AJ Bell Shares magazine 08 February 2024 by Shares Magazine

VOL 26 / ISSUE 05 / 08 FEBRUARY 2024 / £4.49

SMALL CAP

STARS TO BUY TODAY

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Contents NEWS 06 Blow-out US jobs report sends stocks higher despite implications for rates

07 Meta Platform’s dividend call stuns the market 08 Ferrari gets into top gear to buck softer

luxury goods trend

09 Elementis shares soar after receiving a preliminary bid from US fund

09 Tesla shares slide in 2024 as investors mull their next moves

10 Can British Gas owner Centrica continue to deliver? 11 Can Coca-Cola serve up another sparkling performance?

12 March rate cut off the agenda altogether after ‘stunning’ US jobs report GREAT IDEAS 14 Why now is the time for investors to check out

SMALL CAP

Burberry

STARS TO BUY TODAY

15 For those seeking a better class of income, the Aristocrats look swell

UPDATES 17 AG Barr fizzes higher on earnings upgrade and

there could be more to come

FEATURES 18 COVER STORY

5 small cap stars to buy today The smaller businesses with big potential and why the time is right to invest

25 Do mergers and acquisitions actually add

value for shareholders?

30 FUNDS

The bond funds to buy as the rate hiking cycle draws to a close

35 ETFS

How to play gold through exchange-traded products

38 EDITOR’S VIEW

How the WPP tortoise beat the S4 Capital hare

40 FINANCE

Mortgage rates have fallen, what does it mean for homeowners?

43 RUSS MOULD

What could the next general election mean for UK equities?

46 ASK RACHEL

I want to pay a lump sum into my pension but could I breach my annual allowance?

48 INDEX Shares, funds, ETFs and investment trusts in this issue

08 February 2024 | SHARES | 03

Contents

Three important things in this week’s magazine Funds: Th e bond fun ds to buy

SMALL C

The small er

businesse s with big

potential and why

the time is

By The Sha res Team

DAY

right to inv est

ven today’s small. Mic market giants star ted out ros largest com oft may now be out of favo the valuation pany with a $3 trill world’s listed in Lonur more generally, which riva major glo ion sm bal ls All-Share don have struggle aller companies start-up fou economies but it the GDP of some ind d. began life years aga ex is down 18% ove The FTSE AIM Gates and nded by Harvard Col as a inst a 50.1% r his lege drop-o childho World ind advance for the last five would hav ut Bill ex. the FTSE Alle predictedod friend Paul Alle Stuart Wid n. Few the While we its global dowson, the n dom are Inv not ina est tion in this arti exp ment Trust manager cle to enjoy ecting the names today. of (OI con T), cen wh trajectory disc the same trat ich invests Odyssean ussed it in a companies,ed portfolio of well-re small caps, does illustrate the stratospheric says: ‘Typ notes this beginn searched smaller can genera which, thanks to theinherent appeal of ing ical capital gain ly the first asset clas to change. He right ones. te outsized returns ir scope to grow, s wh s to if you inve en see the interes governme st in the On the flip t rate cycle good nt bonds side the bon turns are , n it cascad because sm ds and are less we alle element of then high yield bon es into corporate businesse ll established, have r companies ds. s cap and UK equities that moves Then the first positions, and often more preless diversified you do nee carious fina [on a global small caps look pre tends to be small tolerance d ncia to tty hav l bas interesting e a rea for risk if you is]. ‘You don small cap are going sonable spa to invest in come in to ’t need that much Another ce. new money the We don’t move share prices UK smalle dynamic which is sup kno very materi to r but we don w what is going valuation. companies, in particuportive to to change ally. ’t think it’s The high inte lar, is sentiment To too a broader tap far rest rate into a cha away.’ red nge music aro create a neg uction in risk app environment and und smalle in the prevailing etite ative backdr mo identified r compan op and, wit has helped five ies, Shares od mix of valu small cap stars h UK equitie which offe has e and s 18 | SHARES gro our selectio ra wth. Read | 08 Febr on to disc ns. uary 2024 over

Five small cap stars to buy today As sentiment towards smaller companies improves, the Shares team has identified some attractive small cap opportunities.

Mergers

& Acquisi tions

STARS

TO BUY T O

Feature:

T he b on hiking c d funds to buy a ycle dra US marke ws to a cs the rate ts several rat have priced in lose e cuts for 20

Do merg add valuers and acquisit e for sha io reholde ns actually acquisitio ns are pre rs? ferable n an env

Why bolt-o n

By Martin Gam

here are hop ble Education for bonds es for an improved in Editor turns. In this 2024 as the rate picture For exa hiking article we for look at the cycle years, andmple, if a bond has portfolio cou bonds, consider a case wh price will interest rates increa duration of five best ideas ld make a comeba ether the 60/40 decline by se to play the ck if a bond approxima by 1%, the bond’s bond marke and look at our has t through rates fall by a duration of five tely 5%. Conversely ARE BOND funds. , approxima 1%, the bond’s pric years and interest As central S POISED FOR A REC tely e will increa banks sign The lower 5%. se by rate hiking al an end OVERY? a bon to cyc the d’s le per Invest coupon (int inte centage of prospects erest paid the face valu for their fixe ors might be thin rest tim e as king quite promis to its a e) and the d income investmentsthe ing. lon more sen maturity (when cap Markets siti look ital is retu ger the interest rate ve a bond’s price rned) the following have repriced inflatio is to a cha s. sha nge in Higher dur and bonds rp central bank inten expectations rest rate risk of infl ation bonds expose especially have experienced ation for lon inv a scary dro hikes those wit est ors to the duration US ger which h lon p in prices, In fact, the last two yeager maturities. the last two treasuries have per explains why long the worst rs hav formed so years. on poorly in for longer record with cum e been one of ulative fall duration bon drawdow s in price ds exceed n financial cris(peak-to-trough fall ing the brutal ) seen in the WHY PLA is. Y BONDS THROUG Because mo WHAT IS DU H FUNDS? purchased st corporate bonds Duration, RATION? bas principally in large denominationhave to be bond matur ed in part on the investors. remain the preserve s, they the price es, can help predic length of time unti For of a la t the interests of both this reason of institutional For every bond given a change likely change in in interest funds to gaindiversification, the and in the rates, a bon 1% increase or dec rates. re is exposure There are in the opp d’s price will changerease in interest to the bon logic in using a osite directio app which targ large number of pro d market. n for every roximately 1% et year of dur income ma all different parts ducts available ation. of the fixe rket. 30 | SHARES d | 08 Febr

2 uary 2024

Which bond funds should you buy? After a torrid two years in which interest rates have soared, the outlook for bonds is improving and we highlight the best funds to choose.

to ‘transfor iron global com ment marked by mationa inte l’ deals successfu petition and indust nse aren’t goi l ry ng to are increasmergers and acquisi disruption, ingly tion First, com destroy value. profitabili pan ty of many important to the s (M&A) growth and bankers for valu ies should never rely companies. Yet resear atio ch on investm on n sho because the side ws most me Over the ent dec words, the of the deal, not the‘bankers are always that merge ades, multiple stu rgers disappoint. big company’. Having an ger the deal the In other anticipated rs and acquisitions dies have shown developm in-house valuatio bigger the fees. value inst synergies, and ma fail to generate the ent n exp group is a ead of cre ny still needs good star ert or business ating it. In actually destroy significant to be t, oth per but a vast amoun er words, attention there two to equ centage of M& a to t A cau al table, loo detail before a dea of planning and Those are three instead of five ses two plus kin cash-flow g at how it stacks l even comes to the professor the views of Nuno . s, up of the right muboth before and afte in terms of School and finance at Barcelo Fernandes, ltiple. r, and what While the is Mergers andthe author of The na’s IESE Business Val to do a dea re may be good com – And How Acquisitions Cos ue Killers: How t Compan To distributionl – improving manuf mercial reasons ies Billion So why do Prevent It . s there are and reducing uni acturing or deals and companies continu t costs, for just as ma how can the e to ny inst cha ‘Str bad rea ance – adding rath ategic se er than desy improve the odd M&A they usually deals’ in particular sons. s of troying valu building or amount to little moare dangerous as e? BIGGER DO chief executiegomania on the par re than empireAs profess ESN’T MEAN BET t of the acq ve. TER or The most uiring M&A dea Fernandes explain obv ls fail to cre iou s, s reason wh to add valu down to bad ate value the fact most pay for the e is price – too ma y deals don’t tend starting at luck but due to a is not random or ny compan the series of fail projected target company’s In an arti pre-acquisition ures assets eve ies oversyn n if the ‘This see ergies do eventu on Corpor cle for the Harvard phase. ate reality is thams both simple andally materialise. rules which Governance, he Law School Forum obvious, but t most com sets companies one could the need to sticout the golden make an arg panies overpay. indirectly, In fac k to if the ument tha y ove t, directly t, M&A failure rpayment is the or cau rate,’ says Fernandes se of the high .

Why big M&A deals seldom add value 08 February

2024 | SHA

RES | 25

Most large takeovers and mergers destroy value, yet companies continue to be seduced by ‘bigger is better’. We look at why smaller deals are often a better option.

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:

Middle East conflict weighs on McDonald’s Q4 sales growth

Returning Renishaw optimism sees share price surge as best FTSE 350 performer

Fundsmith Equity the most sold fund during January

04 | SHARES | 08 February 2024

BP profits plunge but surprise $1.75 billion buyback pleases investors

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News

Blow-out US jobs report sends stocks higher despite implications for rates The Fed seems in no hurry to ease monetary policy

arkets often move in unexpected ways and Friday’s (2 February) release of blow-out non-farm payrolls data was no exception. The US economy added 255,000 jobs per month on average in 2023 and coming into the latest data for January the consensus was looking for the rate to slow to 180,000. The actual number of 353,000 jobs created was even higher than the top end 290,000 forecast, while the unemployment rate remained steady at 3.7%. That means the unemployment rate has stayed below 4% for two years, the longest stretch in 50 years. Not only is the labour market showing little signs of slowing, but the rate of wage growth also surprised to the upside with a year-on-year increase of 4.5% compared with 4.1% expected. Economists estimate wage growth of 3% to 3.5% is consistent with an overall inflation rate running close to the Fed’s 2% target. Markets have priced in around six interest rates cuts in 2024 starting in March, although Fed chair Jay Powell served up some cold turkey at the latest FOMC meeting (31 January) by saying he didn’t expect to have enough confidence in the slowing inflation data to start cutting rates next month. With stronger-than-expected jobs data, higher wage growth and shorter odds of a March rate cut, investors might be forgiven for anticipating a negative reaction from equities. After initially trading lower in the pre-market, the benchmark S&P 500 ended the day higher while

06 | SHARES | 08 February 2024

10-year treasury bond yields moved higher pushing back over 4%. Investors may have been disappointed by the declining prospects for lower interest rates, but the resilience of the economy appears to trump this disappointment. Richard Bernstein, chief investment officer of Bernstein Advisors, believes US earnings troughed last spring and he now sees signs of a new earnings upcycle which could herald doubledigit growth. That might seem like a problem for the Federal Reserve, but if earnings growth is accompanied by higher productivity it could happen without added inflationary pressure. Data released on 1 February showed US worker productivity has exceed 3% annualised for the last three consecutive quarters. BlackRock’s global head of fixed income Rick Rieder told Bloomberg his base case for rate cuts has not been derailed by stronger than expected payrolls. He believes core inflation is trending lower and the Fed will have to cut rates to reduce the real rate of interest as inflation decelerates. [MG]

