HOW TO DIAL DOWN VOLATILITY IN YOUR PORTFOLIO
06 A dramatic shake-up of the US presidential race may take time to be felt in markets
07 Western businesses are finding life a grind in China
08 Raspberry Pi dishes up new products just two months after its IPO
09 Beazley shares hit record high as profits almost double / Why engineering outfit Spirax Group is in a downward spiral
10 Staffing group Hays unlikely to provide an upbeat outlook for 2025
11 Can Target demonstrate it is on the right track?
12 Calm returns to markets ahead of Fed inflation test
GREAT IDEAS
1 3 Time to turn sweet on Tate & Lyle
1 5 Dunelm is just the right stock to play a revival in consumer spending UPDATES
1 6 Canadian General Investments beats its benchmark so far in 2024 FEATURES
17 What is a carry trade and why does it matter?
19 COVER STORY
How to dial down volatility in your portfolio
25 Fund managers spy opportunities after recent carnage in Japanese markets
26 How regulatory changes could spark a new wave of cannabis companies
28 DANIEL COATSWORTH
Why more FTSE 100 companies are offloading assets to sharpen their focus
32 FINANCE
New labels hit the ESG investment world
34 EDITOR’S VIEW
Does high executive pay matter for investors?
36 ASK RACHEL
What happens if I pass my pension on to my wife after I’ve turned 75?
39 INDEX Shares, funds, ETFs and investment
in this issue
Three important things in this week’s magazine
1 2 3
Find out how to reduce the level of volatility in your portfolio
After the market turmoil caused in part by the unwinding of the yen ‘carry trade’, we look at stocks and funds which can help offset big swings in your investments.
Why are so many UK companies selling assets and reshaping their business?
This year has not only seen a wave of takeovers but also a marked increase in the number of companies disposing of ‘non-core’ operations.
Could the cannabis sector spark back into life?
Changes to regulations in the US and Europe are rekindling interest in established players and encouraging a new breed of marijuana producers to come to market.
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:
BECOME A BETTER INVESTOR WITH
SHARES
MAGAZINE HELPS YOU TO:
• Learn how the markets work
• Discover new investment opportunities
• Monitor stocks with watchlists
• Explore sectors and themes
• Spot interesting funds and investment trusts
• Build and manage portfolios
A dramatic shake-up of the US presidential race may take time to be felt in markets
There has been a seismic swing in the polling ahead of this year’s crunch US presidential election (5 November).
The latest polls conducted between 5 and 9 August by the New York Times and Siena College put current Democratic vice-president and presidential hopeful Kamala Harris ahead of former US Republican president Donald Trump.
Significantly Harris is ahead of Trump in three key swing states Wisconsin, Pennsylvania and Michigan giving her and (running mate Tim Walz) a fourpercentage point lead – 50% to 46%.
According to a survey conducted by the Financial Times and the university of Michigan Ross School of Business, 42% of voters said they trusted Harris more to handle the economy, compared with 41% who said they trusted Trump.
Polls shows current Democratic vice-president Kamala Harris ahead of former US president Donald Trump 20-Jul 26-Jul 01-Aug 07-Aug 13-Aug
While Trump’s numbers were unchanged, Harris’ was a seven-percentage point improvement compared to incumbent Joe Biden in July’s poll. Tracking by RealClear Politics of betting averages (up to 12 August) suggest Harris has gone from a near 30% chance of victory on 21 July when Biden exited the race to a 52.7% chance. With Trump moving from a 58.4% to 45.7% chance
Harris and Walz will look to sustain this momentum in the run-up to the imminent Democratic National Convention in Chicago (being held between 19 and 22 August).
In terms of the market impact of these shifting fortunes, investors may hold fire until the polling situation stabilises. If Harris is still at these levels by mid-to-late September then we may see more concerted attempts to price in a Harris administration. A planned televised debate between Harris and Trump on 10 September could also be significant in such a volatile race.
Luca Paolini, chief strategist at Pictet Asset Management sees Harris as a continuity candidate: ‘Her policies are unlikely to differ much from
Biden’s, given that she’s second in command in the current administration.’
Paolini draws a contrast with Trump whose ‘political manifesto suggests major changes, some very good for equities (corporate tax cuts), others not so much (trade wars, mass deportations of illegal workers)’.
Given her prominent role in the current Biden administration and the importance of the economy as a driver of voting behaviour, Harris will be hoping recent fears of a US recession prove unfounded and will likely have her fingers crossed for a cut to interest rates at the US Federal Reserve’s meeting on 17/18 September.
Other significant economic releases in the runup to election day include the final estimate of second-quarter US GDP on 26 September and the first estimate of third-quarter GDP just days before voters go to the polls on 30 October. [TS]
Chart: Shares magazine • Source: RealClearPolitics
Western businesses are finding life a grind in China
As well as the poor performance of the world’s second largest economy, shifting consumer habits are at play
Aseries of recent announcements from Western brands and businesses have revealed how tough they are finding life in China.
While some of this is linked to the uneven performance of the world’s largest economy, shifting consumer habits and trends are also at play.
On 6 August, Holiday Inn owner InterContinental Hotels (IHG) reported business in China had declined 7% in the second quarter after an 2.5% uptick in the first three months of the year, while WPP (WPP) saw like-for-like second-quarter revenue in China drop by nearly a quarter (7 August).
The advertising agency blamed difficult economic conditions as well as the loss of some key clients for the eye-catching drop-off.
While China has set an ambitious goal of 5% GDP growth for 2024, there is growing scepticism about its ability to hit this target, particularly after secondquarter growth came in at 4.7% year-on-year versus the 5.1% which had been forecast.
The country faces a series of problems including its uneven Covid recovery, having a demographic profile more akin to those found in the West than the rest of the developing world, an ongoing property market crash and its pursuit of a painful transition from an economy which is driven by exports to one powered by domestic consumption.
While part of the problem is undoubtedly these macro-economic trends impacting demand, changes to consumer behaviour in China also appear to be playing a role.
A slowdown in China is particularly bad news for the luxury sector given the growth Western brands have enjoyed over the last decade or more from serving the country’s emerging middle class.
In June, a report from consulting firm Bain
& Company noted the phenomenon of ‘luxury shaming’, with high-income cohorts avoiding ostentatious displays of wealth, while many luxury influencers have disappeared from social media.
There also increasing signs foreign brands being pressured by domestic Chinese rivals. This is particularly the case in the electric vehicle market with Tesla (TSLA:NASDAQ) overtaken by China’s BYD (1211:HKG) as the world’s top selling EV maker in 2023.
Sportswear giant Nike (NKE:NYSE) has endured its own recent struggles in China, partly linked to historic statements over the use of forced labour in the Xinjiang cotton industry which prompted boycotts but also to a growing sense of cultural pride among Chinese shoppers.
Domestic brands like Anta Sports (2020:HKG) and Li Ning Co (2331:HKG) have been growing rapidly against this backdrop. [TS]
Raspberry Pi dishes up new products just two months after its IPO
The omens are good for more innovative UK companies to come to market
Cambridge-based Raspberry Pi (RPI), the designer and maker of low-cost computing equipment, announced the release this week of Pico 2, a new singleboard computer built on RP2350, its new secure microcontroller platform.
The new microcontroller offers faster processors, more memory, better interfacing and new security features, and like its predecessor professional customers will be able to integrate it into their products licence-free.
The firm also hinted at ‘other exciting product releases through the second half of 2024 and into 2025’.
Raspberry Pi’s IPO (initial public offering) was something of a coup for the London stock exchange, and the company’s faith has been rewarded with a loyal fan base of retail and institutional clients so, despite the recent upheaval in tech stocks, its shares are almost unchanged over the last fortnight.
The computer company’s success has encouraged more firms to take what is known as an ‘early look’ at floating – that is, sounding out institutions in advance to gauge the potential level of interest – which is good news as it is a fairly reliable lead indicator of potential IPO activity to come.
At the same time, Peel Hunt’s newly-launched ‘IPO speedometer’ suggests the UK market is
‘selectively open’ to new issues with conditions having improved slightly between July and August.
