s the ISA nment Stocks ng the Ca There complicate range and be a sm and Share sh ISA and ISA, Sto are six typ d rules. such a art move. s ISA would Lifetim cks and Sh es of ISA in chang also Do no ares ISA existe e ne ISA w e t , Junior latter , Innova nce – Ca servic tax year tho to be ready expect is es com con savers closed to ne ISA and He tive Finan sh panie ugh as fin for the their sys sider launch lp which and investors w money, to Buy ISA ce ISA, tems to ing ne s would ne ancial of . The Mean need to but that w pro ed to sup Curre the other still get help bu while, som port the me ducts or cha types ntly you canISAs they sho their head means of worth y their first eone using rged ISA typ nging ISA ha ISA, while put up to uld use. round a £20,000 ve ind That mimore than £4home canno Lifetime ISA e. the Life level. ivid t gh tim 50 to acr acq ual ,000 un e oss On for exa t be too uire a Gover e of the suglimits at a lowISA and Jun all de pro nm for an mple, Rightmlow for parts r HMRC rul perty ior addition ent could gestions is er better average of £5 ove says fla of the countres. investi al ISA allo let you have the to raise ts 65 y ng in UK wance the ma ,147 last in London – specifi an The stocks the Life ximum proyear. Might sold cally for ISA re a boostGovernmen . for expect time ISA ea perty price it be proper m needs sugges to the eco t is keen to pro ch yea any im under co no 25 tio r? nsult minent % Life We do with to back ns that pro my and the vide ation tim th Elsewhe e ISA exit change to thenot help. In UK business viding an incre are and tim e industry penalty. re, the ISA ha e to de Inn the Lon theory, thi es is one wa entive the s cide s best would dwindled in ovative Fin drive modon Stock could also y to for inv approach Exc be closed not be surpri popularity ance estor an to sed Is it a re interest hange as it nefit ter could We are new mone if the wrapd we m need s’ longsubscr goer? We in the UK ma per s do year so heading y. was £8iption to a Sto not think rket. be loo chancellor toward an ele so. ,690 acc cks king to Jerem ction ording and Share The averag fin y secure Hunt e ding s to HM RC. In ISA in 2021 prope right ap quick wins, votes. That will /22 reality r wh con pro , only ach. ISA ich is no means to decid sultation t term ne e the best with the indreform need the appro eds. ach for ustry and tims invest ors’ lon e g-

The future for ISAs

”

26 Octo

ber 202

3 | SHA

The investment style is resuming its long-term outperformance of Growth and we highlight five investment trusts to play it. RES |

26 Oct ober 202

Changes to the popular savings and investment wrapper could be imminent, editor Daniel Coatsworth gets his crystal ball out to predict what you can expect. 3 | SHA

RES |

Netfli flow x ‘turnar News s oa rs o in theund comp le third quar te’ as cash the n impre ter (NFLX: ssive set of Netflix NASD Netfli

The sh start of ares are up nearl 2023 y 40% since

has he AQ) thi x ($) again lped get the rd quarter marke as ear sha t 450 right be that the comit creates op re price mo nings delive tween gro pany is gettitimism in the ving 400 win rin ng The g profit and g its subscr the balan 350 iber ba cash. ce of the company’s cas se and 300 of $1.27results at $1 h flow wa s .89 bill ion, wa a stand-out Netfli billion. 250 fea y above guidancex has boost consenture 200 sus from the to $6.5 billed its full-ye by the prior $5 billion. Thoughar free cash Jan delayedindustrial acti ion, is infl this numb flow ated som er, up on spend 2023 Apr ing on in Tinseltow Chart: ewhat Shares Jul conten n, which magazin t. Oct e • Sou has rce: LSE G back in What that the double-dig did it Netflix The glo place y cannot kic growth, an report at the d there of $8.54bal stream k on fro top ing Subscr is no m he of 30 Sep billion for giant rep its strate iber numb the film and re and cem reason ort the tembe ers TV guidance en gy r 2023 three mo ed revenue t its hierar to crackd were up paid off nths en be chy Earnin of $8.52 bill ating the ‘non-p , and globa own on pa which meant.’ compa ding l str ayi ssw in the gs per sha ion. ny’s qu Globa ng custom eaming gia ord sharin that EPS of arter with re (EPS) also subscr lly, Netflix ers’ to pay nt has con g has ing ad verted of $3.49$3.73, ahead the compa beat estima taking ibers during ded nearl ones. ny tes of con . y 8.8 mi its the The sensus reporting llion Invest total subscr July-Sep expect year-a company rep ations can be ors will be iber base tember perio go perio orted to 247.2 d EPS of Netfli d. increa sustained aslooking carefu millio $3.10 sed in of $8.69x’s guidance in the France its cor subscription lly to see if n. e marke . expect billion wa for fourth thi s s qu ations Netfli ts in theprices were s of $8.76slightly below arter reven UK, US based x said its ba consen ue billion and Ben Ba . compa customers wilsic and pre sus rringer mi says: ‘Aft , an time Nered to $9.99 l now cost um plans turnarou er a difficul alyst at Qu for US $1 an tfli 1.9 d x ilte $1 has sai raised 9 and 9.99 crack do nd is com t couple of r Cheviot, the US d further pri prices was Mapreviously. $22.99 plete, years, leavin wn on passw The as its rec ce increa Netfli fro rch g If Ne m 2024. ses are 2022. Ne last were strhave paid off ord sharin ent effort x’s tfli sched costs’ tflix can con uled in x than the ong, with . Its latest g and subscrs to an sub the glo d ‘innovatintinue to ‘ke set of ibers growin market wa scription ep nu contin bal streaming g in the spo a lid on its g s expecti s signifi mbers ue,’ ad ‘Indeedtoo. ng and cantly be ds Qu giant’s gro rts world’ thecontent ‘Th , they tte ma ere ilte r rgins now gui live spo will come r Cheviot’ wth looks set n de the creatingrt, but for noa day where s Barringer. to ir sales growt to negoti its own lea w it will be Netflix is sho h to be League ate with thegues and idemore conten wing .’ [SG] as tha t likes of the NF n having L or Pre mier

Netflix getting its act together inflatio n or 2.5 %. It loo pay gro ks at the sea July for wth for the sonally adjust thr and CP the earnings ee month ed s inflatio I data in Sep component to 8.5% forn figure. Ear tember as the and the the three- nings grew by mo nex nth per t unlike iod ly to inflation Had the be higher. reading is new sta te pen sion

26 Octo

ber 202

3 | SHA

RES |

Streaming giant is delivering increased cash flow and password sharing crackdown appears to be paying off. 07

Visit our website for more articles Did you know that we publish daily news stories on our website as bonus content? These articles do not appear in the magazine so make sure you keep abreast of market activities by visiting our website on a regular basis. Over the past week we’ve written a variety of news stories online that do not appear in this magazine, including:

Indivior shares up 5% after agreeing to pay $385 million to settle legacy cases

Analysts overwhelmingly upbeat on Oracle after AI event

TSMC thinks chip industry slump may be in the past

04 | SHARES | 26 October 2023

Cinema chain Everyman Media shares rally as leading shareholder adds to stake

News

Why global bond yields continue to shoot up and what it means The Peterson Foundation projects the US will pay more on servicing its debt than on defense by 2028

fter two consecutive years of losses (prices move in the opposite direction to yields) bond investors were relatively optimistic at the start of 2023. Sadly, that optimism was misplaced with the real prospect of an historic third consecutive year of losses in the cards. Since the US 10-year treasury yield bottomed in August 2020 at 0.5% prices have fallen 31% while the yield is now above 5% for the first time since the eve of the financial crisis in 2007, likewise with the yield on 30-year treasuries. Meanwhile the UK 30-year gilt yield recently breached 5% which is the highest level since 1997. US bond markets play an important role in global capital markets and set the global cost of capital. The Middle East conflict could be having impact on bond yields through the oil price which has risen because of potential risks to supply. Higher oil prices eventually feed through to higher inflation which pressures central banks to keep interest rates higher for longer. Another important driver is the US economy which has been more resilient than many economists were expecting at the start of the year.

US 30-year treasury yield (%) 5 4 3 2 1 0 2005

2010

Chart: Shares magazine • Source: LSEG

2015

2020

In other words, bond markets have had to adjust to the reality that a recession is not happening in 2023 and bets that the Federal Reserve would be cutting rates early in 2024 are now off the table. Ronald Temple, chief market strategist at Lazard points out that consensus expectations for the advanced reading of third quarter GDP is an annualised 4.3%, up from 2.1% in the prior quarter. A healthy economy could be framed as a positive reason for higher bond yields. The prevailing assumption here is that when the effects of monetary tightening feed into the economy, bond yields will fall back. But there could be a less benign explanation driving yields higher. This relates to concerns over the ballooning US fiscal deficit. It could be that bond investors are baulking at the sizable government debt issuance which lies ahead. Adding to the angst is the Fed’s QT (quantitative tightening) policy which effectively means it is now a seller of bonds rather than buyer under its prior QE (quantitative easing) policy. How long the current bond ‘buyers strike’ will last and how high yields could go is anybody’s guess, even if there was a temporary hiatus in bond selling on 23 and 24 October. But one thing is for sure, the higher yields rise, the more financial pain will be inflicted. US annual debt interest payments are running close to $1 trillion, while the government needs to refinance up to $17 trillion of its existing $33 trillion of debt in the next two years. [MG] 26 October 2023 | SHARES | 05

News

Tesla investors left sweating over hope that Tesla would continue to cut vehicle in the months ahead. scope for margins prices Following the third quarter results, investors now have tangible evidence of the savage impact recovery this strategy is having on Tesla’s profitability. Gross Push for market share is coming at a cost

esla (TSLA:NASDAQ) is facing a stiff challenge to repair profitability as multiple price cuts this year threaten to leave a lasting mark on margins and the share price. At the start of October (2 October) Tesla unveiled another round of discounts in the US, the seventh time this year that the world’s biggest electric car maker has lowered ticket prices on some models. Elon Musk’s aggressive pricing strategy was meant to boost sales in a slowing electric vehicle market and, crucially, put more miles between its industry leading profit margins and those of its legacy car maker and Chinese challenger rivals. The strategy seemed to initially work, with vehicle deliveries hitting a near-record 423,000 in the first quarter of 2023 and jumping in the second quarter to 466,000. But price cuts’ ability to stimulate demand is now running out of juice. Deliveries softened in the third quarter at 435,059 vehicles, partly because of planned temporary shutdowns at its gigafactories in Austin and Shanghai for upgrade work. That was shy of consensus analyst estimates of 461,640 vehicles, which were supposedly already recalibrated to reflect the manufacturing stoppages. In turn this prompted some analysts to speculate that buyers might be delaying purchases in the

margins declined for the fourth quarter in a row at 17.9%, falling from 25.1% in the equivalent quarter of 2022. Gross margins peaked in Q1 2022 at 29.1%, which implies a 1,120-basis point drop in 18-months. This has left Tesla’s once market leading gross margins below some mass market rivals, such as Toyota (7203:TYO) and Volkswagen (VOW3:ETR), although these comparative figures include nonelectric vehicles. Tesla investors now face hard questions given that the share prices of mass market rivals typically trade on single-digit or low double-digit price to earnings multiples versus Tesla’s 60-odd. Operating profit margins at Tesla have faced even deeper declines, more than halving in a year, down from 17.2% in the third quarter of 2022 to 7.6% in the same quarter this year. This means that despite largely higher vehicle volumes, quarterly net income has plunged 37% since September 2022 to $2.32 billion, or 44% to $1.85 billion on a GAAP basis (generally accepted accounting principles). Even if analysts forecasts for operating profit margin recovery proves correct, consensus projections of 11.8% in 2024 and below 14% in 2025, means margins will remain roughly 300 basis points below 2022 levels two years from now. Tesla shares have fallen more than 14% since the third quarter results were released to $212.08, their lowest since May 2023. [SF]