Non-farm payrolls come in ahead of expectations for January Forecast

Actual

100

200

300

Jan ’23 Feb ’23 Mar ’23 Apr ’23 May ’23 Jun ’23 Jul ’23 Aug ’23 Sep ’23 Oct ’23 Nov ’23 Dec ’23 Jan ’24 Chart: Shares magazine • Source: Forex Factory

400

500

News

Meta Platform’s dividend call stuns the market Facebook-owner sees biggest ever one-day market value surge

hares of Facebook and Instagram-owner Meta Platforms (META:NASDAQ) soared as the social media company reported blowout fourth quarter results (1 February) that beat even the most optimistic projections and unveiled a maiden dividend. By the end of the Wall Street session on 2 February, the stock had rallied more than 20% to record its highest close ever, at $474.99. According to Bloomberg, that the rough $200 billion one-day surge is the biggest in stock market history. It represents a remarkable turnaround for Meta. It was only a couple of years back the social media giant suffered the single biggest one-day value destruction in stock market history, when an estimated $250 billion was wiped off the firm’s market cap. But Meta has come a long way since then, dazzling shareholders with yet another impressive quarterly earnings report as the social media giant focuses on cutting back costs and shoring up billions in profits. The fourth quarter 2023 numbers were impressive. It reported $5.33 of earnings per share on $40.1 billion revenues, figures that beat consensus estimates of $4.96 and $39 billion respectively. Revenues represented 17.6% growth over the previous quarter (to end September) and 24.5% year-on-year growth. Yet, arguably, the outperformance did not shock investors as much as the surprise introduction of its first ever shareholder dividend. Meta said it would pay investors a quarterly dividend for the first time, announcing a payout of $0.50 a share on 26 March. That comes after cash and equivalents swelled to $65.4 billion at the end of 2023, from $40.7 billion a year earlier. Meta also announced a $50

billion share buyback. It is perhaps this disciplined capital allocation that has most impressed investors during a period of stunning share price appreciation. In 15 months, the stock has soared from $91, gains of more than 400%. Analysts have now raised the question of whether Meta’s emergence as a dividend payer will place greater pressure on other so-called ‘Magnificent Seven’ stocks to follow suit. Apple (AAPL:NASDAQ), Microsoft (MSFT:NASDAQ) and even Nvidia (NVDA:NASDAQ) already pay dividends, while Amazon (AMZN:NASDAQ), Alphabet (GOOG:NASDAQ) and Tesla (TSLA:NASDAQ) may be able to bat off these pressures so long as they are delivering above average returns on capital, currently calculated at 26%, 10% and 11% respectively. Meta’s return on capital is reported at 23.7%. [SF]

Meta Platforms ($) 450 400 350 300 Aug 2023

Sep

Oct

Nov

Dec

Jan 2024

Feb

Chart: Shares magazine • Source: LSEG

08 February 2024 | SHARES | 07

News

Ferrari gets into top gear to buck softer luxury goods trend The company’s iconic prancing horse logo is one of the most recognised symbols in the world

uxury goods shares may have hit the skids in recent weeks on flagging demand in China and the cost of living crisis, but iconic Italian car maker Ferrari (RACE:NYSE) seems to go from strength to strength. The shares hit new highs (2 February) after fourth-quarter sales topped analysts’ estimates and full year profit surged 34% to €1.25 billion. News that seven-time Formula 1 world champion Lewis Hamilton will join from Mercedes in 2025 on a multi-year contract also gave investor sentiment a boost. The rally in the share price means Ferrari’s market value is closing in on €100 billion, making it more valuable than Mercedes-Benz (MBG:ETR), Porsche (PAH3:ETR) and Aston Martin Lagonda (AML) combined. Looking ahead, chief executive Benedetto Vigna commented: ‘The record 2023 results, the ambitions that we have on 2024, together with the exceptional visibility on our order book allow us to look at the high-end of 2026 targets with stronger confidence.’ Ferrari’s long-term ambitions include delivering EBITDA (earnings before interest, tax, depreciation and amortisation) of €2.5 billion to €2.7 billion by 2026 representing a margin on sales of between 38% and 40%. The company generated €932 million of free cash flow in 2023 and has earmarked around €800 million for distribution to shareholders via dividends and share buybacks. Ferrari shares have been on a remarkable ride gaining 58% in the last year and nearly 200% over the last five years, comfortably outperforming German luxury peers Porsche and Mercedes-Benz. Only electric vehicle maker Tesla (TSLA:NASDAQ) has managed to keep pace with its shares

08 | SHARES | 08 February 2024

surging 787% over the last five years. However, Tesla has moved into the slow lane of late with the shares earning the ignominious title of the worst performing stock in the S&P 500 over the last

nine months. The Elon Musk-steered company has been cutting prices to lure back customers and compete with rivals which has impacted margins. Tesla missed Wall Street’s earnings expectations (26 Jan) and warned growth in 2024 deliveries may be ‘notably’ lower than achieved in 2023. Analysts have cut their earnings estimates with consensus now implying a small year-on-year decline. Bad news seems to be mounting up for Tesla, with German newspaper Handelsblatt reporting this week software giant SAP (SAP:ETR) would no longer source fleet cars from Tesla due to late deliveries and price swings. This follows a decision by rental car company Hertz Global Holdings (HTZ:NASDAQ) to slash the number of Tesla electric vehicles from its fleet. [MG]

Ferrari ($) 300 200 100 0 2016

2018

2020

Chart: Shares magazine • Source: LSEG

2022

2024

News

Elementis shares soar after receiving a preliminary bid from US fund News the board rejected the bid is unlikely to please activist investors

Reuters, causing KPS to walk away. This isn’t the first time the group has received offers: in 2020, it was approached by US company Shares in specialty chemicals maker Mineral Technologies, and in 2021 by Elementis (ELM) surged 12% to 139p Innospec (IOSP:NASDAQ), one of its at the end of January following a industry peers. press report it had received a bid Over the past few months there from a US private equity fund. has been considerable pressure The shares eventually hit a new on the Elementis board from 12-month high of 142.4p after it was major shareholders disappointed revealed New York based firm KPS with the firm’s performance, and Capital Partners had submitted 9.8% stakeholder Franklin Mutual an offer of 160p per share in Advisers urged the firm just December. last month to find a buyer, so Moving However, the Elementis the news that it had a bid board rejected the offer as HIGHER and rejected it is not likely to it was holding out for 180p sit well. according to newswire On a positive note,

Elementis (p) 140 120 Oct 2023

Jan 2024

Chart: Shares magazine • Source: LSEG

fourth-quarter trading was ahead of expectations and analysts at Jefferies have recently flagged upside potential in the firm’s operating profit margin. [SG]

Tesla shares slide in 2024 as investors Tesla ($) mull their next moves Electric car company’s stock has lost more than 25% already this year It has been sorry start to the year for Elon Musk and the thousands of loyal Tesla (TSLA:NASDAQ) shareholders. January alone has seen the stock lose 25% of its value, wiping nearly $200 billion off its market cap as the electric car maker continues to grapple with increasing competition, eroded profit margins and consumers thinking twice about big-ticket purchases like a new car.

According to Sharepad, Tesla is the second-worst performing stock in the S&P 500 over the past month and it sits squarely bottom of the pile among the Nasdaq 100. This is despite beating delivery expectations in the last quarter of 2023, reported in early January. There were already simmering doubts about Musk’s 20% delivery growth target for 2024, a target that he has now admitted will be tough to achieve, DOWN while in the fourth quarter in the of 2023 it was overtaken dumps as the biggest volume EV

250 200 Oct 2023

Jan 2024

Chart: Shares magazine • Source: LSEG

seller in the world by China’s BYD (002594:SHE). With Musk having seen his share award package from 2018 ruled out by a Delaware court into the bargain, these are tumultuous times for Tesla. Most of last year’s 100% gains have now been completely wiped out and shareholders’ loyalty is again being tested. Many will undoubtedly stick for the long haul, but how many will twist has become an awkward question. [SF] 08 February 2024 | SHARES | 09

News: Week Ahead

What the market What theof market expects Centrica expects of Centrica

Can British Gas owner Centrica continue to deliver?

2023 2023 2024 2024

The utilities firm may face political pressure due to households' high energy costs

UPDATES OVER THE NEXT 7 DAYS FULL-YEAR RESULTS 15 February: RELX, Centrica

FIRST-HALF RESULTS 14 February: Dunelm 15 February: MJ Gleeson TRADING ANNOUNCEMENTS 9 February: Bellway, S&U 14 February: Severn Trent

EPS EPS

Revenue Revenue

30.5p 30.5p 18.9p 18.9p

£31.7bn £31.7bn £27.9bn £27.9bn

Table: Shares magazine • Source: Stockopedia Table: Shares magazine • Source: Stockopedia

Investors in British Gas owner Centrica (CNA) will be watching closely to see if it can hit forecasts against a normalised energy price backdrop when it reports full year results on 15 February. Analysts are forecasting earnings per share for the full year ending 31 December of 30.5p. In July 2023, the firm reported first half revenue up 60% to £16.5 billion due to higher energy prices. The company also reported a statutory pre-tax profit of £6.4 billion, as opposed to a loss of £1.1 billion for the first six months of 2022. At the same time Centrica announced a green focused investment strategy with annualised investment building to between £600 million and £800 million out to 2028, an extension to its share buyback programme by £450 million to £1 billion and a 33% increase in dividend to 1.33p per share.

This generosity to shareholders has been underpinned by the dramatically improved picture on earnings and cash flow for the company as energy prices surged in the wake of Russia’s invasion of Ukraine. Strong operational performance from its gas production, nuclear and gas storage assets has also helped. Since the end of the pandemic, shareholders have enjoyed substantial gains in the share price, over the past year the stock is up 38%. Centrica could come under political pressure as households continue to struggle with falling energy bills. The company has said it is ‘committed’ to supporting vulnerable customers facing wider inflationary pressures and high energy bills. Since the start of 2022, it has committed £100 million to vulnerable customers. [SG]

Centrica (p) 150

100 Apr 2023

Jul

Chart: Shares magazine • Source: LSEG

10 | SHARES | 08 February 2024

Oct

Jan 2024

News: Week Ahead

Coca-Cola ($) 60 55 Apr 2023

Jul

Oct

Jan 2024

Chart: Shares magazine • Source: LSEG

Can Coca-Cola serve up another sparkling performance? The soft drinks leviathan’s leading brands are helping it ‘win in the marketplace’ Investors will be thirsting for another serving of good news when beverages behemoth Coca-Cola (KO:NYSE) reports earnings for the fourth quarter and full year to December 2023 on 13 February before the opening bell on Wall Street. Consensus calls for a year-onyear rise in fourth-quarter sales and earnings from $10.1 billion and $0.45 to $10.7 billion and $0.48 respectively. Back in October, the Atlantabased drinks giant behind Coca-Cola as well as the Sprite, Costa and Topo Chico brands, delivered better-thanexpected third-quarter revenue and earnings as the positive momentum seen in the first half flowed into Q3. Organic sales fizzed up 11%, and following another period of market share gains Coca-Cola raised its full year organic revenue growth guidance from between 8% and 9% to the 10%-to-11% range. ‘We delivered an overall solid

quarter and are raising our fullyear top line and bottom line guidance in light of our year-todate performance,’ explained chief executive James Quincey. ‘Our leading portfolio of brands, coupled with an aligned and motivated system, positions us to win in the marketplace today while also laying the groundwork for the long term.’ Investors will be hanging on Quincey’s every word when it comes to inflation and pricing trends around the world as well as the benefits of artificial intelligence on Coca-Cola’s innovation and marketing. The performance of zero sugar variants will be under scrutiny too, given investors’ concerns over the potential impact of weightloss drugs on consumers’ thirst for calorific [JC] Whatdrinks. the market expects

