Shares Magazine 12 May 2022 by Shares Magazine

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WILL MARKETS PICK UP SOON? We examine what's gone wrong and what might come next

WANT DIVIDENDS?

Three great stocks for sustainable income in an inflationary environment

A NATURAL HOME FOR YOUR CAPITAL SCAN ME

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• LAUNCHED IN 1988 •

Highly successful partnerships can be found throughout nature. With the health of the global economy so closely linked to the health of our environment, we believe there are ample opportunities for investors to align their interests with those of Mother Nature. Since 1988, we’ve been investing in companies whose core products and services address global sustainability challenges. By focusing on companies creating positive ecological outcomes, our Environmental Solutions team is dedicated to seeking long-term sustainable investment returns. We call this human advantage ‘the value of active minds’. To discover more reasons to consider an allocation now, visit jupiteram.com As with all investing, your capital is at risk.

This advert is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. The Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. *Source: The climate warming stripes graphic depicts annual mean global temperatures (1850-2018, from World Meteorological Organization data). The graphic represents Jupiter’s firm-wide, public commitment to playing its part in actively addressing one of the greatest challenges facing our planet. Credit: climate scientist Ed Hawkins, University of Reading, UK. Use of the graphic does not imply endorsement of any product or service by its creator. Graphic used under licence: Creative Commons – Attribution-ShareAlike 4.0 International – CC BY-SA 4.0. Jupiter Unit Trust Managers Limited, registered address: The Zig Zag Building, 70 Victoria Street, London SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. JAM02156-002-0222

Contents EDITOR’S

05 VIEW

Times are getting tougher so health check your investments now

06 NEWS

Retail warnings do not bode well for Marks & Spencer’s results / Shell’s dividends look safe despite windfall tax talk / Private equity is now casting its eyes over a sold-off UK tech sector / Investors will be hoping for a bumper crop from Deere’s next results

GREAT IDEAS

New: Adobe / Home REIT Updates: SDI / K3 / Smithson / Latitude Horizon Fund

FEATURE

Will markets pick up soon? We examine what’s gone wrong and what might come next

23 FEATURE

Three great stocks for sustainable income in an inflationary environment

29 FEATURE

This might happen to bitcoin now interest rates are rising

DANNI HEWSON

34 FUNDS

INVESTMENT

Can Ferrari’s former superstar drivers help Aston Martin turn the corner?

Not everything is having a bad time. One fund is up nearly 18% this year

36 TRUSTS

Investment trusts versus funds: how do they differ and what are their pros and cons?

38 ASK TOM

I’ve inherited £3,000 – should I pay early on my mortgage or add to my pension pot?

UNDER THE

40 BONNET

Future is starting to look more interesting after a 49% share price fall this year

43 FEATURE

Why AG Barr is the best UK soft drinks firm to invest in right now

45 INDEX

Shares, funds, ETFs and investment trusts in this issue

DISCLAIMER IMPORTANT Shares publishes information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters. Comments published in Shares must not be relied upon by readers when they make their investment decisions. Investors who require advice should consult a properly qualified independent adviser. Shares, its staff and AJ Bell Media Limited do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions. Members of staff of Shares may hold shares in companies mentioned in the magazine. This could create a conflict of interests. Where such a conflict exists it will be disclosed. Shares adheres to a strict code of conduct for reporters, as set out below. 1. In keeping with the existing practice, reporters who intend to write about any

securities, derivatives or positions with spread betting organisations that they have an interest in should first clear their writing with the editor. If the editor agrees that the reporter can write about the interest, it should be disclosed to readers at the end of the story. Holdings by third parties including families, trusts, self-select pension funds, self select ISAs and PEPs and nominee accounts are included in such interests. 2. Reporters will inform the editor on any occasion that they transact shares, derivatives or spread betting positions. This will overcome situations when the interests they are considering might conflict with reports by other writers in the magazine. This notification should be confirmed by e-mail. 3. Reporters are required to hold a full personal interest register. The whereabouts of this register should be revealed to the editor. 4. A reporter should not have made a transaction of shares, derivatives or spread betting positions for 30 days before the publication of an article that mentions such interest. Reporters who have an interest in a company they have written about should not transact the shares within 30 days after the on-sale date of the magazine.

12 May 2022 | SHARES |

Your interests and ours, deeply aligned. For over 150 years we have been earning our investors’ trust, and earning them 50 consecutive years of dividend growth. For decades we’ve been investing responsibly in quality companies around the world to have a positive impact on the earth too. Find out more at

fandcit.com/future Capital is at risk and investors may not get back the original amount invested.

Responsible for our future

BMO Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Registered Office: Exchange House, Primrose Street, London EC2A 2NY. Registered in England & Wales No 517895. 1573649 (09/21). UK

Daniel Coatsworth

EDITOR’S VIEW

Times are getting tougher so health check your investments now McColl’s won’t be the only business to collapse this year

t’s always disappointing to see businesses struggle and sadly the numbers could get worse given the Bank of England’s warning about a big slowdown in the economy and 10% inflation. The troubles at McColl’s Retail (MCLS) have set the scene for difficult times ahead. The company has gone into administration and shareholders are set to lose everything, even though the business is subsequently being acquired by Morrisons. This provides a reminder that investors need to check the health of companies in their portfolio. In a rising interest rate environment indebted companies will be under increasing pressure when it comes to servicing their debts, should they have variable rate borrowings. If they need to renegotiate any loans or credit facilities, the cost of servicing that debt is likely to jump sharply. McColl’s has tiny operating margins and 2022 earnings forecasts have been fiercely downgraded over the past year. Supply problems and a long struggle to compete against the large supermarkets left the business in mess, and that’s no good when debts are high. You’re highly unlikely to find examples of companies going into administration for fund portfolios run by the likes of Nick Train and Terry Smith. That’s because they look for quality companies and balance sheet strength is a key attribute they require before considering a stock for their portfolios. When times are hard, quality companies can ride out the storm because they have the financial strength to cope with short-term shocks. Perhaps you might want to consider increasing exposure to quality stocks in your portfolio?

If the backdrop is so gloomy, it might pay to invest in an insolvency practitioner as their earnings prospects improve if the country is heading towards a recession. FRP Advisory (FRP:AIM) is Shares’ top pick. During the global financial crisis of 2007 to 2009 and again during the Covid pandemic of 2020/2021, the UK government stepped in to help companies in financial distress, which essentially prolonged the life of many businesses. Support measures are now less pronounced, which suggests a greater number of weak companies could go to the wall. Begbies Traynor’s (BEG:AIM) latest Red Flag Alert report found the number of firms in critical financial distress increased to 1,891 in the first quarter of 2022, almost a fifth higher than the same period last year. County Court Judgements, which are a warning sign of future insolvencies, were up 157% to 22,552 in the first quarter compared with a year ago. March saw the highest number in a single month for five years. If you do find one of the companies in your portfolio goes into administration, sadly the investment is likely to be worthless. A company’s shares will be suspended when it goes down this route and there are no real options for ordinary investors to trade them beyond this point, even if a buyer is found for part or all the business. In most cases the shares will eventually be delisted. An administrator’s goal is to keep a business trading while it finds a buyer or to reach a deal with creditors by selling the company’s assets. Shareholders are last in line when it comes to claiming any money left on the table. 12 May 2022 | SHARES |

NEWS

Retail warnings do not bode well for Marks & Spencer’s results Shares in consumer-facing companies are falling in both the UK and the US

he market is increasingly concerned about the outlook for Marks & Spencer (MKS) ahead of the retail bellwether’s full year results on 25 May, judging by a 42% year-to-date share price decline. Investors should prepare themselves for potential news of disappointing recent sales and a downbeat outlook statement. There is clear evidence of faltering UK consumer confidence with Boohoo (BOO:AIM), Joules (JOUL:AIM) and Seraphine (BUMP) all recently coughing up fresh profit warnings. Next (NXT) served up a solid first quarter update on 5 May and reiterated full year sales and profit guidance. However, the impact of its planned price increases to mitigate cost inflation is yet to be seen, with hard-pressed shoppers grappling with soaring energy and other bills. Interest rates are rising, and the Bank of England expects inflation to peak as high as 10% later this year, before falling back below 2% in two years’ time. There is also growing chatter about a potential house price crash in the UK if consumer finances are squeezed further and the economy stutters. These factors are crushing consumer confidence and shoppers are already cutting back on nondiscretionary purchases including clothing and bigticket homewares. BLEAK RETAIL SALES FIGURES The BRC-KPMG Retail Sales Monitor for April 2022 confirmed on 10 May that shoppers were low on confidence, with total sales in April down by 0.3% year-on-year, with the rising cost of living putting the brakes on consumer spending. Sales growth has been slowing since January, though the real extent of this decline has been masked by

| SHARES | 12 May 2022

rising inflation. Crumbling consumer confidence has negative implications for Marks & Spencer, which could see last year’s encouraging progress behind a clothing and home business with an improved range and value proposition halted as shoppers pull in their horns. Another risk is Marks & Spencer’s ever-reliable food business could begin to suffer as shoppers watch their pennies and trade down to cheaper rivals, among them German discounters Aldi and Lidl which collectively account for 15.4% of the UK grocery market according to the latest figures from Kantar, up from just 5.5% a decade ago. Investors will also be worried about the outlook for Marks & Spencer’s online business given a negative read-across from earnings alerts across the sector. For example, online fast fashion retailer Boohoo saw its latest full-year pre-tax profit decline from £124.7 million to just £7.8 million as distribution costs rose and the level of customer returns increased. Boohoo warned to expect no revenue growth in the first half of the current financial year and low single-digit growth for the year, with its customers under financial pressure. Premium British lifestyle group Joules warned market conditions have become more challenging and flagged a hit to margins from increased promotions and reduced demand for full-priced goods. Shares in maternity brand Seraphine slumped

NEWS Selected UK retail and e-commerce stocks year-to-date

Selected US retail and e-commerce stocks year-to-date

Joules

−70%

Vroom

−90%

Musicmagpie

−69%

Wayfair

−67%

Victorian Plumbing

−52%

Etsy

−61%

Naked Wines

−50%

Chewy

−55%

ASOS

−46%

−45%

JD Sports Fashion

−46%

American Eagle Outfitters MercadoLibre

−43%

Moonpig

−45%

Amazon

−36%

Boohoo

−42%

Foot Locker

−35%

Marks & Spencer

−42%

GameStop

−33%

Pets at Home

−40%

Gap

−29%

AO World

−38%

Bath & Body Works

−28%

Dunelm

−37%

Buckle

−27%

Halfords

−36%

Ebay

−26%

B&M

−28%

Lowe's

−24%

Kingfisher

−28%

Urban Outfitters

−21%

−26%

Currys

−23%

Frasers

−15%

WH Smith The Works

−7% −3%

Chart: Shares Magazine • Source: SharePad. Data to 10 May 2022

after it cut guidance for 2022 and 2023 due to cost inflation and weakening consumer sentiment across Europe pinned on the cost-of-living crisis and Russia’s invasion of Ukraine. Shares said to buy Marks & Spencer at 178.5p last September and the price had advanced to 256p by January. It has since fallen to 134.9p. Given a lot of potential bad news has now been priced in, wait for the results to see how the business is coping before deciding whether to sell now or sit tight for a recovery. CARNAGE ACROSS THE POND Retailers’ share prices have also cratered across the pond, where the US Federal Reserve is hiking rates to tame inflation. Shares in major e-commerce companies have sold off heavily amid slowing growth as consumer

