Shares magazine 18 April 2024

CHEAP STOCKS

How to take advantage of a compelling buying opportunity

The Monks Investment Trust

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The UK market looks too cheap by far

Shares puts the case for investing in four UK companies and an investment trust which are trading at a significant discount to fair value.

Fundsmith has a new challenger

This Michael Spencer-backed newcomer aims to take Terry Smith’s crown by investing in a concentrated selection of growth companies.

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:

Mitie Group shares hit five-year high after latest results top forecasts

B&M shares marked down as pedestrian sales growth disappoints

Dr. Martens shares plunge 30% to record low after profit warning and CEO exit 1

Why Coca-Cola continues to dominate the soft drink market

The Atlanta-based company may be approaching its 140th birthday but chief executive James Quincey has his view firmly set on the future.

To invest with confidence, seek out experience. abrdn Investment Trusts

Now more than ever, investors want to know exactly what they’re investing in.

abrdn investment trusts give you a range of carefully crafted investment portfolios – each built on getting to know our investment universe through intensive first-hand research and engagement.

Across public companies, private equity, real estate and more, we deploy over 800 professionals globally to seek out opportunities that we think are truly world-class – from their financial potential to their environmental credentials.

Allowing us to build strategies we believe in. So you can build a portfolio with real potential.

Please remember, the value of shares and the income from them can go down as well as up and you may get back less than the amount invested.

Prospects for US interest rate cuts reduced as inflation remains sticky

Diverging

Federal Reserve chair Jay Powell’s phrase ‘bump in the road’ to describe choppiness in the expected downward path for inflation is being tested following a third consecutive hot inflation reading on 10 April.

Headline consumer price inflation for March remained elevated at 3.5%, while core inflation, excluding volatile food and energy prices came in at 3.8%, both ahead of forecasts.

At the March interest rate policy meeting Powell said February’s and January’s higher-than-expected inflation readings were likely due to ‘seasonal’ factors, but increased uncertainty on the outlook for inflation prompted a sharp reversal in investor sentiment.

US stocks fell and bond yields jumped to their highest levels this year with the 10-year bond yield moving back above 4.5%.

Markets quickly priced the odds of a June interest rate cut down to 24% from around 75% before the inflation data was released, while a cut in July is now seen as no more likely than a coin-flip.

Rate-cut expectations have swung dramatically from 1.5% at the beginning of the year to around 0.4% according to Bloomberg, implying between one and two quarter-percentage-point cuts by the end of the year.

Forecasters calling for zero rate cuts were considered outliers only a few weeks ago but today those voices carry more weight.

One such voice is former Treasury secretary Larry Summers, who told Bloomberg, ‘You have to take seriously the possibility that the next rate move will be upwards rather than downwards.’

This sharp turnaround in expectations means the consensus view is now below the Fed’s own interest rate forecast which calls for three quarterpoint cuts in 2024.

Minneapolis Fed president Neel Kashkari told reporters (4 April) that if inflation continues to stall then no interest cuts may be needed by the end of the year.

Complicating the outlook further is the proximity of the US general election in November, with Franklin Templeton suggesting the Fed won’t want to appear to be unduly influencing the outcome.

In practice, this means the central bank may avoid starting the rate-cutting cycle at either the September or November interest rate meetings.

These gyrations in interest rate expectations are fueling increased volatility in the currency markets, with the US dollar on course for its best weekly performance since 2022 rising 1.6% against a basket of currencies.

The pound fell to $1.243 against the dollar, its lowest since November 2023, while the Euro fell to $1.064 and the Yen sank to a 34 year low below before recovering to $153.89.

Momentum in the US dollar and bond yields was also sustained by March US retail sales which jumped 0.7% (15 April), considerably higher than consensus forecasts for a 0.3% increase. [MG]

US and EU interest rate expectations push up US dollar

What have we learned from the US banks’ first-quarter updates?

High interest rates are no longer the big profit machine they were

Aquick run-through of the first-quarter results from the US banks suggests a clean sweep of better-than-expected revenue and earnings, yet that didn’t translate into a rise in their share prices.

First to report was JPMorgan Chase (JPM:NYSE), which smashed earnings forecasts due to the strong underlying performance of all of its businesses.

Chief executive Jamie Dimon described the economic outlook as favourable but warned inflation and geopolitical tensions weren’t going away, on top of which in his view the US still hasn’t experienced the full effects of the Federal Reserve’s tightening yet.

This caution fed through into the firm’s secondquarter net interest income guidance, which remained unchanged, causing the shares to fall 6%, their biggest one-day loss in four years.

Rival Wells Fargo (WFC:NYSE) also saw its shares slide following its first-quarter update, despite earnings comfortably beating Wall Street estimates, after it revealed a sharp drop in net interest income as customers shifted to higheryielding deposit products.

Having reaped billions of dollars in excess profits thanks to the unprecedented rise in interest rates, it appears the banks are finally having to pass on better savings rates to depositors, thereby eating

into margins, or risk losing customers.

Citigroup (C:NYSE) shares also slipped after it reported a drop of more than 25% in net income due to higher operating expenses and higher credit costs in the shape of growing losses on credit card lending.

This suggests consumers’ balance sheets aren’t as robust as the market thinks, which would tie in with Jamie Dimon’s comments on the effects of higher rates still working their way through the economy.

On the other side of the ledger there were positive performances from Goldman Sachs (GS:NYSE), whose core equity and fixed-income trading operations produced blockbuster results sending the shares up 3%, and from Bank of America (BAC:NYSE) which posted a drop in revenue but also turned in a strong result from its investment banking business. [IC]

Lloyds Bank cuts risk monitoring in effort to drive change

The lender is under scrutiny over its motor finance business

In a surprising development for a company which is usually considered fairly staid, Lloyds Banking Group (LLOY) circulated an internal memo last month letting staff know it was ‘saying goodbye’ to a number people in its risk management team after an internal review found the function was hampering its transformation plans.

The memo from the bank’s chief risk officer, seen by the Financial Times, claimed two-thirds of executives believed risk management was blocking progress while less than half the workforce believed ‘intelligent risk-taking’ was being encouraged.

‘We know people are frustrated by timeconsuming processes and ingrained ways of working that impede our ability to be competitive and leave us lagging behind our peers,’ the memo said.

As a result, the lender is ‘resetting’ its approach to risks and controls in order to allow it to ‘move forward at greater pace’.

The timing of the news is equally surprising to many given Lloyds is at the centre of an FCA (Financial Conduct Authority) investigation into whether credit providers – including its Black Horse division, one of the market leaders – overcharged customers who took out car loans through discretionary commission deals with motor traders.

conditions survey, household demand for credit increased slightly in the first quarter of this year and is expected to increase again in the second quarter, but the rate of growth is unimpressive.

Corporate demand for credit is also growing, but growth is even less dynamic, and spreads are no longer increasing meaning the banks need to pull something out of the hat if they are to show any kind of growth in their core business – which may explain why Lloyds’ has decided to start taking more business risks.

The bank has so far set aside £450 million in provisions for potential misconduct after announcing a 57% jump in profits last year, but some analysts estimate it could be found liable for several times that amount.

According to the latest Bank of England credit

Yet the Bank of England survey also showed defaults are rising among households and corporates, with further increases expected in the second quarter, suggesting the full impact of the rapid rise in interest rates in 2022 and 2023 is still working its way through the financial system.

Lloyds is due to release its first-quarter trading update on 24 April and we suspect shareholders will be scrutinising the statement to a much greater extent than usual, especially retail investors who make up the bulk of the ownership and rely on the regular income they get from the half-yearly dividends. [IC]

Chart: Shares magazine • Source: LSEG

Lok’n Store shares leap on Shurgard cash offer

Self-storage the latest area of interest for commercial property buyers

Shares in AIM-listed selfstorage site operator

Lok’n Store Group (LOK:AIM) hit a new high last week after the firm revealed it had been approached by Belgian company Shurgard with a cash offer for the business.