The key drivers of the model this month have been the successful re-opening of the IPO market with the floats of Raspberry Pi and Rosebank (ROSE) and the positive aftermarket performance of both stocks; continued mixed success of the European IPO recovery; a constructive broader UK capital markets backdrop; better UK investor sentiment; and improving overall fundamentals for the UK.
‘There was a notable shift in investor sentiment on the UK in recent months, helped by relative political stability and improving macro conditions. Although fund flows remain negative on a headline basis, they are decreasing significantly, and we are seeing more positive flows beneath the surface,’ say the analysts.
Despite the increase in market volatility this month, ‘We continue to maintain that the UK IPO market is ‘selectively open’ for either best-in-class issuers or certain niche thematics that resonate,’ adds the team.
‘We expect a small number of further UK IPOs in 2024 and a broader market re-opening in 2025, in line with the many issuer conversations we are having.’ [IC]
Disclaimer: The author (Ian Conway) owns shares in Raspberry Pi.
Beazley shares hit record high as profits almost double
Firm sees plenty of cyber risk opportunities after global IT outage
Shares in specialist insurance underwriter Beazley (BEZ) reached an all-time high at the beginning of August after the firm posted sharply higher half-year earnings and said it saw more business opportunities in underwriting cyber risk insurance.
The company, which manages six Lloyd’s of London syndicates, reported pre-tax profit of $729 million for the six months to June or almost double last year’s level as its combined ratio dropped to 77% from 84% (a combined ratio below 100% means the company makes a profit on underwriting, the lower the ratio the more profit it makes).
The firm admitted the recent global IT outage caused by a faulty
software upgrade from cyber security firm Crowdstrike (CRWD:NASDAQ) had tested its risk controls and said they proved to be ‘highly resilient’.
Chief executive Adrian Cox commented: ‘Expertise in underwriting and active risk selection are key drivers of this strong result, even as the rating environment is moderating.’
Cox added: ‘We see opportunities in the remainder of the year and are confident in delivering on our high single-digit growth guidance.’
Jefferies’ insurance analyst James Pearce described Beazley as the gold-medal winner in terms of results.
Why engineering outfit Spirax Group is in a downward spiral
Analyst thinks margins and cash flow could remain below historical levels for some time
West Country engineering firm Spirax Group (SPX) is being shunned by investors after its first-half results.
The numbers themselves were pretty disappointing but more damaging was the downgraded guidance for 2024 and the implications this has for 2025. The company moved from mid-tohigh-single-digit growth to mid-single-digit growth in revenue and from modest margin growth to flat margins. The company makes products
which help regulate the flow of fluids and steam. After a long period of consistent returns, it enjoyed bumper vaccine-related demand during the pandemic but that has evaporated and the shares are now at less than half the highs above £170 attained in 2021.
While some of this is thanks to a normalisation of a valuation which had got ahead of itself and wider economic uncertainty, the company has also endured material operational issues of its
‘Beazley was the stand-out performer among the UK specialty names, significantly exceeding earnings expectations as well as improving guidance.’ [IC]
own making.
It has also made acquisitions linked to the energy transition, which, while holding long-term promise, have made the story more complex.
Berenberg analyst Andrew Simms lays the situation out in stark terms: ‘Group margins, returns and cash flow are below historical levels and unlikely to materially recover to previous levels in the near term, in our view.’ [TS]
FULL-YEAR RESULTS
22 Aug: Hays
FIRST-HALF RESULTS
20 Aug: Antofagasta, Anexo Group, H&T Group, Wood Group (John), Tribal
Staffing group Hays unlikely to provide an upbeat outlook for 2025
Recruitment firm Hays (HAS) is one of the worst-performing stocks of 2024, having lost 15% since start of the year, and we don’t have high hopes when the company reports full-year earnings next week.
Falling client and candidate confidence has knocked fee income for six, and in a trading update last month the firm said its ‘exit rate’ in the fourth quarter to June was down 18% on last year due to ‘challenging’ conditions in Germany, one of its key markets, along with uncertainty in the UK and France in the run-up to elections.
Temp and contracting fees, which make up 61% of group revenue and in theory should be a bulwark against cyclical downturns, were 12% lower in the final quarter against a strong prioryear result, while permanent fees were down 20% by value and 27% by volume.
The firm has cut costs – largely by cutting consultant numbers, as it tends to do when times are tough, then it has to hire new people when markets pick up – but it doesn’t expect an improvement in its end markets in the second half of 2024 so it just has to tough it out.
Analysts are forecasting a 9% decline in revenue and a drop of more than 50% in EPS (earnings per share) for the year to this June when the company reports on 22 August. [IC]
What the market expects of Hays
Can Target demonstrate it is on the right track?
The department store chain’s discretionary categories skew has been unhelpful at a time of softening consumer demand across the pond
Hot on the heels of updates from Walmart (WMT:NYSE) and Home Depot (HD:NYSE), hardpressed Target Corporation (TGT:NYSE) is the next major retailer to give a read on the health of a US consumer struggling with the rapid rise in inflation and interest rates of the past few years.
The discounter’s secondquarter earnings are slated for 21 August, when Target will need to assure investors it is on track for a return to growth in the 12 months to January 2025, and deliver the previouslyguided uplift in quarterly comparable sales, to avoid a negative share price reaction on the day.
The Minneapolis-based retailer’s greater exposure to general merchandise than Walmart has proved a headwind in recent quarters with cashstrapped US shoppers becoming pickier over their purchases.
Back in May, Target’s shares fell after first quarter earnings missed Wall Street expectations, although well-regarded CEO Brian Cornell did flag a return to digital growth as well as a ‘meaningful improvement’ in discretionary trends, most notably in clothing, in Q1.
On the upcoming earnings call, investors will be eager for an update on Target’s investments in supply chain and AI, as well as its recently
QUARTERLY RESULTS
19 Aug: Estee Lauder, Fabrinet
20 Aug: Lowe’s, Medronic, Dick’s Sporting Goods, Alcon
21 Aug: Salesforce, TJX, Synopsys, Target, Autodesk, Zoom Video, Urban Outfitters
22 Aug: Intuit, Workday, Baidu, Dollar Tree, HP Inc, Abercrombie & Fitch, Gap
announced partnership with Shopify (SHOP:NYSE), which will see some of the Canadian e-commerce platform’s own merchants added to the Target Plus marketplace.
Shares in Target have underperformed the broader market over the past year and are down 5.3% yearto-date versus a near-30% rise for Walmart at the time of writing. [JC]
What the market expects of
Calm returns to markets ahead of Fed inflation test
Bets on a September rate cut have risen since the shake-out
While the sudden spike in volatility which triggered last week’s ‘market reset’ seems to have faded, thankfully, the question of whether the US Federal Reserve has been too slow to cut rates remains.
As Shares went to press, traders were waiting for July’s inflation figures, with producer prices expected to have risen by 2.3% against 2.6% in June (and core prices seen rising by 2.7% against 3%), while consumer prices are expected to have risen by 3% at the headline level, the same as in
Macro diary 15 August to 22 August
June (and core prices are seen rising by 3.2% against 3.3%).
If the rate of inflation comes in significantly below these levels we would expect bets on a September cut in interest rates to rocket, which should see markets resume their upward trend, but if inflation remains stubbornly high those bets will pushed out to the end of the year which could cause further weakness.
In the UK, headline inflation for July is actually expected to turn higher, to 2.3% against 2% in June, as favourable comparisons with energy prices in 2023 drop out of the monthly figures.
‘Core inflation, which excludes more volatile energy and food prices, will receive as much focus as the headline figure,’ says James Gard at Morningstar
‘This measure was forecast to fall to 3.4% in June but remained at 3.5%, the same as in May. In July, the expectation is that core CPI will ease to 3.3%. Services inflation is also a worry for the Bank of England, remaining at 5.7% last month, and policymakers will be keen to see this figure fall back too.’