Macy's

−14%

Build-A-Bear Workshop

−10%

Best Buy

−10%

Target

−3%

Abercrombie & Fitch

−2%

Chart: Shares Magazine • Source: SharePad. Data to 9 May 2022

shopping habits return to pre-pandemic normality and inflation cools spending. They include online shopping giant Amazon (AMZN:NASDAQ), off 36% year-to-date. Weak guidance has weighed on webbased auction and shopping platform Ebay (EBAY:NASDAQ) and arts and crafts website Etsy (ETSY:NASDAQ), while online peers Wayfair (W:NYSE) and Shopify (SHOP:NYSE) are also down heavily year-to-date. All eyes are now on upcoming earnings from major US retailers for a read on the strength of the US consumer. Walmart (WMT:NYSE), the world’s biggest retailer, and home improvement giant Home Depot (HD:NYSE), will update the market on 17 May. Target (TGT:NYSE), and Lowe’s (LOW:NYSE) report earnings on 18 May, followed by Foot Locker (FL:NYSE) on 20 May. [JC] 12 May 2022 | SHARES |

NEWS

Shell’s dividends look safe despite windfall tax talk The oil major should be able to shrug off the impact of any additional levy

ased on consensus forecasts Shell (SHEL) offers a 3.7% prospective dividend yield for 2022. Once you also factor in share buybacks, investment bank Berenberg has forecast the highest returns for the company’s shareholders in a decade. But how safe are these returns of capital given the pressure on the company to invest more in oil and gas, continue to progress its transition into greener forms of energy and the threat posed by a windfall tax on profits? The latter is arguably the most immediate issue. We can’t see any kind of windfall tax in the UK making a huge difference to Shell. According to the 2021 annual report, just 4.4% of its oil production and 1.9% of its natural gas output

came from the UK. Also, in 2021 the company didn’t pay any tax on its UK oil and gas production and received a tax refund of around £100 million as it offset costs linked to the decommissioning of old fields. Investing to produce more fossil fuels and, conversely, to boost its footprint in areas like renewables is a longer-term issue and therefore harder to predict. Further volatility in commodity prices will impact cash flow. However, the continuing improvement in Shell’s balance sheet – net debt was down from $52.6 billion at the end of 2021 to $48.5 billion three months later – means it is well positioned to maintain its current returns via dividends and buybacks. [TS]

Private equity is now casting its eyes over a sold-off UK tech sector £1.09 billion deal for Ideagen shows appetite for quality recurring revenue businesses THE MASSIVE SELL-OFF of technology growth stocks in 2022 to date may see an acceleration of opportunistic buyouts from private equity funds flush with cash. On 9 May, compliance and regulation software supplier Ideagen (IDEA:AIM) agreed a takeover deal from private equity outfit firm Hg worth £1.09 billion, while also opening its books to Hg’s counterpart Astorg. ‘Following initial reports of take private interest in Ideagen last 8

| SHARES | 12 May 2022

month, we emphasised the fact that this could be the start a wave of take privates in the coming months on the back of the broad sell-off of technology stocks,’ says Megabuyte analyst Cameron Naylor. ‘Hg’s offer for Ideagen highlights that despite the downward pressure on public market valuations, private equity is prepared to pay similar prices to before the sell-off for the high quality, recurring revenuebased businesses in which they like to invest.’

This could potentially draw private equity buyers for companies such as GB Group (GBG:AIM), Craneware (CRW:AIM) and CentralNic (CNIC:AIM), which all benefit from high levels of recurring income. Telecoms billing software firm Cerillion (CER:AIM) and online compliance training firm Skillcast (SKL:AIM), which only listed in December 2021, are smaller companies with growing recurring revenue bases. [SF]

NEWS

Investors will be hoping for a bumper crop from Deere’s next results Agriculture-related stocks have been big winners year-to-date amid soaring crop prices

ext Friday (20 May) sees the muchanticipated release of second quarter earnings from iconic US tractor maker Deere & Co (DE:NYSE). After a strong first quarter to the end of January, when the firm beat estimates for both revenue and earnings by some margin and chief executive John C. May raised full year profit guidance, it’s fair to say expectations are high. In its latest quarterly report, rival farm equipment-maker CNH Industrial (CNHI:NYSE) soundly beat earnings forecasts for the three months to March thanks to ‘exceptionally strong’ order books in agriculture and construction. Reduced crop supplies due to shortages in Canada and Latin America combined with the conflict in Ukraine and sanctions on Russia mean global grain markets will remain tight potentially beyond the end of this year, keeping prices high. This in turn offers an incentive for farmers elsewhere to invest in the latest farm tools and machinery to boost the yield on their crops. CNH chief executive Scott Wine said the firm was managing the supply chain crisis and increasing

CNH and Deere have held up well this year CNH INDUSTRIAL

DEERE

0 2018

2019

2020

2021

Chart: Shares Magazine • Source: Refinitiv. Rebased to first

2022

customer deliveries, but at the same time he cautioned investors: ‘Don’t underestimate how difficult the environment is, it’s a battle.’ The firm also took a $71 million hit for the closure of its Russian operations, while Deere has yet to disclose the extent of lost sales due to the conflict in Ukraine. In one incident, Russian troops attempted to steal $5 million worth of tractors from a dealership in Ukraine only to find they were remotely disabled by employees in Illinois. The agriculture and agrochemical sub-sectors of the market have been outperforming since hostilities started and sanctions were imposed as Russia is a major supplier of potash, a key feedstock for fertilisers. This has sent the global price of fertiliser – and companies which make it, such as CF Industries (CF:NYSE) and Mosaic (MOS:NYSE) in the US and K+S (SDF:ETR) in Germany – soaring in the past eight weeks, although much of their gains have been reversed in recent days. Even fairly obscure firms like Harvest Minerals (HMI:AIM), which mines volcanic rock in the Minas Gerais area of Brazil and mills it to make fertiliser, have seen their shares rocket this year as demand has soared. Shares in US food processing and commoditiestrading giant Archer-Daniels-Midland (ADM:NYSE) have risen more than a quarter this year due to ‘robust and resilient’ demand for grains in particular. [IC] 12 May 2022 | SHARES |

Buy dominant Adobe now before rest of the market wakes up to its appeal Creative software market leader has growth and quality credentials and trades at a discount to its usual rating

etting against the market is always risky and it may feel contrarian to be thinking about buying anything technology-related. But we think Adobe (ADBE:NASDAQ) stands out for three clear reasons: its consistently strong financial performance; its exposure to structurally growing markets; and its powerful balance sheet. This is a high-quality business getting very short shrift from the markets right now. Despite beating analyst forecasts in the first-quarter, its shares still slumped 9% (22 Mar), and they have continued to fall. Year-todate, the stock has lost 33%, or 45% from its one-year peak in November. Adobe’s 2022 price to earnings multiple is now 27.5, falling to 20 next year. That might not look especially cheap, but it is historically low for a business consistently growing in the mid-teens and delivering 35% and 25% returns on equity and investment, respectively. A DOMINANT FORCE IN DIGITAL CONTENT Adobe is a dominant force in the creative digital content industry, with more than 50% of the creative software market, according to analysts. We’re all familiar with PDF

| SHARES | 12 May 2022

documents and many readers will know its Photoshop image editing product, but the company’s suite extends far deeper with professional Creative Cloud products like InDesign, Illustrator and Premiere Pro, among others. Effectively, whenever you view an image, video, website, magazine, or even an app, there is a good chance it was created

ADOBE

 BUY

(ADBE:NASDAQ) $376.91 Market cap: $178 billion

Adobe's quarterly performance versus forecasts Reported earnings per share ($) $0

Forecast earnings per share ($) $2

Q1-22 Q4-21 Q3-21 Q2-21 Q1-21 Q4-20 Q3-20

Adobe's quarterly performance versus forecasts Chart: Shares • Source: Company reports, Investing.com Reported revenue ($ billion) $0

Forecast revenue ($ billion) $2

Q1-22 Q2-21 Q3-21 Q2-21 Q1-21 Q4-20 Q3-20 Chart: Shares • Source: Company reports, Investing.com

using Adobe software. We see the company as a major beneficiary of continued explosive growth in this market as ever-richer digital content is consumed across multiple devices. A ROLE IN THE METAVERSE It could also become a key creative force in building the metaverse if people like Facebook’s Mark Zuckerberg and Microsoft’s (MSFT:NASDAQ) boss Satya Nadella, who have bet big on the virtual vision of the future internet, are right. Since 2018, Adobe’s sales have grown from $9 billion to $15.8 billion in fiscal 2021 (to 3 December), with 92% of that coming from annually renewing subscriptions, up from 86% in 2019. Recurring subscription revenue is important. Subscriptions come at a low marginal cost to the company, which gives Adobe control over its own operating expenses, which is good news in the current inflationary environment. This is illustrated by the firm’s gross margins, up from 85% in 2019 to 88% last year. The subscription model is unlocking international growth opportunities and helping to combat software piracy, while drawing users into an ecosystem from which it is difficult to break free. That past success means that investors can have reasonable confidence in the company’s execution and ability to keep on tapping opportunities. Adobe thinks there’s plenty of room to grow, with a total addressable market for its Creative Cloud products

of $63 billion. For reference, Creative Cloud revenue for 2021 was $9.6 billion. Similarly, management claims the addressable market for its Document Cloud products (electronic signatures and more) is $32 billion. In 2021, Adobe reported $2 billion in Document Cloud revenue. Even if these projections turn out to be overly optimistic, it is still reasonable to assume there’s plenty of space for Adobe to continue to take market share and expand its ecosystem, selling a wider variety of products to users, with the cloud at its heart. ALL ABOUT COLLABORATION Enabling users to collaborate from anywhere in the world is key for the creative industry, and Adobe made an important acquisition in this space when it agreed to purchase cloud-based video collaboration company Frame.io in October 2021. Another project it has launched is a ‘lite’ version of its suite, a stripped back set of tools for new users or those that don’t need the full bells and whistles. This could be a great way to seed new users to fully priced tools as their needs change. An Adobe ‘lite’ version is also being used to head off competition. Privately-owned Australian start-up Canva has been making ground with lowcost tools offered to users to which it then tries to upsell.

Making strategic acquisitions like Frame.io and launching new products requires deep pockets, which is where Adobe’s balance sheet muscle comes in. At the end of last year, it had more than $1.1 billion of net cash on its books, having thrown off $6.88 billion of free cash flow during the 12 months. While there is no dividend, surplus cash doesn’t get wasted. Adobe has bought back approximately $12 billion of its own shares since 2018, with scope to repurchase up to another $13.1 billion of stock under its current buyback agreement. There has also been progress in streamlining its business. Operating expenses as a percentage of overall revenue have decreased in each of the past two years, falling from 56% in 2019 to 51% in 2021. As it grows revenue, Adobe is showing its ability to keep costs in line, benefiting from its everincreasing scale. We cannot guarantee that Adobe shares won’t fall further in the coming weeks; there are just too many uncertainties right now. But we do believe that once the global economy and markets are able to find some stability, Adobe will once again win the recognition the business richly deserves. [SF] Adobe ($) 800 600 400 200 0 2018

2019

2020

2021

2022

Chart: Shares • Source: Refinitiv

12 May 2022 | SHARES |

Why every ESG investor should buy this property stock now Home REIT is doing all it can to help solve the homelessness crisis while generating strong returns for investors

or investors who want to put their money to work in ESG (environmental, social and governance) stocks it can be hard to find companies which really meet the ‘S’ or social part of the equation. Step forward property firm Home REIT (HOME), whose whole purpose is to help solve one of the biggest social issues facing the nation right now. The real estate trust buys and maintains high-quality properties throughout the UK to provide accommodation to the homeless at a fraction of what it costs local councils to house people in often less than suitable B&Bs and multi-occupancy properties. Deployment to 28 February 2022 Equity £m