Tesla's gross and operating margins FY 2019 Gross margin Operating margin

FY 2020

16.6% −0.3%

21.0% 6.2%

Table: Shares magazine • Source: Tesla, Statista

06 | SHARES | 26 October 2023

FY 2021 25.3% 12.1%

FY 2022 25.6% 16.8%

Q1 2023

Q2 2023

19.3% 11.4%

18.2% 9.6%

Q3 2023 17.9% 7.6%

News

Netflix ‘turnaround complete’ as cash flow soars in the third quarter The shares are up nearly 40% since the start of 2023

n impressive set of Netflix (NFLX:NASDAQ) third quarter earnings has helped get the share price moving again as it creates optimism in the market that the company is getting the balance right between growing its subscriber base and delivering profit and cash. The company’s cash flow was a stand-out feature of the results at $1.89 billion, way above consensus of $1.27 billion. Netflix has boosted its full-year free cash flow guidance to $6.5 billion. Though this number, up from the prior $5 billion, is inflated somewhat by the industrial action in Tinseltown, which has delayed spending on content. What did Netflix report The global streaming giant reported revenue of $8.54 billion for the three months ending 30 September 2023 beating the company’s guidance of $8.52 billion. Earnings per share (EPS) also beat estimates in the quarter with the company reporting EPS of $3.73, ahead of consensus expectations of $3.49. The company reported EPS of $3.10 in the same period a year ago. Netflix’s guidance for fourth quarter revenue of $8.69 billion was slightly below consensus expectations of $8.76 billion. Ben Barringer, analyst at Quilter Cheviot, says: ‘After a difficult couple of years, Netflix’s turnaround is complete, as its recent efforts to crack down on password sharing and subscribers leaving have paid off. Its latest set of numbers were strong, with subscriptions significantly better than the market was expecting and margins growing too. ‘Indeed, they now guide their sales growth to be

Netflix ($) 450 400 350 300 250 200 Jan 2023

Apr

Jul

Oct

Chart: Shares magazine • Source: LSEG

back in double-digit growth, and there is no reason that they cannot kick on from here and cement its place at the top of the film and TV hierarchy.’ Subscriber numbers were up which meant that its strategy to crackdown on password sharing has paid off, and global streaming giant has converted ‘non-paying customers’ to paying ones. Globally, Netflix added nearly 8.8 million subscribers during the July-September period taking its total subscriber base to 247.2 million. Investors will be looking carefully to see if this can be sustained as price of subscriptions were increased in its core markets in the UK, US and France. Netflix said its basic and premium plans for USbased customers will now cost $11.99 and $22.99 compared to $9.99 and $19.99 previously. The last time Netflix raised prices was March 2022. Netflix has said further price increases are scheduled in the US from 2024. If Netflix can continue to ‘keep a lid on its content costs’ and ‘innovating in the sports world, then the global streaming giant’s growth looks set to continue,’ adds Quilter Cheviot’s Barringer. ‘There will come a day where Netflix is showing live sport, but for now it will be more content creating its own leagues and ideas than having to negotiate with the likes of the NFL or Premier League.’ [SG] 26 October 2023 | SHARES | 07

News

‘Writing on the wall’ for open-ended property funds as M&G closes once popular product There is a mismatch between the liquidity requirements of investors and the realities of selling real estate

n what will seem like yet another case of déjà vu for property investors, one of the biggest open-ended funds in the market has decided to suspend dealing in its shares and shut up shop. This move brings into question the future of this type of property fund given the inherent structural problems it has. Several open-ended funds suspended dealings in the aftermath of the Brexit vote in 2016 and again following the outbreak of Covid in 2020 due to the inability to liquidate their assets quickly enough to meet customer withdrawals. In May 2021, Aviva Investors, part of the UK’s largest insurance firm Aviva (AV.), threw in the towel and closed its £370 million UK Property Fund after it had been frozen for more than a year. Now, M&G Investments has announced its intention to close the £565 million M&G Property Portfolio (Acc: B8FYD92 Inc: B89X8P6) – which was suspended in 2020 but reopened in 2021 – ‘due to declining interest in open-ended daily dealing property strategies from UK retail investors’. Blaming lack of investor interest and ‘persistent outflows over several years,’ M&G says the fund’s reduced size meant the manager couldn’t run a diversified portfolio without incurring the high ongoing transaction costs required to reconfigure the portfolio. As of the end of August, the fund was around 75% invested in physical real estate assets with just under 20% in cash and the remainder in quoted equities. Among the top 10 assets were industrial and office properties in Aberdeen, a retail warehouse in Llanelli, and a shopping centre, leisure centre and industrial park in North Kent. M&G says once regulatory approval has been

08 | SHARES | 26 October 2023

granted, the fund will begin the orderly sale of its assets with the aim of ensuring a fair market price but it expects the process to take around 18 months. Cash will be returned to clients ‘when it becomes available through this period’, while normal income distributions will continue to be paid in January, April, July and October. Ryan Hughes, head of investment partnerships at AJ Bell, says: ‘The writing has been on the wall for open-ended property funds ever since they suspended again in the depths of the Covid crisis. Offering a daily dealing structure for an asset that can take months to sell was an accident that happened all too often and one that ultimately undermined investor confidence. ‘The FCA looked to address the issue through tentative proposals to limit access but while this was a potential solution, the likelihood was always that retail investors would want the comfort blanket of daily dealing even if they didn’t need to access the asset.’ [IC] Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Ian Conway) and the editor of the article (Tom Sieber) own shares in AJ Bell. Steven Frazer also owns a personal interest in Scottish Mortgage and Smithson Investment Trust.

News

Big medical breakthrough drives huge gains in Oxford Biodynamics shares The company gets earlier than expected validation for prostate cancer test

with 55% accuracy from current screening methods used by the NHS. Increased accuracy of the test, which will be run alongside a Biotechnology company Oxford standard test, significantly removes Biodynamics (OBD:AIM) has seen false positives and the need for its shares go up three-fold in the last unnecessary referrals and invasive month driven by positive news flow. biopsies. The company, which is developing Further exciting news came on 18 precision medical tests based on its October when Oxford Biodynamics proprietary EpiSwitch3D genomics announced a strategic partnership platform, announced earlier than with Bupa, the UK’s leading health expected validation of its prostate insurer, to give patients access screening test on 26 September. to EpiSwitch Cirt (Checkpoint The test is groundbreaking inhibitor Response Test). Moving in that it has proven to be It is a first-of-its-kind 94% accurate in predicting HIGHER blood test that accurately the presence or absence of predicts an individual prostate cancer compared cancer patient’s therapeutic

response to treatment and thereby identifies those most likely to benefit from this class of therapy. [MG] Oxford Biodynamics (p) 40 30 20 10 May 2023

Jun

Jul

Aug

Sep

Oct

Chart: Shares magazine • Source: LSEG

Rightmove shares endure a big hit as US real estate giant CoStar agrees OnTheMarket deal Investors react to the implied competitive threat

price increases on its subscriptions rather than selling new products to generate growth for some time. Shares in property listings site ‘CoStar has a track record for Rightmove (RMV) have taken a these types of acquisitions and battering since US real estate giant has stated that it intends to fund CoStar (CSGP:NYSE) announced a a multi-year, multi-£100 million £99 million all-cash offer for rival investment programme to displace OnTheMarket (OTMP:AIM). Rightmove as the number one in The US real estate giant intends residential property in the UK,’ added to turn OnTheMarket into a ‘market the Jefferies team. leader’ which could put pressure on As CoStar has ‘thrown down the Rightmove’s dominant market share gauntlet’ with this OnTheMarket in the UK. offer, Rightmove will have to put CoStar already runs up a fight. US websites Homes. It may prove hard to unseat com, LoopNet.com and from its market leading DOWN position as this creates Apartments.com. in the Analysts at Jeffries noted a virtuous circle. Its site dumps Rightmove has relied on has the most listings and is

therefore the one which prospective property buyers will go to when looking for their next home. This reinforces its position as a musthave product for estate agencies and gives it significant pricing power when it comes to securing subscriptions from agencies. [SG] Rightmove (p) 580 560 540 520 500 Aug 2023

Sep

Oct

Chart: Shares magazine • Source: LSEG

26 October 2023 | SHARES | 09

News: Week Ahead

Grocery chain Sainsbury’s needs to deliver on earnings and guidance The UK’s number two supermarket faces an uphill challenge this quarter

UPDATES OVER THE NEXT 7 DAYS FULL YEAR RESULTS 30 October: Lok’n Store 31 October: Up Global Sourcing, Essensys HALF YEAR RESULTS 30 October: Airtel Africa 2 November: BT, Sainsbury (J) TRADING ANNOUNCEMENTS 27 October: NatWest 31 October: Georgia Capital, NCC 1 November: GSK, Smurfit Kappa 2 November: Shell, Helios Towers, Smith & Nephew

Interestingly, as we head into supermarket chain Sainsbury’s (SBRY) first-half results on 2 November, the group’s shares are trading just above their lows of the last six months. In contrast, shares in grocery market leader Tesco (TSCO) are trading just below their high for the year after the firm posted betterthan-expected first half sales and raised its full-year operating profit guidance earlier this month. Sainsbury’s sales growth has been in line with or slightly ahead of the UK grocery market in each of the last half-dozen monthly till roll surveys by Kantar, and the group has slightly improved its market share to 14.8%, so we suspect the upcoming results will be at least in line with the consensus. However, in the final three months of 2022 the firm’s market share climbed to as much as 15.5%, which looks like a tall order this time round.

Limited-assortment retailers Aldi and Lidl are consistently growing their sales by 20% or more month after month, so it will likely be the outlook which decides the fate of the shares on the day. Sainsbury's (p) 280 260 240 220 200 Jan 2023

Apr

Jul

Oct

Chart: Shares magazine • Source: LSEG

What the market expects of Sainsbury's EPS (p)

Revenue (£bn)

Forecast for 2023

20.7

32.4

Forecast for 2024

22.0

32.8

Table: Shares magazine • Source: Stockopedia. Year-end March

10 | SHARES | 26 October 2023

News: Week Ahead

US UPDATES OVER THE NEXT 7 DAYS

Margins may hold the key to PayPal recovery Sharp share price slump sees stock trade on single digit rating If global lockdowns were a win for PayPal (PYPL:NASDAQ), reopening has been a catastrophe. Since peaking at near-$310 in July 2021, shares in the digital payments platform have sunk to levels not seen since 2017, a staggering fall from grace. Underwhelming margins have been analysts’ chief worry in recent quarters, as lower margin services have held up better, while stumbling growth has hardly helped either. PayPal chief executive Dan Schulman has drawn optimism from largely robust consumer spending, which should improve further as inflation continues to cool, something to watch out for in third quarter results (1 November). What the market expects of PayPal EPS ($)

Revenue ($bn)

Forecasts for 2023

4.95

29.7

Forecasts for 2024

5.66

32.4

Table: Shares magazine • Source: Koyfin

PayPal ($) 90 80 70 60

Jan 2023

Apr

Jul

Oct

Chart: Shares magazine • Source: LSEG

Revenue projections for the three months have been nudging higher lately, from $7.32 billion to the current $7.38 billion, according to Koyfin data, and the $1.23 per share of earnings predicted would be a record quarterly profit, but the devil will be in the detail. There may also be news on Dan Schulman’s successor after his retirement announcement in February. Having fallen this far, the stock has seldom been this lowly rated, offering hope for recovery. Koyfin’s December full year 2024 earnings per share projections for $5.56 implies a price to earnings multiple next year of 9.5, versus mid-teens growth. [SF]

QUARTERLY RESULTS 27 October: Exxon Mobil, Chevron, AbbVie, Charter Communications, Aon, Colgate-Palmolive, Phillips 66 30 October: McDonald’s, Arista Networks, Public Storage, Simon Property 31 October: Pfizer, AMD, Amgen, Caterpillar, Eaton, Marathon Petroleum, Ecolab, MSCI 1 November: Qualcomm, CVS Health, Mondelez, Airbnb, Humana, PayPal, Estee Lauder, Aflac, MetLife, AIG, Kraft Heinz 2 November: Apple, Eli Lilly, ConcoPhillips, S&P Global, Starbucks, Stryker, Booking, Cigna, Regeneron Pharma, EOG Resources, Zoetis, Southern, Duke Energy, ICE, MercadoLibre, Marriott International

26 October 2023 | SHARES | 11

THIS IS A MARKETING COMMUNICATION. PLEASE REFER TO THE KEY INFORMATION DOCUMENT (KID) BEFORE MAKING ANY FINAL INVESTMENT DECISIONS.

