Shares magazine 03 October 2024

A CRUNCH BUDGET

What is in store for the markets and your money

05 EDITOR’S VIEW

The sector which very much isn’t participating in the China rally

07 Handbags at dawn for Mulberry as Boohoo mulls break-up

08 Not for sale: Rightmove sees off interest from Australian rival REA

09 Cranswick shares hit new all-time high on positive earnings surprise

09 Allegations crash Super Micro Computer in September

10 Pub group JD Wetherspoon expected to meet full year expectations

11 PepsiCo is looking to regain its share price fizz 12 UK and European manufacturing activity continues to diverge

14 Food-to-go leader Greggs continues to deliver on its growth promise

16 Why you should buy Blue Whale Growth as the fund turns seven UPDATES

18 Supermarket Income REIT demonstrates the old adage patience is a virtue

19 Strong first-half trading keeps us positive on GYM Group

20 Will China’s stimulus package make a difference for investors?

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What is in store for the markets and your money 29 MY PORTFOLIO

How to navigate the impact of major milestones to reach your investment goals

Why America’s interest bill is so important and why no-one is talking about it

Lifetime ISAs are becoming more popular –but beware the exit charge

42 ASK RACHEL

How can I lower my income to below the £100,000 threshold? 44 INDEX Shares, funds, ETFs and investment trusts in this

Three important things in this week’s magazine

A crunch Budget

Adapting your portfolio for life’s milestones

In

Visit our website for more articles

Did you know that we publish daily news stories on our website as bonus content? These articles do not appear in the magazine so make sure you keep abreast of market activities by visiting our website on a regular basis.

Over the past week we’ve written a variety of news stories online that do not appear in this magazine, including:

The sector which very much isn’t participating in the China rally

The automotive industry is in reverse gear amid a myriad of challenges

As Sabuhi Gard covers in a piece of news analysis this week, China-related stocks and funds are flying thanks to Beijing’s announcement of a big stimulus package.

However, there is one industry with ties to the world’s second largest economy which is very much not joining in the party – the car manufacturers.

On 30 September, Stellantis (STLAM:BIT) – one of the biggest European car producers comprising Fiat, Citroen, Peugeot and Vauxhall as well as Chrysler – and UK luxury car brand Aston Martin Lagonda (AML) both pegged profit warnings, in part, on China.

Several other major players including BMW (BMW:ETR), Volkswagen (VOW:ETR) and Volvo Car (VOLCAR-B:STO) also warned about Chinese trading last month.

Part of this is down to pressure on Chinese households’ ability to spend, although that hasn’t stopped luxury goods firms like Burberry (BRBY) and other sectors reliant on Chinese demand, like miners, from making gains in the last week or so in anticipation of better times ahead.

The other problem facing carmakers in the West is the level of domestic competition they face in China.

There are no Chinese brands with the prestige to challenge the likes of Burberry, Chanel, Hermes (RMS:EPA) or Louis Vuitton, but there is a large and thriving domestic automotive industry with BYD (002594:SHE) notably outstripping Tesla (TSLA:NASDAQ) as the top seller of electric vehicles globally in the fourth quarter of 2023.

stumbling block in terms of mass adoption of electric vehicles being their price tag (as well as range anxiety).

In China, manufacturers have been able to undercut their Western counterparts to offer more affordable EV options and, as a result, Chinese EV adoption is notably greater – moving above 50% of total vehicles sold in July 2024 according to data from the China Passenger Car Association. The US and Europe are still way off this level.

Our three-part series on portfolio management and construction concludes this week with Martin Gamble looking at how to respond to different milestones. As we said at the outset, the My Portfolio section is now intended to be very much a forum for you to discuss your own experiences and a big thank you to those who have already got in touch.

The major automotive players in the West have struggled with the EV transition, with a key

We’ll be reaching out to some of you shortly to discuss your portfolios and how you manage them and, on the basis of these articles, we plan to follow up with our observations on what you’ve had to say.

Chart: Shares magazine • Source: LSEG

What brands does Boohoo

What brands does Boohoo own?

Handbags at dawn for Mulberry as Boohoo mulls break-up

boohoo boohooMAN.com

Karen Millen

Two major shareholders have different views on who should swing the handbags business Mulberry back into fashion

Posh handbag maker Mulberry (MUL:AIM) has rejected (1 October) a potential £83 million takeover proposal from Frasers (FRAS), Mike Ashley’s sprawling retail conglomerate.

Like Lord Wolfson’s Next (NXT), Frasers is expanding its stable of brands through acquisitions of, and investments in, distressed retail assets and on 30 September, proposed a 130p cash offer for Mulberry. However, the embattled British luxury brand spurned the bid on the grounds the offer does not recognise its ‘substantial future potential value’.

Pursuing a strategy to go more upmarket, Frasers holds a sizeable 36.8% stake in struggling Mulberry, but the target has an even bigger shareholder in 56.1% owner Challice, which is backing new CEO Andrea Baldo’s turnaround strategy and doesn’t want to sell out to Frasers. Both Frasers and Challice, controlled by billionaire Ong Beng Seng, are logical owners of the Bath-based fashion house, making this a tricky situation.

On account of its ‘leading retail expertise and presence, and best in class distribution capability’, Frasers is convinced it is the ‘best steward for returning Mulberry to profitability’. Ashley’s charge said it won’t accept ‘another Debenhams situation where a perfectly viable business is run into administration’: for the uninitiated, Debenhams went into administration in 2020 having rejected a rescue plan by Frasers, known as Sports Direct at the time.

PRETTYLITTLETHING

Debenhams

boohoo boohooMAN.com

Karen Millen

PRETTYLITTLETHING

Debenhams

What brands does Boohoo own?

NASTY GAL

coast

boohoo boohooMAN.com

MISSPAP

OASIS

Karen Millen

WAREHOUSE

PRETTYLITTLETHING

BURTON LONDON

Debenhams

WALLIS

NASTY GAL

DP

coast

NASTY GAL

coast

MISSPAP

OASIS

WAREHOUSE

BURTON LONDON

WALLIS

DP

Table: Shares magazine • Source: Boohoo

Table: Shares magazine • Source: Boohoo

MISSPAP

OASIS

WAREHOUSE

BURTON LONDON

WALLIS

DP

Famed for its leather handbags, Mulberry, which lurched into loss for the year ended 30 March 2024 amid falling sales and rising costs, has rejected Frasers’ takeover overtures but would accept its cash as part of a fundraising to shore up its balance sheet. Frasers has until 28 October to make a formal offer or walk away.

Table: Shares magazine • Source: Boohoo

Drama is also unfolding in another part of the Frasers empire, namely beleaguered fast-fashion group Boohoo (BOO:AIM), the owner of the Debenhams brand and in which Ashley’s charge has amassed a 26.1% stake. Management is mulling a break-up of the loss-making fashion business amid shareholder pressure to unlock value and revive its flagging fortunes.

According to The Times, various shareholders have urged Boohoo’s board to sell or spin off Karen Millen and Debenhams and sell winning brands such as Boohoo and PrettyLitleThing in a bid to boost the shares, which have shed 90% of their value in the last past five years. Boohoo, which is shutting down its US distribution centre having struggled to crack the notoriously fickle fashion market across the pond, is thought to be waiting to assess its Christmas trading performance before finalising a break-up plan. [JC]

Not for sale: Rightmove sees off interest from Australian rival REA

UK property portal rejected all four offers from the outfit owned by Rupert Murdoch’s News Corp

In a sign UK companies are in a mood to see off overseas predators, Rightmove (RMV) has successfully batted off interest from Rupert Murdoch-backed rival REA Group (REA:ASX).

The latter says it will no longer pursue the online UK property portal after having its fourth offer rejected.

Rightmove shares reacted negatively to the news on the day (30 September), falling 8% to 613p, though year-to-date the shares are up 10%.

Sean Kealy analyst at Panmure Liberum says REA chose to walk away from making a higher offer for Rightmove as it ‘would have proven EPS (earnings per share) dilutive for the group.

‘REA Group initially chose to exploit a valuation gap that had become ever greater as the underlying business continued to grow circa 8% year-on-year, but the rating continued to compress.’

Kealy reiterates that REA’s offers were ‘opportunistic’ and expresses full confidence in Rightmove: ‘It will repel US real estate giant CoStar’s (CSGP:NYSE) competitive threat and the company remains cheap relative to both peers and history.’

CoStar acuqired Rightmove’s peer OnTheMarket in 2023. There have recently been signs of life in the UK property market which should provide a helpful backcloth to Rightmove.

REA’s CEO Owen Wilson expressed disappointment with Rightmove’s rejection of its fourth proposal saying in the company was disappointed with ‘the limited engagement from Rightmove that impeded our ability to make a firm offer within the timetable available.’

Wilson added: ‘They [Rightmove] had nothing to lose by engaging with us.’

Rightmove’s rebuttal hasn’t discouraged REA Group from looking at other opportunities in the digital property sector and adjacent markets, including India, the company said.

Under the terms of REA’s latest offer, Rightmove

Rightmove

Chart: Shares magazine • Source: LSEG

shareholders would receive 346p in cash and 0.0417 new REA shares, implying a value of 780p based on the closing price of REA Group on the Australian market, as well as 6p per share in cash in lieu of a final dividend for 2024.

The Rightmove board unanimously rejected the proposal saying it still ‘materially undervalued’ the business and its future prospects.

Rightmove chair Andrew Fisher said: ‘We respect REA and the success they have achieved in their domestic market. However, we remain confident in the standalone future of Rightmove.

‘Rightmove has been the leading operator in the UK for over 20 years, and it has differentiated market presence, branding and technology, and very significant opportunities for future growth.’

Fisher added that ‘the last few weeks have been very disruptive, as well as unsettling for our colleagues’.