Looking ahead, Friday sees the release of UK retail sales for July, which should show a recovery after a weather-affected June, while Monday we will get UK house price data but the rest of the week looks fairly quiet in terms of economic data.
Next Central Bank Meetings &
Next Central Bank Meetings &
Time to turn sweet on Tate & Lyle
The negative reaction to a sensible acquisition looks excessive and the ingredients group’s discount to peers looks overdone
Tate & Lyle (TATE) 645p
Market cap: £1.17 billion
Investors have soured on Tate & Lyle (TATE) since the global ingredients group announced the $1.8 billion (£1.4 billion) acquisition of ‘mouthfeel’ specialist CP Kelco in June.
The food producer’s shares have fallen more than 20% from May’s 831.5p five-year high on concerns over price and integration risk, since large acquisitions have an unfortunate habit of destroying rather than creating shareholder value.
Nevertheless, Shares believes this weakness presents a sweet entry point, since the sensible deal affords Tate & Lyle the opportunity to expand its profitable solutions business and increases its exposure to faster-growing markets in Asia, the Middle East and Latin America.
So long as Tate & Lyle continues to exhibit earnings resilience and delivers the cost and revenue synergies promised by the deal, there is scope to close a wide discount to peers.
& Lyle
According to Stockopedia, the shares trade on a grudging 11.7 times forecast 2025 earnings, almost half the 22.8 multiple ascribed to International Flavors & Fragrances (IFF:NYSE) and a massive
discount to Switzerland’s Givaudan (GIVN:SWX) on 33.5 times.
WHAT DOES TATE & LYLE DO?
In recent years, Tate & Lyle has executed a major transformation to become a growth-focused speciality food and beverage solutions group, culminating in the recent sale of its remaining 49.7% interest in the low margin Primient starch business.
The £2.5 billion-cap is now returning the £215 million proceeds from the sale to shareholders through a share buyback.
The group, which sold its historic sugar business back in 2010, is now a North America-focused provider of ingredients and solutions to food and beverage companies, with a strong heritage in corn-derived products.
Guided by chief executive Nick Hampton, the FTSE 250 firm is well positioned for long-term growth given its strong franchise in sugar and calorie reduction, which plays into consumers’ demand for healthier food and drink.
On 25 July 2024, Hampton highlighted a ‘good start’ to the year to March 2025 with first-quarter group EBITDA (earnings before interest, tax, depreciation and amortisation) ahead year-on-year.
‘It’s encouraging to see volume momentum across the business, and we continue to expect volume growth to accelerate as the 2025 financial year progresses,’ insisted Hampton.
CHEWING OVER A TASTY DEAL
The acquisition of CP Kelco from J.M. Huber significantly increases Tate & Lyle’s scale in
speciality food ingredients and should accelerate sales growth through greater exposure to highergrowth emerging markets and an increased opportunity to sell solutions to customers.
The acquired business is a global leader in pectins and speciality gums, an area in which Tate & Lyle doesn’t currently play, and in technologies which complement its existing product portfolio with limited risk of cannibalising sales.
The cash and shares acquisition should sweeten Tate & Lyle’s margins over the next few years, with at least $50 million in cost synergies expected by the end of the second year post-completion.
The deal creates a market leader in ‘mouthfeel’ – literally the way food or drink feels in the mouth –and the two ingredients firms share the same client base.
Simon Gergel, manager of Tate & Lyle shareholder The Merchants Trust (MRCH), believes the negative market reaction ‘may have reflected the headline price paid’, but sees opportunities to raise profitability in the acquired business.
‘I don’t think investors completely understood that CP Kelco was running at a slightly depressed level of profitability,’ he informed Shares recently. ‘The company had just spent a lot of money building up capacity in two plants, but that process had been quite disruptive for the business so the profit margins had fallen, which meant the headline multiple looked quite high.
‘By the time you factor in a recovery in profitability, and the synergy cost savings they should be able to get from putting the two businesses together, we don’t actually think the valuation was that high.’
Gergel sounded excited by a deal which gives Tate & Lyle ‘a step up to be world leader in the whole mouthfeel category’ and ‘really completes the transformation from what was historically a business with a large commodity ingredients element to towards much higher-margin and return-on-capital speciality ingredients’.
Encouragingly, CP Kelco’s trading in 2024-todate has shown a return to volume growth in both pectins and gums while margins are also stabilising.
Analysts at Berenberg think in the longer term the transaction ‘should position Tate & Lyle towards higher-growth markets, with a strong margin tailwind’. [JC]
Dunelm is just the right stock to play a revival in consumer spending
We believe the ‘Home of homes’ is more defensive than investors appreciate
(DNLM) £11.70
Market cap: £2.4 billion
We have been watching homewares retailer Dunelm (DNLM) for some time now and we think the cyclelow is in for the share price.
In fact, the low occurred in April just after the firm released its third-quarter trading update warning of ‘challenging’ homeware and furniture markets but confirmed full-year earnings would meet the consensus.
We believe the group is set capitalise on a UK economic recovery and a pick-up in consumer spending and expect the share price to reach around £15 within a year.
In July, in its fourth-quarter and full-year update, the firm said it had had ‘a good summer sale period, with customers finding the attractive offers they were looking for as well as buying full-priced lines and responding well to new products’.
Growth was consistent across categories, with the exception of outdoor furniture due to poor weather, and we believe Dunelm’s breadth of product ranges makes it less cyclical than many other non-food retailers.
the firm’s sales.
Meanwhile, the firm’s physical footprint continues to grow with selective new openings and store refurbishments or relocations to make the most of customer demand, while its digital platform – which now accounts for 40% of sales –has been upgraded and the number of products made available to click and collect has been increased.
This is backed up by the consistency of its earnings over the 17 years since it floated, and we would argue the business is actually quite defensive due to the ‘essential’ nature of many of the items it sells.
Over the next couple of years, what were formerly headwinds – supply chain bottlenecks, high freight rates and high interest rates – should reverse and become tailwinds, adding impetus to
‘Going into FY25, we have a significant opportunity ahead of us,’ said chief executive Nick Wilkinson last month.
‘We are finding quality sites for new stores and are increasingly confident in our smaller format stores. We are also continuing to invest in both our digital offer and wider operations to support further market share gains. Notwithstanding the continuing uncertainty in our markets, we’re both excited and confident in our plans.’
Assuming earnings per share meet the consensus forecast of 78p next June, the shares just need to re-rate from their current cyclicallyadjusted PE (price-to-earnings) ratio of 15 times to 20 times for the price to top £15 with ease.
Additionally, the shares are on a yield of 4.8% for next June with potential for the dividend to rise while two-year gilts are offering just 3.65% currently. [IC]
Dunelm
Canadian General Investments beats its benchmark so far in 2024
We continue to think the discount will narrow at this trust with enviable longrun returns
Gain to date: 2.4%
We flagged an opportunity to get into this North American-focused investment trust, which is listed in both the UK and Canada, at a big discount in April 2024 citing its impressive longterm track record and the nous of its manager Greg Eckle.
WHAT’S
HAPPENED SINCE WE SAID TO BUY?
In share price terms, not a lot really as the stock is just a smidge higher than where we flagged its appeal. However, given some intervening volatility in the wider financial markets that’s nothing to sniff at and the trust’s latest results (6 August) revealed
Canadian General Investments
Table: Shares magazine • Source: Trustnet. Data to 31 July 2024
NAV (net asset value) growth came in ahead of the benchmark so far for 2024.
Year-to-date NAV returns were 18.6% versus 12.3% for the S&P/TSX Composite Index as of 31 July. As well as Canadian firms, the company has holdings in tech giants Nvidia (NVDA:NASDAQ), Apple (AAPL:NASDAQ) and Amazon (AMZN:NASDAQ) so the portfolio may have suffered a bit of damage since the end of July.
Established in 1930 and run by Toronto-based Morgan Meighen & Associates since 1956, the trust flags that for the 50 years to December 2023, a $10,000 investment in CGI would have grown to almost $2.3 million, representing a compound average annual return of 11.5% versus the benchmark results of $831,000 and 9.2% respectively over the same period.