WE’LL FOCUS ON THE DIVIDENDS, YOU ENJOY THE COMMUTE The Merchants Trust PLC The Merchants Trust aims to provide an above average level of income that rises over time. So whilst we focus on investing in large UK companies with the potential to pay attractive dividends, you can focus on travel, family, home, retirement – whatever really matters to you. Although past performance does not predict future returns, we’ve paid a rising dividend to our shareholders for 41 consecutive years, earning us the Association of Investment Companies’ coveted Dividend Hero status. Beyond a focus on dividends, Merchants offers longevity too. Founded in 1889, we are one of the oldest investment trusts in the UK equity income sector. To see the current Merchants dividend yield, register for regular updates and insights, or just to find out more about us, please visit us online.

www.merchantstrust.co.uk

INVESTING INVOLVES RISK. THE VALUE OF AN INVESTMENT AND THE INCOME FROM IT MAY FALL AS WELL AS RISE AND INVESTORS MAY NOT GET BACK THE FULL AMOUNT INVESTED. A ranking, a rating or an award provides no indicator of future performance and is not constant over time. You should contact your financial adviser before making any investment decision. For further information contact the issuer at the address indicated below. This is a marketing communication issued by Allianz Global Investors UK Limited, 199 Bishopsgate, London, EC2M 3TY, www.allianzglobalinvestors.co.uk. Allianz Global Investors UK Limited company number 11516839 is authorised and regulated by the Financial Conduct Authority. Details about the extent of our regulation are available from us on request and on the Financial Conduct Authority’s website (www.fca.org.uk). The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted; except for the case of explicit permission by Allianz Global Investors UK Limited.

Great Ideas: Investments to make today

The big value indicator telling you Rio Tinto is a buy The miner is offering a dividend yield which suggests the shares are well worth investing in

Rio Tinto (RIO) £48.91 Market cap: £83.1 billion

ne indicator of value is the dividend yield. A high yield is typically telling you two things – either the market knows a company is struggling and the dividend is under threat, or the share price is too low and the dividend is safe. We think the latter is the case for FTSE 100 diversified mining group Rio Tinto (RIO) and on that basis we think investors should invest now. Berenberg has done some number-crunching. The investment bank has identified that, when the dividend yield is above 4.5%, then buying the shares has delivered median returns of nearly 30%. Right now, the forecast yield for 2024 based on consensus forecasts is 6.9%. Obviously Rio is exposed to volatile commodity prices but it is quite conservatively run so it has a strong balance sheet with a net debt to earnings ratio below 0.2 times, having not made lots of risky acquisitions when metals markets were hot. The company also keeps a tight rein on costs. Undoubtedly this year has been a disappointment for the miners, largely thanks to China’s failure to recover as expected having lifted zero-Covid restrictions. This explains why Rio is trading on a high yield with its shares down more than 16% year-to-date. However, Beijing is taking steps to revive the economy and with it, more than likely, demand for global commodities given the world’s second largest economy is a rapacious consumer of them. This could provide a lift to prices. A third-quarter production update revealed Rio Tinto is performing pretty well as it outlined steps

to get back to record production levels of iron ore as soon as 2025. Iron ore, through its complex of mines in Western Australia, and aluminium, are its two big revenue generators but it also produces copper alongside various other metals and minerals. Berenberg analyst Richard Hatch says: ‘Rio has stable production from its business units, as well as growth from lower-risk expansions/new, lower-cost mines in iron ore and in copper, mostly through the ramp-up of the Oyu Tolgoi mine in Mongolia, in which it owns a 66% stake. We also see cost upside in the Pilbara, based on management targets to pull costs lower in this division long-term.’ Unlike the oil and gas sector, which also looks inexpensive and offers high yields, the mining sector in general, and Rio Tinto specifically, have a key role to play in the energy transition so there are fewer question marks about the sustainability of their business. [TS]

Rio Tinto (p) 6,000 5,000 4,000 3,000 2019

2020

2021

2022

2023

Chart: Shares magazine • Source: LSEG

26 October 2023 | SHARES | 13

Great Ideas: Investments to make today

How this fund has benefited from a focus on cheap stocks in a cheap market Picking mispriced shares can generate healthy profits over the medium term

Schroder Recovery (B3VVG60) 132p Fund size: £825 million

he Schroder Recovery Fund (B3VVG60) aims to generate capital gains superior to the FTSE All-Share Total Return Index, net of fees, over a three- to five-year horizon by investing in ‘UK companies which have suffered a severe setback in either share price or profitability’. The fund was launched back in 1970 and has stood the test of time, beating its target return over one, three and 10 years and matching it over five years. In the year to September 2020 the fund underperformed as investors chased lockdownrelated growth stocks, but in the year to September 2021 and again in the year to this September it has outperformed as value stocks have found favour. ‘The UK equity market has been cheap for some time, and it’s getting cheaper,’ say managers Kevin Murphy and Andrew Lyddon in their secondquarter commentary. ‘While the market appears to be increasingly concerned about runaway inflation, and the Bank of England needing to break the economy to bring it under control, the good news is that this is already priced in. ‘We are confident our focus on cheap stocks (within a cheap market) and minimising fundamental risks will be rewarded with significant outperformance.’ As of the end of September, the portfolio was overweight consumer discretionary, industrial, telecom and real estate stocks compared with the FTSE All-Share Total Return Index, and underweight

14 | SHARES | 26 October 2023

financials, consumer staples and healthcare, the latter by a considerable margin. The top 10 holdings, which made up just over a quarter of the fund by value, were: energy company Petrofac (PFC), infrastructure firm Kier Group (KIE), retailer Marks & Spencer (MKS), highstreet lender Barclays (BARC), Italian energy group ENI (ENI:BIT), shopping centre owner Hammerson (HMSO), Asia-focused bank Standard Chartered (STAN), mining giant Rio Tinto (RIO), retail banking group Lloyds (LLOY) and Royal Mail owner International Distributions Services (IDS). The managers made two changes in the most recent quarter, selling out of power firm Centrica (CNA) and reducing their holding in aero engine maker Rolls-Royce (RR.) as one had reached their estimate of fair value and the other was nearing fair value, which gives an insight into their active approach when it comes to running the portfolio. Other holdings referenced in the report were online fashion retailers ASOS (ASC) and Boohoo (BOO:AIM), free-to-air TV broadcaster ITV (ITV), bus and rail firm FirstGroup (FGP) and car spares retailer Halfords (HFD). Income is paid annually and being the accumulation class is rolled over into buying more shares, while the ongoing charge is 0.89% per annum. [IC]

Schroder Recovery (p) 140 120 100 80 60 2019

2020

2021

Chart: Shares magazine • Source: LSEG

2022

2023

Leading the energy transition and driving positive impact on the environment and society. VH Global Sustainable Energy Opportunities plc (GSEO) invests globally in a diverse range of sustainable energy infrastructure assets, working towards its strategic goals of accelerating the energy transition towards a net zero carbon world and providing shareholders attractive risk-adjusted returns.

Why invest in GSEO? A vehicle presenting a distinctive combination of access, return and impact.

Access

Return

Impact

• Access to global private

• Targeting total NAV return of

• Creating environmental and

• A geographically and

• Progressive dividend target

markets energy investments technologically diversified portfolio of actively managed, high-impact investments which aim to ensure an effective and just climate transition

10%, net of costs and expenses of 5.52p reaffirmed for 2023

• High degree of inflation-linkage with over 90% of revenues that are inflation-linked

social impact transforming lives and communities without compromising on returns

• Transparent impact reporting • SFDR Article 9 fund

• Minimal interest rate risk exposure

LONDON STOCK EXCHANGE TICKER: GSEO

✉ info@victory-hill.com

Find out more by visiting www.vh-gseo.com

Disclaimer Important Information: This document may contain promotional information issued by Victory Hill Capital Partners LLP (VHCP), authorised and regulated by the Financial Conduct Authority (FCA) (FRN 961570). This document is intended for summary information purposes only and does not constitute investment advice. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. It is important to remember that past performance is not a guide to future performance. Furthermore, the value of any investment or the income deriving from them may go down as well as up and you may not get back the full amount invested. The target dividends and total returns referred to in this document are targets only and not a profit forecast. There can be no assurance that these targets can be met. If you are in any doubt about the contents of this document or the suitability of the investment to which it relates, you should seek professional advice.

We’re long-term value investors, known for the depth of our research What makes us different? Aurora Investment Trust plc is a closed-end fund that invests in predominantly UK listed equities and trades daily on the London Stock Exchange. Since January 2016, the portfolio has been managed by the specialist investment boutique, Phoenix Asset Management Partners. Phoenix was founded by Gary Channon in 1998, inspired by the value investing principles of great US investors such as Warren Buffett & Philip Fisher. Phoenix has a unique value approach to stock picking.

We are focused We typically hold 15 to 20 stocks in the portfolio because we believe in backing our best ideas. This gives us sufficient diversification and allows us to concentrate our efforts on what we own.

We stick to what we know We have developed a deep expertise in certain areas and don’t operate beyond them.

We buy to hold Although we are buying shares, we consider ourselves as buying a whole business. Ideally, we look for a company whose prospects are so good we could hold them forever.

We have an aligned fee structure Aurora has a fee structure which aligns Phoenix’s interests with those of investors. There is no management fee. Instead, each year, Phoenix earns one-third of the out-performance above the FTSE All Share. Investors are protected from subsequent under-performance by a “clawback” mechanism.

Winner: Citywire Investment Trust Awards 2022, UK All Companies Category Nominee: Citywire Investment Trust Awards 2023, UK All Companies Category

aurorainvestmenttrust.com

Aurora Investment Trust Plc (“the Trust”) is a UK investment trust listed on the London Stock Exchange. Shares in an investment trust are traded on a stock market and the share price will fluctuate in accordance with supply and demand and may not reflect the underlying net asset value of the shares. There can be no assurance that the Trust’s investment objective will be achieved, and investment results may vary substantially over time. The value of investments and any income from them may go down as well as up and investors may not get back the amount invested. Please refer to the Key Information Document before investing. This can be found at: www.aurorainvestmenttrust.com along with the Prospectus and other regulatory documents. This advertisement is issued by Phoenix Asset Management Partners Limited (PAMP), registered office 64-66 Glentham Road London SW13 9JJ, Company number 03514660. Authorised and regulated in the UK by the Financial Conduct Authority.

Editor’s View: Daniel Coatsworth

All change for ISAs at the Autumn Statement? This is what to expect wealthy individuals can afford to max out their full £20,000 annual allowance. There would be no incentive for the average investor to put more money into UK stocks if they still had an unused ISA here is chatter that the Government allowance under current levels. is open to reforming ISAs, the savings There is also the matter that a large chunk of accounts which shelter capital UK-listed companies generate their earnings gains and income from the overseas and are not a straightforward taxman. The chancellor’s Autumn play on the UK economy. Statement on 22 November might A better way to encourage more shed light on how they might investment in UK stocks would evolve. Ahead of that event, here be to remove stamp duty on is what Shares believes might, or Main Market shares, in line might not, happen. with AIM stocks. One of the key goals for Merging the Cash ISA and reforming ISAs would be to Stocks and Shares ISA would also encourage more people to save be a smart move. Do not expect and invest for their future. To such a change to be ready for the achieve such a goal, the Government new tax year though as financial needs to streamline the ISA range and services companies would need to have less complicated rules. consider launching new products or changing There are six types of ISA in existence – Cash their systems to support the merged ISA type. ISA, Stocks and Shares ISA, Innovative Finance ISA, Meanwhile, someone using a Lifetime ISA to Lifetime ISA, Junior ISA and Help to Buy ISA. The help buy their first home cannot acquire a property latter is closed to new money, but that still means worth more than £450,000 under HMRC rules. savers and investors need to get their head round That might be too low for parts of the country – which of the other ISAs they should use. for example, Rightmove says flats in London sold Currently you can put up to £20,000 across all for an average of £565,147 last year. Might it be types of ISA, while the Lifetime ISA and Junior better to raise the maximum property price under ISA have individual limits at a lower the Lifetime ISA each year? We do not level. One of the suggestions is the expect any imminent change to the Government could let you have an 25% Lifetime ISA exit penalty. ISA reform needs additional ISA allowance specifically for proper consultation Elsewhere, the Innovative Finance investing in UK stocks. ISA has dwindled in popularity and we with the industry The Government is keen to provide would not be surprised if the wrapper and time to decide a boost to the economy and there are closed to new money. suggestions that providing an incentive the best approach We are heading toward an election for investors’ longto back UK businesses is one way to year so chancellor Jeremy Hunt will help. In theory, this could also benefit be looking to secure votes. That means term needs the London Stock Exchange as it could finding quick wins, which is not the drive more interest in the UK market. right approach. ISA reform needs Is it a goer? We do not think so. The average proper consultation with the industry and time subscription to a Stocks and Shares ISA in 2021/22 to decide the best approach for investors’ longwas £8,690 according to HMRC. In reality, only term needs.