What the market expects of Coca-Cola What the market expects of Coca-Cola of Coca-Cola EPS Revenue EPS

Revenue

Q4 EPS Revenue $0.48 $10.66bn forecast Q4 $0.48 $10.66bn forecast Q4 $0.48 $10.66bn forecast Table: Shares magazine • Source: Investing.com Table: Shares magazine • Source: Investing.com Table: Shares magazine • Source: Investing.com

US UPDATES OVER THE NEXT 7 DAYS QUARTERLY RESULTS 9 February: PepsiCo, Enbridge, Global Payments, Telus, Fortis 12 February: Arista Networks, Cadence Design, Waste Management, Monday.com, Lattice, ZoomInfo, Avis, Vornado, Teradata 13 February: Coca-Cola, Shopify, Airbnb, Moody’s, Zoetis, Ecolab, Welltower, Biogen, Restaurant Brands, Hasbro, LYFT 14 February: Cisco, Analog Devices, Manulife Financial 15 February: Applied Materials, Deere&Company, Southern, Digital, DoorDash, Pool, Dropbox, US Foods, Procore Technologies, Texas Roadhouse, Shockwave Medical, Air Lease, Nova

08 February 2024 | SHARES | 11

News: Week Ahead

March rate cut off the agenda altogether after ‘stunning’ US jobs report Attention likely to centre on inflation and retail sales reports In our previous issue we predicted the market would take its cue from the central banks’ rhetoric regarding future interest rate cuts,

Macrodiary diary 88 February February to to 15 15 Macro Macro diary 8 February to 15 February February February Date Economic Event Date Economic Event Macro diary 1 February Date Economic Event UK December to13-Feb 7 February 2024 UK December

Previous Previous Month Previous Month Month

4.2% Unemployment Rate 4.2% UK December Unemployment Rate 4.2% Unemployment German ZEW Rate Previous 15.2% German ZEW Economic Sentiment 15.2% Date Economic Month German Event ZEW Economic Sentiment 15.2% Economic US JanuarySentiment Small Bank of England Interest 91.9% US January Small 01-Feb 5.25% Business Optimism 91.9% Rate USDecision January Small Business Optimism 91.9% US January Optimism UKBusiness January 3.4% 46.2% US JanuaryPrice Consumer Manufacturing PMI Index 3.4% US JanuaryPrice Index Consumer 3.4% US January CoreIndex CPI 3.9% Price USConsumer January ISM 47.4% US January Core 3.9% Manufacturing PMI CPI US 3.9% UK January January Core CPI 14-Feb 4.0% Consumer Price Index January USUK Average Hourly 14-Feb 4.0% 02-Feb 0.4% UK JanuaryPrice Index Earnings Consumer 14-Feb 4.0% UK JanuaryPrice CoreIndex CPI 5.1% Consumer USUK Non-Farm Payrolls 216k January Core CPI 5.1% UK January January Core Producer UK CPI 5.1% −2.8% USUK Q4January Non-Farm Prices (Input) Producer 5.2% −2.8% Productivity UK January Prices (Input)Producer −2.8% Eurozone 4Q GDP 0.1% Prices (Input) UKEurozone BRC January Retail 4Q GDP 0.1% 05-Feb 1.9% Sales 15-Feb UK Q4 GDP −0.1% Eurozone 4Q GDP 0.1% 15-Feb UK Q4 GDP −0.1% UKUK January Composite December 15-Feb UK Q4 GDP −0.1% 52.5% 0.9% PMIConstruction Output UK December 0.9% UK December Construction Euozone JanuaryOutput 0.9% US February 47.9% Construction Output Composite PMI Fed Philadelphia −10.6% US February Manufacturing US February USPhiladelphia January Composite FedIndex −10.6% 52.3% Philadelphia Fed −10.6% PMI Manufacturing Index US January Industrial Manufacturing Index 1.0% Production UKUS January Construction January Industrial 06-Feb 46.8% 1.0% US January Industrial PMI Production 1.0% US January Retail 5.6% Production Sales UKUS January Halifax House January Retail 07-Feb 1.7% 5.6% Prices US January Retail Sales 5.6% Sales Table: Shares magazine • Source: Morningstar, central bank websites

13-Feb 13-Feb

Table: Shares magazine • Source: Morningstar, central bank websites

Table: Shares magazine • Source: Morningstar, central bank websites Table: Shares magazine • Source: Morningstar, central bank websites

12 | SHARES | 08 February 2024

and suggested there may be some volatility around the US payroll figures. Sure enough, both the Bank of England and the Federal Reserve batted away any suggestion rates might come down early with Fed chair Jerome Powell going so far as to say they would stay ‘higher for longer if needed’ given the strength of US consumption. Also true to form, the non-farm payroll figures caught the market off-guard with the addition of 353,000 new jobs in January against consensus expectations of a 180,000 increase. As one investor put it, if Jerome Powell had killed all hope of a March rate cut then the jobs number well and truly buried it. As well as slashing their March bets, traders reduced the odds of a May cut with the attention now turning to the US January inflation data due on 13 February and in particular the ‘core’ figure which strips out more volatile food and energy prices. Likewise, odds of an early cut in UK rates have lengthened and all eyes will be on the consumer and industrial inflation numbers on 14 February. Finally, the UK fourth-quarter GDP (gross domestic product) number on 15 February will show whether or not the economy grew in the last three months of 2023 – the current consensus is it shrank slightly – while US January retail sales figures released the same day will be closely watched by the Fed as well as economists to see whether US consumers are still feeling upbeat. [IC]

Next Central Bank Meetings & Next Central Bank Meetings & Current Interest Rates Current Interest Rates Date Date

07-Mar 07-Mar 20-Mar 20-Mar 21-Mar 21-Mar

Event Event

European Central Bank European Central Bank US Federal Reserve US Federal Reserve Bank of England Bank of England

Previous Previous 4.5% 4.5% 5.5% 5.5% 5.25% 5.25%

Table: Shares magazine • Source: Morningstar, central bank websites Table: Shares magazine • Source: Morningstar, central bank websites

Cut through with conviction

Available in an ISA

FIDELITY INVESTMENT TRUSTS Truly global and award-winning, the range is supported by expert portfolio managers, regional research teams and on-the-ground professionals with local connections. With over 450 investment professionals across the globe, we believe this gives us stronger insights across the markets in which we invest. This is key in helping each trust identify local trends and invest with the conviction needed to generate long-term outperformance. Fidelity’s range of investment trusts: • Fidelity Asian Values PLC • Fidelity China Special Situations PLC • Fidelity Emerging Markets Limited • Fidelity European Trust PLC

The value of investments can go down as well as up and you may not get back the amount you invested. Overseas investments are subject to currency fluctuations. The shares in the investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trusts can gain additional exposure to the market, known as gearing, potentially increasing volatility. Investments in emerging markets can more volatile that other more developed markets. Tax treatment depends on individual circumstances and all tax rules may change in the future. To find out more, scan the QR code, go to fidelity.co.uk/its or speak to your adviser.

• Fidelity Japan Trust PLC • Fidelity Special Values PLC

The latest annual reports, key information document (KID) and factsheets can be obtained from our website at www.ﬁdelity.co.uk/its or by calling 0800 41 41 10. The full prospectus may also be obtained from Fidelity. The Alternative Investment Fund Manager (AIFM) of Fidelity Investment Trusts is FIL Investment Services (UK) Limited. Issued by FIL Investment Services (UK) Limited, a ﬁrm authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Investment professionals include both analysts and associates. Source: Fidelity International, 30 September 2023. Data is unaudited. UKM1223/384820/SSO/1224

Great Ideas: Investments to make today

Why now is the time for investors to check out Burberry Shares in the rainwear-to-leather goods seller won’t stay this cheap for long

Burberry (BRBY) £12.94

Burberry

Market cap: £4.6 billion

2,500

2,000

lowing luxury demand and two profit warnings in three months have left Burberry (BRBY) firmly out of fashion with investors. Shares in the British luxury brand have lost around 50% and 30% of their value over one and five years respectively. Given the old stock market adage about profit warnings coming in threes, Shares concedes there is some danger we have gone too early. However, we believe the risk/reward balance is favourable with the trench coat-to-tote bag purveyor’s sell-off overdone and too much doom and gloom priced into a stock which is cheap relative to its own history. Potential positive catalysts include an eventual recovery in key luxury market China and the possible reintroduction of VAT-free shopping for wealthy tourists visiting the UK, in the gift of chancellor Jeremy Hunt, which would boost Burberry’s domestic sales. Tougher luxury market conditions are a headwind, yet Burberry is pulling self-help levers

14 | SHARES | 08 February 2024

(p)

1,500 1,000 2019

2020

2021

2022

2023

2024

Chart: Shares magazine • Source: LSEG

including elevation of the brand to raise margins closer to those of rivals including LVMH (MC:EPA) and Hermes (RMS:EPA) and pushing ahead with revenue-enlivening store refurbishments. TRUE FASHION ICON For the uninitiated, Burberry is the FTSE 100 constituent whose competitive strengths include its unmistakable brand – the iconic Burberry check and Equestrian Knight Device pay homage to its heritage - which confers pricing power upon the business, not to mention an extensive luxury distribution footprint and a cash-generative business model.

Great Ideas: Investments to make today The £4.6 billion cap is now refocusing on ‘Britishness’ under chief executive Jonathan Akeroyd, who has a strong track record of building luxury brands and driving profitable growth, and new designer Daniel Lee. Despite its FTSE 100 status, the company still has a long growth runway ahead with plans to broadly double sales of leather goods, shoes and women’s ready to wear products and grow outerwear revenues by around 50% in the medium term. In addition, Burberry has yet to reach its full potential in e-commerce. That said, sales growth is decelerating with the recent boom in luxury spending normalising and even well-heeled shoppers becoming more selective in the face of cost-of-living pressures. This backdrop is proving more challenging for mono-brands such as Burberry and more manageable for the likes of LVMH, a multi-brand conglomerate which sells products at higher price points, although this is reflected in Burberry’s discounted valuation. VALUATION TOO CHEAP TO IGNORE On 12 January 2024, Burberry downgraded its yearto-March 2024 adjusted operating profit guidance from around £550 million to the £410 million to £460 million range after Christmas sales fell flat against the backdrop of slowing luxury demand. Retail revenue fell 7% to £706 million in the 13 weeks to 30 December 2023 and comparable store sales were down 4%, although there were encouraging signs within the sales mix. While Burberry suffered sharp sales declines in the Americas and South Korea, sales in mainland China, a vital market for luxury goods, rose 8% and were 9% ahead in Japan, where the consumer has an appetite for British brands. China is struggling, but Burberry will be a prime beneficiary of any near-term recovery in the world’s secondbiggest economy once it filters through to consumer sentiment. Meanwhile, its ambitious new management team has set itself a medium-term goal of increasing sales to £5 billion, up from £3.1 billion in full year 2023, and lifting adjusted operating margins to 20%. Downgraded consensus estimates point to EPS (earnings per share) of 81.5p and a 51.5p dividend for the current financial year, rising to 84.7p and 53.1p respectively for the year to March 2025.