Shurgard’s offer of £11.10 represents roughly a 16% premium to the undisturbed share price the day before the offer which is considerably below the average take-out premium of 51% this year.

If the deal goes through –as advocated by Lok’n Store

HIGHER

chairman Andrew Jacobs, who owns 12% of the shares – it will mean 35 ‘fledgling’ companies have been taken private in the past 12 months, the highest total in the last 12 years according to accounting firm UHY Hacker Young.

Part of the appeal for Shurgard will be synergies with its own business, but the wide discount to NAV (net asset value) on UK commercial property and the poor performance of AIM over the past year no doubt contributed to the timing of the approach.

Lok’n Store is enjoyed strong demand for storage solutions in a market which is under-supplied, leading to steady growth in revenue per square foot.

The firm is opening four new stores this with two more on the drawing board. [IC]

Shares in personal care firm PZ Cussons hit 20-year low

Travails in Nigeria and a dividend cut are to blame

Investors in Carex and Imperial Leather maker

Cussons (PZC) be wringing their hands as they see the firm’s share price disappearing slowly down the plughole.

Year-to-date the stock has lost over 40% of its value, while over one year it is down 53% and last week the price hit its lowest level in more than two decades.

The root cause of the problem seems to be challenges in Nigeria where

the naira has fallen 70% in the past year, the biggest drop in the

That led to an 18% fall in group revenue and a 24% drop in adjusted pre-tax profit for the six months to the start of December 2023, which in turn spurred 44% cut in the interim dividend to 1.5p per share.

When it updated the market in February, the firm projected be in the range of £55 million to £60 million against

previous guidance of between £61 million to £68 million. Shareholders will therefore be watching to see whether there is a further change to guidance when the company delivers its thirdquarter trading update on 24 April. [IC]

UK UPDATES OVER T HE NEXT 7 DAYS

FULL-YEAR RESULTS

22 April: Brave Bison, Frenkel Topping

24 April: Sanderson Design Group, Tortilla Mexican Grill, Warpaint

25 April: Sainsbury (J)

FIRST-HALF RESULTS

22 April: Ten Lifestyle

23 April: Tracsis

25 April: Focusrite, WH Smith

TRADING

ANNOUNCEMENTS

22 April: Jupiter Fund Management, Taylor Wimpey

25 April: Currys, Drax, Hikma Pharmaceuticals, Ibstock, Inchcape, London Stock Exchange Group, PPHE Hotel Group, Unilever, WPP

FIRST QUARTER

24 April: HSBC

25 April: AstraZeneca, Barclays, Indivior

Has Associated British Foods-owned Primark maintained its momentum?

The cut-price clothing chain’s margin trajectory and US growth will be in focus when its FTSE 100 parent reports

Primark’s margin recovery narrative and sales performance for the second quarter ended 2 March will be in focus when parent Associated British Foods (ABF) delivers first half results (23 April).

Shareholders will also be seeking reassurance the food-to-fashion conglomerate still expects ‘meaningful progress’ in profit and cash in the year to September 2024.

The jewel in the ABF crown, Primark’s like-for-like sales were up 2.1% in the first quarter to 6 January, a slowdown from the 8% growth delivered in the previous quarter, although higher average selling prices and a strong line in Christmas-themed

clothes helped the discount fashion chain avert a festive disaster.

Gross margins are on an improving trajectory at the cut-price clothing chain, whose UK market share reached a new record at 7.1% for the 12 weeks to 10 December 2023.

However, competition in fast fashion remains fierce and recent downpours won’t have helped store footfall, while investors will be hoping the retailer has successfully navigated Red Sea supply chain disruption.

The market will also be eager to learn if Primark’s US sales, which rocketed 45% higher in the first quarter, remain on a growth tear, and if Associated British Foods’ popular grocery brands, often overshadowed by retail arm Primark, continue to perform well.

Management has previously expressed confidence in a ‘marked’ improvement in British Sugar's profitability this year. Liberum Capital believes Associated British Foods could beat consensus expectations for full year 2024 ‘driven by stronger than expected profitability at both Primark and Sugar’. [JC]

Can Amazon continue to beat ‘The Street’?

First quarter 2024 earnings come soon after setting new record share price high

Tech earnings got off the ground this week but it is over the coming week when the real heavy-hitters report, and few will be as eagerly watched as Amazon (AMZN:NASDAQ) on 25 April.

Coming just a couple of weeks after breaking its share-price ceiling to set a new all-time high ($189.05 on 11 April), can the retail-cum-cloud computing colossus deliver in the first quarter of 2024?

The bar is set high after the firm beat earnings and revenue forecasts in Q4 2023, the third straight quarterly beat on both lines, partly

What the market expects of

thanks to strategic cost-cutting but more due to cloud computing arm AWS’s growth acceleration as clients adopt AI (artificial intelligence) tools.

Chief executive Andy Jassy has previously flagged the tech giant’s approach to generative AI, which he described as Amazon’s potential next pillar of growth. He, like many tech execs, sees generative AI as potentially the largest technology transformation since the cloud and the internet. [SF]

Table:

Table:

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US UPDATES OVER THE NEXT 7 DAYS

QUARTERLY RESULTS

19 April: American Express, Procter & Gamble, Schlumberger

22 April: Albertsons, Verizon, Whirlpool

24 April: AT&T, Boeing, Boston Scientific, Chipotle Mexican Grill, IBM, Lam Research, Meta Platforms, Moody’s, Qualcomm, Thermo Fisher Scientific

25 April: Amazon, Caterpillar, Comcast, Honeywell, Intel, Mastercard, Merck&Co, S&P Global, Southwest Airlines, Starbucks, Union Pacific, VeriSign

Service sector inflation undermines market rally

Record highs give way to profit-taking as investors reassess rate-cut bets

We said last week the market faced a test with the US CPI (consumer price index) report and that’s exactly how it turned out, with a third successive hotter-than-expected print sending the S&P 500 index down 2% on the week, its worst five-day performance since last October.

As expected, it was the ‘core’ reading excluding food and energy prices which did the damage, with services inflation – the Federal Reserve’s big bugbear – rising instead of falling, even excluding the controversial ‘shelter’ component.

Ron Temple, chief market strategist at Lazard, summed up the problem both for the Fed and

the markets: ‘Three months of surprisingly strong services inflation are difficult to explain away and suggest demand strength could be sustaining elevated US inflation, which limits the Fed’s ability to ease policy.’

In contrast, the decision by the ECB (European Central Bank) to leave rates unchanged surprised absolutely no-one but its determination to cut in June regardless of what the Fed does is beginning to raise eyebrows in the currency markets.

UK and European inflation readings this week will be closely watched but any negative surprises are unlikely to have the same impact on stocks and bonds.

Traders are more likely to react to comments from the various Fed, Bank of England and ECB speakers who are doing the rounds, and any pronouncements from the Eurogroup gathering which precedes the upcoming Spring meetings of the World Bank and IMF in Washington.

Next week there are one or two UK data points of note, starting with March retail sales and house prices and ending with consumer confidence, which together should give a reasonable clue as to whether the recent economic bounce has legs or not.

Most of the attention will be on the US though, with first-quarter GDP and in particular the PCE (personal consumption expenditure) measure providing further context for the timing of US rate cuts. [IC]

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Table: Shares magazine

• Source: Morningstar, central bank websites

Table: Shares magazine

• Source: Morningstar, central bank websites

Table: Shares magazine

• Source: Morningstar, central bank websites

Ultimate Products is undervalued and offers a compelling play on the consumer recovery

Resilient and cash generative, we think this branded consumer business has years of robust growth ahead

Ultimate Products (ULTP) 156p

Market cap: £142.9

million

Strong brands, a resilient business model and multiple growth opportunities ahead are among the investment attractions the market is missing at Ultimate Products (ULTP). This company is the owner of homeware brands including Salter and Beldray. The Oldhamheadquartered firm is well placed to profit with UK and international retailers starting to increase orders as consumer headwinds ease. The £142.9 million cap’s robust free cash flow has allowed for a marked reduction in debt and paved the way for an earningsenhancing share buyback, for which the board is seeking approval.