There is a lot of talk that the Government wants to reform the savings and investments wrapper

”

26 October 2023 | SHARES | 17

Value with a difference Finding opportunities globally AVI Global Trust plc The AVI Global Trust (AGT) provides expertly managed exposure to the opportunities presented in various parts of the world. The investment strategy identifies valuation anomalies to create a concentrated, unique and diversified portfolio of stocks. The investment manager then engages with these companies to improve shareholder value. Past performance should not be seen as an indication of future performance. The value of your investment may go down as well as up and you may not get back the full amount invested. Issued by Asset Value Investors Ltd who are authorised and regulated by the Financial Conduct Authority.

THIS IS AN ADVERTISING PROMOTION

VALUE INVESTING IS

BACK Why the style is working and how to get involved

By Martin Gamble and James Crux

alue stocks have outperformed growth stocks by 12% since Pfizer (PFE:NYSE) announced the first effective Covid-19 vaccine on 9 November 2020. That’s comparing the MSCI World Value index against the MSCI World Growth index. We have reason to believe the value investing style could soon deliver even bigger outperformance given the shift in the backdrop from cheap money to more normalised interest rates and how that has a big impact on equities. Read on to discover why value should have a place in your portfolio. While value might look like a winner since a Covid vaccine was developed, it is scant reward in the context of the prior 13 years which saw value underperform growth by more than 50% cumulatively based on MSCI World Value and Growth indices.

That was the largest peak to trough fall experienced by value as an investing style since the Second World War, according to JPMorgan Asset Management. The value investment style lost over 40% in 2020 making it the worst ever single year according to data sourced from the Kenneth French data library. Kenneth French is professor of finance at Tuck School of Business at Dartmouth College. His database identifies different factors which explain stock returns, including value, size and risk. In a broader context prior to 2007, value has outperformed growth in every decade since 1927. Pick any year at random during that period and value had a 65% chance of beating growth.

Value underperformed Growth by some margin in the 13 years after the global financial crisis

MSCI World Value index relative to MSCI World Growth index

MSCI World Value index

Value has returned to its long history of outperforming growth MSCI World Value index 27%

MSCI World Growth index 20%

200

MSCI World Growth index

15%

100 0 2010 Rebased to 100 Chart: Shares magazine • Source: LSEG

2015

2020

Rebased to 100. Pfizer announced first Covid vaccine on 9 Nov 2020 Chart: Shares magazine • Source: LSEG. 6 Nov 2020 market close to 13 Oct 2023 market close

26 October 2023 | SHARES | 19

WHY DID VALUE INVESTING FALL OFF A CLIFF FOR 13 YEARS? Given value’s longer-term performance it is natural to ask whether the 13-year bad patch was just temporary or if something structural had changed. JPMorgan argues the era after the financial crisis in 2007 was an unusual period for several reasons. Firstly, it was characterised by persistently low economic growth and falling inflation expectations. When growth is scarce investors pay up for it which causes the premium attached to growth stocks to increase relative to value. Secondly, central banks tackled low growth by artificially keeping interest rates low through quantitative easing policies – buying bonds from banks to encourage them to use the proceeds to lend to businesses. Value tends to do better in higher inflation environments so falling inflation expectations post-2007 had a material impact on the investment style’s performance. Lastly, the effect of cheap money (virtually zero interest rates) pushed up the value of cash flows which occur far into the future. The combination of low growth and inflation amid a zero-interest world effectively turbocharged growth stocks. Investors scrambled to own any company which offered growth, even ones which had little chance of producing profits. Between 2011 and 2021 the price to earnings ratio of growth stocks increased by 115% while value de-rated by 80%, based on MSCI and Bloomberg data. As mentioned, value has made a mini comeback since late 2020 as higher inflation and rising interest rates have tipped the odds back in its favour. But growth stocks still trade at a relative valuation premium which exceeds the peak seen during the dotcom bubble. In other words, value has rarely looked so attractive relative to growth. Could it make a huge comeback? We think so. Asset manager M&G Investments agrees. It argues the factors supporting growth investing

“Value has rarely looked so attractive relative to growth” 20 | SHARES | 26 October 2023

over the last 13 years could be ending while value has further to run: ‘In our view, the decade-long underperformance of value has not yet come close to fully unwinding.’ WHAT IS VALUE INVESTING AND WHY DO STOCKS GET MISPRICED? At its core, value investing involves buying something for less than it is worth which has universal appeal. But in practice there is more to value investing than meets the eye. In partnership with ASSET VALUE INVESTORS

AVI Global Trust (AGT) offers you value with a difference. For over 35 years AVI has followed the same distinctive investment approach, investing in: • Durable businesses which we believe will grow in value; • Trading at discounted valuations; • With catalysts to unlock and grow value. Simple and effective, AVI seeks out high quality growing assets, that are misunderstood and overlooked by other investors. AVI actively engages with the portfolio companies, and looks for special situations where companies are undergoing strategic or structural changes to unlock and grow value. This global, bottom-up index-agnostic strategy has produced attractive returns for AGT shareholders since 1985. To find out more please visit www.aviglobal.co.uk.

Academics such as Ken French and index providers such as MSCI employ a purely quantitative approach to defining value and growth. The MSCI World Value index defines value stocks using several fundamental accounting inputs such as book value, earnings per share and dividends. Stocks with low price to book, low price to earnings and high dividend yields are considered value stocks. Sceptics focus on the use of book value (the net value of a firm’s assets after deducting liabilities) which they argue is less relevant today. That’s because most companies now have intangible assets such as brands and patents rather than simply physical ones such as plant and machinery. While this is a valid criticism, value fund managers argue they have known this for decades and therefore do pay much attention to book value. More importantly, none of the fund managers interviewed by Shares rely on single valuation metrics. IMPORTANCE OF BEN GRAHAM’S PRINCIPLES Investment director Ben Arnold at Schroder Investment Management’s global value team told Shares the essence of value investing is taking a rational approach to assessing the fundamentals of a business and buying at a deep discount to intrinsic value. Arnold argues value investing today relies on the same principles laid down by the ‘grandfather’ of value investing Ben Graham a century ago. The reason companies become mispriced, explains Arnold, is because of behavioural biases which are hard for investors to overcome. Businesses and industries become ‘unloved’ because of a variety of reasons. Arnold offers up the example of the oil and gas industry which is currently disliked because

of structural threats from the green energy transition. Fund manager Ian Lance at Redwheel suggests rather than asking why anyone would want to be a value investor the question to ask is ‘why should investors expect to earn a superior return from buying popular stocks?’ Lance and comanager Nick Purves have more than 50 years of investment experience and manage the valuefocused Temple Bar Investment Trust (TMPL). Lance says the notion that value investors only buy ‘cheap junk’ is a misconception. The fund manager offers up one of today’s stock market darlings to make his point. A decade ago, he held shares in software giant Microsoft (MSFT:NASDAQ) when it traded on a mere eight times earnings.

Microsoft was considered a value stock a decade ago 12-month forward PE ratio 30 20 10 0 2005

2010

2015

2020

Chart: Shares magazine • Source: LSEG

He explains the stock was unloved at the time because investors believed the business had gone ex-growth. Today the software giant trades on 30 times earnings, showing how investor sentiment can change dramatically over time. Both Ben Arnold and Ian Lance believe the primary reason stocks become misvalued is down to behavioural biases. Contrary to popular belief all industries and stocks have the potential to become unloved and therefore mispriced. 26 October 2023 | SHARES | 21

HOW TO GET EXPOSURE TO VALUE VIA INVESTMENT TRUSTS The investment trust structure routinely creates value opportunities for investors as supply and demand imbalances leave the shares of many funds trading on wide discounts to the value of their underlying assets. There are also plenty of trusts that adopt a value investing style. For example, Temple Bar buys stocks selling for less than their true worth or intrinsic value, while the Schroder Income Growth Fund (SCF) puts money to work with out-of-favour firms with potential to generate strong future returns and offers a 5.5% dividend yield. Merchants Trust (MRCH) has increased its dividend for 41 consecutive years. Manager Simon Gergel looks to provide shareholders with an above-average level of income, income growth and long-term capital growth by investing in higher-yielding UK large caps in the main, though he does invest lower down the cap spectrum. Gergel recently described the UK market valuation backdrop as ‘a stock picker’s dream’. Fidelity Special Values’ (FSV) manager Alex Wright has a contrarian approach, looking for unloved stocks with what he believes to possess limited downside and change catalysts, while Law Debenture’s (LWDB) managers James Henderson and Laura Foll run a diversified

Examples of value-style Examples value-style investmentoftrusts investment trusts Investment trust Investment trust

City of London City of London JPMorgan Claverhouse JPMorgan Claverhouse Murray International Murray International Temple Bar Temple Bar Fidelity Special Values Fidelity Special Values Lowland Lowland Merchants Trust Merchants Trust Shires Income Shires Income Aberforth Smaller Companies Aberforth Smaller Companies Castelnau Castelnau Chelverton UK Dividend Trust Chelverton UK Dividend Trust Diverse Income Trust Diverse Income Trust Table: Shares magazine • Source: Morningstar Table: Shares magazine • Source: Morningstar

22 | SHARES | 26 October 2023

Main focus Main focus

Large cap Large cap Large cap Large cap Large cap Large cap Large cap Large cap Mid cap Mid cap Mid cap Mid cap Mid cap Mid cap Mid cap Mid cap Small cap Small cap Small cap Small cap Small cap Small cap Small cap Small cap

portfolio of companies whose long-run prospects are undervalued by the market. Although the US is best known as a growth market, investors can gain exposure to the value theme trough various trusts including BlackRock Sustainable American Income (BRSA), which aims to deliver income and growth from a portfolio of attractively valued dividend-payers, and the quarterly dividend distributing Middlefield Canadian Income (MCT), currently on a 16.7% discount. Middlefield offers exposure to companies in classic value sectors including financials, energy and utilities. Investors after broader exposure to the value theme can also choose from a selection of trusts which look to access growth at a cheap or reasonable price. For example, the cautiously managed STS Global Income & Growth (STS) aims for long-run capital and income growth, with a focus on investing in large, stable, high-quality, dividend-payers. Trusts investing lower down the market cap ranks include Aurora (ARR), which invests using a value-based philosophy inspired by Warren Buffett, Charlie Munger, Benjamin Graham and Phillip Fisher.