BURBERRY STILL HAS A RUNWAY FOR GROWTH

FY23 revenue by region Americas (24%) Asia Pacific (43%)

EMEIA (33%) EMEIA = Europe, the Middle East, India and Africa

Chart: Shares magazine • Source: Burberry

FY23 revenue by product Accessories

37%

Womens

28%

Mens

29%

Childrens & other

Chart: Shares magazine • Source: Burberry

Analyst coverage for Burberry Strong buy

Buy

Hold

Sell

Strong sell

Chart: Shares magazine • Source: Stockopedia

Based on these forecasts, Burberry trades on a 2024 PE (price to earnings) ratio of 15.9 falling to 15.2 times on next year’s numbers, a massive discount to a recent 2021 PE high approaching 40 times, and investors are being paid to wait for the recovery via an attractive 4% dividend yield. If the market doesn’t ascribe a fuller rating to Burberry before long, a luxury rival or private equity player could pounce with a bid, and a premium-priced one at that, since attractive acquisition targets in the luxury industry are few and far between. [JC] 08 February 2024 | SHARES | 15

Great Ideas: Investments to make today

For those seeking a better class of income, the Aristocrats look swell Only companies with an unblemished record are allowed in this ETF

SPDR S&P US Dividend Aristocrats SPDR S&P US US Dividend Dividend Aristocrats Aristocrats SPDR S&P (P)

SPDR S&P US Dividend Aristocrats UCITS ETF (USDV) Price: £54.30

(P) (P) 6,000 6,000 6,000 4,000 4,000 4,000

Assets: £3 billion

ocial media giant Meta Platforms (META:NASDAQ) is making waves across the pond with news of a maiden dividend but for investors seeking not just a reliable source of income from the US but one that is actually guaranteed to grow each year, the SPDR S&P US Dividend Aristocrats UCITS ETF (USDV) is the ideal investment. The fund is based on the S&P500 Dividend Aristocrats, a select group of companies which have all increased their payout every year for at least the last quarter of a century. If an Aristocrat company cuts or even just holds its dividend unchanged for a year, it exits the index and the clock is reset.

SPDR S&P S&P US US Dividend Dividend Aristocrats Aristocrats SPDR top holdings SPDR S&P US Dividend Aristocrats top holdings top holdings Company Company Company 3M

3M 3M Reality Income Reality Income Reality Income IBM IBM IBM Target Target Target Co Southern Southern Co Southern Co Kenvue Kenvue Kenvue T Rowe Price T Rowe Price T Rowe Price Abbvie Abbvie Abbvie Meditronic Meditronic Meditronic Kimberley-Clark Kimberley-Clark Kimberley-Clark Table: Shares magazine • Source: State Street SPDR Table: Shares magazine • Source: State Street SPDR Table: Shares magazine • Source: State Street SPDR

16 | SHARES | 08 February 2024

Weight (%) Weight (%) Weight (%) 3.3 3.3 3.3 2.8 2.8 2.8 2.4 2.4 2.4 2.2 2.2 2.2 1.9 1.9 1.9 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.7 1.7 1.7 1.7 1.7 1.7

2019 2019 2019

2020 2020 2020

2021 2021 2021

Chart: Shares magazine • Source: LSEG Chart: Shares magazine • Source: LSEG Chart: Shares magazine • Source: LSEG

2022 2022 2022

2023 2023 2023

2024 2024 2024

The index was created in May 2005, and unlike the S&P 500 itself is equally weighted so each constituent is rated the same, without bias, and the basket is rebalanced at the start of every quarter. Constituents must have a float-adjusted market cap of at least $3 billion as of the rebalancing date and a minimum daily liquidity of $5 million. To ensure diversification, there must be a minimum of 40 stocks (today it stands at exactly 100) and no single sector can account for more than 30% of the index weight. Since 1926, dividends have contributed nearly a third of total equity returns and the index is designed to capture sustainably rising dividends as well as capital growth potential. As you would expect, the index looks very different to the underlying S&P 500 – for example, it doesn’t include any of the ‘Magnificent Seven’ tech giants, even though Microsoft (MSFT:NASDAQ) is the biggest index payer in real terms, handing $22.3 billion to shareholders last year, and Apple (AAPL:NASDAQ) is the thirdbiggest payer with $14 billion in dividends. Even so, the Dividend Aristocrats ETF yields 2.28% compared with 1.39% for the S&P500, so there is a reasonable uplift in income, with a 0.35% ongoing charge. Over the last decade the ETF has generated an average total return of 11.15% against 12.62% for the benchmark, although that figure is somewhat distorted by the outperformance of big tech stocks in 2023, when the benchmark produced a total return of 20.82% while the ETF managed just 4.61%. [IC]

Great Ideas Updates

AG Barr fizzes higher on earnings upgrade and there could be more to come Soft drinks business looks in rude health as it confirms succession plans

AG Barr (BAG) 550p

Gain to date: 13.5% We flagged Scottish soft drinks maker AG Barr (BAG) in August 2023 arguing the company was not being given sufficient credit by the market for its sales momentum. We highlighted the strength of its portfolio of brands including IrnBru and Rubicon. WHAT HAS HAPPENED TO SINCE WE SAID TO BUY? We were on the money when we flagged ‘the scope for further upgrades’ as the company boosted guidance for the 12 months to 31 January 2024 in a 1 February trading update – with the notable detail that costs have stabilised. Prior to that, in October 2023, the company announced the £12.3 million acquisition of the Rio tropical drinks brand – a deal which was funded out of existing net cash. Commenting on the company’s strong trading, Liberum analyst Anubhav Malhotra says: ‘Cost inflation has returned to normal levels and the supply chain capex program is on track, with the group now having more confidence and visibility of delivering margin benefits from the program. We see scope for more [upgrades] as we see potential for faster revenue growth and faster margin recovery over the next two years.’ The company has also announced a replacement for longstanding and well-regarded chief executive Roger White who steps down at the end of April.

AG Barr (p) 560 540 520 500 480 Aug 2023

Sep

Oct

Nov

Dec

Jan 2024

Feb

Chart: Shares magazine • Source: LSEG

Saga (SAGA), Superdry (SDRY) and Co-op alumni Euan Sutherland is taking over. Significantly, he has served for eight years on the board as non-executive director at AG Barr peer Britvic (BVIC). White is on hand until the end of July to help smooth the transition. WHAT SHOULD INVESTORS DO NOW? While the stock has enjoyed decent gains and now trades on 15 times forecast earnings for the year to January 2025, we remain fans and continue to expect more earnings upgrades over the medium term. A strong balance sheet, with Liberum forecasting year-end net cash of around £50 million, provides AG Barr with the wherewithal to pursue further accretive acquisitions. [TS] 08February 2024 | SHARES | 17

SMALL CAP

STARS TO BUY TODAY The smaller businesses with big potential and why the time is right to invest By The Shares Team

ven today’s market giants started out small. Microsoft (MSFT:NASDAQ) may now be the world’s largest company with a $3 trillion valuation which rivals the GDP of some major global economies but it began life as a start-up founded by Harvard College drop-out Bill Gates and his childhood friend Paul Allen. Few then would have predicted its global domination today. While we are not expecting the names discussed in this article to enjoy the same stratospheric trajectory it does illustrate the inherent appeal of small caps, which, thanks to their scope to grow, can generate outsized returns if you invest in the right ones. On the flipside, because smaller companies are less well established, have less diversified businesses and often more precarious financial positions, you do need to have a reasonable tolerance for risk if you are going to invest in the small cap space. Another dynamic which is supportive to UK smaller companies, in particular, is valuation. The high interest rate environment and a broader reduction in risk appetite has helped create a negative backdrop and, with UK equities out of

18 | SHARES | 08 February 2024

favour more generally, smaller companies listed in London have struggled. The FTSE AIM All-Share index is down 18% over the last five years against a 50.1% advance for the FTSE AllWorld index. Stuart Widdowson, the manager of Odyssean Investment Trust (OIT), which invests in a concentrated portfolio of well-researched smaller companies, notes this beginning to change. He says: ‘Typically the first asset class to see good capital gains when the interest rate cycle turns are government bonds then it cascades into corporate bonds and then high yield bonds. Then the first element of equities that moves tends to be small cap and UK small caps look pretty interesting [on a global basis]. ‘You don’t need that much new money to come in to move share prices very materially. We don’t know what is going to change sentiment but we don’t think it’s too far away.’ To tap into a change in the prevailing mood music around smaller companies, Shares has identified five small cap stars which offer a mix of value and growth. Read on to discover our selections.

Celadon key milestones

Phase 1 completed - cultivation commences

Celadon licensed by UK Government

2018

2020

2021

Celadon awarded GMP certification1

LVL’s chronic pain study commences

Celadon’s IPO on AIM

Inaugural sales contract win Multiple LOIs in place

Preclinical studies for autism drug

2022

Revenue generation from product sales Upside potential from developing novel breakthrough drugs

Home Office licence updated to allow for commercial supply

Clinical trials

Chronic pain trial approved by NHS’s Ethics Committee

2023

2024+

1) Good Manufacturing Practices (GMP). Source: Celadon Pharmaceuticals

Celadon Pharmaceuticals (CEL:AIM) 84.8p

Market cap: £55.2 million AIM-quoted Celadon Pharmaceuticals (CEL:AIM) is in a great way to play the fast-growing medical cannabis market as it exploits its first mover advantage in a highly regulated market. Celadon has built a high-tech indoor hydroponic growing facility in the Midlands covering 100,000 square feet with a replacement cost of £65 million. The company is one of only two firms in the UK and 10-15 worldwide to have been awarded GMP (Good Manufacturing Practice) certification. It has also secured a Home Office license which allows it to commercially supply EU-GMP medical grade cannabis. Management has made rapid progress in securing commercial manufacturing contracts signing deals worth a combined £30 million in revenues over three years. Analyst Alex Brooks at Canaccord Genuity estimates the company can generate a healthy 70% gross margin on sales. In addition, Celadon has received approval from the NHS’s Research Ethics Committee to rollout a non-cancer chronic pain clinical trial for up to 5,000 patients. It is the first UK large-scale trial that will provide robust and reliable data on treating chronic pain

with cannabis-based medicines. Just as importantly for shareholders the NHS approval allows the company to charge fees. Brooks estimates the company could generate revenues of up to £18 million with an EBITDA (earnings before interest, tax, depreciation, and amortisation) of around £4 million at full capacity. The European medical cannabis market is forecast to grow eight-fold over the next five years according to industry consultant Prohibition Partners generating annual sales of €3.2 billion. Demonstrating keen interest from investors, the company raised £1 million of new equity in October and £2 million in December to fund expansion. Celadon also has a £7 million lending facility. Although there are above average risks in investing in smaller companies operating in new markets, Celadon has demonstrated great acuity and execution. [MG]