WHAT SHOULD INVESTORS DO NOW?
We remain convinced the near-40% discount to NAV should eventually narrow at this trust, at least to its more typical level of around 30%, despite its inability to buy back shares and a concentrated shareholder base which puts some constraints on liquidity.
The manager and the trust have a strong record over the long term and Canada’s merits as an investment destination are still underappreciated given its abundant natural resources, strong financial sector and emerging technology space. [TS]
What is a carry trade and why does it matter?
Explaining a key factor behind the current market volatility
As is often the case in times of stock market volatility, parts of the financial eco-system which previously hadn’t received a great deal of attention are suddenly catapulted into the mainstream.
This time it’s the carry trade, specifically in yen, which is drawing the attention of investors. Effectively a carry trade means borrowing money in one place where interest rates are low and using it to invest in another place with the promise of high returns.
Japan, which has had low rates for years as the government tries to get its sluggish economy moving, has been the go-to place for people looking to execute such a trade, with traders borrowing yen at low rates, converting them into US dollars and putting that money to work in areas like the US stock market.
There are good reasons why retail investors are strongly advised not to use borrowed money to bet on stocks, and the risks associated with what is a leveraged trade writ large have become very apparent since the beginning of August.
The surprise decision by the Bank of Japan to hike
rates for the second time since 2007 on 31 July set the cat among the pigeons.
It pushed the yen higher, which together with concerns about the US economy put downward pressure on the dollar as speculation swirled the Federal Reserve might be forced into making an emergency rate cut.
Add highly valued big tech stocks which were vulnerable to a correction to the mix and the scene was set for significant volatility.
Traders faced a scenario where not only did they face higher interest rates on the yen they had borrowed, they were also impacted by a shift in the exchange rate and losses on their stock bets.
When traders’ losses start to mount, lenders ask for more cash to cover them in what is known as a margin call. That can lead to traders either reducing their bets to raise cash to meet the margin call or selling out altogether.
When this sort of negative spiral takes hold it is often the most popular or ‘crowded’ trades which are affected. This explains why the technology sector has been one of the worst-affected areas in the recent turmoil.
Analysts at investment bank JP Morgan suggest we may be halfway through the unwinding of this trade, although suggestions from the Bank of Japan that it is finished with rate hikes for now have calmed the waters.
Even so, the sums involved are significant –economists at consultancy TS Lombard have put a $1.1 trillion number on the carry trade, run up over the last 18 months or so, which suggests investors may need to watch this issue for some time to come.
By Tom Sieber Editor
HOW TO DIAL DOWN VOLATILITY IN YOUR PORTFOLIO
Stock markets across the globe have just emerged from a short, sharp shock, with the sell-off on 5 August one of the worst days in years as investors mull the frightening thought that the US economy is slowing and could be sent spinning into recession.
Combined with the impact of the unwinding in the yen ‘carry trade’ discussed in this explainer and some stretched valuations and you had the recipe for some alarming market turmoil.
If investors needed reminding of the capricious nature of financial markets, they’ve had it in spades over the past 10 days or so. It’s been bonkers and the frenzy has left many feeling panicked about their portfolios and pondering the question: should I sell too?
The previously high-flying Nasdaq Composite fell into official correction territory, having lost around 12% since mid-July, while the S&P 500 and Dow Jones have dropped off too over that timeframe.
In the UK, the FTSE 100 and mid-cap FTSE 250 have also struggled while the Euro Stoxx 50 is down markedly. That’s nothing compared to Japan, where the Nikkei 225 has been smashed, has been
By Steven Frazer News Editor
flirting with bear market territory. And analysts have been lining up arguments why ‘the dip
may not be a blip’.
‘Though we describe a low double-digit correction there is also risk of a bear market if the slowdown becomes a recession which, by history and definition, would be a surprise to investors and the Federal Reserve,’ analysts at Stifel said.
Goldman Sachs said investors have grown complacent, interpreting negative news as positive, relying on potential interest rate cuts and the robust earnings of large-cap AI (artificial intelligence) companies to offset broader economic sluggishness.
‘High valuation and rising US unemployment from a low level are two of the components that are most stretched and suggest that we are not out of the woods yet’, Goldman’s team said. At least they, for now, are ruling out an outright global bear market, saying that outcome ‘remains unlikely’, an opinion shared by Citi’s analysts, who recently emphasised that a fully-fledged bear market, defined by a 20% drop, is ‘unlikely at present.’
Even so, that’s likely to be cold comfort for ordinary investors staring at potential double-digit losses.
WHAT CAN INVESTORS DO?
This first and most important thing to say is, DO NOT panic. As our box on ‘volatility’ explains (below), sudden lurches in stock markets are nothing new and must be accepted as normal business by active investors. These periods are always uncomfortable, but they can serve a valuable purpose, such as:
• Resetting market expectations when optimism has become too exuberant
• Because intense volatility impacts almost all stocks and funds, these spells can throw up attractive entry points to new stocks, or opportunities to top-up existing holdings
• Provides investors with a trigger to reassess their portfolios and get them shipshape for the months ahead
According to Citi strategists, while these fluctuations might unsettle investors, they are not unprecedented. Historically, the S&P 500 has undergone 5%-plus pullbacks three times a year on average since the 1930s, with larger corrections occurring less frequently.
Remaining invested in the market has historically been the best course of action if you’re in it for the long haul. Stock markets tend to recover faster than
you think, although precisely predicting when that may happen is impossible.
Investors might ask whether the fundamentals have changed for your investments, and if they haven’t deteriorated, it’s probably best to do nothing. If they have, you need to do further research and ask whether you should still own that investment.
But it is also advisable to remain open the possibility that for many good quality companies, little has really changed except the valuation. That could mean a rare chance to invest in a business at a price discounted to levels seldom seen.
That said, it is natural for investors, especially more cautious ones, to consider investments with lower levels of volatility relative to the market, or low-beta stocks and funds. We’ll come to low-beta stocks in a bit, but first, let’s look at some fund options.
LOW-VOLATILTY FUNDS
As you can see, there are plenty of low-cost, low volatility ETF options to choose from. Just ETF lists 22 low-volatility ETFs, across Global, US, and Europe, and including some ESG slanted options too, although some of the funds are very small –the Invesco Quantitative Strategies Global Equity Low Volatility Low Carbon (LVLG) ETF has just £1 million in assets, according to Just ETF.
So, what sort of stocks will you find in these funds? Looking at two of the biggest global ETFs – iShares Edge MSCI World Minimum Volatility (MINV) and Xtrackers MSCI World Minimum Volatility (XDEB), top 10 holdings are identical, with barely any change between stake sizes relative to the scale of the fund, with mobile telco T-Mobile US (TMUS:NASDAQ), communications kit manufacturer Motorola (MSI:NYSE) and waste disposal operator Waste Management (WM:NYSE) the top three holdings in both funds.
Both are also heavily weighted to the US, where about 62% of the funds are invested, followed by Japan and Switzerland – no change there either, just as in sector exposure, both in the Technology, Healthcare and Financials sectors by equal measure.
Where they do differ is scale, plus cost and performance. The iShares Edge MSCI World Minimum Volatility ETF is by far the bigger of the pair, with more than £2 billion in assets. By contrast, the Xtrackers MSCI World Minimum Volatility has a more modest £372 million of assets, although
Minimum volatility ETFs
Table: Shares magazine • Source: JustETF. Data to 9 August 2024
What's in the largest UK-listed global low volatility ETF
iShares Edge MSCI World Minimum Volatility % of portfolio
Table: Shares magazine • Source: JustETF. Data to 9 August 2024
scale isn’t really a selection factor, not at these sorts of levels.
Cost and performance are. The iShares fund is more expensive, with ongoing charges pitched at 0.3%, which is still reasonably low compared to many factor ETFs but not as low as the Xtrackers
option, which has an ongoing charge of 0.25%. Such cost differences may appear almost insignificant, yet they can have a big impact over many years, so it’s worth bearing in mind, especially given that fund performance is close on identical, unsurprising given the make-up of their respective portfolios.