Examples of investment trusts with Examples investment a value andofgrowth blendtrusts with a value and growth blend Investment trust Investment trust

Brunner Brunner Dunedin Income Growth Dunedin Income Growth Schroder AsiaPacific Schroder AsiaPacific STS Global Income & Growth Trust STS Global Income & Growth Trust Aurora Aurora AVI Global Trust AVI Global Trust JPMorgan Mid Cap JPMorgan Mid Cap Utilico Emerging Markets Utilico Emerging Markets BlackRock Smaller Companies BlackRock Smaller Companies North Atlantic Smaller Companies North Atlantic Smaller Companies Odyssean Investment Trust Odyssean Investment Trust River and Mercantile UK Micro Cap River and Mercantile UK Micro Cap Table: Shares magazine • Source: Morningstar Table: Shares magazine • Source: Morningstar

Main focus Main focus

FIVE VALUE-FOCUSED INVESTMENT TRUSTS TO BUY

TEMPLE BAR INVESTMENT TRUST (TMPL) 230p

ABERFORTH SMALLER COMPANIES TRUST (ASL) £11.53

TRADING ON A 6% discount to net asset value, Temple Bar offers investors exposure to lowly-valued names with re-rating potential, predominantly selected from the FTSE 350, for an ongoing charge of 0.54%. Managed by Redwheel’s Nick Purves and Ian Lance, Temple Bar’s philosophy focuses on a company’s true worth. They believe investing in stocks selling for less than their intrinsic value builds in a margin of safety and in the long run the built-in value should be recognised by other investors. Cumulative share price and NAV returns since Redwheel took over the mandate in late 2020 have exceeded the FTSE All-Share index. Top 10 positions include oil producer Shell (SHEL), retailer Marks & Spencer (MKS) and broadcaster ITV (ITV).

SMALL AND MID-CAPS should be the first to recover once inflation is tamed and the rate cycle turns. A savvy way to position portfolios for this eventuality is to invest in Aberforth Smaller Companies Trust, currently trading on a 13.3% discount to net asset value. A value-style trust which buys shares in companies the managers calculate to be selling below their intrinsic value, Aberforth Smaller Companies has delivered three-year annualised total returns of 17.1%. Reassuringly diversified across 78 holdings, the fund offers exposure to mid-cap names FirstGroup (FGP), Redde Northgate (REDD) and gold miner Centamin (CEY) as well as small caps including publisher Wilmington (WIL) and retailer Card Factory (CARD).

Temple Bar Investment Trust

Aberforth Smaller Companies

(p)

(£) 1,500

200

1,000

100

500

0 2005

2010

Chart: Shares magazine • Source: LSEG

2015

2020

2005

2010

2015

2020

Chart: Shares magazine • Source: LSEG

26 October 2023 | SHARES | 23

FIDELITY SPECIAL VALUES (FSV) 259p

ODYSSEAN INVESTMENT TRUST (OIT) 140p

AN 8.6% DISCOUNT on Fidelity Special Values presents a compelling entry point into the UK All Companies sector’s best 10-year share price total return performer, up 92.7%. Fidelity Special Values focuses on special situations and undervalued companies. Manager Alex Wright believes that UK company valuations remain relatively attractive compared to other markets and this has been reflected in takeover activity at a number of portfolio companies. Wright insists the smaller end of the market cap spectrum is ‘particularly rich in investment opportunities given the lack of research coverage’.

A YEAR-TO-DATE pullback presents a buying opportunity at concentrated smaller company portfolio Odyssean, which offers an attractive blend of growth and value. Managers Stuart Widdowson and Ed Wielechowski take a private equity style approach to public markets with the aim of generating attractive total returns, principally through long-term capital growth, by purchasing significant stakes in out-of-favour firms trading at discounts to their intrinsic value. They have proven expertise in picking companies that have subsequently been bought by private equity or strategic trade buyers. We believe the trust could be an investor favourite once small caps return to favour. Odyssean has delivered NAV total returns of 27.7% and 48.6% over the past three and five years respectively, handsomely ahead of the 7.2% and 4.7% generated from the AIC UK Smaller Companies sector.

Fidelity Special Values

Odyssean Investment Trust

(p)

300 150 200 100

100

50 2005

2010

Chart: Shares magazine • Source: LSEG

24 | SHARES | 26 October 2023

2015

2020

2018

2019

2020

2021

Chart: Shares magazine • Source: LSEG

2022

2023

Schroder Asia Pacific

SCHRODER ASIA PACIFIC (SDP) 470P

(p) 600

A 12.9% NAV DISCOUNT on Schroder AsiaPacific should pique the interest of bargain seekers. This five-star Morningstar rated fund aims to take advantage of Asia’s domestic growth story through a bottom-up stock picking approach focused on quality companies but which are considered to be undervalued. Offering exposure to large caps ranging from electronics giant Samsung (005930:KRX) to Chinese tech and entertainment conglomerate Tencent (0700:HKG), the Richard Sennitt and Abbas Barkhordar-managed trust invests in companies located in Asia excluding the Middle East and Japan, together with the Far Eastern countries bordering the Pacific Ocean.

IN NEXT WEEK'S SHARES Out on 02 November

400

200

0 2005

2010

2015

2020

Chart: Shares magazine • Source: LSEG

With competitive ongoing charges of 0.84% and a 2.5% dividend yield on offer, the fund has an impressive long-term track record, having delivered decade-long total returns ahead of the AIC Asia Pacific sector and the Morningstar Asia ex-Japan index.

HOW TO INVEST: IN AN ERA OF HIGHER RATES

26 October 2023 | SHARES | 25

Value with a difference Finding opportunities in Japan AVI Japan Opportunity Trust plc The AVI Japan Opportunity Trust (AJOT) was launched five years ago to invest in a focussed portfolio of over-capitalised small-cap Japanese equities. Asset Value Investors will leverage its three decades of experience investing in asset-backed companies to engage with company management and help to unlock value in this underresearched area of the market. Past performance should not be seen as an indication of future performance. The value of your investment may go down as well as up and you may not get back the full amount invested. Issued by Asset Value Investors Ltd who are authorised and regulated by the Financial Conduct Authority.

Feature: Value stocks

Academics will argue that PEs aren’t a true Three quick and reflection of a company’s growth, financial health or value, but just a short-term ratio for comparing relative value among different companies or easy ways to asset classes. That may be true, but they are also a screen the market quick and easy way of measuring what price investors are prepared to pay for a stock and for value stocks the valuation metric can be applied to almost

We uncover some of the cheapest stocks the UK has to offer

ccording to Charlie Munger, Warren Buffett’s highly respected colleague and co-manager of Berkshire Hathaway (BRK.B:NYSE), ‘All intelligent investing is value investing, acquiring more than you are paying for.’ Or, as Howard Marks of Oaktree Capital Management puts it, ‘It’s not what you buy, it’s what you pay, and success in investing doesn’t come from buying good things but from buying things well.’ So, what simple checks can we do as private investors to see whether stocks which catch our eye are not just good businesses but are worth more than they are selling for? QUICK AND EASY By far the simplest and most popular method of valuing stocks is comparing the share price to a company’s earnings, or the PE ratio for short.

any company.

WHAT DOES THE PE RATIO MEAN? When all is said and done, analysts’ forecasts for sales, margins, currency impact, operating costs, depreciation and even tax, boil down to the earnings per share, so the PE ratio is as good a proxy as any when it comes to measuring a firm’s progress. Simply put, if a stock is on a PE of 10 it means you are paying 10 times this year’s forecast earnings to own its shares. Put another way, it would take you 10 years to get back your investment in the form of earnings if they stayed at the current level indefinitely. The PE is calculated by dividing the latest share price by the expected earnings per share. As a rough rule of thumb, a PE above 20 is considered to be a premium rating or expensive, something between 10 and 20 is in fair value territory – it varies on a sector-by-sector basis – and something on a PE below 10 is cheap. Just remember that some stocks are cheap for a negative reason and deserve to be on a low PE. 26 October 2023 | SHARES | 27

Feature: Value stocks

A selection of FTSE 350 stocks on low forward price to earnings ratios

PE Ratio

5 year average PE

7.4

14.0

Standard Chartered

6.7

13.5

British American Tobacco

6.6

10.4

6.5

7.4

HSBC

6.2

11.2

Imperial Brands

6.2

10.8

Redde Northgate

6.1

9.1

Lloyds

5.7

10.8

NatWest

5.0

9.3

Barclays

5.0

7.3

IAG

4.6

2.3

Drax

3.0

17.5

Just Group

2.8

7.2

Company

Price year-to-date 17% 20% −24% 6% 26% −17% −23% −5% −13% −4% 14% −39% −6%

Data correct as of 18 October 2023 Table: Shares magazine • Source: Sharepad, Stockopedia

A quick screening of the FTSE 350 index using SharePad and based on 12-month forward earnings shows 87 stocks with a PE ratio of less than 10, which if nothing else demonstrates the UK market is full of what would appear to be cheap companies. At the cheapest end of the spectrum are life insurance firm Just Group (JUST), electricity producer Drax (DRX), travel group International Consolidated Airlines (IAG) and high-street banks Barclays (BARC) and NatWest (NWG) on PEs ranging from 2.8 to five times expected earnings. In fact, all of the ‘Big Four’ UK lenders have mid-single-digit PEs, as does Standard Chartered (STAN), along with telecoms provider BT (BT.A) and tobacco groups British American Tobacco (BATS) and Imperial Brands (IMB). On its own, this is interesting information, but it becomes even more interesting when we compare the current ratios with each company’s average rating over say five or 10 years. 28 | SHARES | 26 October 2023

Feature: Value stocks

A selection of FTSE 350 stocks on low price to earnings growth ratios Company

PEG ratio

Vodafone

0.8

−8%

Kingfisher

0.8

−14%

Imperial Brands

0.7

−17%

JD Wetherspoon

0.7

Frasers

0.6

Aviva

0.6

−8%

Barratt Developments

0.5

Legal & General

0.4

−14%

Mitchells & Butlers

0.3

Standard Chartered

0.3

Drax

0.2

Currys

0.2

−16%

Just Group

0.2

−6%

Price year-to-date

46% 12%

52% 20% −39%

Data correct as of 18 October 2023 Table: Shares magazine • Source: Sharepad

Using averages taken from Stockopedia, we can see that Just Group for example is trading at less than half its five-year average PE, while BP is trading almost bang on half its five-year average and most of the banks and tobacco stocks trade at just over half their historic average PEs. The question is, why are investors only willing to pay such a low multiple of future earnings for these stocks? We can think of a couple of possible explanations: maybe investors think earnings forecasts are too high, and therefore the PEs are wrong, or they think these companies aren’t capable of growing their earnings, as growth is an important part of most people’s investment strategy as well as value. HOW TO VALUE GROWTH? USE THE PEG RATIO If growth is a concern, a quick way to measure the market valuation against expected earnings growth is to divide one by the other to create a price to earnings growth or PEG ratio. If a company has a PE of 10 and grows its earnings by 10%, its PEG is one, while if its PE is 5, like many of the stocks in our screening, and earnings growth is 10%, the PEG ratio is 0.5 or half the expected growth rate. A rough rule of thumb is that stocks on a PEG of less than 1 are cheap relative to the growth on offer. Using SharePad to screen the FTSE 350 using forward growth rates throws up a rather different list of names at the bottom of the value pile than plain PE ratios. Out go the banks, with the exception of Standard Chartered, and in come an assortment of insurers, 26 October 2023 | SHARES | 29

Feature: Value stocks

A selection of FTSE 350 stocks on low price to book ratios Company

Price to book ratio

Price year-to-date

0.8

British American Tobacco

0.7

−24%

Redde Northgate

0.7

−23%

Barratt Developments

0.7

Lloyds

0.6

−5%

NatWest

0.6

−13%

Kingfisher

0.6

−14%

Mitchells & Butlers

0.6

Standard Chartered

0.5

Vodafone

0.4

−8%

Just Group

0.4

−6%

Barclays

0.4

−4%

Currys

0.3

52% 20%

−16%

Data correct as of 18 October 2023 Table: Shares magazine • Source: Sharepad, Stockopedia

pub groups and retailers, although like the stocks in the PE table the majority are down on the year in share-price terms. Just Group is still the cheapest stock in the market on a PEG ratio of 0.2, while Drax looks equally unloved. The presence of retailers Currys (CURY) and Kingfisher (KGF) suggests investors are concerned their earnings may be at risk from the cost-of-living crisis, which seems to be borne out by their weak share prices year-to-date. Having Frasers (FRAS) on the list of low PEG stocks is a surprise given it has been doing well as a business. USING PRICE TO BOOK As well as earnings, we can measure the value of a business by dividing the share price by the ‘book value’ or net asset value, also known as NAV. Investors in the real estate investment trust sector will be used to using NAVs, but for 30 | SHARES | 26 October 2023

ordinary equity investors it is the per-share value of the business’s net assets, which is what the company would be worth if it had to be liquidated. Using SharePad again to screen the FTSE 350, this time using trailing 12-month price-to-book – since no-one can necessarily forecast forward net asset values – we get an intriguing combination of the first two tables, i.e., banks, telecoms, retailers and tobacco, plus Just Group, which appears to be the cheapest stock in the market whichever way we look at it. Hopefully, we have provided investors with a short-list of stocks which at least look cheap on a couple of simple metrics and may merit further investigation. By Ian Conway Companies Editor