Celadon Pharmaceuticals (p) 200

0 2019

2020

2021

2022

2023

2024

Chart: Shares magazine • Source: LSEG

08 February 2024 | SHARES | 19

EnSilica (ENSI:AIM) 44p

Market cap: £35 million The UK listed chip space has been eaten alive by M&A over the past few years but recently a handful of new ambitious smaller companies have breathed new life into the sector. One of them, Oxford-based EnSilica (ENSI:AIM) has, we believe, exciting potential. With roots in intellectual property creation and consultancy, it has emerged as a fabless

EnSilica (p) 100 80 60 40 20 0

Jul 2022

Oct

Jan 2023

Apr

Chart: Shares Magazine • Source: LSEG

20 | SHARES | 08 February 2024

Jul

Oct

Jan 2024

ASIC chip designer. ASICs (Application Specific Integrated Circuits) are chips whose end use is very specific and complex, and often requires bespoke functionality. Set up in 2001 by former Nokia, Hitachi and Siemens engineer Ian Lankshear, EnSilica designs customised chips used in automotive, general industry, satellite communication and healthcare sectors. For example, carmakers use its chips to make vehicles handle the road more smoothly, manufacturers install them in factory robots, health firms deploy them for diabetic patches. Customers include global corporations and original equipment manufacturers to technology start-ups, although it is cagey about naming names, probably because of non-disclosure clauses. It joined the LSE’s junior AIM market in May 2022 at 50p per share, having to ride out relatively stormy market conditions. If EnSilica shares are to rally three things need to improve, or show solid signs of improvement; sales growth momentum, operating margin expansion and return on capital. Sales velocity is already showing promise. Comparing the periods 2019 to 2021 (to end May), 2021-23, and forecasts for 2023-25, revenues increased 37%, 138% and 57%. As for margins and return on capital (how efficiently in converts sales into profits, and how well it uses cash to make profit), both are coming from very low bases of 4% and 3.8%, so assuming sales momentum continues and running costs can be managed well, there should be scope for significant gains here.

For example, Texas Instruments (TXN:NYSE), one of the world’s leading ASIC chips designers, has operating margins of around 25% and returns on capital of 40%. Small caps can be accident prone with unpredictable sales cycles, and it is likely that EnSilica will need extra growth funding down the line, even after raising £1.56 million in December 2023. Potential investors will need to accept these risks, but if you do, we believe there could be a real gem of a business here using a business model that has worked for UK chips companies in the past, such as CSR and Wolfson Microelectronics, which were both taken over for large premiums. A buyout in the longer run may well be on the cards for EnSilica, if management can execute successfully enough. [SF]

Hargreaves Services (HSP) 475p

Market cap: £155 million Hargreaves Services 800p sum of the parts valuation

300p

200p

Land business

Services business

Germany

Source: Shares magazine

Whereas some of the other companies in this feature are mainly about growth, Hargreaves Services (HSP) is an asset-backed income play. The firm has a core infrastructure services business, a land business and a large stake in a German industrial materials business. The bulk of its revenue comes from the infrastructure side where it provides earthworks, mechanical and electrical services to major water and electricity companies, as well as working on HS2. It is also a preferred partner to Balfour Beatty (BBY) on the Lower Thames Crossing project, and it is the only contractor on site at the Sizewell C nuclear power plant in Suffolk. The land business owns large former brownfield sites which it upgrades and sells to developers, who

go on to build houses, industrial, logistics or retail warehouse assets and renewable energy projects. After a flat first half of 2023, activity has picked up significantly among the housebuilders and commercial activity is also increasing. Finally, Hargreaves owns 49.9% of the equity in – but the right to 86% of the earnings from – HRMS, a raw materials business in Germany which trades industrial materials, makes carbon and recycles ferrous metals. Using a sum-of-the-parts valuation approach, we believe the business is worth around 800p per share, nearly 70% more than its current market value and slightly above the 770p figure achieved by analysts at Singer Capital Markets using a similar process. We estimate the services business is worth around £100 million or 300p per share, the land business – where the assets are held at book cost – is worth another £100 million, or 300p per share, and the German unit has a book value of £67 million or 200p per share, excluding any profits generated. Obviously realising this value will take time, but in the meantime, investors have the comfort of a fully covered 36p annual dividend which equates to a 7.5% yield. [IC]

Hargreaves Services (p) 1,200 1,000 800 600 400 200 0 2010

2015

2020

Chart: Shares magazine • Source: LSEG

08 February 2024 | SHARES | 21

Kistos (KIST:AIM) 143p

Market cap: £118.5 million Kistos (p) 600 400 200

2021

2022

2023

2024

Chart: Shares magazine • Source: LSEG

If Kistos (KIST:AIM) had its way it may well not have been a small cap by this point. It had hoped a merger with Serica Energy (SQZ:AIM), which it tried and failed to pull off in 2022, would have been a ticket to Main Market status and a place in the FTSE 250. Having absorbed its failure to get that deal over the line, some other operational disappointments, and a significant drop in the high gas prices which followed Russia’s invasion of Ukraine, the shares have been marked substantially lower by the market. This has created what looks a pretty compelling opportunity for risk-tolerant investors to buy a company with enviable balance sheet flexibility, scope for significant growth in free cash flow from its existing portfolio and ambitions to target further deals in the northern European energy space. The company is run by Andrew Austin, who may be familiar to followers of the sector from his previous ventures – including Rockrose Energy (taken over in July 2020 in a £243 million deal). Kistos’ current producing assets are based in the Netherlands and, in line with the company’s strategy of delivering hydrocarbons with lower accompanying emissions, the platform on its core Q10-A field is powered through wind and solar generation. The company is also developing assets in Norway and to the west of Shetland. It received a boost in the latter region when Shell (SHEL) 22 | SHARES | 08 February 2024

received regulatory approval for the development of the Victory gas field. As it plugs into existing infrastructure, including Kistos’ co-owned Shetland gas plant, this could extend the life of the company’s own oil and gas assets in the area, reduce costs and potentially delay decommissioning. Kistos demonstrated its financial strength by paying down a little under €80 million worth of Dutch bonds early in December, which will reduce interest costs. It closed out 2023 with cash and ‘near-cash’ of €275 million (though net debt of €73 million according to investment bank Berenberg). Based on forecasts from Berenberg the company is expected to generate free cash flow of nearly €150 million in 2025 as new assets come on stream. This should provide the firepower for further M&A and is more than the current market value of the business. [TS]

Pro-forma area production forecast Production forecast, boe/d

UK 2P

NL 2P

Norway 2P

Group 2C

25,000 20,000 15,000 10,000 5,000 0

2023 2024 2025 2026 2027 2028

2P = proved and probable resources 2C = contingent resources. boe/d = barrels of oil equivalent per day. Source: Kistos

Victorian Plumbing (VIC:AIM) 87.9p

Market cap: £286.9 million Victorian Plumbing (p) 300 200 100 0 2022

2023

2024

Chart: Shares magazine • Source: LSEG

Investors seeking to tap into a growth stock with a sizeable total addressable market, scope for earnings upgrades and attractive income credentials should buy the UK’s leading bathroom retailer Victorian Plumbing (VIC:AIM). Admittedly, the £286.9 million cap operates in a competitive market with rivals ranging from Kingfisher (KGF)-owned B&Q to Homebase and Wickes (WIX), but this pure-play online retailer benefits from channel shift, a wider product range than rivals limited by store space and its high own-brand mix. Headwinds could

turn into tailwinds this year as falling inflation and interest rates lift consumer confidence. Despite a tough macroeconomic backdrop in the year to September 2023, Victorian Plumbing demonstrated resilience by growing sales, market share and profits and 2024 should be a transformational year for the taps and toilets retailer founded by CEO Mark Radcliffe. The key catalyst for the currently capacity-constrained firm will be the opening of its new automated distribution centre in Lancashire in mid-2024 which should accelerate growth and boost margins. This state-of-the-art warehouse will provide capacity to double sales to around £600 million, take on more stock within the core bathroom category and allow Victorian Plumbing to scale in the growth categories of lighting, flooring, tiles and trade, which could more than double its UK total addressable market to over £3.5 billion and provide scope for profitable cross-selling opportunities. A fortress balance sheet business flush with £46.4 million in the coffers at last count, Victorian Plumbing should benefit from the fall in shipping rates, which remain below pandemic peaks, as well as its recently launched app for trade and retail customers which should drive marketing efficiencies. Canaccord Genuity’s Karl Burns says: ‘We believe Victorian Plumbing could see a re-rating as revenue growth and margins rise.’ ‘While cash generation will also build, resulting in a higher dividend payout and yield, further supporting the share price.’ [JC]

Tap into an exciting growth and income stream Year to September

Sales (£m)

Adjusted pre-tax profit (£m)

EPS (p)

DPS (p)

Yield

2023

285.1

20.3

5.1

1.4

17.2

1.6%

2024 (F)

297.4

22.9

5.4

1.5

16.3

1.7%

2025 (F)

328.9

25.2

5.9

1.7

14.9

1.9%

2026 (F)

357.3

29.2

6.9

3.0

12.7

3.4%

PE & yield calculations based on 87.9p share price. EPS = earnings per share DPS = dividend per share PE = price to earnings Table: Shares magazine • Source: Canaccord Genuity

08 February 2024 | SHARES | 23

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Feature: Mergers & Acquisitions

Do mergers and acquisitions actually add value for shareholders? Why bolt-on acquisitions are preferable to ‘transformational’ deals

n an environment marked by intense global competition and industry disruption, successful mergers and acquisitions (M&A) are increasingly important to the growth and profitability of many companies. Yet research shows most mergers disappoint. Over the decades, multiple studies have shown that mergers and acquisitions fail to generate the anticipated synergies, and many actually destroy value instead of creating it. In other words, a significant percentage of M&A causes two plus two to equal three instead of five. Those are the views of Nuno Fernandes, professor of finance at Barcelona’s IESE Business School and the author of The Value Killers: How Mergers and Acquisitions Cost Companies Billions – And How To Prevent It . So why do companies continue to chase M&A deals and how can they improve the odds of adding rather than destroying value? BIGGER DOESN’T MEAN BETTER As professor Fernandes explains, the fact most M&A deals fail to create value is not random or down to bad luck but due to a series of failures starting at the pre-acquisition phase. In an article for the Harvard Law School Forum on Corporate Governance, he sets out the golden rules which companies need to stick to if they

aren’t going to destroy value. First, companies should never rely on investment bankers for valuation because ‘bankers are always on the side of the deal, not the company’. In other words, the bigger the deal the bigger the fees. Having an in-house valuation expert or business development group is a good start, but there still needs to be a vast amount of planning and attention to detail before a deal even comes to the table, looking at how it stacks up in terms of cash-flows, both before and after, and what is the right multiple. While there may be good commercial reasons to do a deal – improving manufacturing or distribution and reducing unit costs, for instance – there are just as many bad reasons. ‘Strategic deals’ in particular are dangerous as they usually amount to little more than empirebuilding or egomania on the part of the acquiring chief executive. The most obvious reason why deals don’t tend to add value is price – too many companies overpay for the target company’s assets even if the projected synergies do eventually materialise. ‘This seems both simple and obvious, but the reality is that most companies overpay. In fact, one could make an argument that, directly or indirectly, overpayment is the cause of the high M&A failure rate,’ says Fernandes. 08 February 2024 | SHARES | 25

Feature: Mergers & Acquisitions

HOW TO MAKE M&A A SUCCESS Instead of overpaying, companies need to think like financial investors and set a price limit meaning chief executives must be prepared to say no and walk away rather than do a deal at a poor price. ‘Successful acquirers develop models to identify the pros and cons of a deal, they avoid bidding wars, they exercise the discipline to walk away from bad deals, and they establish processes to keep CEO emotions in check. Overconfidence is a notorious value killer, and the board of directors has a strong role to play here,’ advises Fernandes. Companies should have a continuous process linking the pre-deal phase with the transaction and post-deal phase, assigning clear responsibilities and accountability to the executives or teams in charge of planning, negotiating and implementing the acquisition. ‘Too often, the people making promises about merger synergies are not the same ones in charge of putting those synergies into place. Ideally, companies should assign the same team members to every phase of the transaction, including the post-merger integration,’ suggests Fernandes. Linked to this, companies need to move fast and communicate effectively as the news that a company is in talks to be acquired can have a negative effect on employee morale and customer relationships. ‘Companies that communicate quickly, constantly and openly during a deal are better able to retain their focus and reduce uncertainty among customers and employees, especially the best employees of the target company. Because talent exodus is a big risk during most M&As, senior managers must be ready to answer the “What happens to me?” question before employees even ask it,’ is the advice. Finally, all successful acquirers have the management capability not to get distracted or pulled away from their day-to-day operations so deals which result in chief executives and finance officers taking their eye off the ball are likely to end badly.