If low volatility ETFs are not for you and you’d prefer to be more hands on with low beta stock selection, there’s even more options to choose from.
LOW-BETA STOCKS
To help investors identify some stock ideas which might avoid the worst of any near-term volatility Shares has run the numbers to find stocks which have a materially lower beta than the market.
When we talk about beta we’re referring to a ratio which measures the extent to which a stock moves when the market rises or falls by 1%. The starting point is the market has a beta of 1. So, if a stock has a beta of 1.5, it will move 1.5% for every 1% move in the market, while a share with a beta of 0.5 will move just 0.5% in the same scenario.
On this basis, low-beta stocks could afford you some protection against any further wild swings in financial markets.
Using Stockopedia we screened the FTSE 350 to find stocks with a beta versus the FTSE All-Share of 0.75 or less. You can see a selection of those
names in the table below. It is unsurprising to see sectors like health care, utilities, supermarkets and consumer staples well represented as these typically have more predictable revenue and earnings streams and are somewhat less tied to the fortunes of the wider economy.
However, low beta on its own might not mean a stock has defensive qualities. It could simply mean the shares trade less frequently. Plus, this is based on historic data, the beta can change, and a stock which has historically been low beta can become high beta if it undergoes a material change in circumstances. Finally, you should not invest in something just because it is low beta, it is worth considering the inherent qualities of the underlying business. Water utility Pennon (PNN) is low beta but has been a pretty hopeless stock market performer in recent times – the shares falling more than 40% on a five-year view.
With this in mind, we have applied our own knowledge and some number crunching to the individual names on the list to identify two shares which represent great investments in their own right as well as being potentially less exposed to market fluctuations. [TS]
SELECTED LOW-BETA FTSE 350 STOCKS
London Stock Exchange Group
Beta: 0.37
It may be best known for its eponymous stock exchange but the company has, in the words of Berenberg analyst Peter Richardson ‘completely reconfigured its business model since 2007’. When operating the stock exchange was its main area of business, performance was reliant on the number of companies it could attract and retain as it levied listing fees on exchange constituents. It has now expanded massively into information services, which deliver recurring subscription-based revenue, as well as forging a leading position in OTC (over the counter) derivatives. Derivatives are securities with a price that is dependent upon or derived from one or more underlying assets. When they are bought or sold OTC it means they are traded through a broker-dealer network rather than on a centralised exchange. As Richardson explains: ‘This new model exposes it to some of the strongest structural trends in the finance industry: ETF (exchange-traded fund) penetration, OTC clearing, greater risk management and quant investing.’
A new data collaboration with Microsoft (MSFT) also holds significant potential for the business. Given these strengths a valuation of 24.3 times consensus forecast 2025 earnings does not seem overly demanding. Richardson notes the company has received a takeover approach every two-and-ahalf years since listing in 2000, implying bid interest could come to investor’s rescue in the event of share price weakness. [TS]
AG Barr (BAG) 616p
Beta: 0.67
While in the very short term its sales can be dependent on the weather AG Barr (BAG) benefits from the same resilient demand as larger soft drinks players like Coca-Cola (KO:NYSE) and PepsiCo (PEP:NASDAQ).
Even if the economic outlook is uncertain, people are less likely to cut back on impulse purchases of little treats like a can of fizzy pop.
AG Barr is best known for its Irn-Bru – Scotland’s favourite fizzy drink – but it also has other successful brands such as Rubicon and Snapple.
While it might represent a ramping up in terms of competition, Carlsberg’s (CARL-B:CPH) takeover of Barr’s counterpart Britvic (BVIC) has a positive read across for the company’s valuation. According to Liberum, Carlsberg paid an historic EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation) multiple of 13.6 times. This compares with an historic EV/EBITDA of 10.5 times for Barr.
The company has scope to increase margins, after a period when they have been constrained by cost inflation and is sitting on a cash pile of £54 million. Liberum analyst Anubhav Malhotra says the cash generative business could sustain a net debt to EBITDA ratio of 2.5 times which applies as much £250 million firepower which could be put towards acquisitions or M&A. [TS]
Markets need to ‘reset’ from time to time before they can move higher. You have probably heard market commentators use the word volatility a lot over the last few weeks, and with good reason. Most of the time, share prices tend to move higher with little fanfare and that has certainly been the case over the last couple of years.
Post-pandemic daily movements in the FTSE 100 and the S&P 500 have been less than 1%, and very infrequently have they reached 2% or more, with the effect investors have been lulled into thinking there is nothing to worry about. Add to that our instinct to extrapolate the recent past into the near future and there seems no reason to expect share prices to suddenly collapse, yet out of the blue they have and with alarming speed.
S&P 500 option with a life of 30 days. In a nutshell, the price of the VIX reflects how much the index is seen moving during the next 30 days –the higher the value, the more implied volatility.
Over the last two years, the VIX index has been steadily declining, implying lower volatility and allowing the S&P 500 to add over 2,000 points or 58% from its low in October 2022.
The root cause of the sell-off was traders unwinding the yen carry trade following an increase in Japanese interest rates, but this happened at a point in time where volatility had been exceptionally low for a long time.
Volatility in the S&P 500 is measured by something called the VIX index, which is the annualised implied movements of a hypothetical
The FTSE 100 has only added 22% from its October 2022 low, but the good news for investors is volatility in the index is about half that of the S&P 500 – over the last two years it has only moved 1% or more 13% of the time against 25% of the time for the US benchmark.
A key reason for this is the makeup of the UK market, which has a greater weighting in consumer staples, healthcare, oil and gas and utility companies, whose earnings tend to be less volatile, whereas the US has a high weighting in technology companies, whose earnings can be much more volatile.
So, while the last couple of weeks may have been hair-raising, the damage to the UK market has been less severe meaning it doesn’t need to recover as much lost ground. (IC)
Fund managers spy opportunities after recent carnage in Japanese markets
How the professionals are responding to the Nikkei’s worst day since 1987
On the 5 August, the Japanese benchmark index Nikkei 225 plummeted 12.4% in its worst one-day performance since 1987, while other Asian markets such as Taiwan fell heavily.
There were several factors at play which caused the massive sell-off, not only in Asian markets but globally. How have managers of Japanese funds reacted to the turmoil?
Unsurprisingly, given they are effectively talking up their own books, they have a relatively sanguine outlook. More interesting in terms of insights for investors are the reasons they cite for their continuing confidence.
Carl Vine, manager of M&G Japan (B74CQP7) and M&G Japan Smaller Companies (B7FGLY2) says: ‘Despite unusual volatility, sentiment on the ground in Japan has been relatively calm. The Japanese economy continues along its path of structural improvement, especially in the listed corporate sector.
‘Stock market earnings remain solid thanks to genuine self-help and ongoing structural reform of business models and capital policies. Earnings grew some 12% last financial year and earnings in the current fiscal year appear to be off to a strong start.’
Vine says there are opportunities for an investor to find situations where the market has thrown the baby out with the bath water.
Nikkei 225
James Salter, chief investment officer and manager of Zennor Japan (BKPVTJ9) has pointed out how cheap the yen is, to put its recent move higher in context, and doesn’t think there will be a big impact on the competitiveness of Japanese firms.
Salter says: ‘It has felt to us that the market has been discounting some of the yen-boosted earnings for some time. We do not expect this to have a radical impact on Japanese competitiveness or
even earnings. We are having a market setback but nothing that changes our investment case for Japan based on a corporate governance revolution in Japan – just lower prices and better valuations.’
Finally, Joe Bauernfreund, CEO of AVI Japan Opportunities Trust (AJOT) says:
‘The initial move by the Bank of Japan to raise rates was somewhat of a surprise in that they raised by 15 basis points rather than 10 basis points, alongside their comments about further increases, spooked investors.
The 5 August was a bloodbath. But more than that, from our perspective, it left valuations at extremely attractive levels.