Discover the power of Collective Wisdom. We live in an uncertain world. For investors this can mean new levels of volatility. But at Witan we have consistently grown our dividend

for 48 years. Our multi-manager approach offers a combination of collective wisdom, variety and expertise to our shareholders. Discover the Witan approach to global equity investment. witan.com

Discrete Performance*

Q4 2017 Q4 2018

Q4 2018 Q4 2019

Q4 2019 Q4 2020

Q4 2020 Q4 2021

Q4 2021 Q4 2022

Share price

-8.1%

22.1%

2.7%

11.9%

-9.8%

Net Asset Value**

-8.4%

21.3%

4.2%

15.8%

-10.2%

Benchmark#

-6.6%

20.1%

9.5%

19.9%

-6.2%

This financial promotion was approved by Witan Investment Services

Ltd FRN: 446227 on 13 February 2023. Please note that past performance is not a guide to future performance. Witan Investment Trust is an

equity investment. The value of an investment and the income from it can fall as well as rise as a result of currency and market fluctuation and you may not get back the amount originally invested.

*Source: Morningstar/Witan. Total return includes the national investment of dividends. ** The Net Asset Value figures value debt at fair value. # Witan’s benchmark is a composite of 85% Global (MSCI All Country World Index) and 15% UK (MSCI UK IMI Index). From 01.01.2017 to 31.12.2019 the benchmark was 30% UK, 25% North America, 20% Asia Pacific, 20% Europe (ex UK), 5% Emerging Markets.

Exchange-Traded Funds: Trackers with a value focus

ETFs can be a powerful tool in building your value investment strategy Low-cost funds offer wide diversification without the hours of research needed to pick individual stocks

f you started your investing journey at any point in the dozen or so years prior to the global pandemic, today’s challenges will look very strange to you. The decade or more market environment of low inflation and ultra-low borrowing costs was a fertile framework for growth investing, yet the reopening of the world postCovid has cooked up a toxic stew of wealth-sapping inflation and rising interest rates. Whether the pendulum has meaningful swung to traditional ‘value’ strategies remains an open question, but if you are starting to think that your personal portfolio could do with a little more exposure to companies that derive their intrinsic value from their ability to generate cash, pay reliable dividends, and provide a bit more margin of safety for investors during uncertain times, you are not alone. Value investing is an approach that places a high emphasis on pricing anomalies in the market. A value strategy requires seeking out companies where the current price of a stock undervalues the business, in the expectation that over time the true value of the business will be recognised, and the stock will be re-rated by the market. There are risks. Many businesses whose shares trade on a low price to earnings multiple do so for good reason. They may have wafer thin profit margins, little revenue visibility, are structurally challenged, being managed poorly by the top brass or a combination of all or more of these factors. INCREASING EXPOSURE TO VALUE THROUGH ETFS Which is why ETFs with a value slant can add real ‘value’ to investors, neutralising the need for

32 | SHARES | 19 October 2023

lot of detailed research while spreading the risk in the hope that the performance of those stocks that do re-rate higher over time will outgun those that do not. Finding suitable ETFs for this purpose is made easy too. There are any number of websites and data services, some free, others paid-for, but Shares has found JustETF.com to be a good place to search cross-assets and cross-styles. Concentrating on equities in this feature, the ETF Screener tool allows you to zoom in on equitybased ETFs-only, before refining your search further by selecting the Equity Strategy, then Value options. This throws up a list of 25 ETFs, which Just ETF assesses as having a value investment aim. Some offer global exposure, others are more specific, focused on geographic markets, such as the US, Europe, Emerging Markets, or other focused strategies within a value remit. The ETFs come with annual charges ranging from 0.18% to 0.75%. It is worth noting some of the funds are listed on the German XETRA market, although these should be available on most investment platforms. HIGHLIGHTING VALUE ETFS The iShares Russell 1000 Value ETF (R1VL) is London-listed and offers the lowest annual charges of the value ETF options, with an ongoing charge of 0.18%. The fund seeks to match the Russell 1000 Value UCITS 30/18 Capped index, which itself tracks the large-cap value segment among US stocks. The top holding is Warren Buffett’s Berkshire Hathaway (BRK.B:NYSE), followed by Exxon Mobil (XOM:NYSE), JPMorgan Chase

Exchange-Traded Funds: Trackers with a value focus Examples of value ETFs Examples of value ETFs

Fund size Fund (£m) size (£m) 2

Annual charges Annual charges 0.65%

Five- year performance Five- year performance 81.2%

Ossiam Shiller Barclays USBarclays Sector Value 1C (USD) ESG Low CarbonCAPE Shiller CAPETR USUCITS SectorETF UCITS ETF 1A (USD)

2 515

0.65% 0.75%

81.2% 63.3%

Ossiam Carbon Barclays CAPE US ETF Sector UCITS ETF 1A (USD) UBS ETFESG (IE) Low Factor MSCIShiller USA Prime Value UCITS (USD) A-dis

515 408

0.75% 0.25%

63.3% 57.0%

UBS ETFShiller (IE) Factor MSCI USAEurope Prime Value (USD) ETF A-dis1C (EUR) Ossiam Barclays CAPE SectorUCITS Value ETF TR UCITS

408 146

0.25% 0.65%

57.0% 45.9%

Ossiam Barclays Sector Value TR UCITS ETF 1C (EUR) UBS ETFShiller (IE) MSCI USA CAPE Value Europe UCITS ETF (USD) A-dis

146 572

0.65% 0.20%

45.9% 41.6%

UBS (IE)USA MSCI USAWeighted Value UCITS ETFETF (USD) A-dis SPDRETF MSCI Value UCITS

572 96

0.20%

41.6% 33.8%

SPDR MSCI Value Weighted UCITS ETFUCITS ETF (hedged to GBP) A-dis UBS ETF (IE)USA Factor MSCI USA Prime Value

96 9

0.20% 0.30%

33.8% 32.7%

UBS ETF (IE) to GBP) A-dis (LU)Factor FactorMSCI MSCIUSA EMUPrime PrimeValue ValueUCITS UCITSETF ETF(hedged (EUR) A-dis

9 119

0.30% 0.28%

32.7% 32.5%

UBS (LU) FactorValue MSCIUCITS EMU Prime SPDRETF MSCI Europe ETF Value UCITS ETF (EUR) A-dis

119 26

0.28% 0.20%

32.5% 31.0%

SPDR MSCI Value UCITS iShares EdgeEurope MSCI Europe Value ETF Factor UCITS ETF EUR (Dist)

26 32

0.20% 0.25%

31.0% 30.7%

iShares Edge MSCI Europe Value Factor UCITS ETF EUR (Dist)

32 2

0.25%

30.7% 30.2%

iShares Edge MSCI Europe ValueFactor FactorUCITS UCITSETF ETFUSD (Dist) World Value

2 112

0.25% 0.30%

30.2% 28.1%

iShares Edge MSCI World Value Factor UCITS ETF USD (Dist) Russell 1000

112 6

0.30% 0.18%

28.1% n/a

iShares Russell 1000 HSBC MSCI World Value ESG UCITS ETF

6 136

0.18% 0.25%

n/a

HSBC MSCI World Value ESG UCITS ETF

136

0.25%

n/a

ETF ETF Ossiam Shiller Barclays CAPE US Sector Value TR UCITS ETF 1C (USD)

Table: Shares magazine • Source: JustETF

(JPM:NYSE), Johnson & Johnson (JNJ:NYSE) and Procter & Gamble (PG:NYSE). Do not be put off by the meagre £6 million of assets under management, the fund was only launched in June 2023, and we would expect it to attract plenty of investor interest over the coming months, particularly if value strategies start meaningfully outperforming. The SPDR MSCI Europe Value ETF (EVAL) applies its value strategy to the MSCI Europe Value Exposure Select index, which tracks large and medium-sized European companies with a higher quality slant. In other words, it tracks the wheat of the wider MSCI Europe Index while cutting lose the chaff. Top stakes include London-listed companies British America Tobacco (BATS), Shell (SHEL) and HSBC (HSBA), plus large caps from France – STMicroelectronics (STMPA:EPA), Stellantis (STLAP:EPA), Germany – Deutsche Post (DHL:ETR), and Switzerland – Novartis (NOVN:SWX) and Roche (ROG:SWX).

CHECKING UNDER THE BONNET With an ongoing charge of 0.25% HSBC MSCI World Value ESG ETF (HWVS) is the cheapest way to track the MSCI World Value SRI ESG Target Select index, a collection of stocks from developed countries worldwide which are selected according to the value factor strategy and ESG criteria (environmental, social and corporate governance). The parent index is the MSCI World index. That biggest holdings include tech heavyweights like Microsoft (MSFT:NASDAQ), Apple (AAPL:NASDAQ) and Adobe (ADBE:NASDAQ) many have some readers wondering about the value credentials, so a little further digging may be required to assess if this is a value ETF for you, although there is plenty of insight information available on its website. By Steven Frazer News Editor

19 October 2023 | SHARES | 33

Emerging markets outlook Sponsored by Templeton Emerging Markets Investment Trust

The big South Korea emerging markets debate goes on MSCI continues to exclude South Korean stocks from its developed market indices

t is the 12th largest economy in the world with a higher GDP per capita than countries like New Zealand, Italy and Japan and yet South Korea remains in index provider MSCI’s emerging market basket. This means the MSCI Emerging Markets index enjoys exposure to a market with many characteristics of a developed market – notably FTSE Russell diverges from MSCI in classifying South Korea as such. The remaining sticking point, which saw MSCI keep South Korea in its current position in its latest annual review in June 2023 and fail to include it in its watchlist for effective promotion, is accessibility for outside investors. South Korea has introduced some reforms in areas like improving access to its foreign exchange market and easing overseas ownership limits in stocks but has not yet gone far enough for MSCI’s liking.

Still, the South Korean market has delivered robust performance of late. MSCI Korea advancing 26.2% over the 12 months to 29 September 2023 – compared with 22.6% for the developed market MSCI World index and 12.2% for the MSCI Emerging Markets index. The fortunes of South Korean shares are heavily tied to consumer electronics giant Samsung (005930:KRX), whose weighting in the MSCI Korea index is more than 30.5%. Technology in general dominates, with a weighting of 46% which highlights the level of innovation in the South Korean economy. This outlook is part of a series being sponsored by Templeton Emerging Markets Investment Trust. For more information on the trust, visit www.temit.co.uk

MSCI Korea – sector breakdown Health care (4.6%)

Other (4.1%)

Communication services (5.9%) Consumer discretionary (8.6%) Information technology (46.0%) Financials (9.0%)

Materials (9.5%) Industrials (12.3%) Chart: Shares magazine • Source: MSCI, data to 29 September 2023

34 | SHARES | 26 October 2023

Emerging markets outlook Sponsored by Templeton Emerging Markets Investment Trust

Emerging markets: Golden Week for China as developing world beats the dollar blues Three things the Franklin Templeton emerging markets team are thinking about right now

cost of foreign currency debt and tighter liquidity. As there is no uniform EM interest rate trend in the current cycle—Brazil and China are cutting rates while Turkey is raising rates—the historic relationship between the US dollar and emerging markets may not hold as strong. A divergence in performance already occurred in the Q3 period, as domestically-focused markets such as India outperformed externally-focused ones including Taiwan and South Korea.