Number of Assets

800 Number of Assets Total Deployed

749

800

600

472 400

400

243

200

131

103

4 0

Oct-Dec Jan-Mar Apr-Jun 20 21 21 Source: Home REIT

Jul-Sep 21

| SHARES | 12 May 2022

Oct-Dec Jan-Feb 21 22

HOME REIT

 BUY

(HOME) 120p Market cap: £677 million

The company floated in October 2020 at 100p, raising £240 million in the largest REIT listing of the year and the largest UK-focused REIT listing for three years. While its aim is to alleviate homelessness, it also has a target of 7% per year inflation-protected income and capital returns. In its results for the financial year to August 2021, published last November, the firm reported it had bought 711 properties with a year-end valuation of £328 million, 4.5% above the cost of acquisition. The net asset value total return from flotation to the end of August 2021 was 8.9%, including a dividend of 2.5p per share which is set to rise to 5.5p per share this year. By the end of the six months to February, following a heavily over-subscribed issue of new shares for £350 million last September, the portfolio had increased to 1,585 properties with a market value of £713 million while the NAV had risen a

further 5.8% to 111.2p per share. The trust has since acquired a further 156 properties for £42 million, taking its total investment since floating to £700 million and its number of beds for the homeless to 8,556. The properties are rented to charities, housing associations and local councils at low and sustainable rents – typically £95 per bed per week against an average estimated £245 weekly B&B rate in England – with an index link to provide protection against inflation and an average lease length of 25 years. In 2022, the trust is seeing more and more demand from its partners to find suitable accommodation as the homeless population increases. ‘As support measures put in place by the UK Government during the Covid-19 pandemic are unwound and the cost of living in the UK surges, the number of those individuals facing homelessness is sadly expected to increase,’ admits the trust’s chairman Lynne Fennah. [IC] Home REIT (p) 140 120 100 80 2021 Chart: Shares • Source: Refinitiv

2022

ADVERTISING PROMOTION

Fidelity Special Values PLC

An AJ Bell Select List Investment Trust Portfolio manager Alex Wright’s contrarian approach to the trust thrives on volatile and uncertain markets, when stocks are most likely to be misjudged and undervalued. Investing mainly in the UK, and supported by Fidelity’s extensive research team, Alex looks to invest in out-offavour companies, having spotted a potential trigger for positive change that he believes has been missed by others.

their corporate strategy. They also take time to speak to clients and suppliers of companies in order to build conviction in a stock. 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 27 years ago.

Turning insight into opportunity Equity markets at both home and abroad have experienced significant volatility in recent months. While lower valuations could represent a great buying opportunity, it’s also essential to recognise that not every undervalued situation is special. Some unloved stocks are cheap for good reason. Special situations investing requires rigorous analysis and due diligence to back each position and this kind of proprietary research has long been the cornerstone of our investment approach. Our network of 394 investment professionals around the world place significant emphasis on questioning management teams to fully understand

To find out more visit www.fidelity.co.uk/specialvalues

Past performance Apr 2017 Apr 2018

Apr 2018 Apr 2019

Apr 2019 Apr 2020

Apr 2020 Apr 2021

Apr 2021 Apr 2022

Net Asset Value

10.3%

−1.0%

−26.0%

53.9%

5.2%

Share Price

13.5%

2.4%

−30.8%

64.1%

1.2%

8.2%

2.6%

−16.7%

25.9%

8.7%

FTSE All Share Index

Past performance is not a reliable indicator of future returns Source: Morningstar as at 30.04.2022, bid-bid, net income reinvested. ©2022 Morningstar Inc. All rights reserved. The FTSE All Share Total Return 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.

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 Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0222/370477/ISSCSO00062/NA

SDI

K3 CAPITAL

(SDI:AIM) 170p

(K3C:AIM) 230p

Loss to date: 2.6%

Loss to date: 18.7%

HAVING DRIFTED LOWER amid a wider sell-off for growth and technology stocks, a stellar trading update on 6 May has helped give science kit maker SDI (SDI:AIM) a boost. SDI is a collection of businesses which design and manufacture sensing, digital imaging and control equipment used in sectors such as life sciences, healthcare and art conservation. In a record result for the business, sales are expected to be approximately £49 million for the year to 30 April 2022, versus £35.1 million in 2021. SDI is guiding for organic sales growth in excess of 20%, which would be an improvement on the previous year’s 19% organic growth. Adjusted pre-tax profit is expected to be at least £10.5 million, up from the previous year’s £7.4 million. Analyst consensus estimates stood at £9.65 million adjusted pre-tax profit on £46.65 million revenue in advance of the update. FinnCap responded by raising its 2023 revenue and adjusted pre-tax profit estimates by £2.5 million and £1 million, respectively. SDI expects another record year in the 12 months to 30 April 2023, also ahead of previous expectations.

IT HAS BEEN a disappointing couple of months on the market for multi-disciplinary professional services provider K3 Capital (K3C:AIM). The most probable cause of share price weakness is related to downbeat comments from the Bank of England about elevated risks of an economic slowdown later in 2022. This has dampened investor sentiment towards small cap firms. However, the growth and momentum across K3’s businesses remain strong. The company reiterated (9 May) that since reporting a strong start to the second half, trading has continued to be positive and the board remained ‘very confident’ in its outlook for the financial year to 31 May 2022. Recent acquisitions were said to be performing in line with expectations while various bolt-on deals were also being evaluated. K3 has built a diversified business which provides services across the life cycle of companies, from mergers and acquisitions all the way through to restructuring and insolvency services. This should provide resilience whatever the economic weather. At the half-year stage, the company noted the restructuring division was showing signs of recovery following the removal of government support.

Original entry point: Buy at 174.5p, 27 May 2021

Original entry point: Buy at 283p, 24 February 2022

SDI

(p)

200

300

100

200 0

100 2018

2019

2020

2021

2022

Chart: Shares Magazine • Source: Refinitiv

SHARES SAYS:  The recent share price performance does not reflect how well the business is doing. Keep buying. [TS]

| SHARES | 12 May 2022

2018

2019

2020

Chart: Shares Magazine • Source: Refinitiv

SHARES SAYS:  This remains a buy. [MGam]

2021

2022

SMITHSON

LATITUDE HORIZON FUND

(SSON) £12.84

(BG1TMR8) 126p

Loss to date: 32.9%

Gain to date: 2.4%

Original entry point: Buy at £19.15, 2 September 2021 SHARES IN FUNDSMITH’S mid-cap focused investment trust Smithson (SSON) are now trading at an 8% discount to net asset value, a significant change to the premium at which it has generally traded since inception in 2018. The company’s focus on quality has been at odds with a market rotation into value since last November and the situation has been exacerbated by the conflict in Ukraine. When Shares interviewed manager Simon Barnard in late 2021 he noted the trust has at least a 10-year investment horizon and that even a market rotation over two to three years wouldn’t change the approach. We’re going to adopt the same policy; we still think Smithson is a great way to get exposure to excellent small to medium-sized businesses which, because they are less mature, have room to grow over the long term. The April 2022 factsheet revealed no outright sales or purchases of holdings in the month, which underlines the ‘steady as she goes’ approach. Smithson (p) 2000 1500

SHARES HIGHLIGHTED THE potential for this all-weather fund to shine in trickier markets and rising prices. Pleasingly the fund has delivered a positive return compared with double-digit losses for most major share and bond indices. The fund’s investment in US inflation-protected bonds have provided a refuge so far in 2022 because of the strength of the US dollar. This has been driven by the US Federal Reserve’s hawkish stance and interest rate increases. Manager Freddie Lait believes the stocks in the portfolio benefit from, or protect against, inflation in different ways. Holdings such as oil company BP (BP) and US financial services group Bank of America (BAC:NYSE) benefit from price inflation and higher rates, respectively. Companies with revenue which automatically reprices in line with inflation such French holdings Vinci (DG:EPA) and Eiffage (FGR:EPA) effectively benefit from inflation-adjusted profits. Lait highlights other stocks in the fund which have demonstrated good pricing power. Price increases at Meta Platforms (FB:NASDAQ) and Heineken (HEIA:AMS) have been accompanied by continuing strong demand. Latitude Horizon

1000

(p)

500 0

Original entry point: Buy at 123p, 14 October 2021

150 2019

2020

2021

2022

Chart: Shares Magazine • Source: Refinitiv

SHARES SAYS:  The discount to net asset value is a good opportunity for patient investors to top up holdings in the trust. Stay positive. [TS]

Disclaimer: Editor Daniel Coatsworth owns shares in Smithson

100

2019

2020

2021

2022

Chart: Shares Magazine • Source: Refinitiv

SHARES SAYS:  The fund provides a useful combination of capital preservation and growth. [MGam] 12 May 2022 | SHARES |

SIPPs | ISAs | Funds | Shares

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Open our low-cost Self-Invested Personal Pension for total flexibility and control over your retirement with free drawdown. youinvest.co.uk

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WILL MARKETS PICK UP SOON? We examine what's gone wrong and what might come next

any investors are frustrated that a lot of the stocks, funds and bonds in their portfolios have fallen in value this year. It’s been a chaotic time on the markets and negative events keep unfolding. Inflation is at levels not seen for decades, the first major European war of the 21st century has broken out, and after years of ultra-low interest rates central banks are starting to tighten monetary policy. Investors face a tricky task of determining when things might get better and what they should do with their investments in the meantime. Sitting tight and staying invested is a good strategy, but more active investors might be interested in tweaking their portfolios based on the outlook.

By Tom Sieber Deputy Editor

In this article we look at what the experts are forecasting for inflation, economic growth and interest rates and what market observers think has already been priced in. Our aim is to give a picture of how bad life could get or whether things might already be starting to improve. UKRAINE SHAPES THE OUTLOOK There is one key source of uncertainty which makes gauging the outlook difficult, namely the progress of the tragic conflict triggered by Russia’s

Inflation has accelerated over the past year Eurozone CPI

US CPI

UK CPI

10% 8 6 4 2 0 −2 −4 2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

Source: Refinitiv

12 May 2022 | SHARES |

invasion of Ukraine. As Andrew McCaffery, global chief investment officer for asset manager Fidelity, observes: ‘The war in Ukraine has already caused significant economic damage, and it will continue to shape the near-term outlook for global economies, particularly Europe. Outcomes over the coming quarter will be heavily influenced by the timeline to a resolution and the easing of trade disruptions. ‘In the meantime, any hopes for a moderation in energy prices and supply-chain disruptions have been dashed. Together, these dynamics will continue to dampen growth and put upward pressure on already high inflation. ‘This paints an extremely complex picture, both for policymakers and the markets. We believe the market has yet to reflect the full range of possible outcomes, which span extreme left and right tail risks.’ These ‘tail risks’ refer to more positive or negative outcomes than expected. In this context it’s useful to see what is being anticipated by forecasters and what are the best and worst-case scenarios. Trying to second guess what happens next in Ukraine is difficult. Chief Europe economist at consultancy Capital Economics, Andrew Kenningham, says: ‘Unfortunately assumptions about the war have steadily got worse over the past two months. We were hoping and assuming the conflict would ease towards the end of the year. ‘Without forecasting exactly what will happen on the ground we are now working on the assumption the conflict will continue with no early resolution but also no major escalation.’ Assuming this reasoning proves correct, companies and countries may be able to adjust to the disruption but if the conflict widens or deepens in any way this could present a new risk for financial markets.