Under the UK Takeover Code, the Australian property group cannot make any further bid for Rightmove for at least six months – but this doesn’t stop other interested parties approaching the company. [SG]

Cranswick shares hit new all-time high on positive earnings surprise

Company lifts half-year and full-year guidance on sizzling demand

Shares in Yorkshire-based pork and poultry producer Cranswick (CWK) leapt 280p or 6% to a new life-high just shy of £50 on Friday as the firm raised its outlook yet again following a better-than-expected second quarter.

Led for the last decade by chief executive Adam Couch, a Cranswick ‘lifer’, the company has expanded its production in recent years to serve UK supermarkets and

‘food-to-go’ clients as well as export markets, and has diversified into pet food to broaden its revenue base.

In its first-half update, the firm said demand since the end of the first quarter had been stronger than expected ‘underpinned by continued robust volume growth in our core UK food business’ and a positive ongoing contribution from its expanding pig farming operations. As a result, firsthalf results are seen ahead of the same period last year and full-year profits are expected to be ‘towards the upper end’ of current forecasts

Allegations crash Super Micro Computer in September

Popular AI stock in the dock over accounting charges

It’s been a bleak September for AI (artificial intelligence) super computer manufacturer Super Micro Computer (SMCI:NASDAQ), a popular stock with retail investors. First targeted by Nathan Anderson’s short selling firm Hindenburg Research at the end of August, it is now reportedly facing a Department of Justice probe.

A prosecutor in the US attorney’s office in San Francisco has asked for information about a former employee who has previously accused Super Micro of accounting violations, according to market intelligence.

Hindenburg said it identified ‘fresh evidence of accounting manipulation’, according to its report. The allegations include improper revenue recognition and rehiring executives involved in past accounting scandals.

‘Less than three months after paying a $17.5 million SEC settlement, Super Micro began re-hiring top executives that were directly involved in the accounting scandal, per litigation records and interviews with former employees’, the report stated.

Following the allegations, Super Micro said it would not file its annual report for the fiscal year with the US Securities and Exchange Commission on time, sending the shares tumbling, although it remains

of between £179 million and £192 million.

Despite a trend among younger consumers towards vegetarian and vegan diets, UK demand for Cranswick’s meat products remains healthy, although the company has begun to offer other products such as houmous in an effort to broaden its appeal. [IC]

unclear if the delay was related to the Hindenburg allegations.

Whatever the truth of the matter, Super Micro shares have taken a hammering, down nearly 24% since Hindenburg revealed its claims. That’s makes it the worst performer of the entire S&P 500 index during that time, wiping close on $840 million off its market cap. [SF] Super Micro

4 Oct: Wetherspoon

RESULTS

8 Oct: S&U, Angling Direct

9 Oct: Marston’s

Pub group JD Wetherspoon expected to meet full year expectations

Unseasonal weather and disruption from summer riots has not helped hospitality firms

Pub group JD Wetherspoon (JDW) is due to reveal full-year results on 4 October. These are expected to be in line with market expectations according to a pre-close trading statement on 10 July.

Consensus expectations are calling for sales just north of £2 billion for the first time and a pre-tax profit of £72 million, representing year-on-year growth of 5% and 67% respectively.

While achieving record sales is a clear positive, investors will be more focused on seeing continued like-forlike sales growth and comments on the outlook for profitability which has yet to fully recover from the pandemic.

Consensus forecasts for 2025 are calling for 5% growth in sales and pretax profit of £84 million.

Fellow pub company Mitchells & Butlers (MAB) recently highlighted (26

September) a continued normalisation of inflationary pressures, which should be a good read-across.

Improving profitability may awaken talk of reinstating the dividend, which has been absent since 2019, although the company opted for a share buyback equating to £40 million in the first half of its financial year to the end of July. Having spent heavily on expanding its outdoor spaces and gardens since the pandemic, Wetherspoon faces a fresh challenge should the government’s proposal to ban outdoor smoking succeed. [MG]

JD Wetherspoon (p)

PepsiCo is looking to regain its share price fizz

maker plans to return volumes to growth after pushing too hard with price hikes

Investors will be thirsty for evidence of a top-line turnaround when PepsiCo (PEP:NASDAQ) serves up third-quarter results on 8 October.

The sodas-to-snacks powerhouse pushed the inflation-pinched consumer to the limit with price rises with the result second quarter sales missed expectations for only the second time since 2017 and has shifted its focus from marginprotecting price hikes to driving volumes and promotions.

New York-headquartered PepsiCo’s flat one-year share price performance reflects intense competition and weak consumer spending in key markets, not to mention investors’ concerns over the long-run impact of anti-obesity drugs on demand for sugary snacks and drinks. The company will also need to allay fears that a recent snacking slowdown is temporary as cost-of-living pressures weigh on consumer spending across the pond.

On 11 July, second quarter results from PepsiCo, whose brands includes the namesake fizzy pop as well as Doritos, Gatorade, Mountain Dew and Quaker, revealed weaker than expected organic sales growth of

1.9%, possibly the result of hardpressed shoppers switching to cheaper own label versions of its products.

PepsiCo has suffered from a broader snacking slowdown with volumes in its Frito-Lay North America arm proving weak, although management intends to return the segment to 4% to 5% growth by accelerating productivity initiatives and promotions.

And with the international business delivering another quarter of strong sales growth and margin expansion, PepsiCo’s second quarter EPS (earnings per share) beat guidance and CEO Ramon Laguarta said management had ‘a high degree of confidence in delivering at least 8% core constant currency EPS growth for full-year 2024.’ [JC]

UK and European manufacturing activity continues to diverge

In the US the labour market remains investors’ biggest concern

The UK manufacturing sector remained in ‘expansionary’ territory for a fifth month running in September with a reading of 51.5 on the S&P Global UK PMI (purchasing managers’ index).

A figure above 50 indicates an expansion in activity while a figure below 50 represents a contraction.

Both output and new orders continued to rise, particularly in consumer and intermediate goods, with the domestic economy is still the main driver of growth according to the survey.

It was a much less rosy picture across the Channel where the September HCOB Eurozone Manufacturing PMI came in at a disappointing 45,

Macro diary 3 September to 10

falling from 45.8 in August and marking a nine-month low.

The euro area’s manufacturing sector slid deeper into contraction at the end of the third quarter as key barometers of factory strength such as production, new orders, employment and procurement activity all declined at quicker rates, said the survey.

Eurozone goods producers also lowered their inventories as business growth expectations slumped to a ten-month low.

However, Eurozone headline inflation did drop below 2% in September, falling to 1.8% as per market forecasts, its lowest level in three years.

In theory, that means the ECB (European Central Bank) has scope to cut interest rates at least once more before the end of the year in an effort to revamp the flagging economy.

In the US, given the Fed’s repeated mantra about being data-centric, this week’s focus is very much on the jobs market with the JOLTS survey on Tuesday, the ADP non-farm number on Wednesday and the big one, the Bureau of Labour Statistics non-farm payrolls figure, on Friday.

Next week’s economic diary is light but investors will certainly be keeping an eye out for UK house prices and retail sales figures for signs of how the consumer is feeling now the interest rate cycle has peaked. [IC]

Next Central Bank Meetings & Current Interest Rates

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Food-to-go leader Greggs continues to deliver on its growth promise

Despite its obvious success the valuation looks as reasonable as its menu prices

Greggs (GRG) £29.37

Market cap: £3 billion

Back in July we flagged food-on-the-go purveyor Greggs (GRG) as a mid-cap ‘star’ thanks to its ability to consistently grow its earnings at a double-digit rate and its attractive valuation.

The shares have put on a couple of pounds in the last couple of months, and although sales in July and August were slightly slower than expected, most likely due to the cold, damp weather at the start of the summer and further heavy rain in August, the company reported ‘stronger’ trading in September and has maintained its full-year outlook.

With cost-of-living pressures easing and interest rates falling consumers have more disposable income in their pockets, and we believe low-ticket discretionary spending stocks like Greggs will be among the first to experience a pick-up in sales.

THE RISE OF A HIGH-STREET HERO

We doubt Greggs needs much introduction, given the rising popularity of food-to-go and the firm’s presence across the UK retail landscape, but its is worth looking at how the brand has become so successful over the last five years.

While repeated lockdowns in 2020 briefly pushed the Newcastle-based company into a quarterly loss for the first time in its history, it managed to rebuild its earnings remarkably quickly and by the end of 2021 profits were almost back to pre-pandemic levels.

Shares magazine • Source: LSEG

hugely popular.

The firm also broadened its menu, introducing new vegan-friendly food and drink options, and rather than hunkering down it continued to invest in its production capacity in anticipation of a ‘return to normal’.

In late 2021, Greggs set out an ambitious plan to double sales to £2.4 billion by 2026 by increasing the pace of net store openings to around 150 per year, relocating some of its existing shops to better premises with multi-channel potential, extending trading into the evening, broadening its delivery service and expanding use of its app-based loyalty scheme.

DELIVERING ON ITS GROWTH STRATEGY

It achieved this by continuing to roll out new stores, including its first drive-through sites, and by setting up a delivery service across nearly 1,000 outlets or half its estate at the time, which proved

Just over half-way though the plan, the company shows no sign of slowing down – net store openings this year are expected to be between 140 and 160, including around 50 relocations, while sales for the first nine months are up 10.6% and on track to reach £2 billion by the year-end.

Greggs (p)

Chart:

As well as extending its store network, the firm is improving the quality and using new formats, with two further drive-through outlets opened so far this year.

It is also continuing to invest in its production facilities, with a new chilled and ambient national distribution centre planned in Kettering, as well as in its supply chain and distribution centres to support its expanded branch network.

A new autumn menu has been rolled out with new hot products and more vegan items with a

Table: Shares magazine • Source: Stockopedia. All data correct as of 1 October 2024,

Source: Greggs

seasonal twist together with new over-ice drinks.