TEMPLETON EMERGING MARKETS INVESTMENT TRUST (TEMIT)

Golden Week: The first week of October in China is known as national Golden Week. It is a period when workers take time off for travel and entertainment. Investors monitor the holiday to assess household spending trends, as well as sector beneficiaries. Daily trips on China’s railways set a new record of 20.1 million on 29 September, the first day of the holiday. We are monitoring sales data and company updates in the hotel, airline and property sectors for signs of a change in the current cautious spending trend. Higher for longer: The US Federal Reserve’s (Fed) dot plot, a summary of economic projections for interest rates, indicates US rates will be higher for longer. Updates from Asian manufacturers supplying household goods to US retailers indicates demand in the thirdquarter (Q3) period was better than expected. Nevertheless, the cumulative impact of 11 Fed interest rate increases since March 2022 is eroding US household purchasing power. This creates downside risks for demand and in turn emerging market (EM) exports. US dollar strength: The greenback strengthened in the Q3 period, following a weakening trend in the prior two quarters. EMs have historically struggled during periods of US dollar strength due to factors including higher

Porfolio Managers

Chetan Sehgal Singapore

Andrew Ness Edinburgh

TEMIT is the UK’s largest and oldest emerging markets investment trust seeking long-term capital appreciation.

Are you an Emerging Markets Guru? 10 quick questions – some amazing answers. Take the quiz and see how you score. 26 October 2023 | SHARES | 35

Funds: Stewart Investors Worldwide Sustainability

The fund that picks good companies which also do good for the planet Stewart Investors Worldwide Sustainability has an interesting approach to investing

iscerning investors who are looking for well-managed, well-capitalised companies with a sustainable edge have been finding their way to the Stewart Investors Worldwide Sustainability Fund (B7W3061) steadily over the past decade. A £10,000 investment in the fund 10 years ago would be worth £22,372 today, although at the peak towards the end of 2021 it would have been worth just over £28,000 according to Morningstar data.

Stewart Investors Worldwide Sustainability (p) 300 200 100 2014

2016

2018

2020

2022

2024

Chart: Shares magazine • Source: FE Fundinfo

WHAT MAKES THIS FUND DIFFERENT? The use of the word ‘sustainabilty’ in the fund’s name isn’t a case of the firm jumping on the ESG (Environmental, Social and Governance) bandwagon, it is central to the way the managers think about the companies in which they invest. In any case, the fund pre-dates the ESG boom and its focus on sustainability has its roots in Stewart Investors’ many decades of experience 36 | SHARES | 19 October 2023

investing in Asia, where, as product specialist Clare Wood puts it, ‘if you didn’t do proper due diligence on management and the sustainability of the business you were very likely to lose your money.’ The managers assess companies on three criteria. First, companies with a sustainable business tend to have been around a long time and tend to have high-quality management who have a long-term vision and are good ‘stewards’ of shareholders’ money. Second, and key to a company’s sustainability, is the quality of its business franchise, including its ability to grow. Third is the quality of the firm’s financial position and its reporting – the managers are only interested in businesses with strong balance sheets, preferably with net cash, ‘clean reporting’ with no financial engineering, and a conservative approach to accounting. Combining these qualities with businesses which are sustainable in the ‘green’ sense, in that they do good rather than harm, means the pool of companies in which the fund can invest is much smaller than other global funds. WHAT DOES THE FUND AVOID? ‘We don’t own luxury stocks, because although they undoubtedly have great management, great franchises and solid balance sheets, what they do doesn’t sit with our sustainable approach,’ says Wood. Nor does the fund invest in solar or wind companies, because although the energy they

Funds: Stewart Investors Worldwide Sustainability produce is clearly sustainable their franchises aren’t high-quality and neither are their finances. On the other hand, so long as they fit the quality criteria, financial companies can be a force for good, particularly in emerging markets where access to basic banking services is one of the first steps for people lifting themselves out of poverty. ‘We obviously pay attention to what is going on in the world in terms of interest rates and economic growth and so on, but that has no impact at all on how we build the fund or which stocks we own,’ says Wood. North America accounts for just over a quarter of the portfolio against almost two thirds in the MSCI All-Countries World Net Index (the fund’s benchmark), while EMEA (Europe, the Middle East and Africa) accounts for nearly 40% against just 12.5% for the index. The same is true at a sector level, where healthcare is the biggest position at 25% of the portfolio against less than half that level for the index, and industrials and consumer staples which jointly make up over 30% of the portfolio against just over half that figure in the index. COMPETITION FOR A PLACE IN THE PORTFOLIO Describing the stock selection process, Wood likens the fund to a Premier League football club where there is ‘constant competition for a place not just on the team but also on the bench’. The portfolio includes US cybersecurity firm Fortinet (FTNT:NASDAQ), Swiss pharmaceutical giant Roche (ROG:SWX) and German semiconductor maker Infineon (IFX:ETR). It also has stakes in UK safety equipment firm Halma (HLMA), Italian diagnostic specialist DiaSorin (DIA:BIT) and French biotech company SOCIAL AND ENVIRONMENTAL FOCUS As of 30 June 2023, the fund held 50 companies, all of which were contributing to at least one human development pillar such as healthcare, housing, standard of living and education. Just under three quarters of companies in the portfolio (72% or 36 stocks) were contributing to climate change solutions.

Fortinet in included in its portfolio

BioMerieux (BIM:EPA), among others. The managers rarely sell stocks, and if they do it tends to be for one of two reasons: either the shares have performed spectacularly well, in which case the valuation has become too stretched, and the managers will look to reinvest at a lower multiple going forward; or the investment case has changed and either the management, the franchise or the financials are no longer compelling. Two recent sales were Japanese robotics maker Fanuc (6954:TYO), where the team grew concerned over the firm’s rising capex needs and its ability to fend off cheaper Chinese competition, and electronics manufacturer Tokyo Electron (8035:TYO), whose valuation has soared four-fold since 2020. ‘For tech stocks, the outcome is often binary,’ says Wood. ‘All the time the company is doing well, that’s fine, but if it warns and the shares have quadrupled it’s not going to be fine.’ Interestingly, the managers are not only standing by their investment in Dutch payments firm Adyen (ADYEN:AMS), a former fintech ‘darling’ whose shares have more than halved in the last two months, they have added to their holding. ‘Adyen was involved in a price war with Paypal (PYPL:NASDAQ), but it turns out the US firm was losing money in its attempt to gain market share so it called a truce. We think Adyen is a much better business than Paypal anyway and will pick up a bigger share of more complex transactions,’ explains Wood. By Ian Conway Companies Editor

Source: Stewart Investors

19 October 2023 | SHARES | 37

ADVERTISING PROMOTION

TR Property:

your one-click property portfolio

TR Property Investment Trust’s fund manager, Marcus Phayre-Mudge, looks at why many property companies are well positioned to wait out high inflation. TR Property has focused solely on the property sector since 1984, offering diverse exposure to the UK and European property markets, primarily through listed real estate equities. The Trust has beaten its benchmark in 11 of the past 12 years.

Over the long term listed property can act as a wealth generator, due to its virtue of producing index-linked, and therefore inflation-proof, income. Across much of TR Property’s pan-European investment universe, rental increases are tied to national inflation, giving property owners and operators excellent protection against the erosion of their earnings. Yet, property investments succumb to two main sicknesses. One is an oversupply of (or collapse in demand for) physical real estate. The other is when the cost of money shoots up, making debt more expensive. It is this latter factor that is responsible for most downward price action over the last 18 months. Investors panicked about inflation and the resultant rising cost of borrowing. The good news is that many property companies still have very manageable loan-to-value ratios, with debt that is fixed longer-term. Meanwhile, we have focused vociferously on weeding out companies that have borrowing burdens they are no longer able to cope with. Imagine you have two friends, both of whom bought their flats two years ago. One is on a floating rate mortgage and winced as higher mortgage costs ate away at their disposable income. The other secured a five-year fixed deal, so isn’t overly worried about what is happening to interest rates presently. The same situations are playing out in our world but on a much bigger scale – and this demonstrates how the impact of rate rises are neutral for some companies.

Nonetheless, listed real estate is highly sensitive to the sentiment that accompanies prolonged inflation. At time of writing, the terrible events unfolding in the Middle East have thrown further uncertainty into an already fragile global economy. The side effect may be that energy prices and inflation remain higher for longer. At TR Property we are consistently hearing that the companies we invest in are sound, with few tenant defaults and healthy occupancy levels. In the case of industrials, logistics, student accommodation and prime city centre offices, rents are rising. Market cycles over the last 30 years have shown that when interest rate projections do peak, property equities recover much more sharply than the wider stock market. This recovery should be supported by the fact there are many sub-sectors where demand remains strong. We continue to focus on companies operating in supply-constrained sectors that have little near-term refinancing, manageable loan-to-value ratios and all importantly, the ability to grow their earnings through indexation. Selecting individual property stocks and REITs is time, resource and expertise intensive – especially during a period of uncertainty. Our aim at TR Property is to make it easy to gain broad, balanced exposure to the UK and European property sector with one click.

Danni Hewson: Insightful commentary on market issues

Confidence is in short supply but that can create opportunities It pays to avoid short-term decisions when it comes to investing

was lucky enough to attend an investor event in Leeds recently and the subject everyone wanted to discuss was confidence or at least the lack of it. There are plenty of reasons investors are feeling shaky not least concerns about the potential impact of the Israel-Gaza war and, closer to home, fears that inflation might prove stickier than had been hoped. CONSUMER CONFIDENCE ON THE FLOOR Consumer confidence, both in the UK and in the US has dropped away, not the kind of trajectory that warms hearts as we plough deeper into the ‘golden quarter’. That lack of confidence, that uncertainty is influencing investor behaviour and shaping global financial markets with both the FTSE 100 and 250 down since the start of the year – the latter almost 10% as UK shares struggle to find the front foot. But it’s crucial not to make short term decisions, to remember that current instability will be transient and that investing as a long game means downturns can actually present opportunity. Looking back to 2020 as mutterings about Covid-19 turned into pandemic lockdowns, confidence took a similar dip with several big stocks diving and some new names emerging as

pandemic winners. The oil price plummeted as the global economy ground to a halt. It’s almost surreal to remember shuttered shops and discussions about negative interest rates. Fast forward to where we are now, and those stocks have enjoyed impressive gains as the world continued spinning and what passes for normal service has been resumed, all be it with a few inflation-fuelled tweaks. PANDEMIC WINNERS BECOME POST-PANDEMIC LOSERS Conversely many pandemic winners have become post-pandemic losers. Homeworking has become entrenched, but we’ve adapted to a hybrid

UK GFK Consumer Confidence 0 −10 −20 −30 −40

2014

2016

2018

2020

2022

2024

Chart: Shares magazine • Source: LSEG

26 October 2023 | SHARES | 39

Danni Hewson: Insightful commentary on market issues

Pandemic Pandemic winners winners became became post-pandemic post-pandemic losers and vice versa losers and vice versa Company Company Frasers Frasers Shell Shell Natwest Natwest Ocado Ocado Persimmon Persimmon Marriott International Marriott International Starbucks Corp Starbucks Corp Zoom Communications Zoom Communications

Performance 1 Jan to 1 Performance 1 Jan to 1 May 2020 (%) May 2020 (%)

Performance 1 May Performance 1 May 2020 to 23 Oct 2023 2020 to 23 Oct 2023 (%) (%)

−45.1 −45.1

217.0 217.0

−46.4 −46.4

128.0 128.0

−52.9 −52.9

76.3 76.3 26.3 26.3 −18.1 −18.1

−44.0 −44.0

−69.4 −69.4 −57.0 −57.0 122.0 122.0

−16.1 −16.1 10.4 10.4

27.6 27.6 −55.5 −55.5

Table: Shares magazine • Source: LSEG Table: Shares magazine • Source: LSEG

model which has lessened the ubiquity of video feel about your finances and your financial future. conferencing services and now we don’t have to Mitigating that risk doesn’t mean playing it queue around the supermarket car park, popping to safe. It doesn’t mean throwing everything into a the shop is a much more desirable option for people cash cushion because the returns on cash savings more interested in bargains than convenience. look positively obscene compared to what we’ve There’s always an outlier and UK housebuilders been used to over the last decade. We’ve all only enjoyed a brief moment of optimism before come up close and personal with inflation. We’ve the weight of increased borrowing costs caused the experienced its impact on our living standards, on sector to buckle. our wages and its crucial we understand that our But with a UK election hurtling towards us expect savings aren’t exempt. a plethora of housebuilding pledges and schemes to help buyers get on or climb up the ladder. TIME IS YOUR FRIEND While we can all spot potential opportunities, So many people I spoke to in Leeds hadn’t really without a crystal ball or some kind of Warren got to grips with that little conundrum and its Buffet-esque superpower it’s impossible to predict understandable that headlines about war, about the timing of stock market fluctuations but the geopolitical uncertainty are taking a toll on man himself advises us ‘to look at market people’s investing confidence. But like fluctuations as your friend rather than life, markets are cyclical and despite your enemy’. the dismal outlook the current crop of Risk isn’t a In the last couple of weeks there have earnings has been remarkably robust. bad thing, its been countless articles espousing the Buying the dip isn’t new and whilst just a measure virtues of refreshing your stock shopping there are no guarantees that past of how you feel list, targeting companies you’d rather like performance will be repeated; finding about your to add to your portfolio if they reach a good value, good quality opportunities finances and price that appeals. And it’s here that the from that dip is a favoured tactic of many your financial unsettling volatility, those fluctuations an institutional investor. Remember time can actually work in your favour. Risk isn’t future. is your friend, even if you’re not feeling a bad thing, its just a measure of how you particularly confident today.