‘We saw [this] as a buying opportunity. All the positive things we have been talking about over the past few years in Japan remain in place. The one fly in the ointment is what foreign investors will do now. Clearly some panicked at the first sign the weak yen was reversing course.’
By Sabuhi Gard Investment Writer
How regulatory changes could spark a new wave of cannabis companies
The US cannabis market is forecast to grow at an annualised rate of 14% a year over the next decade
Out of nowhere, signs of life are appearing in the cannabis sector following a near total collapse in share prices over the last three years. Unlike prior booms and busts, of which there have been many over the last six years, this latest flourish appears to have legs.
The Financial Times reported (15 July) several European start-ups are looking to go public to take advantage of potentially significant rule changes in Germany and the US.
Notice of changes to US cannabis regulation first appeared in May and gave a boost to quoted names in the sector including Nasdaq-listed Tilray Brands (TLRY:NASDAQ), a leading global cannabislifestyle company whose shares rallied 40% from $1.77 to $2.47 on the news.
The performance of Tilray shares have reflected the ups-and-downs of the wider sector, trading as high as $150 in 2018 and as low as $1.65 in July 2024.
THE TIMES THEY ARE A-CHANGIN…
The US started the process of legalising recreational cannabis in 2012 with Washington State and Colorado leading the way. Twenty-two states have since followed suit, but cannabis has so far been a
state-by-state affair which means cannabis cannot be transported across the state line.
In May 2024 the US DEA (Drug Enforcement Administration) published a notice signalling its intention to remove cannabis from its list of most dangerous drugs.
This is significant because it lays the ground for a reduction in the rate of taxes on state-legal businesses which can be as high as 70% or more. It seems fair to say some US states have done very well out of legalising cannabis.
In addition, medical research on marijuana is likely to become easier. A total of 38 US states allow the medical use of cannabis. At the federal level, medicinal cannabis products need FDA (Food and Drug Administration) approval.
While the manufacture, distribution and possession of recreational cannabis would remain illegal under federal law, applicable offenses would be reduced.
Importantly, if cannabis is moved to a lowerrisk category it would allow businesses to deduct business expenses on federal tax filings, according to a report published by the Congressional Research Service.
Meanwhile changes are also afoot in Germany
which is Europe’s largest market for medical cannabis. In April the authorities decriminalised possession and small-scale home cultivation and removed it from the country’s narcotics list.
In summary, the backdrop for operators in the sector appears more favourable from both a financing and investor appetite perspective.
FLURRY OF NEW LISTINGS ON THE CARDS
Joshua Roberts, co-founder of Wellford Medical, a medicinal cannabis manufacturer and distributor in the UK and Germany summed-up the mood music well: ‘If the US reclassifies, coupled with the legislative change in Germany, it could be the perfect time for us and investors to catch that sentiment.’
The company said it is considering an IPO (initial public offering) on Nasdaq in due course.
cannabis is also seeking an IPO on Nasdaq and hoping for a ‘reasonable’ valuation of $250 million.
The company will look at secondary listings in London and Toronto according to its founder and CEO Michael Sassano. The business is a largescale EU-GMP (good manufacturing practice) manufacturer of cannabis products focused on the highest quality medical grade pharmacological applications.
EU-GMP designation and oversight is provided by the European Medicines Agency.
Somai recently (12 May) signed a two-year distribution deal with Grow Group to expand its global presence to the UK.
In April the authorities decriminalised possession and small-scale home cultivation”
London-based medicinal cannabis distributer Grow Group told the Financial Times it is planning an IPO on Nasdaq in the spring of 2025, targeting a valuation of more than £100 million.
Created in 2017 the company says it is focused on enabling global access to quality medicinal cannabis. It grows its own cannabinoid extracts from facilities in Andalusia, Spain and claims to be the UK’s and Ireland’s largest supplier of quality prescribed cannabis medicines.
CEO and co-founder Benjamin Langley told the Financial Times that after a period relative drought for funding he is seeing more money in the space again, particularly from venture capital investors.
Another London-based group Somai Pharmaceuticals, involved in the extraction, development and distribution of medicinal
Under the deal Somai will create access to its ‘differentiated’ cannabinoid-containing product portfolio for all the UK-based medical cannabis-prescribing clinics and doctors, utilising Grow Pharma’s extensive distribution network.
The company expects to generate €750,000 of revenue in the first year of the contract. Sassano says: ‘We are excited to partner with Grow Pharma to expand our reach to the UK clinics equally and introduce them to SOMAÍ innovative cannabis-based medical products with different tastes and terpene mixes.
‘By navigating the intricate regulatory landscape, SOMAÍ aims to provide innovative solutions for patients grappling with conditions such as chronic pain, epilepsy, and multiple sclerosis.’
By Martin Gamble Education Editor
Why more FTSE 100 companies are offloading assets to sharpen their focus
It’s not just the number of firms on the UK stock market that’s shrinking
There is a phrase in business – ‘shrink to greatness’ – meaning companies selling or demerging assets and focusing on what they do best.
You might call it streamlining, others might say it is an admission that the previous strategy did not work and the company was too bloated.
This trend is firmly in motion across the UK stock market with nine companies in the FTSE 100 either in the middle of shrinking or having recently done it.
For example, Reckitt (RKT) has put certain well-known brands up for sale and Unilever (ULVR) is separating its ice cream arm from the rest of its business. There are further FTSE 100 companies ripe for getting rid of non-core
assets including Diageo (DGE) and WPP (WPP).
WHAT PROMPTS ‘SHRINKING’?
A falling share price, pressure from activist investors to enact change, or fighting off a takeover attempt are three key catalysts for a company to ‘shrink’ through asset sales or demergers. Investors unhappy with share price performance often call for a business to sell certain assets in the hope they are worth more than the market attributes. This can range from selling property at greater than book value to selling operating divisions that certain investors did not even realise existed or held any value of note.
ITV (ITV) surprised the market in March by selling its stake in the international part of its Britbox streaming venture for £255 million. Most
FTSE 100 companies selling/demerging assets now or recently
Anglo American
To sell or demerge its De Beers diamond arm, demerge its holding in Anglo American Platinum, and sell its steelmaking coal assets.
HSBC Recently sold its French and Argentinian businesses.
Legal & General Has put its Cala housebuilding business up for sale.
National Grid
Planning to sell its UK Grain LNG liquefied natural gas terminal and US onshore renewables business.
Reckitt To sell non-core brands including Air Wick, Mortein, Calgon and Cillit Bang, and consider the future of its nutrition business.
Sainsbury's Recently sold its core banking operations to NatWest.
Tesco Recently sold its core banking operations to Barclays.
Unilever To sell or demerge its ice cream business.
Vodafone Recently sold its Spanish business and is in the process of selling its Italian arm.
Table: Shares magazine • Source: AJ Bell, Company announcements
people thought Britbox was a disaster and worth nothing, not 11% of the entire market value of ITV, which turned out to be the case. ITV’s share price has pushed ahead since this sale as investors wonder what else has hidden value inside the group.
Despite the pickup in the company’s valuation in recent months, the shares are still trading 70% below their peak in 2015. The market continues to fret about the broadcaster’s exposure to traditional (linear) TV, where viewing trends are in decline across the industry.
That is the bad, but what about the good? Certain fund managers believe the ITV Studios production arm is worth more than implied by the group’s market valuation. The ITVX streaming platform is also making progress and there are brighter prospects ahead for advertising income as ITV can offer more information on viewers, data which is valuable for companies seeking targeted promotions.
ITV has so far rejected the idea of selling the Studios arm to realise hidden value. That looks a sensible call given it is crucial to the group’s success as it feeds a range of ITV’s own broadcast channels and streaming platform with content, and also generates good revenue from licencing fees.
Elsewhere, who knew FTSE 100 life insurer Legal & General (LGEN) owned a housebuilder? Most people did not until it put the business, called Cala
Homes, up for sale earlier this year with a reported £750 million price tag.
WHY WOULD COMPANIES OFFLOAD WELLKNOWN BRANDS?