Also on a positive note, the firm says it now sees the overall level of cost inflation this year being towards the bottom end of its 4% to 5% range of expectations which we take to mean its operating margin may be higher than anticipated.

According to Stockopedia, consensus forecasts are for sales of £2 billion this year and £2.2 billion in 2025, suggesting the target of £2.4 billion by 2026 is within reach, while earnings per share are seen at 134p and 148p respectively, putting the shares on a 2025 PE (price to earnings) ratio of 20 times which is around the average of the last 30-odd years.

While Greggs isn’t considered an income story, existing shareholders have been well rewarded this year with a special dividend of 40p per share on top of a final 2023 dividend of 62p, an interim 2024 dividend of just under 20p (up from 16p last year) and a 15% gain in the share price.

With the popularity of its value-for-money offering, the investment in its store estate and supporting infrastructure, longer opening hours, delivery service and the data coming in from its loyalty scheme which it can use to target its marketing more effectively, we can see Greggs hitting its medium-term targets with ease, which should result in a re-rating of the shares over the next year or two. [IC]

Why you should buy Blue Whale Growth as the fund turns seven

Under the radar global growth collective is unfairly overlooked

Blue Whale Growth (BD6PG78) 236.07p

Fund size: £1.1 billion

When most UK retail investors think about funds that invest in highquality businesses, Terry Smith’s Fundsmith Equity (B41YBW7) will likely be the first name that springs to mind. It’s had its rough patches, but it has overall been an exceptional performer for its investors over the years, returning roughly 15% a year since its launch in November 2010, according to the fund’s own data.

The Blue Whale Growth (BD6PG78) fund really stands out to us as an alternative high-quality growth stock option, one that we believe is still insanely overlooked by most mainstream investors. Like Fundsmith Equity, Blue Whale Growth’s investment philosophy is deceptively simple; invest into high quality businesses with long-run growth

scope, at attractive prices.

This is typically measured by investment criteria such as ROCE (return on capital employed), ROE (return on equity), free cash flow and others.

• High-quality large and mega-caps at an attractive price

• Companies with strong competitive positions and good management teams

• Exposed to structural growth drivers

• High return on invested capital, equity and cash flows

BLUE WHALE’S INVESTMENT LENS

BEATING ITS BENCHMARKS

Blue Whale Growth turned seven last month and has beaten its Investment Association Global Index benchmark in all but one of those years (2022), when lots of active funds struggled, Fundsmith too.

Since inception, the fund has delivered an annualised total return of 12.7%, far better than the 9% served up by global equities over the last 25 years, based on Barclays’ Equity Gilt Study. More recent performance is also impressive, up 11.8% in 2024 (to 30 August) having put up 30.7% returns in 2023. Its IA Global benchmark has put up 8.4% and 12.7% respectively, for comparison.

Blue Whale eschews research from third party brokers, instead relying on its own in-house team of analysts to come up with great investment opportunities, then robustly track them in detail once they make it into its concentrated portfolio, typically with between 25 and 35 stocks (currently 26). It means the fund’s team can spot opportunities early, whether that’s new ones, topslicing or adding to existing names, or see mistakes that need fixing.

It works. For example, Blue Whale Growth started buying AI (artificial intelligence) chip champion Nvidia (NVDA:NASDAQ) more than three years ago at around the $20 mark (adjusted for stock splits), long before the stock went to the moon. Nvidia now trades at $121.44 and its one of the fund’s largest stakes at close on its 10% of funds limit.

But while it does have sizeable stakes in names like Nvidia, Lam Research (LRCX:NASDAQ) and Meta Platforms (META:NASDAQ), this is no tech fund, an accusation that remains one of the chief frustrations of Blue Whale Growth manager Stephen Yiu.

‘If you ask me today what our mission statement is, it’s to compound your investment at the highest return possible. That’s what we want to do over the medium term,’ Yiu says.

NOT JUST ABOUT TECH

So, investing in tech is not for tech’s sake, rather because it remains an area where Yiu and his team see the potential to generate the most alpha, exactly what investors want. Tech stocks currently represent about 45% of the fund, which means more than half is outside the space, in things like high-end fashion (Moncler (MONC:BIT)), financial services (Charles Schwab (SCHW:NYSE)), and oil and gas (Canadian Natural Resources (CNQ:TSE)).

While some readers might worry about portfolio duplication between Blue Whale Growth and Fundsmith Equity, given their similar approaches, this is not really an issue. For example, of the pairs’ respective top 10 stakes, only Meta Platforms and Visa (V:NYSE) are in both.

True, there are cheaper funds around but not by much for this level of successful active management, with ongoing charges at 1.09%.

That compares to Fundsmith’s 0.95% ongoing charge, although this is partly a function of the scale advantages of the larger fund and we would expect Blue Whale Growth charges to come down as assets continue to build. Ultimately, Shares believes Blue Whale Growth is a fantastic, under the radar investment option for those taking a multi-year view. [SF]

DISCLAIMER: The author of this article (Steven Frazer) owns a personal interest in Blue Whale Growth and Fundsmith Equity.

Supermarket Income REIT demonstrates the old adage patience is a virtue

Supermarket Income REIT

(SUPR) 76p Gain to date: 0%

We suggested investing in the company in late March on the basis income was rising due to strong sales at supermarkets and the shares were yielding 8% with the dividend fully covered by earnings.

While zero returns isn’t quite what we’d hoped for, in the meantime investors have received two interim payments of 1.515p per share, one in midMay and one in mid-August, so they have literally been paid to own the stock.

WHAT HAS HAPPENED SINCE WE SAID BUY?

The beauty of owning a company which owns multichannel stores and sites operated by Sainsburys (SBRY) and Tesco (TSCO) is you know there is no question over occupancy or rent collection, which

Investors who bought in March have been paid two interim dividends already Supermarket Income

REIT

continues to be 100% in both cases.

The company has generated a 12% increase in annualised passing rent thanks to a 4% like-forlike rental uplift and accretive acquisitions during the 12 months to June.

The big two supermarket groups are actively investing in their sites to capture a greater share of the grocery market, and a recent visit to Sainsbury’s Cobham store had analysts salivating over its plans to rejuvenate 100 of its stores to drive greater sales, all at its own cost.

Meanwhile, the trust’s managers have been expanding the portfolio, adding multi-channel sites in France operated by food giant Carrefour (CA:EPA), which aims to treble online sales to €10 billion by 2026, at a very attractive net initial yield.

WHAT SHOULD INVESTORS DO NOW?

We believe Supermarket Income REIT will reward patient investors, although while an 8% yield is nice we do also expect the share price to get a shimmy on as we approach retail’s ‘golden quarter’.

Commercial property valuations should rise as interest rates fall, which will give added support to the stock price, and we can even see the case for the discount to NAV (net asset value) narrowing which would be a bonus. [IC]

Strong first-half trading keeps us positive on GYM Group

The group is on track to open around 50 new sites over the next three years

GYM Group (GYM) 157p

Gain to date: 14%

Gym operator GYM Group (GYM) is showing good gains since we identified the low-cost gym specialist as an attractive risk/reward investment opportunity on 18 August.

We noted the business has got itself back into shape and appears to be building strong momentum with consistent like-for-like sales growth and rising site yields amid an acceleration of new site openings.

WHAT HAS HAPPENED SINCE

WE SAID TO BUY?

First-half results on 11 September did not disappoint with a significant increase in profit above market expectations.

Revenue climbed 12% to £112 million with memberships up 3% year-on-year and average revenue per member per month rising 9%. Like-forlike revenue grew 9% in the period.

Group adjusted EBITDA (earnings before interest, tax, depreciation, and amortisation) less normalised rent increased 28% while free cash flow jumped 73% to £24.5 million.

The group has opened seven new sites in the year to date and remains on track to open 10 to 12 new sites for year, as previously guided. There is a strong pipeline of high-quality sites to accelerate openings to between 15 to 20 sites in 2025, all funded from free cash flow.

The company said strong trading continued in July and August and it now expects to deliver between 5% and 6% like-for-like revenue growth in 2024. Management raised full-year guidance to the top end of recently revised market expectations.

This implies full-year EBITDA less normalised rent of close to £44 million based on company-compiled consensus estimates.

Chart: Shares magazine • Source: LSEG

Shore Capital’s leisure analyst Greg Johnson increased his 2024 EBITDA forecast by £1 million to the top of the guided range and sees scope for further modest uplifts as the year progresses.

WHAT SHOULD INVESTORS DO NOW?

The group appears to be executing well on its growth plans while increasing profitability and site returns on investment. With plenty of headroom to profitably grow the estate, and the shares trading below replacement cost, we remain buyers. [MG]

Will China’s stimulus package make a difference for investors?

Various sectors from property to financial services have been given a boost

On 24 September, the PBOC (People’s Bank of China) unveiled a major stimulus package to support economic growth, promote the expansion of consumption and investment and throw a lifeline to struggling industries and sectors.

The central bank also announced a 800-billionyuan ($114 billion) lending pool to help fund managers, insurers and brokers buy more stocks and initiate share buybacks.

China’s stock market indices reacted positively to the news with Hong Kong’s Hang Seng index making a 12.9% weekly gain and the local CSI 300 index gaining 15.7%.

There were also moves to stimulate the Chinese property market including a cut in interest rates for existing mortgages and the minimum down payment on all homes was reduced to 15% from 25%.

On the 25 September, the central bank went a step further, cutting the interest rate on its medium-term lending facility from 2.3% to 2% and promising to cut the amount of cash banks have to hold in reserve which would free up around a trillion yuan ($142 billion).

WHY IS BEIJING ACTING NOW?

President Xi Jinping has been under pressure since March to boost the country’s flagging economy,

with a growing likelihood it would miss its 5% GDP (gross domestic product) growth target for this year.