The company is seeking to reduce its exposure to suppliers in China, a bear point that partly explains its low valuation, and Shares believes a big move higher is possible as margins benefit from falling

Adjusted pre-tax profit continues to build

Adjusted pre-tax profit continues to build

Ultimate Products

freight rates and Ultimate Products generates robust sales growth in the years ahead by attacking a sizeable opportunity in Europe.

DIVERSE AND RESILIENT

For the uninitiated, Ultimate Products owns, manages, designs and develops a range of valuefocused consumer goods brands including Salter, the UK’s oldest housewares brand established in 1760, and Beldray, the laundry, floor care, heating and cooling brand founded in 1872.

Guided by straight-talking CEO Andrew Gossage, the group is an expert in bringing professional, sought-after products to a mass market with strong demand for its high-quality, affordable wares, evidenced by the fact nearly 80% of UK households own at least one of its products. In recent years, Ultimate Products has pivoted from a licence holder to a brand owner, providing the small cap company with a resilient core from which to expand and grow.

Table: Shares magazine

Table: Shares magazine

• Source: Company data, Canaccord Genuity estmates

• Source: Company data, Canaccord Genuity estmates

Table: Shares magazine

• Source: Company data, Canaccord Genuity estmates

With a sourcing office and showroom in China and a further showroom in Paris, the company’s product range spans five major categories – Small Domestic Appliances; Housewares & Cookshop; Laundry & Cleaning; Floorcare and Scales. Besides Beldray

Year to July 2023 - geographic sales split

Year to July 2023 - geographic sales split

Year to July 2023 - geographic sales split

Rest of Europe (21%)

Chart: Shares magazine

UK (69%)

• Source: Company reports, Canaccord Genuity

Chart: Shares magazine

• Source: Company reports, Canaccord Genuity

Chart: Shares magazine • Source: Company reports, Canaccord Genuityand Salter, the two most important brands for the group, key owned brands also include Progress, Kleeneze, Petra and Intempo, while the firm markets non-electrical Russell Hobbs products under licence and has scope to add additional brands through acquisitions in future.

The self-styled ‘Home of Brands’ sells its products to a reassuringly broad range of national and international supermarkets, discount retailers and online platforms ranging from Tesco (TSCO) and Action to Amazon (AMZN:NASDAQ) and B&M European Value Retail (BME), as well as direct-toconsumer through the Salter.com and Beldray.com websites.

EMERGING GREEN SHOOTS

Results (9 April) for the six months ended 31 January 2024 showed sales down 4% to £84.2 million as Ultimate Products saw lower supermarket ordering due to overstocking issues and lapped tough comparatives boosted by a surge in demand for energy efficient air fryers in the run-up to Christmas 2022. A subdued consumer backdrop and disruption to sea freight in the Red Sea also constrained top line progress, but market share gains from Beldray and Kleeneze arrested the overall pace of the decline. With a helping hand from falling debt, which reduced finance expenses, Ultimate Products still managed to

generate a 2% uplift in pre-tax profit to £9.5 million.

‘Macro conditions remain challenging, but our strategy of providing beautiful products at massmarket prices to UK and European households is continuing to stand us in good stead,’ said Gossage. Encouragingly, he added that his charge is now seeing ‘the gradual resumption of normal ordering patterns from our customers after the overstocking issues that were brought about by the pandemic, and we have a range of initiatives underway to improve operational efficiencies and deepen our customer relationships’.

Analysts believe revenue growth is likely to resume in the second half of 2024 and continue into full year 2025, with green shoots emerging as customer overstocking issues ease and several customers now placing orders for the first time in 18 to 24 months.

First half cash generation was strong, with the net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) leverage ratio falling to a comfortable 0.4 times, well below management’s newly-set target of one times. Given the improving balance sheet and the grudging valuation ascribed to its equity, Ultimate Products has decided to launch a buyback of up to 10% of its share capital which should limit the downside from here.

SCOPE FOR UPSIDE

For the current year to July 2024, Canaccord Genuity forecasts a rise in adjusted pre-tax profits to £18.6 million, rising to £20.5 million and £22.5 million for full years 2025 and 2026 respectively.

Estimates & ratios for Ultimate Products

Based on the broker’s current year 15.4p earnings per share forecast and an estimated 7.7p dividend, the shares look a bargain on a prospective price to earnings ratio of 10.1 with a 4.9% dividend yield, building to a bumper 5.6% based on next year’s dividend forecast. [JC]

Estimates & ratios for Ultimate Products

Table: Shares magazine

• Source: LSEG

Table: Shares magazine

• Source: LSEG

Investing in robots: why now could be the right time

iShares Robotics & Automation ETF is an excellent diversified and low-cost option

iShares Automation & Robotics ETF (RBTX) £10.22

Fund size: £2.77 billion

In scenes from the film I, Robot, androids can be seen doing all sorts of household tasks – running errands, carry heavy shopping, cleaning the home, for example. In the real world most robots do repetitive, heavy-lifting, and dangerous tasks in places like car factories.

Yet humans and robots are forming a close friendship like never before as technology has become more powerful, efficient, and cheaper. Today, they mow your lawn or vacuum the house but there is far more to come. Go on YouTube and you’ll find clips of robots that can move like humans – walk, navigate stairs, bend, lift, and it doesn’t take a massive leap of the imagination to believe that within the next decade many of us could have human-like robots doing basic chores and more.

With the adoption of fast-improving AI (artificial intelligence) they might also provide far more valuable tasks, perhaps care for the ill and disabled when nursing staff are in short supply, or communicate well enough to provide a basic level of companionship. According to BlackRock, the robotic nursing market alone is expected to grow more than 22% a year through 2026 to more than $2 billion in annual sales.

iShares Automation & Robotics (p)

Group, while the wider robotics industry is looking at near seven-fold growth, on a best-case basis. Even the consultancy’s base case scenario implies a $39 billion robotics market in 2023 expanding to $260 billion by 2030, 310% higher.

But investing in robots of the future requires a diversified approach. This makes, Shares believes, the iShares Robotics & Automation ETF (RBTX) an excellent, reasonable lowcost catch all option. With a portfolio of more than 150 stocks, it should capture the industry potential from all angles, from industrial applications to in-home solutions.

Consumer companies like Tesla (TSLA:NASDAQ) and Apple (AAPL:NASDAQ) are investing billions into robot development telling us that the future of robots will be far more ubiquitous than industrial applications, a large growth market in itself.

The market for mobile and stationary professional services robots could grow 10-fold by 2030, according to data from the Boston Consulting

Key names are well-represented – Nvidia (NVDA:NASDAQ) is its largest holding, while Advanced Micro Devices (AMD:NASDAQ), ServiceNow (NOW:NYSE), Workday (WDAY:NASDAQ), are balanced with lesser-known names, like Japan’s Advantest (6857:TYO), a selfproclaimed expert in mechatronics, or advanced automated manufacturing.

Since inception in 2016, the ETF has delivered 177.6% total returns, or 11.9% a year over the past five, according to Morningstar data.

An ongoing charge of 0.4% looks like a reasonable price to pay for a piece of the potential pie. [SF]

Chart: Shares magazine • Source: LSEG

Gold spike puts shine on Centamin’s investment credentials

Precious metal miner is benefiting from improved prices and lower costs

Centamin (CEY) 128.3p

Gain to date: 31.3%

We flagged the appeal of Egyptian gold miner Centamin (CEY) a little over two months ago based on two key factors: operational improvements and exposure to strong gold prices.