26 | SHARES | 08 February 2024

WHAT ABOUT ‘BOLT-ON’ DEALS? Some of the most successful, highest-return businesses in the UK market are also serial acquirers, but their dealmaking doesn’t make the headlines. Instead of ‘strategic’, or worse still ‘transformational’ acquisitions, they seek out attractive smaller businesses which they can comfortably absorb to increase their geographical footprint or their commercial offering to clients, complementing their organic growth and making them more of a ‘one-stop shop’. Take equipment hire firm Ashtead (AHT), which in the year to April 2022 posted 22% growth in rental revenue helped by $2.4 billion of investments in its business and $1.3 billion spent on 25 small acquisitions. In the year to April 2023, the firm reported another 22% increase in rental revenue, helped this time by $3.8 billion of capital invested in the business and $1.1 billion spent on 50 small bolt-on acquisitions. All these investments are funded from operating cash flow, and they allow the company to open hundreds of new sites in North America to, in the words of chief executive Brendan Horgan, ‘take advantage of the substantial structural growth opportunities that we see for the business’. Alternatively, look at ‘global specialist’ acquirer Halma (HLMA), which in the year to March 2022 posted a 16% increase in revenue and a record profit for the 19th consecutive year thanks to strong organic growth, spending on R&D (research and development) and 13 small acquisitions for a total of £164 million. In the year to March 2023, Halma reported a 21% increase in revenue and its 20th consecutive

Feature: Mergers & Acquisitions year of record profit due once again to doubledigit organic growth, another hike in R&D spending and seven medium-sized acquisitions worth just under £400 million to complement its existing businesses. Or take the example of video games service company Keywords Studios (KWS:AIM), which saw revenue rise by 37% in the year to December 2022 driven by 22% underlying growth together with five ‘high-quality’ acquisitions, delivering against its strategy of extending its reach and capabilities while scaling its technology offering. For the year just ended, Keywords reported revenue growth may have slowed to 17% on a constant currency basis due to the Hollywood strikes but the firm still enjoyed nearly 10% underlying growth and made five more ‘highquality’ bolt-on acquisitions. ACQUISITION-DRIVEN COMPOUNDERS The appeal of these high-quality ‘acquisitiondriven compounders’ hasn’t gone unnoticed by professional investors. Scandinavian wealth management

firm REQ specialises in running ultra-longterm, concentrated equity funds focused on just such companies, including the three mentioned above. The managers look for companies which: • Are excellent at sourcing and closing frequent, small acquisitions in the private market at highly attractive multiples; • Have strong cash flow generation, which in turn is reinvested at high returns on capital; • Have management teams who are excellent capital allocators and often own a significant part of these companies; • Have decentralised business models and offer exposure to a diverse array of small private companies spanning multiple end-markets; • Have dual engines of profitable growth (organic and through acquisitions).

A selection of specialist and generalist 'acquisition-driven compounders' Specialist Acquirers

Generalist Acquirers

Ashtead

Constellation Software

AutoNation

Danaher

CDW Corp

DCC

Dassault Systemes

Diploma

Eurofins Scientific

Fastenal

Ferguson

Halma

Keywords Studios

IMCD

LVMH

Interpump

Nemetschek

Judges Scientific

Rollins

Nordson

Thermo Fisher

Roper Technologies

Watsco

Software Circle

Waste Management

TransDigm

Table: Shares magazine • Source: REQ Capital

08 February 2024 | SHARES | 27

Feature: Mergers & Acquisitions Acquisition-driven compounders, also known as ‘programmatic acquirers’, specialise in buying small, private niche businesses, frequently familyowned which enjoy a solid financial record and organic growth but typically lack the organic reinvestment opportunities to absorb the significant cash flow they produce. Once these small, niche business have been acquired, the strong cash flows they generate can be reinvested to generate a higher return on capital than their cost of capital for an extended period. At first glance, acquisition-driven compounders may seem confusing: ‘From a 30,000-foot view, what you see might look like a mess. The logical conclusion may be to embark on integration efforts as these businesses seem ripe for serious cost and sales synergies.’ However, a closer look at the highest-performing companies in the universe reveals a collection of decentralised and autonomous business units, each protecting its entrepreneurial independence. ‘Many of these businesses have distinct cultures, but they all thrive on ownership and autonomy enabled by decentralisation. Therefore, finding the right balance between decentralisation and integration represents an ongoing battle with temptations and difficult trade-offs,’ argue the managers. DISCLAIMER: The author of this article owns shares in Halma.

THE WORST M&A DEALS IN HISTORY The golden era of mega-takeovers was the late 1990s, when technology and telecom firms saw their valuations soar giving then the financial firepower to make all-share offers for their rivals. The biggest and most ill-timed deal of all time has to be AOL-Time Warner, a $165 billion transaction announced in January 2000 just before the tech bubble burst. The merged firm racked up almost $100 billion of losses in less than two years and the firms ultimately went their separate ways a decade later. Companies Involved

Value

AOL-Time Warner, 2000

$165 billion

Citicorp-Travelers, 1998

$83 billion

Daimler-Chrysler, 1998

$37 billion

Sprint-Nextel, 2005

$35 billion

CBS-Viacom, 1999

$35 billion

Alcatel-Lucent, 2006

$13 billion

HP-Autonomy, 2011

$12 billion

Kmart-Sears, 2004

$11 billion

Table: Shares magazine

By Ian Conway Deputy Editor

28 | SHARES | 08 February 2024

Funds: The bond funds to buy

The bond funds to buy as the rate hiking cycle draws to a close US markets have priced in several rate cuts for 2024

By Martin Gamble Education Editor

here are hopes for an improved picture for bonds in 2024 as the rate hiking cycle turns. In this article we look at the case for bonds, consider whether the 60/40 portfolio could make a comeback and look at our best ideas to play the bond market through funds. ARE BONDS POISED FOR A RECOVERY? As central banks signal an end to the interest rate hiking cycle Investors might be thinking the prospects for their fixed income investments look quite promising. Markets have repriced inflation expectations following sharp central bank interest rate hikes and bonds have experienced a scary drop in prices, especially those with longer maturities. In fact, the last two years have been one of the worst on record with cumulative falls in price for longer duration bonds exceeding the brutal drawdown (peak-to-trough fall) seen in the financial crisis. WHAT IS DURATION? Duration, based in part on the length of time until a bond matures, can help predict the likely change in the price of a bond given a change in interest rates. For every 1% increase or decrease in interest rates, a bond’s price will change approximately 1% in the opposite direction for every year of duration.

30 | SHARES | 08 February 2024

For example, if a bond has a duration of five years, and interest rates increase by 1%, the bond’s price will decline by approximately 5%. Conversely, if a bond has a duration of five years and interest rates fall by 1%, the bond’s price will increase by approximately 5%. The lower a bond’s coupon (interest paid as a percentage of the face value) and the longer the time to its maturity (when capital is returned) the more sensitive a bond’s price is to a change in interest rates. Higher duration bonds expose investors to the risk of inflation for longer which explains why long duration US treasuries have performed so poorly in the last two years. WHY PLAY BONDS THROUGH FUNDS? Because most corporate bonds have to be purchased in large denominations, they principally remain the preserve of institutional investors. For both this reason and in the interests of diversification, there is logic in using funds to gain exposure to the bond market. There are a large number of products available which target all different parts of the fixed income market.

Funds: The bond funds to buy

IS THE 60/40 PORTFOLIO STRATEGY STILL VALID? For the last 40 years, bonds have provided ballast against falling stock markets, a relationship statisticians describe as a negative correlation. It essentially means they move in opposite directions. Asset prices can also move together perfectively in lockstep, (positive correlation) or there might not be any strong relationship at all (zero correlation). The success of the popular 60-40 portfolio (60% equities, 40% bonds) has largely been

due to equity and bond prices moving in opposite directions. Take a typical bear market. Let’s say equities fall 30% and bond prices move up 10% as yields drop. A £100 portfolio with 100% in equities will fall to £70. A 60/40 portfolio will see its equity portion fall from £60 to £42 (60x 0.7) while the bond portion will rise to £44, (40 x 1.1) giving an overall value of £86. The strength and relative stability of bonds reduces the overall loss to 14%. The all-equity portfolio needs to gain 43% to get back to £100 (100/70) while the 60/40 only needs a 16% gain (100/86). The negative correlation relationship between stocks and bonds is strongest in government bond markets. Corporate bonds act more like stocks because of the credit risk associated with investing in company debt. One aspect to be aware of is that corporate bonds of lower quality are more susceptible to losses during a recession as weaker companies struggle to generate enough cash to service debts. In conclusion, there is a good chance bonds and stocks re-establish their negative correlation as interest rates fall but there is an outside chance that markets have moved into a new paradigm.