Raheel Altaf, manager of the Artemis SmartGARP Global Emerging Markets Equity fund (BW9HL13), believes China’s problems come from a prolonged period of lockdowns followed by stalling growth and weaker consumer sentiment.

‘A lack of resolute measures to stimulate demand and clampdowns on technology, real estate, and the education sector further dampened sentiment,’ says Altaf.

‘High levels of youth unemployment and the demographic challenge of an ageing population have also created headwinds to growth.’

China’s imports rose by just 0.5% from a year earlier in August compared to 7.2% growth seen in July, while retail sales missed expectations with a year-on-year rise of 2.1% narrowly, only just above their previous post-pandemic low.

Analysts at US investment bank Goldman Sachs responded to the latest disappointing data by cutting their forecast for China’s overall economic growth this year from 4.9% to 4.7%.

WHAT DOES THE STIMULUS PACKAGE MEAN?

Last week’s intervention could help with economic recovery, but some investors remain sceptical says Quilter’s Lindsay James: ‘Following on from the

China-exposed stocks and trusts rally on stimulus package

term implications of the stimulus package and benefits to their portfolio, what is clear is traders have been piling into stocks and funds with exposure to China to make sharp short-term gains.

Over the past week, mining stocks have benefited from the China stimulus package announcement with Anglo American (AAL), Antofagasta (ANTO), Glencore (GLEN) and Rio Tinto (RIO) all making progress.

On 27 September, financial services firm Prudential (PRU) was the biggest riser on the FTSE 100 index climbing 3% on the day, while Standard Chartered (STAN) was up 6% on the week.

Luxury retailer Burberry (BRBY) made double-digit gains over the course of the week, with major European luxury stocks such as LVMH (MC:EPA) and Hermes International (RMS:EPA) also in demand.

FUND MANAGER PERSPECTIVE

Fund manager Altaf expects the latest stimulus package to have a positive effect on his fund with more policy support ahead from the Chinese central bank: ‘In the few days since the announcements, Chinese stocks have rallied significantly, which has proved a favourable tailwind to our fund.’

rate cut in China, and its package of property and market stimulus offerings, markets across Asia have rallied on hopes that this will be a turning point for the Chinese economy.

‘The difficulty with this is investors won’t necessarily know if it is. Economic growth data is opaque and widely mistrusted, and multinationals are leaving the country in swathes. Data that was once a good signal of investor appetite, such as foreign-investment inflows, is now published only sporadically rather than daily.

‘Investors rely on heavily on data and good quality corporate access. With both now harder to come by, the efforts of the Chinese government to rightly act to stimulate what is a struggling economy are not likely to be enough to tempt foreign investors back in any size.’

GAINS FROM STOCKS AND FUNDS

While investors may be sceptical about the long-

The fund has just over 30% exposure to China and over the past 12 months is up 24.3% versus 13.2% for the MSCI Emerging Markets index.

‘In recent weeks we had been increasing our allocation to China. Pessimism had reached extreme levels and with low investor positioning we felt the risk-reward had become much more favourable.

‘We therefore reduced our exposure to some defensive areas and increased allocations to more pro-risk China names. These include car manufacturer Geely (175:HKG), retailers JD.com (JD:NASDAQ) and Alibaba (BABA:NYSE), Tencent (700:HKG) and pharmaceutical Sino Biopharm (1177:HKG),’ says Altaf.

By Sabuhi Gard Investment Writer

The merits of pursuing an equal-weighted strategy

While this approach can offer investors diversification the MSCI World Equal Weighted Index has underperformed over a one-, three- and five-year period

As the leadership of the market has become ever more concentrated on just a handful of stocks there has been increasing interest in getting equalweighted exposure to the markets.

But what does this mean and what are the pros and cons of products which adopt such an approach? An equal-weighted index is one where all the constituents have the same weighting, unlike most indices which are weighted by market valuation. Put simply, the latter set-up means the direction of the market is heavily tied to the biggest stocks.

People typically invest in broad market indices to achieve diversification but in an index like the S&P 500 or MSCI World, where just three stocks, Apple (AAPL:NASDAQ), Nvidia (NVDA:NASDAQ) and Microsoft (MSFT) have a weighting of around 14% and 19% respectively, their diversification needs arguably aren’t being fully met.

The combined weight of the top 10 holdings in the MSCI World Index is currently 25% of that index, the highest concentration in more than 40 years.

NEW PRODUCT LAUNCH

There aren’t a huge number of products to choose from in this category but global asset management firm Invesco recently launched the Invesco MSCI World Equal Weight UCITS ETF (MWEQ) which will track the MSCI World Equal Weighted Index.

The MSCI World Equal Weighted Index is constructed from the parent MSCI World Index by including the same constituent securities but equally weighting each company at each quarterly rebalance date rather than weighting securities by their float-adjusted market capitalisation.

The index comprises more than 1,400 stocks of large and mid-capitalisation companies across 23 developed markets.

Gary Buxton, head of EMEA (Europe, Middle

East, and Africa) and APAC (Asia-Pacific) ETFs and indexed strategies at Invesco, says: ‘Our new ETF offers investors a sensible way to maintain broad exposure to global equity markets, but with reduced sensitivity to the performance of any individual company.

‘The MSCI World Equal Weighted Index is constructed from the parent MSCI World Index by including the same constituent securities but equally weighting each company at each quarterly rebalance date rather than weighting securities by their float-adjusted market capitalisation.’

SPREAD RISK AT THE STOCK LEVEL

Chris Mellor, head of EMEA equity ETF product management at Invesco told Shares: ‘Most investors instinctively think of an equal-weight approach as being a way to spread risk at the stock level.

‘While that observation is completely valid, an ETF tracking the MSCI World Equal Weighted Index is also more balanced from a sector and geographic perspective. For instance, you end up with an allocation of around 42% to the US compared to over 70% in the standard index, and that allows you to capture increased exposure to Japan, the UK and other developed markets.’

The charges on Invesco’s new ETF are broadly in line with those of other equal-weight ETFs at 0.2%

a year, the same as the iShares S&P 500 Equal Weight UCITS ETF (ISPE) and the Xtrackers S&P 500 Equal Weight ETF (XDWE).

Although an equal-weight ETF reduces exposure to single stock risk there are a few disadvantages.

Tom Bailey, head of ETF research at HANetf says there is the potential increased trading costs that rebalancing to equal weighting can incur. The MSCI World Equal Weighted Index has also underperformed over one-, three- and five-year periods compared to the MSCI World Index.

Over the past year, the MSCI World Equal Weighted Index has returned 18.2% compared to the MSCI World Index return of 25%. Over three years the former has returned 2.75% and the later 7.42% on an annualised basis.

As Invesco’s Mellor observes, another key difference between the two indices is the country weightings. The US dominates the MSCI World, with a 71.6% weighting to the US, and only a 5.8% weighting to Japan. For the MSCI World Equal Weighted, US exposure is 42.5%, Japan represents 14.8% and 26.8% is accounted for by other countries. As the grahic shows the MSCI World Equal Weighted is also more diversified by sector. Notably the dividend yield of the MSCI World Equal Weighted Index is 2.44% compared to 1.78% yield from the MSCI World and the former looks cheaper based on average valuation metrics, on a forecast price to earnings ratio of 15.7 times compared with 18.8 times for the traditional index.

Invesco’s Gary Buxton sees the demand for equal-weight ETFs will continue for the third quarter of 2024 as ‘questions over concentration are likely to persist’.

By Sabuhi Gard Investment Writer

Source MSCI, data to 30 August 2024

A CRUNCH BUDGET

What is in store for the markets and

Prime minister Keir Starmer and chancellor Rachel Reeves have made no bones about making ‘painful’ decisions in order to stabilise public finances and grow the economy, so investors are right to be nervous over what might be included in the Labour party’s first Budget since 2009 at the end of this month.

Top of the list of investor concerns is that rather than raising income tax, national insurance or VAT (value-added tax) across the board, which the party has pledged not to do, it will focus on what it calls those with the broadest shoulders by raising the tax on capital gains and reducing the tax breaks on saving and investing.

In this article Shares seeks to identify some of the key areas to watch and examines which parts of the market might be at risk from budget cutbacks or higher taxes.

By Ian Conway Deputy Editor

Budget - areas chancellor Rachel Reeves might target

Pensions

Capital gains tax

Dividends

Inheritance tax

Possible flat rate for tax reliefon contributions

Removal/reduction of taxfree lump sum

Removal of inheritance tax exemption

Increase in rate

Lower allowance

Increase in rate

Lower allowance

Removal of exemption for AIM stocks

Table: Shares magazine • Source: Shares, AJ Bell

ISA simplification

A non-revenue raising measure in the Budget could be to simplify ISAs. Potentially by reducing the number of iterations of the tax wrapper and/or allowing you to hold cash and stocks and shares within the same account.

CAPITAL GAINS TAX IN FOCUS

Since coming to power, the Labour party has repeatedly referred to a £22 billion ‘black hole’ in public finances which it inherited from the Conservatives in order to prepare the public for tax rises.

‘While the chancellor pledged in the election campaign not to raise the rate of income tax, that doesn’t preclude extending the current freeze on thresholds, which is tantamount to raising tax by the back door,’ observes AJ Bell’s head of personal finance Laura Suter.

This wouldn’t be a new policy – the Conservatives used it to raise taxes when wages were rising at a time of high inflation – and the effect may be muted if inflation and wage rises slow, but it is still an easy way to raise tax revenue.

Capital gains tax (CGT), on the other hand, looks like an obvious place for the government to make changes and generate more tax revenue.

‘The most radical option is equalising CGT rates with income tax – which would represent a huge

tax increase for investors,’ says Suter.

‘The Office for Tax Simplification previously argued the CGT exemption was too high and the disparity between rates of CGT and income tax distorted decision-making. The CGT free allowance has been slashed in the past two years as Jeremy Hunt sought to balance the books, but that doesn’t rule out further tax increases.’