WHAT’S HAPPENED SINCE WE SAID TO BUY?

The recent move higher in gold prices has been extremely helpful as geopolitical tensions in the Middle East escalate and inflationary pressures continue to prove stubborn. There are predictions in the market gold could move from its current level of $2,350 per ounce to as much as $4,000.

Centamin is better placed to benefit from any move higher in the precious metal after a three-year investment programme which helped to bring down operating costs.

Results for 2023, released on 21 March, saw the company reaffirm its Sukari mine was positioned towards consistently delivering 500,000 ounces of

gold per year with further scope for cost savings and growth identified. Key industry metric AISC (all-in sustaining costs) fell 14% to $1,205 per ounce.

The company reported positive free cash flow of $49 million after a free cash outflow of $18 million in 2022. Centamin revealed cash and liquid assets at the end of December of $153 million.

Berenberg analyst Richard Hatch commented: ‘This was a stable set of numbers but we think it is important to again focus on operational improvements. Management flagged ongoing productivity gains, which have contributed to falling costs, as has a transition to owner-mining from underground-contractor mining.’

WHAT SHOULD INVESTORS DO NOW?

The economic and geopolitical backdrop makes a case for having some exposure to gold in a portfolio and Centamin offers the prospect of additional upside, albeit with risk attached, as it delivers on a solid-looking strategy so this is an idea to stick with.

Updates on the company’s prospective Ivory Coast Doropo development and its EDX exploration project as well as further upgrades at Sukari offer further catalysts in the coming months. [TS]

If you want to take full advantage of the incredible growth of China’s middle classes and a seismic shift towards domestic consumption, you need real on-the-ground expertise.

Fidelity China Special Situations PLC, the UK’s largest China investment trust, looks to capitalise on an extensive, locally based analyst team to make site visits and attend company meetings. This helps us find the opportunities that make the most of the immense shifts in local consumer demand.

China’s growth story

Since its launch in 2010, the trust has offered direct exposure to China’s growth story; from tech giants right the way through to entrepreneurial medium and small-sized companies, and even new businesses which are yet to launch on the stock market. Portfolio manager Dale Nicholls looks to identify and invest in companies that are best placed to capitalise on China’s incredible transformation.

Past performance

Investing in China’s most compelling growth drivers

Dale believes a vast and still expanding middle class is increasingly driving stock market returns in China.

“China is well established now as a major driver of growth and investment performance, not just in Asia, but in the wider world. The sheer size of China’s economy, its continued growth and ever-increasing global importance, should see investors increase their exposure to China as part of a balanced investment portfolio.”

Past performance is not a reliable indicator of future returns.

Past performance is not a reliable indicator of future returns

Source: Morningstar as at 31.01.2024, bid-bid, net income reinvested. ©2024 Morningstar Inc. All rights reserved. The FTSE All Share Index is a comparative index of the investment trust

Source: Morningstar as at 31.01.2024, bid-bid, net income reinvested. ©2024 Morningstar Inc. All rights reserved. The MSCI China Index is a comparative index of the investment trust.

Important information

The value of investments can go down as well as up and you may not get back the amount you invested. Overseas investments are subject to currency fluctuations. Investments in emerging markets can be more volatile than other more developed markets. The trust invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The Trust can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

UKCHEAP STOCKS

HOW TO TAKE ADVANTAGE OF A COMPELLING BUYING OPPORTUNITY

stocks look cheap on so many different valuation metrics, not just one or two, suggesting a robust, genuine investment opportunity is available to long-term investors. So why does nobody seem convinced?

This article explores the scepticism surrounding the UK’s market’s attractive valuation and examines the underlying evidence to support it. Shares concludes UK stocks really are a compelling investment opportunity.

Later we reveal a selection of stocks sitting on attractive discounts which have the greatest return potential should the discount narrow, as well a UK value-focused investment trust sitting on a big discount to NAV (net asset value).

THE DOUBTING THOMAS VIEW

There are plenty of objections to the premise that UK stocks are cheap, the biggest being cheapness

does not necessarily equate to undervaluation.

Fund manager Terry Smith is fond of reminding investors not to confuse a cheap PE (price-toearnings) rating with undervaluation or a premium rating with overvaluation. That is because the market prices different fundamental characteristics (earnings growth, return on equity, balance sheet strength) differently.

Lower-quality businesses with modest growth prospects tend to trade at a PE discount to their higher-quality, higher-growth compatriots. Taking an extreme example, British American Tobacco (BATS) is never going to attract the same PE rating as Microsoft (MSFT:NASDAQ).

The former has grown EPS (earnings per share) and free cash flow by around 6% and 3% a year respectively over the last six years while the latter has grown EPS by 20% a year and free cash flow by 14% a year.

Another criticism of the UK market is its indices are comprised of ex-growth sectors such as tobacco, consumer staples and ‘old economy’ stocks while also lacking exposure to quality growth stocks.

Compounding negative sentiment surrounding the UK is the effect of fund flows. Investors have been broadening their global exposure at the cost of reducing their UK exposure, and this persistent selling has provided a tough headwind for markets.

Lastly, the ‘killer’ objection for giving any credence to UK cheapness is valuation alone is not sufficient to warrant buying the market today. The argument goes something along the lines that the same observations could have been made at any time over the past five years, so why should today be any different?

In other words, there is no level of ‘discount’ which magically heralds a change in fortunes.

The sum of these objections is enough to keep some investors from pulling the trigger on buying UK stocks on worries it may be a value trap.

THE UNDERLYING EVIDENCE

On closer inspection the reality may be very different to the popular narrative. Research by Rathbones analyses the data on an ‘applesto-apples’ basis to account for the sectoral composition of UK indices as well as growth and profitability factors.

The results show the UK trades at a 22% discount to the US and a 9% discount to Europe. What this means is companies trading in the same sector with the same growth and quality characteristics

are cheaper simply because they happen to be listed in the UK, which looks anomalous.

Rathbones concludes: ‘The UK market contains global businesses that — on a level playing field, after adjusting for sector and quality and growth characteristics — appear significantly undervalued relative to international peers.’

Fidelity’s Alex Wright, who manages the Fidelity Special Situations Fund (FUND:B88V3X4) and Fidelity Special Values (FSV), has a similar view.

He points out that on a sector-neutral basis, the UK is extremely attractive compared with the US and relatively attractive against Europe, Japan, and the Pacific ex Japan based on forward PE multiples.

Addressing the argument the UK has been cheap for some long time, Wright explains what has changed to tilt the balance and make the UK a compelling buying opportunity today compared with a few years ago.

First the UK’s valuation discount has widened to its biggest in over 10-years, but just as importantly, other regions of the world and especially the US have become more expensive. This means the UK offers better relative value today than two years ago while at the same time investing outside the UK brings risks which were not apparent before.

Similarly, new research from Liberum analysts Joachim Clement and Susana Cruz shows the UK’s valuation discount to the US widening out to a new all-time high of 31.4% at the end of March.

Redwheel fund managers Ian Lance and Nick Purves, who manage Temple Bar Investment Trust (TMPL), highlight that based on research Average

*Controlling for 5-year annualised sales growth, 5-year return on invested capital, percentile ranking of interest coverage and percentage of revenue generated outside UK.

Chart: Shares magazine

• Source: LSEG, Rathbones

by Hussman Strategic Advisors looking at implied future returns, the US stock market has only been as extremely valued as it is today on two previous occasions – at the end of December 2021, and at the end of August 1929, a particularly inauspicious precedent.

In contrast, investors can buy UK listed companies with similar prospects on cheaper valuations, reducing their overall portfolio risk. Just for good measure, UK stocks are also cheap relative to their own history trading on a forward PE of around 11 times compared with a long-term average around 14 times.