Equity/bond correlation in different inflation environments 0.47 0.40

0.40

0.34 0.27

0.25

0.20

1.1-2.0

2.1-2.5 2.6-3.0

−0.20

−0.21

3.1-3.5

3.6-4.0

4.1-6.0

6.1 plus

−0.17

Rolling 36-month correlation between one month S&P 500 total return and one month 10-yr Treasury return versus 3-yr average core inflation Chart: Shares magazine • Source: Bloomberg-Barclays, Shiller, Ruffer, GFD, BLS, Minack Advisors

08 February 2024 | SHARES | 31

Funds: The bond funds to buy

THE BULLISH CASE FOR INVESTING IN BONDS If interest rates are close to their peak in the current economic cycle a case can be made for locking in 4% plus yields on 10-year UK and US government bonds. Markets are anticipating as many as six interest rate cuts from the Fed this year which looks too aggressive relative to Fed forecasts of three cuts. There are two justifications why the central bank might cut rates. First, if inflation continues to fall towards target, not cutting rates increases the real rate of interest (nominal rate minus inflation) which tightens financial conditions. Given all the good work done so far to create the conditions for a soft landing, it would appear selfdestructive for the Fed to inadvertently push the economy into recession. Second, if the economy slows faster than anticipated it makes sense for the central banks to begin cutting interest rates. In any case Fed chair Jerome Powell has indicated the bank will not wait for inflation to return all the way back to 2% before cutting rates. In both scenarios bonds should do well if inflation remains well behaved. Investors can lockin a decent yield and potentially see capital gains as rates fall and prices rise. Another factor to consider is money flow. There is an estimated $6 trillion of cash sitting in US money market funds according to Bob Michele, head of global fixed income at JP Morgan. These investors are happy clipping 5.5% coupons in the current environment argues Michele but will quickly move into bonds when interest rates come down. 32 | SHARES | 08 February 2024

THE BEAR CASE There is no guarantee inflation will return to preCovid levels. Sticky, volatile inflation is the enemy of bonds as it eats away at the purchasing power of fixed income. Economist Mohamed El-Erian argues the combined effects of deglobalisation (more expensive supply chains) and the transition to a green economy imply higher levels of inflation than the past. The investment team at capital preservation fund Ruffer Investment Company (RICA) are in the same camp. They argue markets are too complacent on inflation risk. This matters for bond investors because history shows that during periods of higher inflation bonds do not provide protection against equity market turmoil. Under the scenario where inflation remains elevated and more volatile than in recent years bonds may struggle to perform. Longer duration bonds will be more vulnerable to the effects of inflation than shorter duration bonds.

PASSIVE EXPOSURE Investors interested in getting broad exposure to global bond markets might consider the iShares Core Global Aggregate Bond ETF (AGGU). This £2.4 billion fund invests in more 13,000 issuers and tracks the Bloomberg Global Aggregate Bond index for an annual charge of 0.1% a year.

Funds: The bond funds to buy

BOND FUNDS TO BUY ARTEMIS STRATEGIC BOND FUND INC (BJT0KT2)

INVESCO BOND INCOME PLUS (BIPS)

The £1 billion fund has a flexible mandate to invest across fixed income markets as the economic cycle turns and market conditions change. It invests in government bonds, investment grade bonds, and high yield bonds. The managers aim to preserve capital in difficult times and to profit when conditions improve. The fund has outperformed the Bloomberg Global Aggregate Bond Index over three, five and 10 years. The Artemis team have a positive view across the whole spectrum of bonds. In a recent update they said bonds of almost any variety are a buy and high yield bonds are attractive under almost any scenario. The fund typically holds between 100 and 130 positions and is well diversified across different sectors. The portfolio has around 73% exposure to corporate credit and the rest to government bonds. The fund has a 30% weighting to credit of the highest quality companies, 41% to companies on the lowest rung of investment grade and around 5% in the lowest quality. The underlying yield is 4.3% and the ongoing charge is 0.59% a year.

This £300 million fund is managed by Rhys Davies who is supported by Edward Craven of Invesco’s fixed income team which, combined, oversee assets worth £28 billion. The strategy is to maximise income without taking undue credit risk based on company specific research, taking a two-to-three-year view. Performance has been good with net asset value outperforming Morningstar’s Flexible Bond category over one, three and five and 10 years. The portfolio tends to be diversified across more than 160 issuers with the top 10 currently representing 37.5% of net asset value. The biggest sector exposures are financials (around 27% of net asset value) and insurance (8%) followed by automotives (7%), food and beverage (5%) and telecoms (5%). At the end of December 2023, the fund had a trailing yield of 7.5% and a yield to maturity of 8.6% which is higher than the ICE BofA European Currency High Yield index. Yield to maturity is the expected yield including capital gains (the portfolio’s average price was 92) and income. The fund has a duration of around four years. The ongoing charge is 0.86% a year and the shares trade at a 1.27% premium to net asset value.

Artemis Strategic Quarterly Bond

Invesco Bond Income Plus

(p)

(p) 200

85 150

80 75

100 2019

2020

2021

Chart: Shares magazine • Source: LSEG

2022

2023

2024

2010

2015

2020

Chart: Shares magazine • Source: LSEG

08 February 2024 | SHARES | 33

ADVERTISING PROMOTION

Fidelity Special Values PLC

An AJ Bell Select List Investment Trust

The recent strong relative performance of the UK equity market has gone largely unnoticed by investors, reinforcing its unloved status. Alex Wright, portfolio manager of Fidelity Special Values PLC, believes the value-oriented areas of the UK market represent a strong investment opportunity. Turning insight into opportunity Despite the UK being a value market, many of those who invest in the market don’t invest with a value bias. However, Alex looks to construct portfolios focused on unloved UK companies entering a period of positive change. The market is often slow to recognise change in out-of-favour stocks which creates opportunities to add value by identifying companies whose improving growth prospects are not yet recognised by other investors. Our broad analyst coverage means that we are able to find ideas across the market cap spectrum, giving us many shots on goal. Our network of over 400 investment professionals around the world place significant emphasis on questioning management teams to fully understand their corporate strategy. They also take time to speak to clients and suppliers of companies in order to build

conviction in a stock. Our approach translates into a clear bias towards small and mid-cap value stocks, compared to most of our competitors who are often less differentiated. It’s a consistent and disciplined approach that has worked well; the trust has significantly outperformed the FTSE All Share Index over the long term both since Alex took over in September 2012 and from launch over 29 years ago. To find out more visit www.fidelity.co.uk/specialvalues

Past performance Past performance Jan 2019 Jan2019 2020Jan Jan 2020

Jan 2020 Jan2020 2021Jan Jan 2021

Jan 2021 Jan2021 2022Jan Jan 2022

Jan 2022 Jan2022 2023Jan Jan 2023

Jan 2023 Jan2023 2024Jan Jan 2024

Net Asset Share PriceValue

11.4% 9.2%

−8.3% −6.7%

30.1% 29.8%

5.4% −4.5%

1.4% 2.5%

Share Price FTSE All Share Index

9.2% 10.7%

−6.7% −7.5%

29.8% 18.9%

−4.5% 5.2%

2.5% 1.9%

FTSE All Share Index 10.7% of future returns −7.5% Past performance is not a reliable indicator

18.9%

5.2%

1.9%

Net Asset Value

11.4%

−8.3%

30.1%

5.4%

1.4%

Past performance is not a reliable indicator of future returns Morningstar as at 31.01.2024, bid-bid, net income reinvested. ©2024 Morningstar Inc. Source: Morningstar at 31.12.2023, bid-bid, income ©2024index Morningstar All rights reserved. Pastrights performance isasnot a reliable indicator of future All reserved. The FTSE All Sharenet Index isreturns areinvested. comparative of theInc. investment trust The FTSE All Share Index is a comparative index of the investment trust Source: Morningstar as at 31.12.2023, bid-bid, net income reinvested. ©2024 Morningstar Inc. All rights reserved. The FTSE All Share Index is a comparative index of the investment trust

Important information The value of investments can go down as well as up and you may not get back the amount you invested. Overseas investments are subject to currency fluctuations. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The Trust can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. The trust invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies and the securities are often less liquid. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser. Investment professionals include both analysts and associates. Source: Fidelity International, 31 January 2024. Data is unaudited. The latest annual reports, key information documents (KID) and factsheets can be obtained from our website at www.fidelity.co.uk/its or by calling 0800 41 41 10. The full prospectus may also be obtained from Fidelity. The Alternative Investment Fund Manager (AIFM) of Fidelity Investment Trusts is FIL Investment Services (UK) Limited. Issued by FIL Investment Services (UK) Ltd, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0224/385993/SSO/0524

Exchange-Traded Funds: Gold

How to play gold through exchange-traded products Geopolitical tensions, a weaker dollar and potential interest rate cuts in the US have helped to push the precious metal to record highs

n December 2023 gold reached new all-time highs above $2,100 an ounce and it has been above $2,000 for all of 2024 to date. So far in the 21st century gold has even outperformed the total return from the S&P 500 – one of the best performing equity markets globally. According to the World Gold Council in 2023 the precious metal beat the performance of emerging market stocks, US bonds, the US dollar, global treasuries, and commodities in general. One of the most cost effective and straightforward ways to gain exposure to gold is exchange-traded products and we will explain why later in this article. WHY INVEST IN GOLD? The precious metal is often viewed by investors as a ‘safe haven’ during periods of geopolitical

Gold vs S&P 500 Rebased to 100 Gold bullion

S&P 500 (total return)

600

400

200

0 2000

2005

2010

2015

2020

Chart: Shares magazine • Source: LSEG

tension and economic uncertainty. ETF provider WisdomTree’s head of commodities and macroeconomic research Nitesh Shah says gold can function as a ‘hedge against inflation’ for investors as well as having ‘defensive’ and ‘cyclical’ 08 February 2023 | SHARES | 35

Exchange-Traded Funds: Gold qualities as part of a diversified portfolio. Gold price forecast He adds: ‘Although geopolitical risk seems to have calmed down a little since October 2023, Actual Consensus Bull Bear when the Israel-Hamas war broke out, this source of risk remains elevated. ‘In December 2023, Houthi attacks on ships 2,000 in the Red Sea highlighted that tensions in the Middle East are not simply confined to Israel-Gaza. 1,500 Chinese president Xi Jinping used his annual new year address to the nation to sound a warning 1,000 to Taiwan’s voters, days ahead of the island’s presidential election. He said, reunification of Taiwan and China was a historical inevitability. 2010 2015 2020 2025 ‘Many analysts had thought the prolonged war in Ukraine would be a deterrent to Xi in Chart: Shares magazine • Source: WisdomTree Model Forecasts, pursuing annexation of Taiwan, but recent Bloomberg Historical Data, data available as of close December 2023. rhetoric from Xi indicates that risk is still on markets are volatile. the cards.’ Analysts at JP Morgan are positive A peak in the current interest rate cycle about both gold and silver. Gregory is also potentially supportive for gold Shearer, head of base and precious prices. Because the precious metal metals said: ‘Across all metals, we offers no income, it tends to have have the highest conviction on a an inverse relationship with ‘real’ or bullish medium-term forecast for inflation adjusted interest rates. When the dollar both gold and silver over the course Another big driver for gold in recent drops in value, times is demand from central banks as gold typically rises, of 2024 and into the first half of 2025, though timing an entry will continue they seek to diversify their reserves. enabling central to be critical. Gold’s inverse relationship with the US banks to protect ‘At the moment, gold still appears dollar, another major reserve asset, their reserves quite rich relative to underlying rates is an element of its appeal for central and foreign exchange fundamentals, banks. When the dollar drops in value, when markets and still looks vulnerable to another gold typically rises, enabling central at volatile modest retreat in the near-term, as banks to protect their reserves when Fed rate cut expectations are now running earlier than our forecasts.’ JP Morgan forecasts gold prices will peak at $2,300 per ounce in 2025.