INFLATION The supply chain issues and high food and energy prices which have contributed to rising prices remain in place. The reintroduction of Covid restrictions in China, the so-called factory of the world, has only added to these inflationary pressures. However, there are reasons to think we are close to peak levels of inflation. Investment bank Berenberg expects US inflation to peak at 18

| SHARES | 12 May 2022

UK consumer price inflation forecasts (Q4 2022) % Highest UK forecast:

8.9%

Lowest UK forecast:

4.4%

Average:

7.2%

Table: Shares Magazine • Source: Office for National Statistics, 20 April 2022

8.1% and UK inflation to peak at 8.6%, both in the second quarter. Jennifer McKeown, at the consultancy Capital Economics, says: ‘Globally inflation is going to come down this year thanks to very strong base effects linked to the reopening of economies in the second half of last year.’ Saying that inflation has peaked, for now, is not the same thing as predicting a rapid fall in prices. Berenberg forecasts inflation will remain above 6% in the final quarter of 2022 in the US and the first three months of next year for the UK. Consensus forecasts on UK inflation may not go far enough. Panmure Gordon chief economist Simon French was already on record as saying UK inflation could hit double digits in 2022 before the Bank of England surprised many observers with a prediction for inflation to peak above 10% at the end of this year. This would represent the highest level in 40 years but doesn’t seem too extreme given UK inflation data, up to the end of March, is yet to reflect Ofgem’s lifting of the energy price cap by

54% at the beginning of April, with a further big increase expected in October. The chances of wholesale energy prices easing substantially are limited by attempts on the part of European countries to wean themselves off Russian gas and oil. The US, which is effectively energy independent by comparison, is more insulated on this front. Tight labour markets, particularly in the developed world, are also contributing to inflation as wages increase. Eurozone unemployment hit a record low of 6.8% in March and the US reported record job openings for the same month.

The Conference Board does not believe a US recession is likely in 2022 – even under its modelling of some extreme scenarios, including oil hitting $200 per barrel. COVID STILL A PROBLEM The two main risks to this view are policy mistakes on the part of the US Federal Reserve and mutation or resurgence of Covid-19. Remember the pandemic continues to rage in some parts of the world.

GDP Surging inflation is one of the key reasons economists have been busily revising down growth forecasts this year. In its latest World Economic Outlook, published in April, the International Monetary Fund lowered its global growth forecast to 3.6% in 2022 and 2023. This was 0.8 and 0.2 percentage points lower respectively than in the January report.

UK GDP 2022 forecasts % Highest UK forecast:

5.7%

Lowest UK forecast:

3.1%

Average:

4.1%

Table: Shares Magazine • Source: Office for National Statistics, 20 April 2022

There is little debate over whether the postCovid economic recovery has been hit by the Ukrainian conflict. The question is whether it could be derailed entirely. We are already facing stagflation, which is a toxic combination of slowing growth and rising prices. The yields on two-year and 10-year US government bonds recently inverted, i.e., the longer-dated debt offered a lower yield than the more short-term debt, which is often seen as a signal of recession and US GDP unexpectedly contracted 1.4% in the first quarter. Nonetheless, non-profit research organisation

There seems to be a greater risk of recession in Europe. Russia and closely linked emerging European economies look particularly vulnerable to a downturn but developed Europe too could risk slipping into a slowdown. Capital Economics’ Andrew Kenningham says: ‘For the Eurozone overall we are forecasting almost flat second and third quarters with Italy and Germany at risk of falling into technical recessions; France and Spain should avoid that.’ A technical recession is defined as two consecutive quarters of negative growth and while the Bank of England thinks this fate can be avoided, it is forecasting a 0.25% contraction in UK GDP for 2023. Outside of the US and Europe, China may be on a different trajectory with the easing of restrictions as Covid cases come down, helping growth to increase through the course of the year. Whether it can hit Beijing’s target of 5.5% is open to question.

INTEREST RATES The finely balanced outcomes on inflation and economic growth create a tricky backdrop for central banks. It seems certain the Federal Reserve, Bank of England and, even the laggard of the three, the European Central Bank will end the year with 12 May 2022 | SHARES |

Peak interest rate forecasts 3.75% 3.75%

1.75% 1 .75% 1.25% 1 .25%

US (in Q4 2023)

UK (in Q3 2023)

Eurozone (in Q3 2023)

Chart: Shares Magazine • Source: Berenberg, 29 April 2022

higher interest rates. However, the exact pace and trajectory of those increases remains in question. In its latest update (4 May) the US Federal Reserve lifted rates by 0.5 percentage points for the first time since 2000 but signalled it was not considering a 0.75 percentage point increase in rates for now. The central bank did nothing to suggest consensus expectations for rates to finish 2022 somewhere around 2.5% were out of whack. Nick Clay, who runs investment manager Redwheel’s global equity income team, observes: ‘I think the Fed’s been boxed into a corner. It will lead on this, but bond yields particularly in America have already priced a lot of that in. ‘Corporates and governments because of their levels of indebtedness are going to find it difficult to suffer higher interest rates for any length of time. By the time we get to the end of this year we will look back at this period and realise this was the peak in interest rates within the bond yield even if the Fed is still raising rates.’

| SHARES | 12 May 2022

The negative economic assessment which accompanied the Bank of England’s latest rate hike to 1% (5 May) suggests it may look to avoid hiking rates materially from here. Consensus expectations are for UK rates to reach a high of 2% next year but not everyone agrees with this assessment. Capital Economics’ chief UK economist Paul Dales says: ‘We think longer-lasting domestic price pressures will mean the MPC (Bank of England’s Monetary Policy Committee) ends up raising rates to a peak of 3% next year, which compares to the peaks of 2.5% priced into the markets and 2% expected by other analysts.’ The European Central Bank may not have moved on rates yet, but it opened to the door to a July rate rise at its meeting in April. The central bank faces an even more difficult task than the Fed and Bank of England given it needs to balance the needs of economies with very different dynamics. Inflationary pressures are also more acute in the Eurozone given its heavy reliance on Russian energy imports. Berenberg forecasts two 0.25 percentage point interest rate rises in the third and fourth quarter of this year which would still leave Eurozone rates a long way behind those in the US and UK.

WHERE WILL THE MARKETS END UP? How much of the increase in rates, reduced growth prospects and higher inflation have been factored in by the markets? There is no question that investors have reacted to these events. The first quarter saw bond and stock prices fall in tandem for the first time in nearly 30 years.

The table shows how global stock markets have performed year-to-date and it paints an ugly picture in most places. The UK’s FTSE 100 index is doing best thanks to its strong commodities exposure. In the US, the Nasdaq receives the wooden spoon as investors turn away from highly rated growth stocks. Rupert Thompson, investment strategist at asset manager Kingswood, comments: ‘The falls in both bonds and equities have been driven by the move towards stagflation, the unpalatable combination of high inflation and stagnation in economic activity. Worries on this front have been bolstered by recent developments.’ Will there be more pain to come for stocks?

How major stock markets have fared in 2022 % FTSE 100 (UK) Nikkei 225 (Japan)

0.6% −6.9%

In early April, investment bank Goldman Sachs updated its year-end forecasts for the S&P 500 index in the US for a closing level at the end of December of 4,700. This would represent a modest drop versus 2021’s closing level of 4,766 and compares with a current level of 4,125. This represents its bestcase scenario. In the event of a recession the bank thinks the index could fall to 3,600. Bank of America says there have been 19 bear markets in the past 140 years. A bear market is a 20% decline or more from recent highs. The average price decline in these 19 bear markets was 37.3% and an average duration of 289 days. It says: ‘Past performance is no guide to future performance, but if it were, today’s bear market ends on 19 October 2022 with the S&P 500 at 3,000 and the Nasdaq at 10,000. The good news is many stocks are already there, e.g., 49% of companies in the Nasdaq are more than 50% below their 52-week highs.’

S&P 500 5,000 4,500

S&P 500 (US)

−13.0%

DAX (Germany)

−13.6%

Hang Seng (Hong Kong)

−14.5%

3,000

CSI 300 (China)

−18.8%

2,500

Nasdaq Composite (US)

−21.3%

2,000

4,000

Table: Shares Magazine • Source: SharePad, data to 6 May 2022

3,500

2018

2019

2020

2021

2022

Chart: Shares Magazine • Source: Refinitiv

12 May 2022 | SHARES |

Elsewhere, Morgan Stanley forecasts the S&P 500 to end 2022 at 4,200, JPMorgan predicts 4,900 and Barclays estimates 4,800. Gains for US stocks have been driven by the big technology companies and as Redwheel’s Nick Clay says, ‘They are very expensive. Even the best company in the world at the wrong valuation becomes the riskiest company. Your expectations are so high they can’t even deliver on those extended expectations.’

Corporate earnings are holding up well. On 29 April Factset said that of the 55% of companies in the S&P 500 which had reported results for first quarter to that point, 80% had reported earnings per share above estimates, which was greater than the five-year average of 77%. As we write, about half of the STOXX 600 companies in Europe have reported so far and 71% of those have topped analysts’ profit estimates according to Refinitiv IBES data. Typically, one might expect just over half of companies in this index to beat estimates in a quarter. The question is whether results for the first three months of 2022 reflect the full impact of rising input costs and reduced consumer spending. After all, some businesses are still enjoying a post-pandemic recovery in demand and may also have been able to react to inflation by driving efficiencies. It will be worth keeping close tabs on the second quarter and first half reporting season to see if earnings can continue to beat forecasts or if mounting inflation and weaker demand start to have a wider negative impact. Clay at Redwheel says: ‘I think interest rates aren’t going to go up as much as people ultimately fear they might have to, and therefore by the end of this year we’re going to start talking about when they are going to stop raising rates and start cutting them again. The backdrop has plateaued. We’ve had the worst of it.’ 22

| SHARES | 12 May 2022

WHAT SHOULD INVESTORS DO? Many readers will be nursing portfolio losses but it is important not to panic. It is worth having a good look at your investments and if any specific holding has performed very poorly, particularly if it has fallen more than the 13.4% year-to-date decline in the MSCI World, then it is worth taking a good look at why. However, unless anything fundamental has changed on an individual investment then it is worth staying invested and riding out the volatility if you have time on your side. Time in the market is better than trying to time the market. Asset manager BlackRock found that if you had invested a hypothetical $100,000 in the S&P 500 index of US stocks between 1 January 2001 and 31 December 2020 you would be sitting on $424,760 if you stayed invested but by missing just the best five days that number dropped to $268,277. Often the best days follow some of the very worst. One way of smoothing out the impact of volatility and remaining invested in the markets is to invest regularly. By doing so you benefit from an effect called pound cost averaging.

When markets rise, a monthly contribution buys fewer shares or units in a fund. When markets fall the same contribution buys more shares or fund units. In terms of what you should invest in, Fidelity’s Andrew McCaffery says: ‘We believe focusing on high quality companies, rather than sector selection, is the best approach given the rising geopolitical and stagflation risks. ‘Companies with pricing power and the ability to protect margins should perform relatively strongly in this environment. Equities should still provide a robust source of income, now that balance sheets have been repaired following the worst of the pandemic.’