Alex Wright also highlights an encouraging development many investors may have overlooked, and which may be supportive for the UK given its value bias.

UK value stocks have continued to outperform growth (based on MSCI indices) stocks over the last year, reflecting further momentum in the trend which began shortly after the first vaccine was developed in 2020.

In terms of sectors, Liberum highlights the healthcare and basic materials sectors as trading at the deepest discounts to US peers.

While historical performance is no guarantee of future performance, when these sectors were trading at similar discounts in the past the following 12 months saw mining stocks rally 25% on average, energy stocks rally 20% and healthcare stocks gain 16%.

SHARES’ BEST PICKS

Logically, with UK stocks trading at a deep discount it makes sense to invest in value-focused UK investment trusts which themselves are trading at deep discounts to NAV. This approach may allow investors to benefit from both a rebound in UK shares as well as the narrowing of a trust’s discount.

Two thirds of UK income trusts have dividend yields above the 3.8% offered by the FTSE All-Share index with many of them delivering at least 3% dividend growth over the last five years, according to analysis from Stifel.

Investment trusts have been suffering from the same negative investment flows as individual shares.

The Times newspaper recently reported investors have withdrawn around £2.5 billion from UK trusts over the last four months while pouring £6.7 billion into US equity funds over the same period.

This avalanche of money chasing US stocks may be one reason the broad market trades on such a big valuation premium.

Conversely, money flowing out of the UK has contributed to widening discounts which analysts at Stifel believe presents investors with a genuine buying opportunity.

Poor recent performance can magnify the widening of discounts, but this has not been the case over the year to 5 April when two thirds of UK equity trusts have outperformed the FTSE All-Share index total return of 7.8%.

Temple Bar (TMPL) 244p

Market cap: £708 million Discount to NAV: 10%

Value-driven Temple Bar has outperformed the FTSE All-Share by 15% over the last year and trades at an undeserved 10% discount to NAV while offering an historic yield of 3.9%.

Since Redwheel took over management of the trust in October 2020, the managers have delivered an NAV total return of 82% and price total return of 88.5% compared with the FTSE All-Share total return of 48%.

Co-managers Nick Purves and Ian Lance have worked together for over 20 years, during which they have added significant value for clients.

The managers focus on neglected areas of the market which potentially offer the biggest discounts to intrinsic value. Sometimes also referred to as business value, this metric is a fundamentally-based estimate of a company’s underlying economic value.

While in the short term a company’s share price may fall further, over the longer term intrinsic

value should be recognised by investors prompting the discount to narrow and the shares to rise as business value increases.

The manager’s underlying investment philosophy is that starting valuations determine long-term shareholder returns. That is, the lower the starting valuation the higher the long-run shareholder total return.

To reduce risk, the managers look to weed out companies which trade on a cheap valuation for a good fundamental reasons. The bottom line is a belief that good-quality, undervalued companies with strong cash flows and robust balance sheets offer the best potential for attractive long-run returns.

The current portfolio is heavily weighted towards energy companies and banks which comprise around 44% of the fund’s value. Top holdings include Shell (SHEL) whose shares recently made new all-time highs, NatWest (NWG), Aviva (AV.), Marks & Spencer (MKS) and ITV (ITV)

The trust has an ongoing charge of 0.53% a year.

Card Factory (CARD)

Share price: 94.3p

Market cap: £325 million

A single digit PE (price-to-earnings) ratio, doubledigit earnings yield - the inverse of the PE ─ and a plump free cash flow yield suggest Mr. Market underappreciates the earnings power, growth potential and cash generation of Card Factory (CARD).

The value-focused greeting card-to-party supplies retailer’s revenue has returned to above

pre-pandemic levels and the business has positive momentum under chief executive Darcy WillsonRymer’s new growth strategy.

Wakefield-headquartered Card Factory’s valuefocused product offer continues to serve it well during a cost-of-living crisis and heap pressure on arch-rival Clintons, which is heading for a restructuring with potentially a fifth of its stores to close.

As the consumer backdrop brightens, Shares expects the group’s expanded gift offer could feel the benefit ─ at present it only has a 1.7% share of a UK gifting market worth £13.4 billion.

While the UK greetings card market in which Card Factory has the leading value and volume share is considered low-to-no growth, the birthday cards-to-balloons purveyor is cannily developing partnerships to sell through other retailers, which currently include Aldi and Matalan in the UK and The Reject Shop in Australia.

The acquisition of SA Greetings in South Africa and a franchise deal with Liwa in the Middle East mean there is an interesting overseas growth angle too.

Back in January, Card Factory delivered yet another upgrade to its earnings guidance following strong Christmas sales across stores and online; Liberum Capital cautions that ‘when (not if) Card Factory get its online business moving, one should maybe be concerned for the likes of Moonpig Group (MOON) and Funky Pigeon’.

Results for the year to January 2024 are slated for 30 April, with the consensus pointing to a 21.5% rise in pre-tax profits to £61.4 million following a series of upgrades.

With Card Factory’s balance sheet in a much healthier position, dividends ─ which were put on pause due to Covid ─ could even be restarted during the year to January 2025. [JC]

ITV (ITV)

Price: 73.25p

Market cap: £2.95 billion

Broadcaster and media company ITV (ITV) looks very unloved given the shares trade on a single digit forward PE (price to earnings) ratio of 8.5 times and an estimated 15% free cash flow yield.

These valuation metrics look anomalous and undemanding for a business which is expected to grow its EPS (earnings per share) by double-digit percentages over the next couple of years and

generate strong cash flows.

The shares also trade at a 15% discount to global peers according to Idata from research provider Infront.

ITV is one of the largest global content creators, producers and distributors and generates 55% of its revenue from outside the UK.

At the recent 2023 results (7 March), management expressed confidence in achieving medium-term financial targets which would see ITV studios delivering 5% average organic revenue growth per year out to 2026 and achieving margins between 13% and 15%.

For the media and entertainment division (58% of revenue), the firm said it was on track to deliver £750 million of digital revenues by 2026.

At the same time, the company positively surprised analysts by announcing it would reach its £150 million cost savings target a year ahead of schedule in 2025.

The sale of ITV’s share of Britbox will see all the cash proceeds returned to shareholders via a new £235 million share buyback.

Further demonstrating shareholder-friendly policies, the board proposed a final dividend of 3p per share taking the total dividend to 5p per share, equivalent to £200 million for the full year.

Combining the proposed share buyback and 2023 dividend equates to roughly 15% of the current market capitalisation, demonstrating the clear value on offer.

JET2 (JET2:AIM)

Price: £14.54

Market cap: £3.2 billion

Analysts have struggled to keep pace with UK package holiday business and travel operator Jet2’s (JET:AIM) earnings momentum post the pandemic resulting in double-digit upgrades to forecasts over the last year.

Therefore, despite the shares gaining 13% over the last 12 months, the valuation remains attractive with a one-year forward PE ratio of 8.6 times.

The fundamental driver of the upgrades is people are still booking holidays despite the cost-of-living crisis and the associated strain on household budgets.

At the same time, the group is expanding its UK footprint with a new Liverpool base at John Lennon airport, its eleventh base so far, with Bournemouth airport to follow.

Analyst Damian Brewer at Canaccord Genuity believes Jet2 shares are ‘over £5 too cheap’, citing the strength of the group’s holiday product and ‘strong repeat custom’.

‘The annual holiday is a priority that consumers cherish – and for families seeking a stress-free break in-resort support is important,’ says Brewer.

‘We believe Jet2’s key differentiators are variableduration stays to suit each customer’s budget; all-in holiday cost certainty in a ‘one-click’ purchase; repeat customer base; stand-out attentive service; capital to meet off-season cash outflows; access to competitive wholesale hotel inventory and prices; and access to peak season UK and overseas airport slots.’