”

HOW TO INVEST IN GOLD Whatever the short-term trajectory for gold there are decent arguments for having exposure to the precious metal as part of a diversified portfolio. There are several ways to invest in gold. You can in theory buy the physical product – a kilo, coins, or a 400-ounce bar. The latter would set you back around $798,435 in today’s money and be pretty heavy to carry. There would also be the cost of storing physical gold (which adds up). It is not surprising then, that people invest in gold instead through 36 | SHARES | 08 February 2023

Exchange-Traded Funds: Gold

Gold ETCs compared

ETC

EPIC

Ongoing charges

Three-year performance (%)

Xtrackers IE Physical Gold ETC Securities

XGDU

0.11%

18.57%

Amundi Physical Gold ETC (C)

GLDA

0.12%

18.55%

Invesco Physical Gold A

SGLP

0.12%

18.80%

iShares Physical Gold ETC

SGLN

0.12%

18.39%

WisdomTree Core Physical Gold

GLDW

0.12%

18.68%

WisdomTree Physical Swiss Gold

SGBX

0.15%

18.77%

HANetf The Royal Mint Responsibly Sourced Physical Gold ETC

RMAP

0.22%

18.57%

iShares Physical Gold GBP Hedged ETC

IGLG

0.25%

n\a

WisdomTree Physical Gold - GBP Daily Hedged

GBSP

0.25%

5.69%

Xtrackers Physical Gold ETC

XGLD

0.25%

18.39%

Xtrackers Physical Gold ETC (EUR)

OXA5

0.25%

18.08%

Xtrackers IE Physical Gold GBP Hedged ETC Securities

XGDG

0.28%

5.26%

Invesco Physical Gold GBP Hedged ETC

SGLS

0.34%

5.17%

WisdomTree Physical Gold

PHGP

0.39%

17.91%

Gold Bullion Securities

GBSS

0.40%

17.84%

Table: Shares magazine • Source: JustETF, 2 February 2024

funds, investment trusts and gold an individual. mining shares. There is even a gold ETC backed by the Easy to buy and Among the lowest-cost options Royal Mint and created in partnership sell and can be can be found in the exchange-traded with HANetf. This product is backed held in a SIPP product universe. These gold vehicles by LBMA (London Bullion Market are not ETFs (exchange-traded funds) Association) good delivery bars that or ISA because their single-asset focus means are sourced on a best endeavour basis they don’t meet diversification criteria. from the LBMA’s Responsible Sourcing Instead, they are known as ETCs (exchange-traded programme to assure investors that the gold is commodities). They are easy to buy and sell and from conflict-free, legal sources. However, soothing can be held in a SIPP or ISA. any ethical concerns does come at a higher cost than the more plain-vanilla gold ETCs. THE RANGE OF GOLD ETCS The table compares the main products by both Many providers offer gold-related ETCs including cost and three-year performance. Xtrackers, WisdomTree, Invesco, BlackRock and Amundi. Most are backed by securely stored physical gold bullion. Providing all the benefits and By Sabuhi Gard Investment Writer security of owning physical gold at a significantly reduced cost compared to those you would face as

”

08 February 2023 | SHARES | 37

Editor’s View: Tom Sieber

How the WPP tortoise beat the S4 Capital hare Sorrell aimed to leave his former charge for dust but it continues to plug away while his new vehicle stalls

hen Martin Sorrell completed his acrimonious exit in 2018 from the business he had built up over decades he had a point to prove. His S4 Capital (SFOR) vehicle was supposed to leave his former charge in the shade by adopting a similar buy-and-build model to that employed at WPP (WPP). The latter started life as wire shopping-basket manufacturer Wire and Plastic Products before Sorrell and co-founder Preston Rabl acquired it in the mid-1980s as a listed entity through which to build a global advertising giant. The idea was S4 would be a clean digital-led marketing business without the legacy analogue bits which remained in the WPP group. Sorrell’s name, and some swiftly-executed acquisitions, initially created a real buzz and at its peak in 2021 S4 had a market valuation almost two thirds that of WPP. A big retrenchment in advertising spend has subsequently taken the air out of its balloon and the shares are down 95% from their highs. Revenue has reversed sharply; the company is scrambling to cut costs and Peel Hunt says it expects ‘little clarity on the outlook’ for 2025 ‘as visibility on client budgets will likely be low’. On the face of it, the story is only marginally happier at WPP. Under Sorrell’s successor, Mark Read, the shares have continued to slide against a difficult backdrop. However, it is a more established, more diversified business which has seen its way through several economic cycles, and the unshowy Read provided some evidence at the company’s latest capital markets day (31 January) that the business might have some life to it.

38 | SHARES | 08 February 2024

While S4 was making a splash with a series of acquisitions, WPP has made significant progress in simplifying an operation which had a lot of individual moving parts. While the growth targets outlined at the investor event are steady rather than stratospheric – with 3%-plus organic revenue growth being projected – if they can be delivered alongside stronger margin performance and improved cash flow they could help lift a valuation which, at a little more than eight times forecast earnings, feels pretty bombed out. Read was clear-eyed on the impact of AI (artificial intelligence). This author would be minded to agree with him that machines aren’t suddenly going to replace the creative elements of advertising. Instead, they can help increase efficiency in areas like buying media space for ads. What is striking is that AI is not a new thing for WPP. It has played a role for almost 10 years, with its adoption accelerated by the acquisition Satalia in 2021. This business builds and applies AI technology to solve efficiency problems for clients such as supermarket giant Tesco (TSCO) and Big Four accounting firm PwC. Shore Capital says the company’s use of AI is ‘the next chapter in its digital and technology adoption story, rather than a radical reboot – providing comfort around the likelihood of successful execution’. ‘We also regard the group’s ongoing commitment to self-help initiatives, investing in technology and building partnerships with key industry players, as key to cementing its position as a leading global player and its ability to add value to a diversified blue-chip client base,’ add the analysts.

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Impax Asset Management Group (IPX) Ian Simm, Founder & Chief Executive Impax Asset Management Group (IPX) offers a range of listed equity, fixed income and private markets strategies. All strategies utilise the firm’s specialist expertise in understanding investment opportunities arising from the transition to a more sustainable economy.

Sovereign Metals (SVML) Sapan Ghai, Chief Commercial Officer Sovereign Metals is a mineral exploration company. It is engaged in the mineral exploration, identification, and appraisal of resource projects.

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Personal Finance: Mortgage rates

Mortgage rates have fallen, what does it mean for homeowners? Home loans are becoming more affordable but you still need to be alert

he Bank of England has held interest rates for a fourth time, but despite that mortgage rates are dropping, giving some hope for homeowners who are refinancing. The base rate was kept at its 15-year high of 5.25% at the Monetary Policy Committee’s first meeting of 2024. However, the year has started with a significant drop in mortgage rates, despite there being no shift in base rate. We’ll look at the outlook for rates, what the fall means for those who are coming to remortgage this year and what action homeowners can take. WHAT’S THE OUTLOOK FOR INTEREST RATES?

Market expectations are that base rate will be held at current levels until May or June this year, when the Bank will make its first cut to rates. It is then expected that it will keep cutting for the remainder of the year, with rates ending up at around 4.25% by December this year – a significant drop from where we are now. However, this is just what the market expects and the Bank of England has continually said it’s potentially too soon to be talking about rate cuts. We have also learnt from recent experience that a few bits of economic data can make a big difference to rate expectations. If inflation proves stubborn, for example, the path to rate cuts could change. WHY HAVE MORTGAGE RATES DROPPED WHEN BASE RATE HASN’T? Mortgages are priced based on market expectations of interest rates but also on competition. At the start of 2024 we saw a number 40 | SHARES | 08 February 2024

of big lenders come out and cut their rates, which prompted others into rate cutting action. This will partly be based on the expectation that rates are going to fall, with mortgages being priced based on interest rates across the two or five years of the fix, not just what rates are today. It will also partly be based on a lacklustre housing market meaning that not as many people have been taking out mortgages – so banks and building societies need to price more attractively to sell more. WHAT ARE RATES NOW? The latest Bank of England data shows a drop in the interest rate paid on new mortgages by six basis points in December – which was the first fall in average mortgage rates for three years. Based on Moneyfacts data since the start of August 2023, the average two-year fixed rate mortgage has fallen from 6.85% to 5.56% and the average fiveyear fixed rate has fallen from 6.37% to 5.18%. But what’s perhaps more dramatic is the drop we’ve seen this year, with the average two-year deal falling from 5.93% to 5.56%, and the five-year deal falling from 5.55% to 5.18%. Also bear in mind that these are average figures, so those with good credit ratings and a healthy loan-to-value ratio will be able to lock in much lower rates. However, there are some words of caution that these rates may not last. Rachel Springall, finance expert at Moneyfactscompare.co.uk, says: ‘Lenders

Personal Finance: Mortgage rates

How rates have changed in the mortgage market 8.0%

Standard variable rate (SVR)

6.0

10-year fixed mortgage Two-year fixed mortgage Five-year fixed mortgage

4.0

2.0

Jan 2022

Apr

Jul

Oct

Jan 2023

Apr

Jul

Oct

Jan 2024

Average rates shown are as at the first available day of the month, unless stated otherwise. Chart: Shares magazine • Source: Moneyfactscompare.co.uk

can pull deals if they have an influx of applications, and a volatile swap rate market can put pressure on pricing where margins are already tight. It would be inevitable to see a mix of both fixed rate rises and cuts when lenders endeavour to manage consumer demand, any targets and future rate expectations.’

MY FIX IS UP THIS YEAR, WHAT SHOULD I DO? Around 1.5 million homeowners have a fixed rate mortgage deal coming to an end this year, according to the FCA (Financial Conduct Authority), which means they need to face the realities of higher mortgage rates for the first time. The best thing to do is be prepared. Make a note of when your fixed rate deal is up and put a note in your diary for six months ahead. At this point you can lock in a new mortgage deal – if rates fall in the six months between then and when your fixed rate deal expires you can move to the lower rate – but by getting a deal in place six months ahead you have a fallback plan. You can use a broker to help

navigate this (there are fee-free brokers out there) or do it with your current lender. The worst thing you can do is let your fixed rate deal elapse and fall onto the lender’s standard variable rate or reversion rate. It’s the default rate that you go onto when your fixed-rate deal expires and you haven’t lined up a new one, but it is the most expensive rate a mortgage lender will charge and currently some are charging 8% or even 9%. Even a few months on this rate could be financially crippling for some – so avoid it at all costs. While mortgage rates have dropped, they are still almost guaranteed to be higher than your current deal. So, it’s good to work out ahead of time whether your new repayments will be affordable or not. If you need to reduce your monthly repayments you could extend the term of your mortgage – although this will cost you more in the long-run – or you could switch to an interest-only deal for a while (but this should be a short-term move rather than a long-term plan). If you think you’re going to struggle to make your payments ahead of your fixed rate deal ending (or if you’re on a variable rate deal) contact your lender as soon as possible to work out your options. You can also get help from organisations like Citizens Advice. By Laura Suter AJ Bell Head of Personal Finance

08 February 2024 | SHARES | 41

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ANEXO GROUP (ANX) A specialist integrated credit hire and legal services group focused on providing replacement vehicles and associated legal services to impecunious customers who have been involved in a non-fault accident. REABOLD RESOURCES (LSE- RBD) The principal activity of the company is an investment in pre-cash flow upstream oil and gas projects, primarily as significant minority interests in unlisted oil and gas companies or majority interests in unlisted oil and gas companies with non-operating positions on licenses. TEAM INTERNET (TIG) Since 1996, (formerly CentralNic) has been transforming the way organisations, brands, publishers and consumers connect and thrive online. TIME TO ACT PLC A development business focusing on Advancing Clean Technologies. We own, operate, improve and scale up cleantech and renewable supply chain businesses with promising profiles but embedded challenges that we can help to overcome.