Unilever no longer wants to sell ice cream. Even though it owns widely loved brands such as Magnum, Wall’s and Ben & Jerry’s, the division has lower growth prospects than the rest of the group.
In theory, exiting this product line should improve the growth profile of Unilever and potentially lead to investors being willing to pay a higher multiple of earnings for the shares. That is the plan, but there is no guarantee it will play out in such a way.
Reckitt is going to sell various brands which certain people thought were among its crown jewels – including Air Wick, Europe’s biggest air care brand; Calgon, Europe’s biggest water softener brand; and Cillit Bang, Europe’s fourth biggest surface cleaning brand. These are iconic products and Reckitt should not struggle to find buyers.
Why is it offloading them? It is the sign of a new chief executive trying to make their mark and distance the business from mistakes of old. Reckitt’s share price is trading at an 11-year low, thanks to worries about the quantum of liabilities from legal action around a baby formula product and from longer-standing concerns about strategic mistakes.
If you were digging around the house looking for things to sell, it is easy to pick items that you know could fetch a decent price alongside other items you no longer want. There might be elements of this approach with Reckitt, alongside a bigger strategic move to sharpening its focus and do fewer things.
It wants to concentrate on the brands that generate the most profitable business for the group. Reckitt might also sell the nutrition business housing the baby formula products once its resolves legal issues.
THE BENEFIT TO INVESTORS OF A DEMERGER
Demergers can be one way to appease shareholders who wish to maintain exposure to a specific part of a business but where there is a ‘shrinking’ strategy in motion. Shareholders in the parent company receive free shares in the demerged entity, which they can either keep or sell on the market.
The FTSE 350 index is full of companies born out of a demerger. For example, miner Anglo American (AAL) spun off packaging group Mondi (MNDI), drug company Haleon (HLN) used to be part of pharmaceutical giant GSK (GSK), and engineer Dowlais (DWL) was previously a division of Melrose (MRO).
It is worth keeping an eye on demerged entities as they might flourish once they have left their former parent. This is often the result of management being free to make their own decisions rather than the parent company dictating them.
Reckitt
A study in 2003 by the Krannert School of Management found that subsidiaries spun out of companies outperformed their former parent by more than 20% over the first three years following the demerger; with a majority of the excess returns within the first 12 months of trading.
This chimes with a US tracker fund designed to mirror the performance of companies spun off from larger corporations within the past four years.
The Invesco S&P Spin-Off ETF is up 23.9% over the past 12 months versus 12.9% from its Russell Midcap index benchmark. Over three years, it is up 4% versus 2.4% from the benchmark.
Those periods are too short term to draw any firm conclusions and investors must appreciate that past performance is not a guide to future performance.
‘SHRINKING’ COMPANIES COULD FATTEN AGAIN
Selling assets or spinning off parts of a business might make the original parent company’s profit margins look better for a while, but investors will always be looking for new growth catalysts.
Once the ‘shrinking’ has played out, a chief executive will be under pressure to take the business forward and that eventually raises the temptation to do deals to accelerate growth. A company which had slimmed down might easily fatten up again. It is just the nature of business.
WATCH RECENT PRESENTATIONS
Cohort (CHRT)
Andy Thomis, Chief Executive
Cohort is the parent company of six innovative, agile and responsive defence technology businesses providing a wide range of services and products for UK and international customers. It has headquarters in Reading, Berkshire and employs in total over 1,100 core staff there and at its other operating company sites across the UK, Germany, and Portugal.
Custodian Property Income REIT (CREI)
Richard Shepherd-Cross,
Investment
Manager
Custodian Property Income REIT offers investors the opportunity to access a diversified portfolio of UK commercial real estate through a closed-ended fund that seeks to provide an attractive level of income and the potential for capital growth
JPMorgan UK Small Cap Growth & Income (JUGI)
Katen Patel, Executive Director
The Company’s objective is to achieve capital growth from UK listed smaller companies and a rising share price over the longer term by taking carefully controlled risks. The Company has the ability to use borrowing to gear the portfolio within the range of 10% net cash to 15% geared in normal market conditions.
New labels hit the ESG investment world
Unpicking an attempt to prevent greenwashing on the part of funds
ESG investors often find selecting a fund which meets their environmental and ethical preferences involves wading through an alphabet soup of acronyms and buzz words which provide little illumination as to how their investments are going to reflect ESG criteria in their investment portfolio. In a bid to help improve consumer communications, the financial regulator (the FCA) is introducing a series of reforms over the course of 2024.
One of these is an ‘antigreenwashing rule’, which requires fund providers to ensure the claims they make about the ESG characteristics of their fund actually match up with what’s going on in the portfolio. But they have also introduced four new investment labels which you might start to see on fund literature. The labels cover what the FCA believes to be four different approaches to ESG investing, and which it hopes will help consumers make more informed decisions. In order to use the labels, funds will need to have an explicitly stated sustainability objective and at least 70% of the fund’s assets will need to be invested accordingly.
The new labels are as follows.
SUSTAINABILITY FOCUS
Funds falling into this category will need to invest more than 70% of their portfolio into assets which are environmentally or socially sustainable.
SUSTAINABILITY IMPROVERS
These funds will need to demonstrate at least 70% of their portfolio is invested in assets which have the potential to improve environmental or social sustainability over time. Fund providers will need to identify the period of time over which improvement is expected to happen and engage with companies in the portfolio to keep this on track.
In order to use the labels, funds will need to have an explicitly stated sustainability objective”
SUSTAINABILITY IMPACT
To qualify as a Sustainability Impact fund, providers will need to ensure their funds aim to achieve a predefined, measurable and positive impact on environmental or social outcomes.
SUSTAINABILITY MIXED GOALS
These funds will need to invest 70% into assets
that meet a combination of the above three approaches. Many funds will employ a combination of approaches to ESG investing and this category provides a label for funds which might not qualify for any of the other categories in isolation.
The FCA says the sustainability characteristics of a fund must conform to a robust, evidencebased standard which is an absolute measure of environmental and/or social sustainability. In some cases, fund providers themselves may develop their own standards, but it seems likely many will defer to existing frameworks to define the standard for their funds. In either case the regulator is trying to get funds to provide evidence they are actually delivering on ESG promises rather than simply having good intentions.
NEED FOR MONITORING
Fund providers will need to monitor compliance with these labels and undergo an independent assessment to judge if they are meeting the right standard. They will also need to issue a suite of disclosures to keep investors informed of their ESG activities. Interestingly the regulator says governance alone is not a sufficient outcome to target for a label, rather they see good governance as a means of achieving positive environmental or social outcomes.
Personal Finance: New ESG labels
label. The regulator seems to afford them some leeway here, but says they are still expected to take reasonable steps to make sure the fund maintains the ESG standards laid out to investors. This will include communicating with index providers if there looks like being a mismatch between the components of the index and the sustainability objective of the fund.
There will be funds out there which apply some sort of ESG lens to their portfolio, but don’t qualify for any of these labels. As well as not being able to use one of these labels, these funds won’t be able to use the words ‘sustainable’, ‘sustainability’, and ‘impact’ in their names. That still leaves other related names which could be used, such as ‘responsible’, ‘ethical’ or ‘stewardship’. The FCA has also issued rules on how these funds are marketed to investors, and the disclosures they need to make, again as a barrier to what is seen as funds talking the ESG talk but not walking the walk.
IMPACT REMAINS TO BE SEEN
Passive funds will be included in the labelling regime, though they don’t normally control the composition of the index they are tracking, which could mean the index provider taking action which would mean the fund no longer qualifying for a
Whether these rules help consumers make more informed choices remains to be seen. There is likely to be a bedding in period as firms adjust to the labels and the quite onerous requirements attached. Beyond that, as the FCA itself states there is no single definition of “sustainability’. These labels are really an attempt to provide some standardisation across a landscape which is varied and extremely nuanced.
At some point we are expecting the UK Green Taxonomy to be published by the government, a common framework to set clear definitions of the economic activities and investments that can be defined as environmentally sustainable. The fact the regulator is pushing ahead with rules to govern the large ESG fund industry before this framework has been published tells us the authorities are rushing to erect some regulatory scaffolding around a haphazard building that has popped up very quickly.