In February, the company raised its group pre-tax profit outlook for the financial year to March to between £510 million and £525 million (from £480

million to £520 million previously) on the back of strong winter 2023/2024 forward bookings – up 17% - for both flight-only and package holiday products.

In addition, on-sale seat capacity for summer 2024 is currently 12.5% higher than summer 2023 at 17.2 million seats. [SG]

Morgan Sindall (MGNS)

Buy at £22.25

Market cap: £1 billion

Infrastructure, affordable housing and urban regeneration group Morgan Sindall (MGNS) is a typical example of a UK stock with an aboveaverage growth rate selling at a discount not only

to its international peers but also relative to its own history.

The group’s construction arm is expert in physical infrastructure and complex regeneration projects, while its fit-out division is the UK market leader generating consistent cash flows which support the group’s investment in affordable housing and mixed-use redevelopments.

Using almost 30 years of historic data, we estimate the firm has grown its earnings by an average of more than 11% per annum with lower volatility than either mainstream construction firms or housebuilders.

The firm posted record results in what was a challenging year for the construction sector as a whole to December 2023, with revenue up 14% to £4.1 billion and adjusted pre-tax profit up 6% to £145 million.

The order book as of December stood at £8.92 billion or more than two years’ worth of work, with management taking a selective approach to bidding and spreading its risk across suppliers and subcontractors.

Management also has a strong capital allocation discipline, the priority being to maintain a strong balance sheet, including an element of downside protection in the event of a macro downturn, followed by maximising its investment in its regeneration activities to drive sustainable growth and then bolt-on acquisitions to accelerate growth.

Only when these priorities are satisfied would the board consider special returns to shareholders, which to us seems eminently sensible.

The shares trade on a 2024 price to earnings multiple of less than 10 times which seems cheap for a business with a proven track record, a return on capital employed of more than 20% and a prospective dividend yield north of 5%. [IC]

Select financial valuation data for Shares picks

Select financial valuation data for Shares picks

FY1 PE= 1 year forward price to earnings ratio. ROE= Return on equity.

Table: Shares magazine

• Source: Stoockopedia, Refinitiv

FY1 PE= 1 year forward price to earnings ratio. ROE= Return on equity.

Table: Shares magazine

• Source: Stoockopedia, Refinitiv

Funds: Fundsmith versus Nutshell and Blue Whale

How Fundsmith stacks up versus Nutshell and Blue Whale rivals

£10,000 bet on 2024 performance is fun, but investors should concentrate on the wider picture

If you had £10,000 to invest in a single fund, which would you choose – one of the most popular with retail investors for more than a decade, or a relative new kid on the block with a similar asset allocation approach?

In a manner of speaking, it is what billionaire City grandee Michael Spencer challenged formidable money man and Fundsmith Equity (B41YBW7) founder Terry Smith at the end of 2023, throwing down the gauntlet with a £10,000 wager that a fund he backs can beat Smith’s fund during 2024.

Spencer is believed to have invested around £10 million of his own money in Nutshell Growth (BLP46Q1), a little-known fund that invests in a concentrated portfolio of long-term quality growth equities. Sound familiar?

Fundsmith, founded by Smith in 2010, has become hugely popular with retail investors, with £25.5 billion of assets managed, by doing along similar lines, buying shares in companies with sustainably high returns on capital, defendable market positions and that do not rely on debt to progress.

Nutshell was launched in May 2020, the brainchild of Mark Ellis, who runs the £30.7 million fund. Ellis uses a mix of human analysis and stock

picking with AI (artificial intelligence) to calibrate his portfolio.

LIMITED CORRELATION

Investors might think that sharing a similar investment style would lead to plenty of equity crossover in their respective portfolios, an accusation levelled at Blue Whale Growth

WHAT FUNDSMITH LOOKS FOR

• high quality businesses that can sustain a high return on operating capital employed

• businesses whose advantages are difficult to replicate

• businesses which do not require significant leverage to generate returns

• businesses with a high degree of certainty of growth from reinvestment of their cash flows at high rates of return

• businesses that are resilient to change, particularly technological innovation

• businesses whose valuation is considered to be attractive.

Funds: Fundsmith versus Nutshell and Blue Whale

Top 10 stakes compared

Fundsmith Equity Nutshell Growth

Blue Whale Growth

Microsoft Alpha Group International Applied Materials

Novo Nordisk Dollarama Charles Schwab

Meta Platforms Fortinet Lam Research

L'Oreal Microsoft Mastercard

Stryker Novo Nordisk Meta Platforms

Visa AutoZone Microsoft

LVMH Equasens Moncler

IDEXX Mastercard Nvidia

Philip Morris MSCI Sartorius

Automatic Data Processing Nvidia

Visa

None of the funds give percenatge stake details. Green equals multi-portfolio stake

Table: Shares magazine • Source: Fundsmith, Nutshell, Blue Whale

(BD6PG78) in the past, which also invests in top quality companies

Now, as then, this is not really the case, and the same goes for Nutshell, sharing limited correlation with either Fundsmith or Blue Whale, as the graphic shows.

Yes, there are some names repeated, but not overly. Obesity drug-maker Novo Nordisk (NVO:NYSE) sits in both Fundsmith and Nutshell, while Nutshell and Blue Whale share stakes in Nvidia (NVDA:NASDAQ), while you might argue

that owning either Visa (V:NYSE) or Mastercard (MC:NYSE) amounts to the same thing (both are in the Blue Whale portfolio top 10).

Microsoft, seen by many analysts as the chief winner in software AI, appears in all three funds, while they are collectively invested in the wider future of healthcare theme through companies like IDEXX Laboratories (IDXX:NASDAQ), Stryker (SYK:NYSE), Equasens (EQS:EPA), Sartorius (SRT:XTR) and the previously mentioned Novo Nordisk.

But when it comes to consumers, the bias in the Fundsmith and Blue Whale portfolio towards luxury brands differs hugely from Nutshell’s take, which owns a stake in Canadian discount retailer Dollarama (DOL:TSE).

What we know so far is that Nutshell’s year to date performance of 10.3%, according to Morningstar data (to 10 April) is marginally ahead of Fundsmith’s 8% total return (share price growth plus reinvested dividends). Interestingly, Blue Whale has beaten both so far in 2024, up 16.6%, says Morningstar, possibly a result of its greater lean towards technology stocks.

WHAT’S BEEN MOVING THE DIAL

According to Nutshell, stakes in Nvidia, Arista Networks (ANET:NYSE) and Alpha Group International (ALPH:AIM) have been driving performance this year, although a holding in Hong Kong-listed China Overseas Property (2669:HK) hasn’t helped.

Holdings in companies such as Novo Nordisk, Microsoft (MSFT:NASDAQ) and food producer McCormick (MKC:NYSE) helped lift Fundsmith Equity, with IDEXX Laboratories and Nike (NKE:NYSE) dragging on performance.

According to Blue Whale manager Stephen Yiu, its performance this year has been driven by investment in key themes, such as AI – Nvidia and Meta (META:NASDAQ), silicon sovereignty – Applied Materials (AMAT:NASDAQ) and LAM Research (LRCX:NASDAQ), and inflation beneficiaries (Visa and Mastercard).

We have no idea whether Smith took up Spencer’s £10,000 wager, but it hardly matters, whoever wins the bet, a single year of data is not a large enough sample size to draw any meaningful conclusions.

Funds: Fundsmith versus Nutshell and Blue Whale

Fundsmith, Nutshell, Blue Whale performance compared

What is more important is performance over multiple years, and this is where comparisons become less clear. Over the relatively short period of three years (as far back as Nutshell data goes), Fundsmith’s performance lags both Nutshell and Blue Whale.

Over five years, a timeframe most longer-term fund managers see as reasonable for analysis, Blue Whale also trumps Fundsmith, yet over a 10-year period, Fundsmith’s annualised 15.9% is exceptional. That decade-long performance is close on 50% better than the fund’s Global LargeCap Growth Equity category, based on data from investment platform AJ Bell.