FEATURE

Three great stocks for sustainable income in an inflationary environment Maintaining parity with rising prices has become a more important consideration in the search for yield

avers and investors searching for decent income have been starved over the last decade as central banks have engaged in quantitative easing which kept interest rates artificially low. The pandemic and the war in Ukraine have changed the landscape dramatically. Interest rates are now on the rise across the globe in response to persistent inflation and a strong rebound in economic growth. Inflationary pressures reduce spending power and make fixed income investments look less attractive. Global bond prices are down around 12% year-to-date. This new regime has changed the arithmetic and dynamics for dividend-paying shares too. After all, higher interest rates raise the costs of borrowing. BEWARE OF UNSUSTAINABLY HIGH YIELDS Some analysts have argued shares are a good place to get inflation protection because companies have real assets which can rise with inflation. The reality is more complex and even large companies with established brands such as Unilever (ULVR) have discovered they cannot always pass on higher costs without losing market share to cheaper alternatives. Pressure on margins from cost inflation and higher interest payments could reduce the ability of certain companies to maintain dividends at the same level as before the pandemic. Therefore, investors should be mindful of these factors when searching for decent income. WHERE TO FIND MORE RELIABLE PAYERS Later in this article we reveal a stock screen designed to identify companies which offer a more reliable income with the added potential of

growing the dividend to keep pace with inflation. One fund which specifically invests in companies which provide sustainable income is the Guinness Global Equity Income Fund (BVYPP13). Managers Ian Mortimer and Matthew Page believe dividend payers outperform in the long term, and dividend growers even more so. They also argue that dividend payers protect against inflation over the long term. The fund has beaten its benchmark over the past three, five and 10 years, delivering annualised returns of 13.3%, 12.1% and 12.8% respectively. The annual dividend paid over the last 12 months represents a yield of 2.2%, below the FTSE All-Share yield of 3.5%. However, the growth of dividends from the fund should also be considered as this is an important driver of returns over the longer term. The fund has an ongoing charge of 0.8% a year. Top holdings include US pharmaceutical company AbbVie (ABBV:NASDAQ) which has a 3.9% prospective dividend yield. The company has grown dividends at a compound annual rate of 18% over the last five years. 12 May 2022 | SHARES |

FEATURE Other top holdings in the fund’s portfolio include UK dividend stalwarts British American Tobacco (BATS) and engineering group BAE Systems (BA.). These companies have prospective dividend yields of 7% and 3.5% respectively. UNDER NEW MANAGEMENT James Harries and Tomasz Boniek are responsible for Troy Asset Management’s global income strategy. Troy was appointed investment manager of Securities Trust of Scotland (STS) in November 2020 and has turned around the fortunes of the investment trust. Harries doesn’t have a strong view on the outlook for inflation but makes the case that his investment approach should deliver sustainable income in such an environment. The trust aims to invest in a concentrated portfolio of exceptional, resilient companies and deliver above-average returns with belowaverage volatility. Importantly for income investors, the trust aims to grow the dividend backed by genuinely surplus cash flow generated by the companies in the portfolio. It has an historic dividend yield of 2.5% and an ongoing charge of 0.92% a year. Unlike open-ended funds, investment trusts can use revenue reserves to maintain or grow dividends during periods when there is a shortfall from investee companies such as we saw during the pandemic. Harries and Boniek find their investment opportunities by focusing on sectors which display low capital intensity and low cyclicality. These sectors tend to produce higher returns on capital. A good example in the consumer goods space is US drinks and snacks group PepsiCo (PEP:NASDAQ) which generates consistently high returns on equity.

| SHARES | 12 May 2022

Harries believes PepsiCo has good pricing power due to the nature of its brands which tend to be characterised by ‘repeat purchases’ of impulse-driven goods. For example, nobody thinks twice about the price of a bag of PepsiCo-owned Lay’s or Walkers crisps when they are on the move and fancy a snack, argues Harries. PepsiCo’s shares have a dividend yield of 2.7%. Other types of companies in the portfolio include platform businesses such as options and futures exchange CME Group (CME:NASDAQ) and capitallight property group InterContinental Hotels (IHG). For investors who prefer a cheaper broad-based passive approach to investing in global income, the Vanguard FTSE All-World High Dividend Yield (VHYL) exchange-traded fund looks like a strong candidate. The highly diversified $2.7 billion fund invests in approximately 1,800 stocks across the globe and has a dividend yield of 3.2% and an annual charge of 0.29%.

FEATURE GLOBAL SHARE PICKS Shares has used Stockopedia’s platform to screen for high-quality companies which have consistently grown their dividends and have a decent yield. We have broken the universe into the UK, Europe and the US to gain a wider exposure to global income shares. Rather than looking solely at the level of the

UK TOP PICK

yield we have also considered the potential to grow the dividend to counter the pernicious effects of inflation. The criteria include unbroken growth in the dividend of at least five years and a return on equity in the top quartile (25%) of the market.

Examples of UK stocks with sustainable income qualities

BAE SYSTEMS (BA.) 749p YIELD: 3.3%

Name

Yield* (%)

Coca Cola HBC

BAE Systems (p)

B&M European Value Retail

800

BAE Systems

3.7% 3.6% 3.3%

James Halstead

600

3.2%

Homeserve

400

2.8%

Sage 2018

2019

2020

2021

2022

Chart: Shares Magazine • Source: Refinitiv

2.5%

Spectris

2.4%

Relx

2.1%

Bunzl

Leading defence contractor BAE Systems (BA.) has grown its dividend every year over the last 20 years representing an annual compound growth rate of 5% a year. Excluding the 2002 financial year when the company maintained its dividend, BAE has an unbroken record of dividend growth going back to 1993. The track record is testament to the company’s diverse portfolio and robust execution which has allowed it to generate strong, reliable cash flows. The company has an unbending focus on margin expansion and sustainable revenue growth. Investment bank Berenberg estimates BAE will generate between £1.68 billion and £1.98 billion of free cash flow in each of the next three years, versus the £689 million earned in 2020. This means growth in future dividends looks

1.8%

Spirax-Sarco Engineering

1.2%

Gamma Communications Fevertree Drinks Halma

1.1% 0.9% 0.7%

*yield is based on trailing 12 months Table: Shares Magazine • Source: Stockopedia, Refinitiv

secure and could be bolstered by share buybacks down the line. The defence sector is benefiting from a significant tailwind in the near term as countries around the world bolster their military spending in response to Russia’s invasion of Ukraine. Jefferies has estimated that if all NATO members were to raise defence budgets to 2% of GDP it would imply a 25% increase in overall spend, excluding the US, which would trigger significant benefits across the entire industry. 12 May 2022 | SHARES |

FEATURE US TOP PICK

Examples of US stocks with sustainable income qualities

TEXAS INSTRUMENTS (TXN:NASDAQ) $176.20 | YIELD: 2.5%

Name

Texas Instruments

AbbVie

3.5%

Pfizer

($)

3.2%

Cisco Systems

200

2.9%

Bristol-Myers Squibb

100 0 2018

2019

2020

2021

2022

Chart: Shares Magazine • Source: Refinitiv

The world’s largest manufacturer of analog microchips, Texas Instruments (TXN:NASDAQ) has an unbroken record of increasing its annual dividend which stretches back over 30 years. Over the last six years the company has increased its dividend well above the inflation, clocking up compound annual growth of 21% a year. The company throws off oodles of cash and has delivered an average return on equity of 55% over the last six years, supporting the dividend payment which is covered 2.5 times by earnings per share. The company supplies its microchips into a vast array of markets which provides diversification and underpins the reliability and durability of its revenues and cash flows. The firm’s relatively cheap but essential components convert real-world signals, such as sound, touch and temperature, into digital information. They are also used for power management, especially useful in batteries for mobile devices. That hints at future growth opportunities as more electronics become mobile. Costing just a few cents per chip, the company retains surprising pricing power because its chips are typically designed into new electronic products. Supply agreements tend to be for the lifecycle of a product which means customer switching costs can be prohibitive. Durable economic advantages and a steady growth outlook makes Texas Instruments an attractive candidate for reliable income portfolios. 26

Yield* (%)

| SHARES | 12 May 2022

2.7%

United Parcel Service

2.6%

PepsiCo

2.6%

Comcast

2.5%

Texas Instruments

2.5%

Procter & Gamble

2.2%

Home Depot

2.2%

Qualcomm

1.9%

Abbott Laboratories

1.6%

Walmart

1.4%

Lowe's

1.4%

Eli Lilly

1.2%

Accenture

1.2%

Nike Microsoft

0.9% 0.8%

Costco Wholesale

0.6%

Apple

0.6%

*yield is based on trailing 12 months Table: Shares Magazine • Source: Stockopedia, Refinitiv

FEATURE EUROPEAN TOP PICK

of sales when patent protection expires, which leads rivals to sell copycat drugs more cheaply. Roche’s Alzheimer’s drug Gantenerumab recently received FDA breakthrough therapy designation and stage three trial data is on track to be released in the second half of 2022.

ROCHE (RO:SWX) CHF 374 YIELD: 2.6%

Roche (CHF)

Examples of European stocks with sustainable income qualities

400 300

Name

200 2018

2019

2020

2021

2022

Chart: Shares Magazine • Source: Refinitiv

Pharmaceutical company Roche (RO:SWX) has increased its dividend by a compound annual growth rate of 10% a year over the past two decades. The diversity of the company’s drug pipeline and high return on equity have provided reliable cash flows to support the dividend as well as invest in future drugs. Returns on equity have averaged 40% a year over the last five years. Spending on healthcare by governments has generally kept pace with, and even eclipsed, inflation over the last few decades. This means the healthcare sector is an attractive option for investors looking to protect themselves from rising prices. Roche has reached a turning point in the lifecycle of its drug pipeline where the growth in sales of new drugs is more than compensating for the loss

Yield* (%)

Telenor

7.0%

Krka Dd Novo Mesto

6.4%

Rai Way

4.3%

Elisa

3.7%

Fuchs Petrolub

3.5%

Etablissementen Franz Colruyt

2.9%

Roche

2.6%

Recordati Industria Chimica E Farmaceutica

2.5%

Royal Unibrew

2.4%

Geberit

2.3%

Coloplast

1.9%

Rockwool

1.8%

Sweco

1.8%

Vidrala

1.7%

Wolters Kluwer

1.4%

Novo Nordisk

1.3%

Pharmagest Interactive

1.2%

Interroll

1.0%

Sika

1.0%

0.6%

Nemetschek

0.5%

Adesso

0.3%

Vitec Software

0.3%

*yield is based on trailing 12 months Table: Shares Magazine • Source: Stockopedia, Refinitiv

By Martin Gamble Education Editor

12 May 2022 | SHARES |

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FEATURE

This might happen to bitcoin now interest rates are rising Worst case scenarios for the cryptocurrency space could be very ugly

n one corner there is the co-founder of PayPal (PYPL:NASDAQ) and secretive data analysis platform Palantir (PLTR:NYSE). In the other, arguably the best investment double act ever. Peter Thiel and Warren Buffett/Charlie Munger respectively have been throwing cryptocurrency brickbats at each other in recent weeks. The former says crypto is a transformation that will change how we move and even think about money forever. The latter believe bitcoin and its ilk are a bigger scam than Bernie Madoff funds. At this year’s Bitcoin 2022 conference in Miami in April, billionaire investor and entrepreneur Thiel talked about the potential of bitcoin, why it is not achieving that potential, and the way we value money – which he illustrated by throwing $100 bills into the crowd. Oh, the theatre. He also labelled Buffett bitcoin’s enemy number one, calling him the ‘sociopathic Grandpa from Omaha’. UNCHARTED TERRITORY Running in the background remains the ongoing debate about whether bitcoin or any cryptocurrency can emerge as the transactional utility they are designed to be. The immediate conversation is less esoteric and centres on something all investors can understand; how will bitcoin and other cryptocurrencies react to rising US interest rates? Unusually, it’s a question for which there is little precedent. Interest rates in the US averaged 5.44% between 1971 until 2022, according to data from Trading Economics, reaching an all-time high of 20% in March 1980 and a record low of 0.25% in December 2008. Last week’s 0.5 percentage point rate rise by the Fed is expected to be the latest of many given that inflation is running at 40-year highs, potentially creating an environment that predates Satoshi

Nakamoto’s whitepaper (the pseudonym used by bitcoin’s creator or creators) on 28 October 2008. But in 2018, the last calendar year in which we saw more than two increases in US interest rates, bitcoin fell by nearly 70%.