”

40 | SHARES | 26 October 2023

Strategic Equity Capital plc

Aiming to create long-term value from a private equity approach Strategic Equity Capital plc - Looking to deliver growth from an active, concentrated, UK smaller listed companies portfolio

strategicequitycapital.com Capital at risk. I nvestments in smaller companies typically involve a higher degree of risk. Not an investment recommendation.

Ask Tom: Your retirement questions answered

Might we see changes to the triple-lock state pension system in the future? A reader wants to know if the system could be radically different when they retire in three decades’ time

I am in my 30s and each year I’ve seen the triple lock policy means that the state pension goes up by quite large amount – often by more than my salary. I’m not against the state pension going up, but I wonder if I will ever see the benefit that those in their 60s and 70s are seeing now. How long will this policy be guaranteed for? And is the system likely to be hugely different by the time I retire in three decades’ time? Shane, Derby Tom Selby, AJ Bell Head of Retirement Policy, says:

Let’s start with how the state pension works and what the triple-lock is before getting our crystal ball out. Anyone who reaches state pension age from 6 April 2016 onwards builds up an entitlement to the ‘new’ state pension. You need a 35-year National Insurance (NI) contribution record to qualify for the full new state pension, and at least a 10-year NI record to qualify for some. For every year below 35 years’ NI contributions you have built up, a deduction will be made to the benefit you receive from state pension age. In most cases you will build up years of NI naturally through your career, but it is also possible to claim NI credits 42 | SHARES | 26 October 2023

in certain circumstances, such as if you take a career break to care for your child or an elderly relative. The UK state pension age is currently 66. It is scheduled to rise to age 67 between 2026 and 2028, and again to age 68 between 2044 and 2046. The full new state pension is worth £203.85 per week (£10,600.20 per year) in 2023/24. The ‘old’ state pension, paid to those who reached state pension age before 6 April 2016, is worth £156.20 per week (£8,122.40 per year). The old state pension amount is lower than the new state pension because under the old system, people could also build up entitlement to additional state pension, usually referred to as ‘SERPS’ or ‘S2P’. Depending on your circumstances, this could have entitled you to a much higher state pension than the basic amount. THE STATE PENSION TRIPLE-LOCK The ‘triple-lock’ is a political pledge to increase the old and the new state pension by the highest of average earnings growth, consumer prices index (CPI) inflation or 2.5%. Any additional state pension entitlements built up under the old state pension system usually increase in line with CPI only. Other benefits, such as pension credit, also tend to rise in line with CPI. Since the triple-lock was first introduced over

Ask Tom: Your retirement questions answered a decade ago, the earnings growth figure used in the calculation has been the three months to July in the prior year, while the inflation peg has been determined by CPI in September in the prior year. If this approach is followed for next year’s increase, the old and new state pension will increase by 8.5%, in line with average earnings growth in July. This year, the state pension rose by 10.1%, in line with CPI in September 2022 and well in excess of average earnings growth. We only know at the moment that the current Government is committed to the triple-lock for the rest of this Parliament. We will need to see each party’s manifesto to get a better idea of whether that commitment is likely to continue into the next Parliament. WHAT COULD IT LOOK LIKE IN THE FUTURE? It is impossible to predict what the state pension will look like in the future – and the triple-lock only adds to the uncertainty. There is a danger the costs of the triple-lock will eventually be recouped by faster rises in the state pension age, which would create tensions about the intergenerational fairness of the system.

Part of the problem is the triple-lock is a policy without a stated aim, randomly ratcheting up the real value of the state pension in relation to earnings when inflation is high, inflation when earnings are high, and both when earnings and inflation are below 2.5%. Its existence is essentially the Government admitting the state pension is too stingy, but without ever saying what it should actually be worth. What is absolutely certain is that, at some point, the triple-lock will have to be scrapped, otherwise the state pension will eventually be worth more than average earnings. TIME TO REVIEW THE SYSTEM The uncertainty you describe is one of the reasons I believe an independent commission will be needed to review the UK state pension. This review will need to consider a variety of factors, including life expectancy and wealth in different regions of the country, to determine what the state pension should be worth and for how long in retirement people should receive it. But without that certainty, it is hard for young people in particular to plan their retirement. I still believe the state pension will exist when you reach retirement – but I cannot say that for certain. What’s more, I cannot confidently tell you how much you will receive if the state pension still exists or when you will receive it. This is another reason why taking responsibility for your own retirement is crucial. That means saving as much as you can in tax-efficient vehicles like pensions today, taking advantage of matched employer contributions (where available), tax relief and tax-free investment growth over the long term.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES? 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.

26 October 2023 | SHARES | 43

WEBINAR VIDEOS

WATCH RECENT PRESENTATIONS Frenkel Topping Group (FEN) Richard Fraser, CEO Frenkel Topping Group (FEN) is a longestablished family of businesses who are tried, tested and trusted. We are always available to provide advice and technical support to our legal Clients and those they represent. We support lawyers and their Clients with a concierge approach to anything they may need throughout the litigation journey.

abrdn Asia Focus (AAS) Gabriel Sacks, Fund Manager abrdn Asia Focus (AAS) - A fundamental, high conviction portfolio of well-researched Asian small caps. abrdn Asia Focus is an Investment Company listed on the London Stock Exchange aiming to find the best managed Asian smaller companies that are setting the new standard.

Mercia Asset Management (MERC) Dr Mark Payton, CEO & Martin Glanfield, CFO Mercia Asset Management (MERC) is a proactive, specialist asset manager focused on supporting regional SMEs to achieve their growth aspirations. Mercia provides capital across its four asset classes of balance sheet, venture, private equity and debt capital; the Group’s ‘Complete Capital Solution’.

Visit the Shares website for the latest company presentations, market commentary, fund manager interviews and explore our extensive video archive.

CLICK TO PLAY EACH VIDEO

SPOTLIGHT

www.sharesmagazine.co.uk/videos

Personal Finance: How to build a bigger pension

The risks of investing in bonds: everything you need to know Make sure you fully understand how the asset class works before investing

or over a decade following the global financial crisis, bonds offered little in the way of return and carried significant price risk. But the return of inflation and higher interest rates have changed all that. You can now get a 4.5% annual yield on a UK government bond maturing in 10 years’ time. That compares to under 0.2% in the depths of the pandemic in 2020. To spell out the gargantuan difference between these two yields, if you invested £10,000 in a bond yielding 0.2% and held it to maturity, you would get back £10,200 after 10 years. If instead the bond was yielding 4.5%, you would get back £14,500. THE OPPORTUNITIES FOR INVESTORS The yields currently available on bonds are definitely tempting, more so because we have come through such a long period of yield deprivation. Bonds, especially government bonds, are also traditionally seen as less risky than equities, because they tend to be less volatile. They often move in the opposite direction to shares too, making them a good diversifier for an equity portfolio. That may be so, but there are still risks to investing in bonds, which investors need to consider.

THE RISK OF DEFAULT When you buy a bond, you are effectively lending money to a government or company. They may fail to pay back all, or just some, of the capital and interest they have promised. The risk of default depends on the financial strength of the government or company to whom you are lending money. Generally speaking, lending to well-financed governments in the developed world, like the US, UK and Germany, is very safe, because these countries are unlikely to default on their debt. If they did default, it would mean these countries would have to pay more on international debt markets to borrow again. Emerging market governments are more prone to default. For instance, Argentina has defaulted on its debt nine times. Consequently its bond yields are eye-wateringly high, but attract only the most risk-hungry investors. In developed markets it’s riskier to lend to companies than it is to governments. The latter can raise money through taxation to service debts, but Unilever (ULVR), for example, can’t make us buy more of its Ben & Jerry’s ice cream.

26 October 2023 | SHARES | 45

Personal Finance: How to build a bigger pension

DIFFERENT GRADES OF BONDS Corporate bonds are normally divided into investment grade and high yield or ‘junk’ bonds. Investment-grade bonds get a strong score from the credit rating agencies because their finances are relatively robust, so they are judged to be able to handle their debts. An S&P rating of BBB and above is deemed to be ‘investment grade’ (the ratings run from AAA through to D). Companies with a credit rating below this level fall into the ‘high yield’ bucket, and as the name suggests, they have to offer more interest to lenders to make up for their shakier balance sheets. This is common throughout the bond universe; the more risk you take, the higher the yield becomes. It’s possible to mitigate the risk of default by investing in bonds via funds, which hold a diversified portfolio of loans to many different companies. However, in tough economic times, or times of rising interest rates, the number of defaults in any portfolio can be expected to grow. INTEREST RATE RISK The other big risk to consider is interest rate risk. When you lend money via a bond, you lock into a certain interest rate. If market rates rise after you’ve bought in, you’re stuck in something that might offer a relatively paltry rate of return. Anyone who locked into a 0.2% annual yield from UK gilts in 2020 is probably kicking themselves because they could now have picked up an interest rate of 4.5%. This dynamic will also hurt the paper value of your bond holdings, because if interest rates rise, this will almost certainly mean your bond falls in value. This effect will be bigger for longer dated bonds. You will still get your money back if you hold the bond to maturity, assuming there’s no default, but 46 | SHARES | 26 October 2023

if you want to sell at a market price this may well be lower than what you paid for it. INFLATION RISK Bond investors are also typically open to inflation risk. The cash flows from a conventional bond are fixed when you buy it, they don’t go up and down. If inflation goes up, those cash flows can be left looking less attractive. This will probably reduce the price of the bond but will also mean the income being provided will have less spending power. Consider again our hypothetical investor who bought a UK gilt yielding 0.2% in 2020, only to see inflation hit double digits a couple of years later. Not a happy scenario by any stretch of the imagination. It’s possible to buy bonds where the interest payments and capital are linked to inflation, such as index-linked gilts. However, you normally have to accept a lower starting yield in exchange for the inflation protection, and as ever, existing market expectations for future inflation will already be baked into prices. The bond market has woken up and is offering more compelling value than it has for a long time. Investors need to consider a bond allocation in the context of other assets though, chiefly equities and cash. For those who don’t wish to run a portfolio of different assets, a multi-asset fund might be the ticket. These funds offer a blend of shares, bonds and cash, and sometimes property and alternative assets like gold and commodities too. They come in a variety of risk levels and can be a useful onestop shop for those who want a more hands-off approach to their investment portfolio. By Laith Khalaf AJ Bell Head of Investment Analysis