A sign that Fundsmith’s approach is tiring? It will be several years before investors can judge either Nutshell or Blue Whale over a decade, and presumably, both would be chuffed if they get close

to Fundsmith’s performance.

Fundsmith may have drawn a little criticism after a spell failing to outperform wider indices, but it remains one of the most popular funds with private investors in Britain, with little indication of that changing.

Think value investing?

Think Temple Bar.

Temple Bar Investment Trust is managed by Redwheel’s Ian Lance and Nick Purves, who have more than sixty years of investing experience between them.

Experts in the UK stock market, Ian and Nick are classic value investors, looking to build a diversified portfolio of the most compelling undervalued companies they can find.

With the UK stock market currently among the cheapest assets that investors can buy anywhere in the world, they are currently very excited about the potential opportunity that lies ahead for the Trust.

For further information, please visit templebarinvestments.co.uk

Data as at 31 March 2024.

“UK stocks look attractively valued in a global context and when compared to history. We believe that recent market behaviour suggests the stars are aligned for an improvement in the performance of value stocks in the years ahead. Timing such a change in market conditions precisely is always difficult, but the long-term opportunity for UK value investors is significant.”

Ian

Lance, Portfolio Manager, Temple Bar Investment Trust

No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment. Investments can go up and down in value and you may not get back the full amount invested. The information shown above is for illustrative purposes only and is not intended to be, and should not be interpreted as, recommendations or advice. RWC Asset Management LLP is the appointed portfolio manager to the Temple Bar Investment Trust Plc, and is authorised and regulated by the Financial Conduct Authority.

Under the Bonnet: Coca-Cola

Why Coca-Cola is still a sparkling investment

The world’s largest non-alcoholic beverage business remains a favourite of legendary investor Warren Buffett

Aclassic example of a superb business with staying power, The Coca-Cola Company (KO:NYSE) is blessed with iconic brands spearheaded by Coca-Cola or ‘Coke’, the world’s most recognised soft drink synonymous with its red cans.

Coca-Cola’s brands resonate with consumers around the world, making the New York-listed group’s products the beverage of choice for billions when at home or on the move.

Powerful brands, a massive share of the global non-alcoholic drinks market, unparalleled distribution capabilities, cost advantages arising from scale and strong retailer relationships give Coca-Cola what Warren Buffett describes as an economic ‘moat’ or a sustainable competitive advantage which keeps rivals at bay.

The appeal of the Atlanta-headquartered giant’s products means it can charge a premium over lesser-known brands which consumers are willing to pay up for. Combined with low demand elasticity, this affords Coca-Cola considerable pricing power which has enabled the company to grow sales, profits and dividends down the years.

The rising shareholder reward has formed an important part of the total returns for investors through the decades and Coca-Cola’s unbroken dividend growth streak now stretches back 61 years.

Legendary investor Buffett has increased his stake in Coca-Cola over the years and his Berkshire Hathaway (BRK.B:NYSE) conglomerate owns 9.3% of the company, which has proved to be one of the Sage of Omaha’s all-time great investments. In fact, Buffett once quipped that he is ‘a quarter CocaCola’ in reference to the amount of his daily caloric intake delivered by the delicious fizzy drink.

HOW DOES COCA-COLA MAKE MONEY?

Eponymous brand Coca-Cola was born at a soda fountain in Atlanta back in 1886 and studies have shown it is among the world’s most-admired and best-known trademarks; it has even been documented that Coca-Cola is the second-most widely understood term in the world after ‘okay’.

Intriguingly, the formula for making Coca-Cola remains the best-kept secret in the world of food and drink, and the brand itself has provided a winning formula for patient portfolio builders down the years including Buffett.

The investment case for the world’s largest nonalcoholic beverage company is much more than the flagship brand, however, since Coca-Cola is a ‘total beverage’ company with products sold in more than 200 countries and territories and a formidable

Under the Bonnet: Coca-Cola

portfolio of 200 brands spanning carbonated soft drinks, water, sports, energy, juice, and coffee.

Its sparkling soft drinks portfolio includes Sprite and Fanta, although the company also owns an array of water, sports, coffee and tea brands, among them the likes of Dasani, smartwater and Topo Chico, BODYARMOR and Powerade, and Costa Coffee and Gold Peak Tea.

It also owns a slew of juice, value-added dairy and plant-based beverage brands ranging from Minute Maid and innocent to Del Valle and fairlife, not forgetting its increasingly valuable 19.6% equity stake in energy drinks developer and marketer Monster Beverage (MNST:NASDAQ).

The business model sees Coca-Cola manufacture and sell concentrates and syrups to its network of bottling partners, while still owning the brands and holding sway over the brand marketing initiatives.

Two of its major bottling partners are Londonlisted companies, namely Coca-Cola HBC (CCH) and Coca-Cola Europacific Partners (CCEP), the latter being the largest Coca-Cola bottler in the world by revenue and volume. These bottling partners use the concentrates and syrups to make, package and distribute the finished soft drinks to customers, who then sell Coke to consumers.

Under chair and chief executive James Quincey, Coca-Cola has a strategic focus on a ‘total beverage’ portfolio and its pivot to non-sparkling categories bodes well for healthy top-line growth

going forward.

North America is Coca-Cola’s biggest market, representing 36% of revenues in the year to December 2023 and 30% of operating income, but the drinks giant generates around two thirds of sales overseas with a significant portion from emerging economies in Latin America and AsiaPacific.

One revenue segment with big growth potential is Global Ventures, which includes Costa, the $4.9 billion acquisition from Whitbread (WTB) completed in early 2019 which gave Coca-Cola a footprint in the global coffee business. Global Ventures also includes the Monster Beverage stake as well as Innocent juices and smoothies and Dogadan tea.

Under Quincey’s stewardship, Coca-Cola is constantly transforming its portfolio, either by reducing sugar in its drinks or launching innovative new products, and has a major focus on sustainability by replenishing water and promoting recycling.

Despite tracing its origins back to 1886, CocaCola regards itself as a growth company providing ‘brands and beverages that make life’s everyday moments more enjoyable’. As Quincey has said, ‘We’re building this business for the next century: not just the next quarter.’

Consumer concerns over the health impact of carbonated, sugary drinks and restrictive

North America Europe, Middle East & Africa

Latin America Asia Pacific Bottling Investments Global Ventures

Chart: Shares magazine • Source: The Coca-Cola Company, 2023 investor presentation

Under the Bonnet: Coca-Cola

The Pepsi Challenge – Coca-Cola vs great rival PepsiCo

ROCE = return on capital employed

Table: Shares magazine

• Source: Stockopedia

regulations have been headwinds which Coca-Cola has navigated, and there are numerous growth opportunities ahead of it in the reformulation of classic recipes, new ‘better-for-you’ products with natural ingredients, not to mention expansion in under-penetrated markets ranging from India and South East Asia to Africa.

While the Coca-Cola drink accounts for the bulk of total sales, newer brands are contributing to higher growth overall. In the fourth quarter, trademark Coca-Cola sales were up 2% year-onyear while revenue from juice, value-added dairy, and plant-based beverages increased by 6% driven by Minute Maid brand Pulpy in China, the Mazoe brand in Africa and the Fairlife dairy brand in the US.

The canny Quincey always has an eye on the future too. For instance, in last year’s fourth quarter, Coca-Cola leveraged the success of its first artificial intelligence-based platform, ‘Create Real Magic’, by inviting consumers to create shareable, digital greeting cards featuring its iconic brand

assets such as cherished depictions of Santa Claus and the Coca-Cola polar bear.

HOW IS COCA-COLA PERFORMING?