Bitcoin in 2018 $10,000

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Chart: Shares Magazine • Source: Refinitiv

Numerous analysts have identified the Fed’s bearish stance as the main factor in recent asset downswings, with Blockchain Coinvestors chief executive Lou Kerner saying rates continues to wield power over the market. ‘Tightening by central banks is the biggest macro issue driving both the stock and crypto markets today, which is why we’re seeing a very high correlation between the markets,’ he said. These rates obviously affect borrowers, but they also provide higher returns for lenders, including 12 May 2022 | SHARES |

FEATURE relatively heavier in slower-growing banking, retail and manufacturing stocks. The cryptocurrency is down 31% year-to-date or 51% from its $67,582 peak last November. Ethereum and XRP, other popular cryptos, are down 27% and 37% respectively in 2022. BITCOIN ($)

Bitcoin is a digital currency and a protocol that enables instant worldwide payment transactions with low or zero processing fees. Unlike typical currencies, bitcoin operates with no central bank or authority. Instead, the task of managing transactions and issuing bitcoins is carried out collectively by the network of users. The software is a communitydriven, free, open-source project. Basically, it uses cryptography to control its creation and transactions. in some relatively safe assets. That competition for capital, among other factors, has already led to big falls for more speculative assets. This includes growth stocks and, in particular, technology firms. Rising rates are already changing the risk/reward calculation for investors. It’s a complex calculus, because a ‘safe’ investment like a bond can easily attract money that otherwise would have gone to a higher-return but also higher-risk assets such as cryptocurrencies. Consider ARK Innovation (ARKK:NYSEARCA), the aggressively future-forward fund managed by Cathie Wood. ARK Innovation has lost 72% of its 2021 peak value, with Wood betting heavily on many speculative tech, fintech and biotech growth firms, such as online commerce enabler Shopify (SHOP:NYSE), payments firm Block (SQ:NYSE), Zoom (ZM:NASDAQ) and Tesla (TSLA:NASDAQ), the fund’s largest stake. These are firms which either aren’t profitable yet (most of the biotechs), were expected to become much more profitable (Zoom) or are only profitable thanks to aggressive accounting (Tesla). CATHIE WOOD VERSUS CRYPTOS ARK Innovation has lost 53% since the start of 2022, more than twice the fall in the Nasdaq Composite (down 23%) and this compares to a 10% drop in the Dow Jones Industrial Average, which is 30

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NASDAQ COMPOSITE

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Chart: Shares Magazine • Source: Refinitiv. Rebased to first

‘It’s stunning to see crypto hold up better than a more conventional technology growth fund,’ says David Z Morris, the author of Bitcoin is Magic. ‘Certainly part of that is continuing investor optimism about crypto and blockchain.’ Yet this space still faces similar dangers if investors are less inclined to take risk. Put simply, the overall effect of three (or more) consecutive rate rises may be to increasingly weigh down bitcoin and crypto in general, ensuring that 2022 becomes another bear market year for cryptocurrency. The market is different now than it was in 2017, so there’s an argument to be had that it will do a better job of preserving its highs. But some economists and analysts have recently predicted that higher rates of inflation will last longer than initially predicted, with Allianz’s Mohamed El-Erian arguing in late 2021 that high inflation will ‘last for a while’ and that the Fed is losing credibility over its (currently) soft policy. Put differently, inflation may get worse before it gets better, with the Fed potentially forced to initiate multiple rate rises this year. If so, the negative effect on crypto could be substantial. How far prices may actually fall is anyone’s guess but the limited historical precedent is not encouraging.

By Steven Frazer News Editor

DANNI HEWSON

AJ Bell Financial Analyst

Can Ferrari’s former superstar drivers help Aston Martin turn the corner? Investors will be hoping for a miracle given the state of the share price

n the weeks before Aston Martin’s (AML) stock market listing four years ago Andy Palmer, who was CEO at the time, told investors the company didn’t make cars, it made dreams. Well, the dream has become something of nightmare with the value of shares down 93% since their peak in October 2018. The company’s latest set of results did little to calm jitters. Pre-tax losses in the first quarter nearly tripled compared to the same period the year before. Deliveries fell by 14% and net debt soared by a third to a £957 million, which is a little more than the current market valuation of the company. The man behind the car maker’s 2020 bailout is convinced the company can be transformed into ‘the world’s most desirable ultra-luxury British performance brand’. However, executive chairman Lawrence Stroll has a lot of skin in the game and it’s clear from the last set of financials that his turnaround plan hasn’t exactly gone to plan.

Aston Martin’s stock market horror story (p) 10,000 5,000 0 2019

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Chart: Shares Magazine • Source: Refinitiv

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To be fair, the last couple of years have delivered the kind of market environment no-one could have predicted. Supply chains have been shaken and stirred and key components have been in short supply. His decision to bring in two Ferrari (RACE:BIT) veterans to spearhead a ‘new phase of growth’ could be viewed as either a stroke of genius or a considered gamble. When you compare the two brands it’s easy to see why Stroll would look to emulate the Italian company. Since floating in 2015, Ferrari’s market value has jumped from €9 billion to €36 billion while the British rival has only found reverse gear. A Ferrari driver could just as easily fall for Bond’s motor – exclusive, sporty and very expensive. Both businesses are chasing the same electric dreams and now operate in very similar ways after Stroll’s 12 May 2022 | SHARES |

DANNI HEWSON

AJ Bell Financial Analyst

Ferrari accelerates after its stock market listing (€) 300 200 100 0 2016

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Chart: Shares Magazine • Source: Refinitiv

previous management team delivered both cost savings and a pipeline of new models. MARKET STILL TO BE CONVINCED The market only gave a lukewarm welcome to the new team in Aston Martin’s driving seat. Former Ferrari boss Amedeo Felisa understands cars and delivering consistent quality must be the hallmark of Aston Martin’s next chapter under his new leadership. However, the expert is in his 70s. Felisa has come out of retirement to work his magic, but his age suggests he’s not exactly in it for the long haul. The way the changing of the guard happened set tongues wagging. Ousted Aston Martin CEO Tobias Moers had only just begun pushing through his transformation plans, ones which had the backing of the company’s executive chairman. Yet mere months later the business is now apparently ready for its next phase. Is there something worse with the business than people are letting on? In the plus column the brand remains one of the strongest names in the automobile industry. Aston Martin is also back on the F1 grid after a 50year absence, pitting its performance credentials against the very best motor fans can dream of, and a potential partnership with Audi is intriguing. Pricing for Aston Martin’s traditional road models has been stronger after dealing with 32

| SHARES | 12 May 2022

issues of over-supply. But problems delivering the much-heralded limited-edition Valkyrie have cost the business dear both in monetary terms and in consumer confidence. Pandemic job cuts have created gaps in manufacturing and there is ongoing criticism that for such a high-end brand it fails to sufficiently update its popular models in the same way its rivals have perfected. THE FUTURE IS ELECTRIC The race could yet be won if Aston Martin can deliver a heart stopping electric vehicle. Sports cars are about performance; they’re about the drive and enthusiasts will tell you no-one has quite delivered the ultimate electric ride just yet. Both Felisa and returning teammate Roberto Fedeli as Aston Martin’s new chief technical officer could make the difference at their new employer but they’ll need to work quickly. Aston Martin’s chairman recently pledged the business would only sell hybrid or electric options from 2026 and delivering that is going to take a unified team and a whole load of cash. Details on how it will deliver that promise are fairly sketchy, but Aston Martin says it is on track for delivery of its first plug-in hybrid by the beginning of 2024 and its first fully electric option in 2025 – right around the time Ferrari is scheduled to unveil its own all-electric model. That’s where the dream really starts to unravel. The rising cost of living might not be such an issue to an Aston Martin customer, but anticipated price hikes might slow demand and narrow margins. But it’s the cost of servicing all that debt that’s the real worry, particularly when you consider how far in the red the company is. It’s not exactly the kind of a calling card you want if you need to refinance. While Aston Martin’s engine partnership with Mercedes should help keep development costs down, the shift to electric vehicles is an expensive game that all motor companies are caught up in. Aston Martin seems like it’s finally heading in the right direction, but as the song goes, the road is long.

WEBINAR

WATCH RECENT PRESENTATION WEBINARS Wentworth Resources Katherine Roe, CEO Wentworth Resources (WEN) is an upstream oil and natural gas company. It is actively involved oil and gas exploration, development, and production operations.

Belvoir Group Louise George, CFO Dorian Gonsalves, CEO Belvoir Group (BLV) is a UK-based property franchise group delivering residential lettings and sales, and property-related financial services to the individual businesses nationwide.

Anglesey Mining (AYM) Jo Battershill, CEO Anglesey Mining (AYM) is engaged in the business of exploring and evaluating its Parys Mountain zinc, copper, and lead project in North Wales.

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Not everything is having a bad time. One fund is up nearly 18% this year Argonaut has shown it is possible to make good money despite markets falling

arry Norris, founder of Argonaut Capital and manager of the long-short VT Argonaut Absolute Return Fund (B7FT1K7), takes no prisoners with his investment style, an approach which reflects his interest in military history and strategy. Describing the fund’s first quarter performance, Norris quotes Prussian Field Marshall Helmuth von Moltke who observed that ‘no plan survives first contact’. In other words, the invasion of Ukraine saw the fund’s over-exposure to commodities give it a much higher negative correlation with the broader market than Norris anticipated. As result, the manager reduced the amount of money where the fund would profit if certain share prices fell (known as ‘short’ selling) and sharpened his focus on stocks which he hoped would rise in value (his ‘long’ book). That decision led to the fund returning 1.4% during March, compared with a 0.6% return for the Investment Association’s absolute return sector. Together with April’s gain of 6.2%, Norris’s contrarian approach has generated a return for his investors of 17.8% so far this year against a loss of 1.4% for the IA’s absolute return sector. The rationale for his over-exposure to energy and materials stocks is simple: there is too little commodities supply to meet demand. ‘Since the financial crisis of 2008 we have had a bear market in fossil fuels and a bull market in almost everything else, based on cheap money, inexpensive energy, and free trade, all of which are now in the rear-view mirror,’ writes Norris in his Argonautica Blog. ‘Investors lost interest in energy: cast out by the high priests of ESG (environmental, social and governance) into the financial wilderness, to live out the remainder of its days in penitence

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VT Argonaut Absolute Return Fund Contributors to performance, April 2022

Company

Sector

April Return

Longs (The fund gains from a rise in the share price) K+S (SDF:ETR)

Agrochemicals

17%

SLC (SLCE3:BVMF)

Agriculture

15%

Euronav (EURN:EBR)

Shipping

15%

Shorts (The fund gains from a fall in the share price) Carvana (CVNA:NYSE)

Online Retail

Rivian (RIVN:NASDAQ)

Electric Vehicles

−37%

Adler (ADJ:ETR)