Yet raising CGT may not be the cash cow the government hopes – indeed its own figures suggest a hike in tax could actually lead to lost revenue because investors would change their behaviour.

This would seem to be confirmed by a recent poll of Financial Times readers which showed many of those who own stocks and shares outside of ISAs have already been selling down their holdings in anticipation of an increase in the tax rate.

‘An alternative would be to get rid of some of the CGT tax breaks for businesses, where business owners selling their company benefit from a lower rate of CGT,’ suggests Suter.

Raising this rate from 10% up to 20% to equalise it with standard CGT rates could generate £710 million for the government by 2027/28, but it would clearly be unpopular with entrepreneurs.

CGT being wiped out on death also creates an incentive in some cases to hold onto assets, so they are taxed as part of the estate under inheritance tax (IHT), potentially paying less or no tax.

However, if the government scrapped this tax break there would likely need to be some allowance made to account for inflation, warns Suter, otherwise people who have owned investments for a long time would be severely punished.

PENSIONS TAX RELIEF UNDER THE MICROSCOPE (AGAIN)

There has regularly been speculation over a cut to pensions tax relief running into major fiscal events and this time is no different.

Among the most obvious avenues the government could go down would be to restrict the entitlement to tax-free cash when an individual retires.

Currently you can take 25% of your pot as taxfree cash from the age of 55, rising to 57 from 2028. This could be lowered or even abolished although this would be unpopular and fraught with complication given the need to avoid retrospectively hitting people who have built-up entitlements under the current regime.

Another possibility would be to introduce a flat rate of pension relief, meaning higher and additional rate taxpayers would get the same as basic rate payers. However, this could create problems with defined benefit schemes in the public sector.

Finally, the Treasury might look to remove the ability to pass on a pension pot tax-free to nominated beneficiaries before the age of 75, and for it to be taxed as income after the age of 75 and not form part of your estate for inheritance tax purposes.

WHAT OTHER TAXES ARE ON THE TABLE?

Given the previous government slashed the dividend tax allowance from £5,000 to just £500, it is debatable whether Labour will cut it any further.

‘HMRC expects to collect almost £18 billion from dividend tax in the current tax year so it is already a meaningful source of revenue,’ points out AJ Bell investment analyst Dan Coatsworth.

‘While slashing the allowance, perhaps to £250, cannot be ruled out, the new government would be incredibly unpopular with investors if it reduced the dividend allowance any further.’

Another option would be to raise the rate of dividend taxation, suggests Coatsworth, although there’s only so much room for manoeuvre with tax rates on dividends already very close to matching income tax rates for higher and additional rate taxpayers.

‘The government will likely tread carefully here. Labour wants to encourage investment into the UK stock market and create a more vibrant place for British businesses to access growth capital. Therefore, taking even more of investors’ returns as tax would mean shooting itself in the foot.’

Again, on the topic of inheritance tax, the government’s only move so far has been to end the use of offshore trusts for tax avoidance, and analysts believe it is unlikely to increase the current headline rate of 40%, although it could tinker with allowances or whittle away some relief.

For example, as it stands a couple leaving their main residence to their children could potentially shelter a £1 million estate from IHT thanks to the personal nil-rate band and the residence nil-rate band, but either of these could be cut.

AIM FIGHTS ITS CORNER, FINALLY

The issue of inheritance tax exemption for investments in stocks listed on AIM is also a live one. There has much been speculation BPR (business property relief) could be abolished in the budget on the basis some people just use AIM shares as a way of avoiding tax in the event of their death rather than it having anything to do with the relief’s objectives.

Instead of exempting AIM shares from IHT, some commentators have suggested introducing

progressive taxes and giving people up to 10 years to pay.

In the nick of time, Grant Thornton has published a report commissioned by London Stock Exchange Group (LSEG) saying the AIM market ‘continues to play an important role in supporting business growth and in doing so provides a range of investor opportunities, delivering notable economic value to the UK’.

Since its inception, AIM companies have raised £48 billion at admission and followed this with further fundraising amounting to £87 billion, say the authors, although the total money raised in 2023 was admittedly 70% lower than in 2020.

The study also claims AIM companies contributed close to £36 billion of GVA (gross value-added) to UK GDP last year, more than either the arts and entertainment sector, advertising and marketing, or agriculture, forestry and fishing, and directly supported more than 400,000 jobs while generating £5.4 billion in corporation tax for the Treasury.

‘By providing access to the necessary funding, AIM enables new and existing companies to make the investment needed to turn ideas and knowledge into marketable products and services,’ continues the report.

In terms of GVA per job filled, AIM companies are supposedly more productive than the national average with productivity of £87,100 GVA per employee against a national average of £58,327 and a London average of £82,801.

The message is clear – AIM companies represent growth and profitability, and given the government’s mission to ‘support economic growth and create good jobs and productivity in every part of the country’ it should leave well alone, especially when it comes to business relief which incentivises investment.

WHICH SECTORS COULD BE AT RISK?

The new chancellor has already set out a target to halve the amount it spends on external consultants and contractors in a push to save more than £1 billion annually, with work being passed to the civil service instead.

According to a Labour spokesman quoted by Reuters, ‘We are taking action to stop all nonessential government consultancy spending in 2024-25 and halve government spending on consultancy in future years, with a target saving of £550 million in 2024-25 and £680 million in 2025-26.’

Consulting firms have been told any contract above £100,000 must be signed off in future by a permanent secretary, and contracts above £600,000 will need approval from the relevant secretary of state.

Transport and infrastructure providers are also likely to see their budgets squeezed as the chancellor seeks more savings to plug the deficit.

The electrification of the Manchester-to-Leeds train line, which has been delayed for years due to tinkering by ministers and other interested parties, is apparently being studied to see whether the contractors can find savings out of the £11.5 billion budget.

Meanwhile, despite London mayor Sadiq Khan’s enthusiasm for working with a Labour government, none of his £50 billion of unfunded projects –like extending the Bakerloo line south to Hayes, building a North-South ‘Crossrail 2’ between Wood Green and Wimbledon or a West London orbital suburban line joining up Hendon and Hounslow –are likely to find a friendly ear in Westminster.

Two years after the Elizabeth Line opened, and for the first time in two decades, there are no large public transport projects being built in London other than the HS2 rail link, which is technically an inter-city link and isn’t aimed at improving transport inside London.

IMPACT ON CUMULATIVE INCREMENTAL PRODUCTION UNDER DIFFERENT FISCAL

Scenario 1: EPL 2 (current scenario)

Headline tax rate at 75% and maximum relief at 91.4p

Scenario 2: EPL3 (Future proposal)

Headline tax rate at 78% and maximum relief at 46.25p

Another sector which doesn’t have much to look forward to in the budget is North Sea oil and gas production, which faces tax proposals described by energy consultants Wood Mackenzie as likely to cause ‘irreversible damage’.

Energy firms have already scaled back their activity this year, including halting new projects, while they wait for a decision on windfall taxes and relief on capital spending.

As things stand, from November companies will have to pay 78% tax on their profits after an increase in the energy profits levy which was introduced by the previous government in response to the jump in energy prices following the invasion of Ukraine.

Wood Mackenzie suggests if the energy levy remains in place and all allowances for investment are removed it ‘would wipe out £19 billion or 65% of the UK’s remaining development capital expenditure, halve UK production by 2030 and all but eliminate industry cash flows by the 2030s’.

The consultants also warn that under this scenario smaller companies will likely fail leaving their partners – and possibly the UK government – on the hook for future decommissioning costs which could run to £40 billion according to the North Sea Transition Authority.

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author (Ian Conway) and editor (Tom Sieber) of this article own shares in AJ Bell.

How to navigate the impact of major milestones to reach your investment goals

A well-thought out plan should be able to deal with most of life’s challenges

This is the third and final part of our miniseries on portfolio construction where we discuss some key life milestones and how they can impact investment plans and portfolios.

Managing a portfolio of investments should be a dynamic process which evolves with changing life circumstances, goals, age, and risk appetite.

Your early 20s are often associated with significant changes to financial and personal circumstances. Whether it is completing qualifications and apprenticeships, graduating from university, or starting a new career and moving out from the parents.

The cost-of-living crisis and rampant inflation have made it tough for most people to get by, let alone put money aside for the future. Balancing short-term budgets with longer-term financial goals is never easy.

But it is worth remembering that starting as young as possible provides a longer runway for investment returns to grow and for compounding to take effect.

STARTING OUT

Benjamin Franklin probably described compounding the best: ‘Money makes money. And the money that money makes, makes money’.

Studies have shown that starting early with small amounts is superior to waiting and investing larger amounts later. Also, depending on your life goals, starting earlier may allow you to retire sooner.

Part one of this series looked at the importance of

diversification and provided some tips on how best to go about creating a well-balanced portfolio by purchasing just a few products.

When starting out always consider the benefits of tax efficient vehicles like ISAs (individual savings accounts) and pensions first before should ordinary dealing accounts.

Twentysomethings do not need to worry about whether the stock market is about to tank. In fact, if they do, it would be a boon since this cohort of investors are likely to be net buyers of stocks for many decades to come.

Stock markets anticipate economic recoveries ahead of them happening as the next cycle of wealth is created. This has been the pattern for several decades.

This means younger investors can embrace more risk by allocating a bigger proportion of their portfolio to stocks and shares.

Once in a job, it usually entails working up the career ladder which means promotions and job hops. This is not only good for career progression and confidence, but it can also bring in extra cash each month.

Rather than spending all the extra cash, consider using some of it to feed longterm savings and investments. You may look back and not remember that nice treat many years later but you will probably see the difference it makes to the size of your pension pot if you forgo it.

PREPARING FOR A RAINY DAY

Career paths do not always run smoothly and losing a job can be a devastating experience and a knock to confidence. Under these circumstances it makes sense

to focus on getting back to work.