By Laith Khalaf AJ Bell Head of Investment Analysis
Does high executive pay matter for investors?
The issue of executive pay and how it compares with that of the average worker is one which can generate a fair amount of heat and noise, but how much does it actually matter to shareholders?
A new report from the High Pay Centre, a think tank which aims to promote quote, unquote fairer pay, shows the median pay of chief executives of FTSE 100 companies increased by 2.2% to £4.19 million in 2023.
Notably this is below the average of more than 7% implied by ONS data for all UK workers in 2023, although in observing this it would be facetious not to acknowledge that FTSE 100 remuneration is at record levels.
The sums involved also mean these individuals
are hardly facing pressures to keep up with the cost of living, with their median pay now 120 times the median Briton in full-time work.
And while the median increase was relatively modest, on a mean basis pay was actually up more than 12% to almost £5 million.
There are at least a couple of reasons why investors might be exercised by this – first, if you own shares in a company either directly or indirectly through a fund, you are a part-owner of said business and its cash flows.
More money for those at the top arguably means less money for investing in future growth or returning capital to shareholders, although for most FTSE 100 businesses the pay cheques of its chief executives reflect a drop in the ocean.
There is also a risk that a big disparity in pay between those at the top and bottom of a business can breed resentment which, if the old idiom that a happy workforce is a productive workforce holds true, could affect performance.
On the flipside, the argument for paying significant sums to executives is these companies are operating in a global marketplace to attract top talent and FTSE 100 pay still lags the median levels in the S&P 500 by some distance (these totalled $16.3 million in 2023 according to Equilar).
To put all of these numbers in some sort of context it felt like an interesting exercise to relate pay for the top 10 most handsomely-rewarded bosses with the market value of their respective charges and their 10-year total return. You can see the results in the table on the previous page.
A few necessary caveats. Pay trends across different industries are potentially a more relevant factor than the overall size/value of a business. Second, the majority of these executives will not have been in place across the whole of the decade over which we have chosen to measure their performance – although we can probably assume their remuneration won’t, in most cases, have been hugely out of whack with that of their predecessors. Which making the fact just three have outperformed the FTSE 100 over that period a relevant consideration.
Given the performance-related element of their pay, some will also have seen bumper pay packets in 2023 as a reward for exceptional performance. Think Rolls-Royce (RR.) executive Tufan Erginbilgiç, who led the best performing FTSE 100 company in 2023 by some distance having revived the aviation engineer’s fortunes.
Money & Markets podcast
featuring AJ Bell Editor-in-Chief and Shares’ contributor Dan Coatsworth
LATEST EPISODE
Magnificent Seven disappointment rattles markets, sub-4% mortgages return and a new direction for Reckitt
What happens if I pass my pension on to my wife after I’ve turned 75?
Helping with a question on the tax treatment of leaving retirement holdings to a spouse
I have a SIPP and am currently 65 years old.
If I die before the age of 75, I believe the holdings can be passed on to my wife (without any tax problems). If I die over 75, what happens when I pass holdings to my wife?
Would my wife need a SIPP with the same provider so that the holdings could be placed in her name? Would she be taxed?
Finally, when my wife passes, can the holdings be passed onto our two children? As the holdings are a pension, would that final scenario be exempt from inheritance tax?
Manuel
Rachel Vahey, AJ Bell Head of Public Policy, says:
People’s pension funds can form an important part of their overall wealth when they die, so it’s worth knowing exactly how they will be treated when the member passes.
Pension freedoms allow pension funds to be passed to loved ones when a member dies. The pension member can nominate who they would like to receive the pension pot. Ultimately, though, it’s the scheme administrator’s decision who receives it, and although they will take into account a member’s wishes, they will want to make sure any dependant – such as a spouse or partner – is financially secure.
THE CHOICES OF A BENEFICIARY
The beneficiary then has a choice. They can take the pension money as a lump sum or, if they have been nominated by the member or are a dependant of the member, they can take the pension pot as an income, such as drawdown. Drawdown gives them the benefit of taking the funds gradually to suit their needs or to reduce the
amount of income tax they could pay, whilst the remaining money continues to benefit from being in a tax-advantaged environment.
If the member dies before age 75, then the beneficiary who receives the pension pot will not pay income tax on any money they withdraw from it. If they choose to take a lump sum – rather than take the money through drawdown – then there will be a test to see if the lump sums the member took during their life plus the inherited amount is more than their ‘lump sum and death benefit allowance’ (which is usually £1,073,100). Any amount exceeding this allowance will be subject to income tax.
If the member dies after age 75, then the whole pension pot will be subject to income tax when the beneficiary takes it, regardless of whether they take it as a lump sum or through drawdown.
Turning to practicalities. Most SIPP providers will work on the basis that if the beneficiary chooses to take drawdown, then they move the inherited pension pot to their SIPP. This can be done even if it’s not with the same provider. If the beneficiary doesn’t have a SIPP, then they will have to set one up.
When the beneficiary dies, if there is any inherited pension pot left over, then this can be passed onto others. However, it’s up to the beneficiary to choose who to nominate to receive the money, as it’s treated as their own pension
Ask Rachel: Your retirement questions answered money. The original member does not get a say in where the pension pot goes next.
WHEN PROBLEMS MIGHT ARISE
In most cases, this may not be a problem, as money may be passed to other family members. But with blended families some issues may arise. For example, a couple married later in life, when they both had children with previous partners. The husband may pass the pension pot to his wife. But she may choose to leave leftover funds to only her children – his step-children – rather than to his full children.
If the original holder of the pension pot would like more control, then they could consider setting up a ‘bypass trust’ to receive the pension funds. But this comes with its own tax implications and complexity for the chosen trustees.
The tax treatment of the leftover funds will depend upon the age of the beneficiary when they die. For example, if the original member died aged 70, then their spouse could withdraw funds without paying any income tax. (If the children took
Questions about retirement?
Rachel Vahey, AJ Bell Head of Public Policy,
is here to answer your questions
a lump sum, then there would be a test against the deceased beneficiary’s lump sum and death benefit allowance – not the original member’s.)
However, if the spouse then died aged 80, and chose to pass leftover pension pot to their children, then this pension money would be taxed in the same way as earnings when the children withdraw it.
Finally, pension pots are usually not subject to inheritance tax, regardless of whether they are passed on the death of the original member, or on the death of a beneficiary.
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.
2024 at 18:00
ANGLE (AGL)
ANGLE is a world-leading liquid biopsy company commercialising a platform technology that can capture cells circulating in blood, such as CTCs, intact living cancer cells, even when they are rare in numbers, and harvest the cells for analysis. ANGLE’s cell separation technology is called the Parsortix system and is the subject of granted patents in multiple jurisdictions.
ENSILICA (ENSI)
EnSilica is a leading fabless chipmaker focused on custom ASIC for OEMs and system houses, as well as IC design services for companies with their own design teams. EnSilica has world-class expertise in supplying custom RF, mmWave, mixed signal and digital ASICs to its international customers in the automotive, industrial, healthcare and communications markets.
JP MORGAN ASIA GROWTH AND INCOME
JPMorgan Asia Growth and Income (JAGI) provides access to the Asian equity market and targets predictable quarterly income without compromising its focus on growth. Managed by a locally based team of investment experts to provide access to Asia’s fast growing markets and benefits from our long experience in the region.
MENHADEN RESOURCE EFFICIENCY (MHN)
Menhaden Resource Efficiency is a UK-listed investment company that seeks to generate long-term shareholder returns, by investing in businesses and opportunities, delivering or benefitting from the efficient use of energy and resources.
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:
Daniel 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.
3. Reporters are required to hold a full personal interest register. The whereabouts of this register should be revealed to the editor.
4. A reporter should not have made a transaction of shares, derivatives or spread betting positions for 30 days before the publication of an article that mentions such interest. Reporters who have an interest in a company they have written about should not transact the shares within 30 days after the on-sale date of the magazine.