Property

−37%

−40%

Table: Shares Magazine • Source: Fund fact sheet, Shares, data correct as of 4 May 2022

for its sins. ‘Like the Israelites emerging from Sinai, with oil now back over $100 per barrel, fossil fuels are now being welcomed back from exile and look set to be the best performing asset class of the next decade.’ Even the great electric vehicle evangelist Elon Musk, chief executive of Tesla (TSLA:NYSE), has joined the chorus: ‘Hate to say it, but we need to increase oil and gas output immediately.’ Asked if he can foresee anything to make him change his view, Norris says there is already plenty of pushback. ‘China locking down again will probably affect spot prices, but not futures prices because at some point it will remove restrictions, and unless the Fed is trying to kill inflation to the extent it kills the cycle then no,’ he comments. The Federal Reserve can’t do anything to stimulate energy supply, says Norris, and rate hikes will have to do a lot more damage to financial assets before they start to hurt the economy. As well as energy and materials, which made up nearly 60% of the fund’s net exposure at the end of the first quarter, Norris likes industrials, although he also has several bets in the sector where he would profit from a falling share price. ‘Pricing power has now swung from innovators to commodity producers. Electric vehicle manufacturers still have easy access to capital and high valuations, but the bottleneck is the raw commodities, which will remain supply constrained for many years to come,’ he argues. ‘Every electric vehicle manufacturer will now warn on volumes and gross margins. The choice for the investor is simple: would you rather pay 50 times profitless sales to buy an EV manufacturer or three times earnings to buy a nickel miner with no debt? We want to be short the former and long the latter.’ ANTI-ESG VIEWS Norris reserves his greatest scorn, however, for the ‘mountains of dumb money’ as he calls it pouring into ESG funds, in particular investments in wind power. As he sees it, politicians in the UK in particular ‘have fallen into the trap of focusing solely on the low cash cost of intermittent renewable production, without realising the value of this

energy to the grid will always be low and as the market share of wind increases it will be negative’. Wind energy is protected against its own low value to the grid by a subsidy, without which, even at high energy prices, wind projects will not be financially sustainable, he argues. ‘A renewable grid will produce abundant electricity for a few days annually and prohibitively expensive and unreliable power the rest of the time, resulting in demand destruction and supply rationing. This is a monumental misallocation of capital and a generational policy folly.’ His ardent opposition to renewables is unlikely to win him many friends or investors among the ESG fraternity, but Norris is a manager who thrives on taking a contrarian view. He was one of the few fund managers brave enough to short German payments company Wirecard before it collapsed in 2020 due to a €1.9 billion accounting fraud. Having met the firm several times, Norris described it as having had ‘more red flags than a communist rally’. Without short sellers, he argues, ‘we would inevitably have a more dishonest stock market and that would lead to a higher cost of capital and lower long-term economic growth.’ [IC]

VT Argonaut Absolute Return Fund Largest long positions at 30 April 2022

Company

Sector

Weighting

Bayer (BAYN:ETR)

Chemicals

4.7%

Bunge (BG:NYSE)

Agriculture

4.6%

Archer-Daniels (ADM:NYSE)

Food Production

4.4%

Gaztransport (GTT:EPA)

Shipbuilding

4.3%

Kinder Morgan (KMI:NYSE)

Energy storage

4.0%

Table: Shares Magazine • Source: Fund fact sheet, Shares, data correct as of 4 May 2022

12 May 2022 | SHARES |

Investment trusts versus funds: how do they differ and what are their pros and cons? Both can sit together and play a key role in a diversified investment portfolio

he UK’s investment trust industry can chart its history back more than 150 years, when Queen Victoria sat on the throne. But it has been eclipsed by unit trusts, which are a relatively new kid on the block, having been introduced in the UK in 1931. There’s currently around £270 billion held in UK investment trusts, compared to around £1.5 trillion in unit trusts, or speaking more accurately, open-ended funds. Investment trusts and open-ended funds are championed by two different industry groups, which can sometimes lead to a polarised view of these two investment vehicles. But the reality is that investors can happily have a portfolio that includes both, because there are pros and cons to either option, and different investment strategies might lend themselves better to one or the other structure. KEY CHARACTERISTICS OF OPEN-ENDED FUNDS One of the key differences between investment trusts and open-ended funds is that the former are closed-ended, and the latter are open-ended. Open-ended means these funds create or cancel new shares depending on investor demand. They only issue one price per day, and to deal you would usually have to place your investment instruction

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the day before, so you don’t know precisely what price you’re going to get. For long term buy and hold investors, this forward pricing structure shouldn’t make a great deal of difference, because one day’s performance will ultimately be neither here nor there. The fund manager must ensure the price you get is based on the value of the underlying portfolio of securities held in the open-ended fund, give or take any transaction costs involved. WHERE INVESTMENT TRUSTS DIFFER Some investors may prefer investment trusts because there is a live price throughout the day, so you can trade at any point, and you will know exactly the price at which you’re buying or selling. That’s because investment trusts are closed-ended, which means the fund manager is investing a fixed pool of money. Shares in the investment trust then trade on the market like ordinary stocks, and investors buy and sell them between each other. The price can therefore deviate from the value of the underlying portfolio of securities (which along with cash and debt is called the net asset value), depending on demand for the investment trust itself.

DISCOUNTS AND PREMIUMS Investment trusts often trade at a discount or a premium to the underlying portfolio, and sometimes there can be a significant divergence, especially in distressed markets. Now you may think if you are buying an investment trust at a discount, you’re getting a bargain, and in a sense you are. But to realise the value of that discount, you would need to be able to sell the trust nearer to the net asset value of the underlying portfolio at some point, and if a trust continually trades at a hefty discount, you may find that is easier said than done. You need to look at the track record of an investment trust to see what its discount has been historically, to gauge whether you’re picking up a good deal. The same goes for trusts trading at a premium, which shouldn’t necessarily put you off a purchase. For long term buy and hold investors, the movement in the discount or premium should be small in comparison to the returns generated by the underlying portfolio. KEY RISKS OF INVESTMENT TRUSTS The existence of discounts and premiums does make investment trusts more complex than openended funds. It also makes them more volatile, because as well as variation in the price of the underlying portfolio, there is movement in the discount or premium. Investment trusts are riskier than open-ended funds for another reason too: they can borrow money to invest. This amplifies returns in the bull markets, but exacerbates losses in downturns, so investors need to be prepared for a bumpier ride with investment trusts. BETTER FOR PROPERTY AND INCOME INVESTMENTS Investment trusts are generally preferable when investing in illiquid assets, like commercial property. That’s because open-ended funds might have to suspend trading if lots of investors want their money back at once – it’s quite hard to sell an office block or a shopping centre at the drop of a hat. Investment trusts might also be useful for income-seekers, because they can effectively keep

some dividends back in good years to top up the dividend payments in bad years. This facility can produce a smoother income stream. There are currently no passive investment trusts, so for investors who want a simple tracker fund, then open-ended funds are the way forward. WHAT ABOUT CHARGES? It’s probably fair to say that investment trusts tend to have lower annual charges than their openended cousins. For instance, in the global sector, the average annual charge for an active openended fund is around 0.9%, but for investment trusts, it’s around 0.6%, according to data from Morningstar. However, this isn’t universally true, and investors should also be aware that approximately a third of investment trusts carry a performance fee, compared to around 5% of unit trusts. Partly this is down to the fact that a greater proportion of investment trusts offer exposure to more specialist markets, such as unlisted companies. Investors should compare the specific charges of the funds or trusts they are considering, because there are cheap and expensive examples in both camps. The same goes for the quality of the fund manager because that will be one of the key drivers of your returns, whether you’re investing in investment trusts or open-ended funds. By Laith Khalaf AJ Bell Head of Investment Analysis

12 May 2022 | SHARES |

I’ve inherited £3,000 – should I pay early on my mortgage or add to my pension pot? Our expert answers a question on what to consider with a grandparent’s legacy I have received £3,000 from my grandad when he died and I’m trying to decide whether to pay off some of my mortgage early or boost my retirement savings. I know you can’t tell me what to do as that would be advice, but what sort of things should I be thinking about? Jason Tom Selby, AJ Bell Head of Retirement Policy says:

I am often asked questions like this and the answer will depend on a range of factors. The first thing you should consider when choosing where to put any money is whether you have any higher cost debts that need paying off. For example, it would make little sense to use a £3,000 windfall to pay off a mortgage charging, say, 4% interest if you have credit card debt accumulating interest at 40%. If you don’t have any highcost debts like credit cards, your next port of call should be your ‘rainy-day’ fund – a pot of money held in a cash account for emergencies. It’s up to you how big you want this reserve to be, but generally holding three to six months’ fixed 38

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expenses in cash is a sensible target. Use websites like MoneySavingExpert to find the best paying cash account on the market. Once you’ve paid off any high-cost debts and set up a rainy-day fund, you can start to think towards the longterm – which brings us to your question. Firstly, check your bank or building society allows you to pay off part of your mortgage early without imposing a penalty. Assuming there is no penalty, usually when choosing whether to pay off debt or invest, the key is whether the returns you expect to get from your investments will be higher than your mortgage interest repayments. So, if your mortgage has an

interest rate of 4%, then your investments would need to deliver returns of at least this amount post-charges for the decision to pay off. Historically this hasn’t been a high bar for a diversified portfolio or fund to achieve over the long term, although there are no guarantees when it comes to investing. Remember pensions benefit from upfront tax relief at 20%, meaning if you contributed £3,000 it would automatically be boosted to £3,750 in a pension. What’s more, if you’re a higher-rate taxpayer you’ll be able to claim an extra 20% tax relief from the taxman, while an additional-rate taxpayer could claim an extra 25%. The amount you can

personally contribute to a pension is limited to 100% of your earnings, with a cap on total annual contributions – including any you receive from your employer – set at £40,000. In addition, there is a lifetime allowance set at £1,073,100 in 2022/23, with funds above this level potentially subject to a lifetime allowance charge. Provided you are happy to wait until age 55 to touch your money (rising to age 57 from 2028) and have sufficient annual and lifetime allowance to make a £3,000 contribution, money invested in a pension is likely to deliver a bigger bang for your buck than paying off your mortgage early. If you want to invest your

money tax-free but with easier access, an ISA might be a good alternative. If you’re aged between 18 and 39 and saving for retirement or a first home, a Lifetime ISA – which comes with a 25% government bonus – could be a good option. You can read more about the difference between Lifetime ISAs and pensions here.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES? Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares. Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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05 May 2022 | SHARES |

Future is starting to look more interesting after a 49% share price fall this year Growth shares may be off the menu but this company has a magic recipe

t the end of November 2021, publisher Future (FUTR) had a market value of £4.5 billion and looked as if it could soon qualify for the FTSE 100 index. However, during the past six months the market has been less enthusiastic about paying a high rating for fast-growth stocks, a group which includes Future. This shift in investor behaviour has seen Future’s share price fall by 49% year-to-date.

Future (p)

2,000 0 2018

2019

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Chart: Shares Magazine • Source: Refinitiv

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2021

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Given Future’s robust record of profitability, cash generation and progressive dividend policy the extent of the share price decline suggests additional concerns. Recent results from Google’s parent company Alphabet (GOOG:NASDAQ), specifically its YouTube operation, might suggest the digital advertising cycle is near its peak. Moreover, the ability of Future to entice consumers to acquire products through its affiliate partners may become progressively more difficult in an economic environment where consumers’ finances are increasingly constrained. However, there are good reasons why the group could prosper longer term. HOW IT MAKES MONEY Future has a large portfolio of magazines and websites. It creates interesting content such as information about cycling, photography or music which compels the reader to click on links to buy

“

On an average day, Future’s readers buy approximately 43,500 items as a result of clicking on links in its articles.

related products. It then receives commission on sales. Other sources of income include advertising, subscriptions, newsstand sales and events. The company has market leading positions in the UK and US in content about technology, and depth and strength in video gaming. However, it’s still early days in terms of profiting from women’s lifestyle interests, fashion and beauty, homes, health and wellness, and financial services. There is a large opportunity for the group if it can grow and monetise the audience in these categories on both sides of the Atlantic.