Inevitably it also means there is no money to put towards an investment pot. It highlights the advantage of building up cash savings for a rainy day. Taking a break is not a disaster in the long run, particularly if you continue to reinvest dividend income.

The principle that investing is a long-term endeavour and should not be done with money which might be needed within five and ideally 10 years remains a strong principle, but unforeseen circumstances do happen.

Pensions are off limits until 55 years of age, but ISAs have some flexibility (not all providers provide flexible ISAs) which allow a short-term withdrawal during the tax year without reducing your current year’s allowance as long as you put it back in the same tax year.

Money cannot be withdrawn from a Junior ISA until the child turns 18 which means this is a genuinely long-term investment. But the rewards from compounding can be worth it.

For example, contributing £250 a month or £3,000 a year over 25 years (£75,000 invested) into a global diversified equity portfolio can turn into roughly £150,000 after reinvesting dividends, assuming the portfolio achieves 5% compound annual growth.

APPROACHING RETIREMENT

Talking with a financial advisor is always a good option for investors approaching retirement to help navigate the pension rules and available options.

From a portfolio perspective, as retirement comes into view it is natural to start thinking about dialling down risk.

Falling markets may be a boon for younger investors but they are a nightmare for retiring investors. A market sell-off just before retirement can significantly reduce the capital value of a portfolio and therefore, potential income.

Shifting more of the portfolio into safer bonds can help dampen portfolio volatility and provide a higher income. There is no need to rebalance in one go, and each investor will have their individual preference for the optimal mix of assets.

A typical approach is to aim for around two thirds of the portfolio in stable fixed interest bonds and the rest in equities. There is also the option to shift the equity portion towards funds and shares with an income bias.

FAMILY MATTERS

Settling down and starting a family is often a challenging time and can put a strain on family finances.

In such circumstances, consider reducing contributions rather than stopping altogether, if practicable. Taking a break from regular investing does not mean your portfolio will be starved of new money. Remember those dividends which can be reinvested.

Families that can afford it might consider opening a stocks and shares Junior ISA. Annual contributions are capped at £9,000.

Depending on individual circumstances and general health there is no need to rush though, given the average life expectancy is 79 for men and 83 for women.

Some investors may prefer to move to part time working before hanging up their boots for good and taking income from a pension can come in handy during this period.

Investors looking to

retire early should remember that while ISAs can be assessed at any time, private pensions are only accessible from the age of 55. From 2028, the age restriction moves up to 57. The state pension can be taken from 66 years of age for both men and women.

For many people this means the gap between early retirement and drawing from a pension is too large to be practicable unless they have a large ISA pot to rely on or property income.

One option to consider, which had fallen out of favour due to the low interest rate environment which prevailed before the pandemic is to purchase an annuity, providing a guaranteed fixed income for life. You do not need to be fully retired to purchase an annuity.

Interest in annuities has surged with annuity sales spiking by 40% in 2023/24 compared to the previous year.

It is not surprising given the big increase in interest rates seen over the last two years. Annuity yields are closely linked to long term bond yields. With the Bank of England on a path to lower official interest rates, investors are looking to lock in the higher rates on offer.

To give an idea of the change in annuity rates, we can look at 15-year gilt yields as a proxy. In January 2020 gilt yields troughed around 0.4% whereas today they yield 4.3%. Other factors affect the price of annuities such as age, health and whether they are single or joint life.

Tom Selby, director of public policy at AJ Bell reminds investors: ‘Anyone going down this avenue needs to be absolutely sure about the decision as once you lock into an annuity, there is no going back.

‘It is critical before buying an annuity that you shop around the market not just for the best rate, but for the product that is most appropriate to your circumstances.’

An alternative popular option is to choose to enter drawdown from a pension pot which provides flexibility.

Tom Selby says: ‘For those choosing to access their retirement pot for the first time, drawdown remains the overwhelming top choice, with the number of people entering drawdown surging 28% year-on-year to almost 280,000.

‘Those choosing this route can benefit from flexibility and the potential for their fund to enjoy

long-term growth.’

A quarter of the value of the pension can be withdrawn tax free while future withdrawals are taxed.

The lifetime allowance was abolished from 1 April 2024 and replaced by a lump sum and death benefit allowance of £1,073,100 which affects both lifetime withdrawals and death benefits.

Nominated beneficiaries of a pension drawdown receive remaining benefits tax free if the pensioner dies before the age of 75.

Disclaimer: Financial services company AJ Bell referenced in the article own Shares magazine. The author (Martin Gamble) and the editor (Tom Sieber) own shares in AJ Bell.

By Martin Gamble Education Editor

WE WANT TO HEAR FROM YOU

We are looking for individuals or couples to share their experiences of managing their own investment portfolios.

If you would like to take part, we want to know why you chose certain stocks, funds or bonds, why you might have subsequently sold some of them, and what you hope to achieve from investing.

We will pay £50 in John Lewis vouchers as a thank you to anyone whose story is published in the digital magazine.

Drop us a line with your name and two lines describing your investment experience. For those picked to feature in the magazine, we’ll be in touch to get the full story.

CONTACT: shareseditorial@ajbell.co.uk with the words My Portfolio in the subject line.

DISCLAIMER: Shares/AJ Bell does not provide advice or personal recommendations. The My Portfolio articles are for information only. You must do own research and consider your own personal circumstances before making investment decisions.

International Biotechnology Trust Looking back on another year of outperformance

Earlier this year, International Biotechnology Trust (IBT) celebrated its 30-year anniversary, having launched as a pioneering investment trust dedicated to what was then a nascent opportunity in the biotech industry, back in 1994. The trust remains a compelling way for investors to access the attractive long-term growth on offer from biotech, and Ailsa and I have been privileged to have now co-managed the trust since March 2021, having been part of the investment team from 2006 and 2014 respectively.

Over the course of the last three years, we have witnessed a variety of market conditions, with the Nasdaq Biotechnology Index reaching an all-time high shortly after we took full responsibility for the trust, before experiencing a sustained correction through 2022 and 2023. This year, however, we have seen increasing evidence of recovery and, despite this market volatility, our efforts to adapt the portfolio to evolving conditions have enabled us to consistently add value for shareholders.

A YEAR OF RECOVERY

After a challenging period, 2024 has seen a more

positive backdrop emerge for the biotechnology sector. In the year to 31 August 2024, the Nasdaq Biotechnology Index increased by 15.5% in UK sterling terms. IBT was ahead of its benchmark with a net asset value (NAV) total return of 16.1%[1]. In share price terms, however, IBT was modestly behind its benchmark as a result of a wider discount (the gap between an investment trust’s NAV and share price), a phenomenon experienced by much of the investment trust sector during the period under review. Initially, the recovery was driven primarily by larger companies, but it has broadened out as the year has progressed, with small and mid-cap biotech stocks increasingly participating in the rally. Having seen encouraging signs of renewed vitality in smaller, earlier-stage biotech, we elected to increase the portfolio’s exposure to this part of the market and also increased gearing to a peak of 14%, confident that the recovery would continue to gather momentum. Both of these strategic decisions stood the portfolio in good stead through the initial stages of the biotech rally. We have subsequently reduced gearing to 5% but the portfolio remains well exposed to small and mid-cap biotech, where we continue to find very attractive opportunities.

Dividend growth was also positive, and the year end NAV implies a further dividend increase in the year ahead, as illustrated in the chart on the previous page.

BID ACTIVITY DRIVES RETURNS

One key development during the year has been the resurgence of merger and acquisition (M&A) activity in the biotech sector. Four companies from the IBT portfolio were acquired during the period, each at a significant premium.

In October 2023, Bristol-Myers Squibb announced it would acquire commercial-stage, targeted cancer specialist Mirati Therapeutics, for $4.8bn. The deal was struck at a 45% premium to Mirati’s undisturbed share price as well as a contingent value right (CVR) worth up to an additional $1bn if its non-small cell lung cancer therapy, MRTX1719, is approved by the FDA.

Bristol-Myers Squibb also acquired Karuna Therapeutics for $14bn in December 2023, paying a 53% premium to the pre-bid share price. Karuna’s lead asset, KarXT, is positioned as a potential firstin-class treatment for schizophrenia and other neuropsychiatric conditions.

Meanwhile, within the private element of the portfolio, EyeBio, an innovative retinal disease therapy developer, was acquired by Merck in May for up to $3bn, including up to $1.7bn in potential milestone payments, and in July, Edwards Lifesciences acquired Endotronix, a leader in heart failure management technology, as part of a broader $1.2bn deal.

As well as realising meaningful gains for IBT shareholders, this renewed M&A activity reflects continued innovation in the biotech sector and the desire among larger pharmaceutical companies to bolster their pipelines through deals. Furthermore, it highlights our ability to identify attractively valued biotech businesses with exciting technology in development.

OUTPERFORMANCE IN ALL WEATHERS

Over the three years to 31 August 2024, IBT’s NAV rose 11.8% whereas the benchmark index NBI fell 1.3%, an outperformance of 13.1%.2 IBT has consistently outperformed its index in a range of different market conditions, as illustrated in the table below.

Source: Bloomberg in total return, UK sterling terms. Past performance is not a guide to future performance and may not be repeated.

The key to this outperformance has been a flexible, valuation-driven strategy, adapting to evolving market conditions with a focus on capital preservation and selective risk taking. For example, in the market downturn of 2022, we focused on managing downside risk by reducing exposure to higher-risk, smaller biotechs in favour of larger, resilient, cashflow generating businesses. This cautious stance paid off, and we were then able to take advantage of lower valuations in 2023 to move back towards earlier-stage biotechs once the market had shown signs of stabilisation. Shareholders have increasingly seen the benefit of these strategic moves as we have progressed through 2024. This flexibility is typical of what investors should expect from our management. There will always be

a strong emphasis placed on capital preservation, as reflected in the approach to “binary event risk”, where we look to reduce exposure to holdings as they approach critical milestones such as trial results, in order to minimise exposure to excessive share price volatility.