To achieve this, Future is trying to replicate the journey it has taken with the technology vertical by targeting areas where research is done online and where there is a high intent to purchase. For example, it is pushing hard on the homes market. This encompasses interior design and products from home security and kitchen technology to white goods and services. The acquisition of TI Media in April 2020 for £140 million has enabled the group to move into the home and women’s lifestyle segments with brands including Country Life and Women and Home. Future also owns popular magazines Homes & Gardens and Ideal Home. Financial services could be a key growth driver for the group. The £594 million takeover in February 2021 of GoCo, the parent company of comparison website GoCompare, has been instrumental in developing the group’s e-commerce and financial services capabilities. The deal also brought energy savings service Look After My Bills into its portfolio. ALL ABOUT THE CLICKS The sales Future derives from people clicking links to products recommended in its articles have become one of its core sources of income. Future’s proprietary technology automatically adds links to products from affiliate sellers with whom it has agreed revenue sharing agreements. These are updated based on availability and price. If inventory is low or delayed, Future will receive advance notice. This is a valuable tool for content writers who will only cover products that are available at the time. On an average day, Future’s readers buy approximately 43,500 items as a result of clicking on links in its articles. The company’s proprietary e-commerce platform known as Hawk has proved critical in the group’s success. It keeps track in real time of inventory stock levels from its multitude of affiliate partners including Amazon (AMZN:NASDAQ), Walmart (WMT:NYSE) and Best Buy (BBY:NYSE). Affiliate commerce has been a key driver of earnings growth. E-commerce revenue grew 36% to £216 million in 2021, making it the group’s fastest growing division. ACQUISITION BENEFITS Acquisitions have been an integral part of the 12 May 2022 | SHARES |

VIDEO IS HIGHLY LUCRATIVE Video advertising generates four times the yield of display advertisements. Future uses data to ensure relevant videos are created and placed on its own websites. This involves monitoring search terms and audience traffic. The percentage of page views that resulted in a video being watched rose by 6% between October 2020 and January 2022. Future’s digital advertising yields jumped by 9% from the first to the second half of 2021. This was due to an increase in the proportion of direct marketing campaigns, coupled with an increase in video advertising that now accounts for 12% of all digital advertising.

Future success story. There are often two clear drivers behind its acquisition strategy. Deals invariably bolster a vertical that the group is already in or provides editorial expertise and reach in a new category. Future’s acquisition of digital entertainment publisher CinemaBlend in 2020 increased its digital audience by over 19 million unique users per month and enabled the group to start signing advertising deals with streaming vendors and Hollywood studios. Marie Claire was acquired in May 2021 and although it had been engaged in affiliate e-commerce for some time, its success and offering greatly benefited from using Future’s Hawk platform, which enabled a more user-friendly shopping experience by integrating numerous links for where to make purchases. Video is another area where acquisitions have boosted the group’s scale and scope in a rapidly growing segment. For example, Future acquired Barcroft Studios in November 2019 for £23.5 million. Subsequently the asset has been renamed Future Studios and has added video creation to Future’s production capabilities. Video accounted for 5% of Future’s group revenue in 2021. 42

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INVESTMENT IN VIDEO REFLECTS GROWTH POTENTIAL Future intends to create a content hub in Atlanta. There are also plans to create more videos in the women’s lifestyle, home and living verticals. Its video content is published on all major social media sites including YouTube, Facebook and Snapchat which combined have millions of users. The company strives to have endemic advertisers, and that is why it is in specialist content as opposed to more generalist sectors. According to Shore Capital analyst Roddy Davidson, Future is forecast to generate £290 million of earnings before interest, tax, depreciation and amortisation and 160p of adjusted earnings per share in 2022. At £19.26 the shares trade on 12 times forward earnings. The rating is attractive given its potential to deliver organic upgrades and make further acquisitions that are earnings-enhancing. While sentiment is currently weak towards the stock, one must consider a lot of bad news about a potential slowdown in affiliate revenue growth is already priced in. The publication of half-year results on 18 May should give a better idea of how Future is coping in the current environment. We would be inclined to say the shares are worth buying if there is no bad news in this announcement. By Mark Gardner Senior Reporter

FEATURE

Why AG Barr is the best UK soft drinks firm to invest in right now The sector is recovering from the pandemic but the consumer outlook is uncertain

he soft drinks sector has long been a fruitful place to make money. Some of the bestknown brands are available to investors via shares in UK and overseas-listed companies. Once again, the soft drinks market is proving its resilience in volatile times, though the companies face headwinds in the form of regulation, an uncertain consumer spending outlook and the threat from private-label products, which could gain popularity as the cost of living goes up. To the soft drink sector’s benefit is the fact products are typically low price so consumers may not cut back on them in the way they might for bigger ticket items. Our key UK-listed soft drinks pick is AG Barr (BAG), the Scotland-headquartered company behind iconic tipple Irn-Bru. Its shares have rallied amid investors’ thirst for its impressive resilience against inflationary pressures. AG Barr’s sales and profits for the year to January 2022 surpassed pre-pandemic levels on strong

trading and a tailwind from the reopening of hospitality. Putting pandemic disruption behind it, AG Barr said on 29 March that trading in the early weeks of the new financial year was ‘well ahead’ of the prior year and we welcome the fact the company has resumed paying dividends. Its shares aren’t particularly cheap, trading on 18.1 times forecast earnings. However, it has a cash-rich balance sheet to withstand shocks as well as to fund future organic and inorganic growth. AG Barr, which also owns Rubicon, Tizer, Strathmore spring water and ready-to-drink cocktails label Funkin, is focused on building a multi-beverage brand portfolio with a specific focus on higher growth sectors. The investment in plant-based foods company Moma, whose oat milk is a premium quality product with significant potential and which sits alongside Moma’s existing porridge and oat-based products, demonstrates AG Barr is responding to shifting consumer tastes and preferences.

Market valuations of UK-listed soft drinks firms Company

Forward PE

Fevertree Drinks

45.6

Nichols

24.9

AG Barr

18.1

Britvic

15.4

Coca-Cola Europacific Partners

14.8

Coca-Cola HBC AG

14.4

East Imperial

n/a

Prospective dividend yield (%) 1.0% 2.0% 2.7% 3.3% 4.6% 3.5% n/a

Table: Shares Magazine • Source: SharePad, Refinitiv

12 May 2022 | SHARES |

FEATURE THE BIG US NAMES The US stock market features beverages giants Coca-Cola (KO:NYSE) and PepsiCo (PEP:NASDAQ). Both have just reported forecastbeating quarterly results as the world reopens after the pandemic, with price hikes helping to offset the impact of cost inflation and fresher brands gaining traction. Consumers continue to gulp down Coca-Cola’s iconic namesake brand as well as healthier variant, Coca-Cola Zero, the Bodyarmor and Powerade sports drinks and its increasingly popular Topo Chico hard seltzer. Meanwhile PepsiCo, the drinks maker behind Pepsi, 7UP and Gatorade, has successfully raised prices in response to commodities and energy cost inflation and in a testament to its resilience, lifted its full year organic sales growth forecast from 6% to 8%. PepsiCo has also made a foray into alcohol through Hard Mtn Dew, made in partnership with Boston Beer (SAM:NYSE). OTHER NAMES IN THE SECTOR The UK stock market has quite a few names in the soft drinks sector including Coca-Cola bottling partners such as Coca-Cola HBC (CCH), though this is a high-risk stock given the company’s significant exposure to Russia and Ukraine. FTSE 250 constituent Britvic (BVIC) owns such brands as Fruit Shoot, Wimbledon tennis tournament favourite Robinsons and Tango. Its shares trade on 15.4 times forward earnings and offer a prospective 3.3% yield. Like AG Barr, Britvic also plays in the high growth plant-based drinks category following the acquisition of Plenish. Investors should note that Britvic also produces and sells various PepsiCo soft drinks brands including Pepsi and 7UP under exclusive agreements. While the mutually beneficial relationship between Britvic and PepsiCo is longstanding, any future change could have an impact on the Britvic share 44

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price, while investment bank Morgan Stanley flags the risk to Britvic from private label competition in Western Europe. On London’s AIM market is Nichols (NICL:AIM), the diversified soft drinks group behind the Vimto brand popular in the UK, Middle East and Africa. While inflation is a concern, Nichols’ trading update on 27 April signalled a good start to 2022 with group revenue up 28.9% year-on-year to £39.6 million in the three months to March. Vimto has outperformed the wider UK soft drinks market year-to-date, achieving growth of 10.8% in value terms versus 9.8% across the market. Nichols’ international business softened towards the end of the first quarter after a solid start, due to temporary transport logistics disruption to canned drink supplies into Africa in March which have now been resolved. Broker Singer Capital Markets says Nichols is ‘a branded international business with above-average growth prospects and a strong balance sheet’. PREMIUM MIXERS £2.1 billion premium mixer business Fevertree Drinks (FEVR:AIM) continues to perform well, though a high price to earnings ratio of almost 46 times means any disappointments will be harshly punished by the stock market.

Indeed, the sharp increase in commodity prices exacerbated by the conflict in Ukraine prompted the upmarket mixer brand’s management on 16 March to cut earnings guidance. Lower down the market cap ranks is another play on the global trend towards premiumisation, namely £24 million market cap East Imperial (EISB), a posh tonic water, ginger beer and grapefruit soda company which is inking distribution deals. By James Crux Funds and Investment Trusts Editor

INDEX Main Market

Overseas shares

Funds

Investment Trusts

AG Barr

AbbVie

Home REIT

Aston Martin

Adobe

Alphabet

Latitude Horizon Fund

BAE Systems

24, 25

Securities Trust of Scotland

Guinness Global Equity Income Fund

Amazon

VT Argonaut Absolute Return Fund

Smithson Investment Trust

7, 41

British American Tobacco

Britvic

Coca-Cola HBC

East Imperial

Future

InterContinental Hotels

Marks & Spencer

CNH Industrial

McColl's Retail

Coca-Cola

Deere & Co

Seraphine

Ebay

Shell

Eiffage

Unilever

Archer-Daniels-Midland Bank of America

Best Buy

Block

Boston Beer

CF Industries

CME Group

Etsy Ferrari

AIM

Foot Locker

24 9

15 7 31 7

Begbies Traynor

Heineken

Boohoo

Home Depot

CentralNic

K+S

Cerillion

Lowe's

Craneware

Meta Platforms

Fevertree Drinks

Microsoft

Mosaic

KEY ANNOUNCEMENTS OVER THE NEXT WEEK Full-year results: 17 May: DCC, Genincode, Land Securities, Pacific Assets Trust, Smartspace Software, Velocys, Vodafone. 18 May: British Land, N Brown, Burberry, Experian, Ninety One. 19 May: Inspecs, Investec, National Grid, QinetiQ, Royal Mail. Half-year results: 13 May: Sage. 16 May: Cerillion, Diploma. 17 May: Britvic, Imperial Brands, Renew, Sureserve, Watkin Jones, Zytronic. 18 May: Benchmark, Marston’s. 19 May: Auction Technology, Euromoney Institutional Investor. Trading updates: 13 May: Contour Global. 16 May: Greggs. 17 May: TI Fluid Systems. 18 May: TBC Bank. 19 May: Watches of Switzerland. WHO WE ARE

Palantir

PayPal

James Crux @SharesMagJames

PepsiCo

COMPANIES EDITOR

Roche

Shopify

K3 Capital

Target

Nichols

SDI

GB Group

Harvest Minerals

Ideagen Joules

Skillcast

8 ETFs

Ark Innovation

Vanguard FTSE All-World High Dividend Yield ETF

Tesla

30, 35

Texas Instruments

Vinci

Walmart

7, 41

Wayfair Zoom

NEWS EDITOR:

Tom Sieber @SharesMagTom

Steven Frazer @SharesMagSteve

EDUCATION EDITOR

CONTRIBUTORS

Martin Gamble @Chilligg

Danni Hewson Laith Khalaf Russ Mould Tom Selby Laura Suter

Daniel Coatsworth @Dan_Coatsworth FUNDS AND INVESTMENT TRUSTS EDITOR:

FRP Advisory

DEPUTY EDITOR:

EDITOR:

SENIOR REPORTER:

Mark Gardner

Ian Conway @SharesMagIan

ADVERTISING Senior Sales Executive Nick Frankland 020 7378 4592 nick.frankland@sharesmagazine.co.uk

PRODUCTION Head of Design Darren Rapley

Designer Rebecca Bodi

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