Similarly, we take a “basket approach” to therapeutic areas where the ultimate winners are hard to predict. This involves a lower risk, diversified strategy of taking smaller positions across a range of the most promising assets, rather than backing a single opportunity.

In addition to our scientifically driven and valuation aware bottom up stock picking, investors should expect us to continue to take a top-down view which informs whether the portfolio should be tilted towards

2Source: Total return, UK sterling terms. Bloomberg to 31 August 2024. Past performance is not a guide to future performance and may not be repeated.

defensive or riskier biotech companies, depending on where we are in the investment cycle. This view can also be amplified through active management of the gearing facility, and by taking advantage of market volatility as conditions evolve.

This approach has served our shareholders well over the last three years, and we hope that our process will continue to deliver returns for our shareholders in the future.

LOOKING AHEAD

The biotech sector looks poised to make further progress as we look towards 2025 and beyond. With inflation seemingly under control and interest rates expected to decline, the environment should be increasingly favourable for long-duration assets such as biotech. There are signs that the IPO window is beginning to open and secondary offerings remain strong, indicating renewed appetite for biotech from a broader range of investors. This is all typical of what we would expect to see in the more positive stages of the biotech investment cycle

Meanwhile, innovation continues apace in the sector, with record levels of new trial initiations and a number of key product launches, approvals and late-stage clinical trial read outs anticipated in the months ahead.

As has been the case in prior years, the US Presidential election could

result in near-term volatility in the biotech sector, and for healthcare more broadly. We will understand more about specific policy intentions as the campaign momentum builds, but based on current information, we do not expect any election outcome to materially change the long-term biotech investment case.

STRONGER THAN EVER WITH SCHRODERS

IBT’s transition to Schroders is now complete and the Trust has been benefiting from this partnership for a full nine months. The support of a large organisation like Schroders, with its administrative and distribution capabilities, has further expanded the Trust’s reach and makes the IBT investment proposition even more robust.

As we move further into what has historically been one of the most rewarding phases of the biotech investment cycle, IBT is therefore well positioned to capture the opportunity that lies ahead, through the disciplined application of a successful and repeatable investment approach, augmented by the strength and resources of Schroders. Notwithstanding the risk of near-term volatility as we move through the US election season, we view the long-term future for IBT and its shareholders with more confidence than ever.

International Biotechnology Trust plc Risk Considerations

We recommend you seek financial advice from an Independent Adviser before making an investment decision. If you don’t already have an Adviser, you can find one at www.unbiased.co.uk or www.vouchedfor.co.uk

Before investing in an Investment Trust, refer to the prospectus, the latest Key Information Document (KID) and Key Features Document (KFD) at www.schroders.co.uk/investor or on request.

For help in understanding any terms used, please visit address www.schroders.com/en-gb/uk/ individual/glossary/

• Capital risk / distribution policy: As the Company intends to pay dividends regardless of its performance, a dividend may represent a return of part of the amount you invested.

• Concentration risk: The Company’s investments may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the Company, both up or down.

• Currency risk: The Company may lose value as a result of movements in foreign exchange rates, otherwise known as currency rates.

• Gearing risk: The Company may borrow money to make further investments, this is known as gearing. Gearing will increase returns if the value

of the investments purchased increase by more than the cost of borrowing, or reduce returns if they fail to do so. In falling markets, the whole of the value in that such investments could be lost, which would result in losses to the Company.

• Liquidity risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. In difficult market conditions, investors may not be able to find a buyer for their shares or may not get back the amount that they originally invested. Certain investments of the Company, in particular the unquoted investments, may be less liquid and more difficult to value. In difficult market conditions, the Company may not be able to sell an investment for full value or at all and this could affect performance of the Company.

• Market risk: The value of investments can go up and down and an investor may not get back the amount initially invested.

• Operational risk: Operational processes, including those related to the safekeeping of assets, may fail. This may result in losses to the Company.

• Performance risk: Investment objectives express an intended result but there is no guarantee

IMPORTANT INFORMATION

This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.

The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as

that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve.

• Share price risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. This means the price may be volatile, meaning the price may go up and down to a greater extent in response to changes in demand.

• Smaller companies risk: Smaller companies generally carry greater liquidity risk than larger companies, meaning they are harder to buy and sell, and they may also fluctuate in value to a greater extent.

• Valuation risk: The valuation of some investments held by the Company may be performed on a less frequent basis than the valuation of the Company itself. In addition, it may be difficult to find appropriate pricing references for these investments. This difficulty may have an impact on the valuation of the Company and could lead to more volatility in the share price of the Company, meaning the price may go up and down to a greater extent.

amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.

Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.

Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.

Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.

Why America’s interest bill is so important and why no-one is talking about it

Stocks and bonds radiate an air of complacency but gold investors may know better

The US Federal Reserve is cutting interest rates for the first time since the pandemicpoleaxed year of 2020 in a welcome (and necessary) affirmation of the equity markets’ bullish narrative that inflation will cool, the American and Western economies will enjoy a soft landing (if they suffer any landing at all) and central banks will ease policy as a result.

This cheaper credit will, in turn, support growth, corporate earnings and thus share prices, and stock markets are sticking to the script as evidenced by the move higher in response to the central bank’s easing of monetary policy.

Granted, the S&P 500 stands just 1.5% higher than it did in July, but bulls will welcome a new peak all the same, especially as the US Treasury market is not necessarily welcoming Fed’s policy pivot.

The US 10-year yield is rising, not falling, although it has already fallen sharply. As such, this could yet be a case of the market pricing in the cut long before it actually happened.

S&P is making new highs in the wake of the Fed cut, but bond yields are rising

The equity market has also traveled a long way, and this again could explain why the S&P 500 has responded very calmly to chair Jay Powell’s policy pronouncement.

Equally, it may be worth asking what prompted the Fed to go for a half-point rate cut in September when it felt comfortable doing nothing in July, because something has clearly changed.

This matters because prior rate cycles show the equity market welcomes rate cuts so long as a recession does not then follow and the starting point valuation is not egregious either.

Both of those conditions applied in 2000 and 2007, which was why rate cuts did not stop a bear market from breaking out and those downcycles are outliers compared to historic averages.

PAYROLLS PROBLEM

The US Federal Reserve has two mandates – keeping inflation stable (at around 2%) and maximising employment.

Powell’s latest speeches suggest the Federal Open Markets Committee feel it is getting inflation under control, as does the summary of the US central bank’s latest economic projections.

This means jobs (and by extension a weaker economy) are now the focus, even if the Atlanta Fed GDPNow service is forecasting a very respectable annualised growth rate of 2.9% for the third quarter of 2024 (after 3% in Q2 an 1.6% in Q1).

That does not suggest major weakness is on the horizon, and nor do analysts’ consensus forecasts for earnings growth from the S&P 500 of 10% for 2024 and 17% for 2025.

Yet the unemployment rate has ticked up by nearly one full percentage point from the lows and job vacancies have dropped by a third from their 2021 peak.

As a result, the ratio of vacancies to unemployed workers in America is down from a high of 2.03 times to 1.07 times.

US Federal Reserve economic projections

Table: Shares magazine • Source: US Federal Reserve, September 2024

There are signs the US job market is (finally) weakening

Source:US Bureau of Labor Statistics, FRED – St. Louis Federal Reserve database

This data could be a result of summertime blues, or even the massive disruption caused in southern states by Hurricane Beryl back in July, but it could suggest something more malign.

The monthly non-farm payroll numbers have been subjected to regular negative revisions for 18 months, and the Bureau of Labor Statistics admitted that America added 818,000 jobs fewer than originally thought in the year to March 2024, a third of the published total.

Downward revisions usually occur when the US economy slows and upward ones when it grows.

BORROWING BLITZ

The Fed’s own economic projections sweep aside these concerns, as no real deterioration is expected in unemployment from here onwards – a scenario that fully ties in with the ‘soft landing’ scenario but not really one which merits a deep, one-half-point rate cut.

Perhaps other factors are at work – treasury secretary Janet Yellen is now publicly discussing the need to reduce the interest bill on the ever-growing

US federal debt mountain, which is running at $1 trillion on an annualised basis, a sum that exceeds the defence budget.

Heaven help the US deficit if a recession unexpectedly reduces the tax take and increases welfare spending.

If the White House and Congress cannot (or will not) cut spending or raise taxes when the economy is robust, then the only alternative is to try to lower the interest bill on the borrowing.

That could mean playing fast and loose with inflation, but inflation boosts nominal GDP and thus helps to flatter debt-to-GDP ratio calculations, too.

Perhaps the outcome is greater volatility in inflation, and by extension interest rates and government bond yields, something that does not sit easily with the prevailing equity and bond market narrative.

While that may only become an issue in the second half of next year, when the year-on-year comparisons for the consumer price index come off a less testing base, the gold price does not seem to be waiting around to find out.

Negative revisions to initial US payroll estimates are now dominant

Source:US Bureau of Labor Statistics

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Ecora Resources (ECOR) strategy is to acquire royalties and streams over low-cost operations and projects with strong management teams, in well-established mining jurisdictions. Their portfolio has been reweighted to provide material exposure to this commodity basket and we have successfully transitioned from a coal orientated royalty business in 2014 to one that by 2026 will be materially coal free and comprised of over 90% exposure to commodities that support a sustainable future.

Lifetime ISAs are becoming more popular – but beware the exit charge

The benefits of this tax-efficient vehicle can really stack up over time

Lifetime ISAs have gained popularity, with an additional £732 million being deposited into these accounts last year, according to government data.

Recent data reveals a 43% increase in contributions to Lifetime ISAs in 2022/23. The total savings reached a record £2.4 billion that year, nearly double the amount contributed three years ago. Additionally, the average contribution per account has risen, with more people investing larger sums.

Lifetime ISAs serve a dual purpose: helping people save for their first home or for retirement, with the funds accessible at age 60. An increasing number of account holders are using the funds to buy property, with approximately 57,000 individuals using their Lifetime ISA to purchase a home last year.

On average, people withdrew nearly £15,000 from their accounts to buy homes, up by around £1,000 compared to the previous year. As these accounts mature, it’s natural that savers are accumulating more, allowing them to make larger withdrawals when purchasing a home.

Since the launch of Lifetime ISAs in April 2017, almost 230,000 people have used their accounts to buy property, with over £3 billion withdrawn for first-home purchases. This averages about £13,300 per withdrawal.

REMEMBER THE EXIT PENALTY

However, many savers face penalties for early withdrawals. If funds are withdrawn before age 60 for any purpose other than buying a first home, a 25% government-imposed exit charge applies. This charge not only recovers the government bonus but also reduces the saver’s original contribution.

For example, if you contribute £4,000 to your Lifetime ISA and receive a £1,000 government bonus, bringing the total to £5,000, an unauthorised withdrawal would result in a 25% exit penalty of £1,250. This means you’d only get back £3,750, even though you initially contributed £4,000.

Despite this, more savers are withdrawing funds and facing the penalty, with more than £75 million lost in withdrawal charges last year. This represents a nearly 40% increase from the previous year, and

Personal Finance: Lifetime ISA

Saving in a Lifetime ISA

the amount is now 14 times higher than it was in the year after the accounts were introduced. The average value of these unauthorised withdrawals has remained around £3,000, except for a brief period during the pandemic when the withdrawal charge was temporarily reduced from 25% to 20%. The number of savers making unauthorised withdrawals surged by almost a third last year, affecting about one in eight Lifetime ISA holders.

LIFETIME ISA EXPLAINED

A Lifetime ISA is designed to help savers save for their first home or retirement. For every £4 you put in, the government adds £1 of free money up to a maximum contribution of £4,000 a year and government bonus of £1,000 a year. You must have had your account opened for at least 12 months before using it to purchase a property if you want to use the government bonus.

You can open one between the ages of 18-39 and continue to contribute until you turn 50. You may face an early access withdrawal charge of 25% if you withdraw from your LISA prior to buying your first home or before age 60.

A LIFETIME ISA CAN ACCELERATE YOUR SAVINGS

If someone had opened a Lifetime ISA in 2017 and contributed the maximum £4,000 each year, their account would now be worth just over £50,000, assuming an average 5% annual investment growth after fees. Over those eight years, the individual would have contributed £32,000, received £8,000 in government bonuses, and earned approximately £10,000 in investment growth.

By comparison, saving the same £4,000 annually in a regular stocks and shares ISA over the same period would result in a pot of about £40,000, assuming the same 5% annual growth. Without the government bonus, you’d miss out on an extra £10,000, showing the significant advantage a Lifetime ISA provides over other savings options.

Try AJ Bell’s Lifetime ISA calculator to see how much you could save towards your home or retirement: https://www.ajbell.co.uk/isa/Lifetimeisa/calculator

DISCLAIMER: AJ Bell, referenced in this article, owns Shares magazine. The author (Laura Suter) and editor (Tom Sieber) own shares in AJ Bell.

By Laura Suter AJ Bell Head of Personal Finance

15 OCTOBER 2024

NOVOTEL TOWER BRIDGE

LONDON EC3N 2NR

Registration and coffee: 17.00

Presentations: 17.55

Reserve your place now!

COMPANIES PRESENTING

AB DYNAMICS (ABDP)

During the event and afterwards over drinks, investors will have the chance to:

• Discover new investment opportunities

• Get to know the companies better

• Talk with the company directors and other investors

Sponsored by

Supplies measurement and testing equipment to the automotive industry. The principal activity of the Group is the design, manufacture, and supply of testing, simulation and measurement products for the world-wide transport market. The Group’s products and services are used for the development of road vehicles, particularly in the areas of active safety and autonomous systems.

CALEDONIA INVESTMENTS (CLDN)

Are a FTSE 250 self-managed investment trust company with a long track record of delivering consistent returns and progressive annual dividend payments to shareholders. Our aim is to generate long-term compounding real returns that outperform inflation by 3%-6% over the medium to long term, and the FTSE All-Share index over 10 years.

THE EUROPEAN SMALLER COMPANIES TRUST (ESCT)

Aims to turn investments in Europe’s dynamic smaller businesses into capital growth. Evidence shows that smaller companies have historically achieved greater growth, as a group, than their larger peers.That’s why the trust’s team of expert managers harness regional experience and diverse information sources to find Europe’s undiscovered and promising businesses.

How can I lower my income to below the £100,000 threshold?

Loss of the personal allowance above this level means the tax rate will soar

I am drawing a final salary pension and the state pension. Very soon, the total of these will take me over £100,000 in annual income when I will start to lose my annual personal allowance of £12,570 and my effective tax rate will be 60%.

I have minimised other income outside of ISAs, i.e. dividends from shares and interest from savings. So, I am looking at ways to stay below £100,000.

From reading AJ Bell articles, it appears my options would be:

1. To invest in EIS and VCTs, and/or

2. Make pension contributions in a SIPP, as I have 5.66% remaining from my Fixed Protection 2014 LTA. I am not clear if I can do this as I do not have any earned income. However, I understand that everyone is allowed to make pension contributions of £3,600 gross annually.

I appreciate your help.

Nat

One of the more unfortunate ‘kinks’ in the UK tax system is how taxation works for those people whose income is in excess of £100,000.

Once your income hits this figure, you’ll start to lose the tax-free personal allowance (currently frozen at £12,570) at a rate of £1 for every £2 of income above the threshold.

By the time your income reaches £125,140 it’s completely gone, meaning as you say you will pay an effective tax rate of 60% on the band of earnings between £100,000 and £125,140.

Fortunately, there are several steps those in this position can take to avoid this tax hike.

You can maximise your tax-free allowances, such

as ISAs. Or if you have filled up your own allowances you could transfer investments to a spouse to use up their allowances or, if they fall within a lower tax bracket, they could pay tax at a lower rate.

Any income you generate within an ISA is completely tax free, and you can pay in up to £20,000 a year.

‘Bed & ISA’ involves selling an investment, using the proceeds to make an ISA payment, and then repurchasing the investment within the ISA.

However, you need to be aware selling investments outside an ISA may realise a capital gain which will be taxed if it is above your annual exempt amount of £3,000.

Another option is paying in pension contributions, which effectively reduces your taxable income and could help bring your income back under the £100,000 threshold, avoiding the 60% tax trap, but there are several things to consider.

The annual allowance is set at £60,000 and covers total contributions from both the employer and the individual, as well as tax relief.

This annual allowance falls to £10,000 if someone has flexibly accessed their pension pot, usually by taking a taxed income from drawdown.

If, for example, you have only taken a tax-free cash lump sum and left the rest untouched in drawdown, or you have bought an annuity or are receiving a defined benefit pension, then you get to keep the higher £60,000 allowance.

However, there is another limit for personal contributions of 100% of your UK earnings. If you have no earnings then you can still contribute to a pension – up to £2,880, which is £3,600 once you add in pension tax relief.

Keep in mind pension contributions don’t receive tax relief after you turn 75, so many providers won’t accept them from that point.

The lifetime allowance has now been completely abolished from pensions, yet it still manages to cast a shadow in some areas.

Rachel Vahey, AJ Bell Head of Public Policy, says:

Ask Rachel: Your retirement questions answered

We now have two new limits. The lump sum allowance is usually set at £268,275 and covers the tax-free lump sum someone receives in their life.

The lump sum and death benefit allowance is usually set at £1,073,100 and covers the tax-free lump sums someone receives in their life as well as the ones their loved ones receive on their death.

If you have some form of lifetime allowance protection, then these allowances will be set at a higher level.

When moving to the new regime, your allowances will be reduced based on how much lifetime allowance you have used up.

If you have some lifetime allowance left, then it’s likely you can take more of your tax-free lump sum until you have used up your new lump sum allowance.

For example, if your lifetime allowance was protected at £1.5million, and you have 10% of your lifetime allowance left, then your lump sum allowance would be 10% of £375,000 (a quarter of £1.5million), which is £37,500.

However, this is a complicated area and it is worth

checking exactly what new allowances you have left. If you are paying a pension contribution then even if you don’t receive a tax-free lump sum from the fund built up from it, it may be worthwhile if you receive pension tax relief of 20% plus reducing your higher tax bill.

Finally, EIS (enterprise investment schemes) and VCTs (venture capital trusts) both offer significant tax reliefs on income and capital gains.

However, both are complex, and it may be worthwhile speaking to a regulated financial adviser about these arrangements.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to askrachel@ajbell.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.

WHO WE ARE

EDITOR: Tom Sieber @SharesMagTom

DEPUTY EDITOR: Ian Conway @SharesMagIan

NEWS EDITOR: Steven Frazer @SharesMagSteve

FUNDS AND INVESTMENT

TRUSTS EDITOR: James Crux @SharesMagJames

EDUCATION EDITOR: Martin Gamble @Chilligg

INVESTMENT WRITER: Sabuhi Gard @sharesmagsabuhi

CONTRIBUTORS: Dan Coatsworth

Danni Hewson

Laith Khalaf

Laura Suter

Rachel Vahey

Russ Mould

Shares magazine is published weekly every Thursday (50 times per year) by AJ Bell Media Limited, 49 Southwark Bridge Road, London, SE1 9HH. Company Registration No: 3733852.

All Shares material is copyright. Reproduction in whole or part is not permitted without written permission from the editor.

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, selfselect 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.

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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.