While the drinks sector faces headwinds from geopolitical uncertainties, the cost-of-living squeeze and raw material inflation, not to mention consumer concerns over the sugar content of fizzy drinks, a backlash over single-use plastic and an emerging threat from anti-obesity drugs, CocaCola has continued to serve up refreshingly robust operating numbers.

The company delivered organic revenue growth of 12% for the year to December 2023 based on broad-based 2% volume expansion, which was actually better than the 1% contraction at great rival PepsiCo (PEP:NASDAQ), although Coca-Cola is forecasting an organic growth slowdown to between 6% and 7% this year and needs to ensure it doesn’t push price increases too far, since consumers are still grappling with pressured finances.

WHAT DO FUND MANAGERS THINK?

FRAN RADANO IS THE manager of The North American Income Trust (NAIT), which has a stake in what he describes as the ‘premier global beverage leader’ with a resilient business model. Under Quincey’s total beverage strategy, Radano says, Coca-Cola ‘seeks to create a compelling offering across all daily needs including simple refreshment, sports drinks, health focused beverage and many other need states’.

The company has also ‘invested and collaborated with its strong bottling system which has resulted in driving above trend sales and subsequently improved market share positions despite already leading from a position of strength. Furthermore, the beverage category is an advantaged category from a growth perspective globally and Coca-Cola’s scale benefits and execution expertise positions it well in the future.

‘The result of its capital-light business model is a robust amount of free cash flow which continues to be reinvested in the business, used for opportunistic M&A as well as distributing the majority of the company’s surplus funds to shareholders via a progressive, covered dividend. Share repurchase is typically done on a smaller scale as a means to keep the share count flat to optimise its cost of capital.’

Morningstar scribe Dan Su believes CocaCola has built ‘a wide economic moat around its global beverage operations based on strong intangible assets and a significant cost advantage that will enable the company to deliver excess investment returns above its cost of capital over and beyond the next 20 years’.

James Cook, one of the managers of investment trust JPMorgan Global Growth & Income (JGGI), says: ‘While historical analysis and current metrics suggest consumer staples are overvalued on a global basis, we think the US names appear more fairly priced. One name we like is Coca-Cola. The company has immense pricing power, no significant competition and has a wholesale and concentrate business model. Think about it, you’re selling a can of Coke at about 70p. This pricing power makes for rather attractive dividends.’

‘We attribute the volume resilience to the firm’s consumer-valued innovations in ingredients, formulas, and packaging, as well as smart digital marketing that resonates with consumers globally,’ wrote Morningstar analyst Dan Su back in February.

‘Despite a softening consumer backdrop and intense competition in the beverage aisle, we think the firm remains well-positioned to capture growth in the coming years, thanks to heavy investments in innovations and brands, as well as deft in-market executions that assert its competitive standing globally,’ added Su.

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Disclaimer : Issued by CIRCA5000 UK Ltd. Registered in England and Wales, company no. 13214839. Registered office: 86-90 Paul Street, London, United Kingdom, EC2A 4NE. CIRCA5000 UK Ltd is an appointed representative (FCA reg no. 950019) of CIRCA5000 Ltd, who is authorised and regulated by the Financial Conduct Authority (FCA reg no. 846067). Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by CIRCA5000. The CIRCA5000 ICAV is an open ended Irish collective asset management vehicle which is constituted as an umbrella fund with variable capital and segregated liability between its sub funds and registered in Ireland with registration number C -491100 and authorised by the Central Bank of Ireland as a UCITS. The manager of the ICAV is Carne Global Fund Managers (Ireland) Limited, who is authorised and regulated by the Central Bank of Ireland, reference number C 46640. The ICAV is a recognised scheme under section 272 of the Financial Services Market Act 2000 and so the prospectus may be distributed to investors in the UK . Thematic Risk: The Fund may be subject to the risks associated with, but not limited to, investing in companies with a material exposure to the climate transition. These risks include the obsolescence of intellectual property as technology evolves and changes in regulation or government subsidies that may affect the revenue or profitability of a company Derivative Risk: The Fund may invest in Financial Derivative Instruments (FDIs) to hedge against risk , to increase return and/or for efficient portfolio management. There is no guarantee that the Fund’s use of derivatives for any purpose will be successful. Derivatives are subject to counterparty risk (including potential loss of instruments) and are highly sensitive to underlying price movements, interest rates and market volatility and therefore come with a greater risk . Sustainability Risk: The Manager, acting in respect of the Fund, through the Investment Manager as its delegate, integrates sustainability risks into the investment decisions made in respect of the Fund. Given the investment strategy of the Fund and its risk profile, the likely impact of sustainability risks on the Fund’s returns is expected to be low. Currency Risk: Some of the Fund’s investments may be denominated in currencies other than the Fund’s base currency (USD) therefore investors may be affected by adverse movements of the denominated currency and the base currency. Market Risk: The risk that the market will go down in value, with the possibility that such changes will be sharp and unpredictable. Operational Risk: The Fund and its assets may experience material losses as a result of technology/system failures, human error, policy breaches, and/or incorrect valuation of units. Capital at risk . The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. All features described in this fact sheet are those current at the time of publication and may be changed in the future. Nothing in this fact sheet should be construed as advice and it is therefore not a recommendation to buy or sell investments. If in doubt about the suitability of this product, you should seek professional advice. No investment decisions should be made without first reviewing the key investor information document of the Fund (“KIID”) which can be obtained from www.circa5000.com This marketing material is only directed at investors resident in jurisdictions where this fund is registered for sale. It is not an offer or invitation to persons outside of those jurisdictions. We reserve the right to reject any applications from outside of such jurisdictions.

Pessimism towards UK stocks means there are bargains galore

Conversely, euphoria in US markets means buyers should tread carefully

They say you can lead a horse to water but you can’t make it drink, however that’s exactly what we are trying to do with this week’s cover story on the compelling value being offered in UK stocks right now.

We may be sowing our seed on stony ground –indeed according to figures from one newspaper there has been a £2.5 billion outflow of money from UK funds and trusts in the last four months compared with a £6.7 billion inflow into US funds over the same period.

To put the latter figure in perspective, it means that between December 2023 and March 2024 alone UK investors put more money into US equities than they have in total in the past nine years (£6.69 billion).

You only have to look at the net flows from DIY investors in ISAs (individual savings accounts) on the AJ Bell platform from the start of the year to 5 April so see UK punters continuing to shun UK funds and trusts.

Despite the stellar performance of the US market – or should that be because of its stellar performance – investors are pouring increasing amounts of money into both tech-focused funds and trusts and S&P 500 index trackers, which nowadays are almost as good a proxy for tech as specialist funds thanks to the excessive weightings of the ‘Magnificent Seven’.

There doesn’t seem to be much love for active management, either – eight of the top 10 most

popular funds are index trackers, which makes sense if you just want be ‘in it to win it’.

According to the Investment Association, in the first two months of 2024 there were net outflows of £7.5 billion from active funds which is an even higher run-rate than last year when £38 billion of retail money flowed out of active into passive.

Sir John Templeton, one of the greatest stock pickers of all time, described bull markets as being born out of pessimism, growing on scepticism, maturing on optimism and dying on euphoria.

It’s probably fair to say attitudes towards the UK market are somewhere between pessimism and scepticism, while towards the US market they are somewhere between optimism and euphoria.

Templeton also maintained that outperforming other investors means doing what they aren’t doing, buying when others are in despair and selling when everyone else is full of hope and exuberance.

Maybe his most important advice however was ‘Focus on value, because most investors focus on outlooks and trends’.

Value matters, because if you buy cheaply you can afford to take your time when it comes to selling – or, if you are like Warren Buffett, you can decide to hold ‘forever’.

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

Could the rise of AI and machine investing spell the end for active money managers? Money managers versus machines

The inexorable progress of AI and machine learning has left more than a few investment managers decidedly hot under the collar. Machines are already far better than humans in a range of disciplines: from playing chess to medical image recognition and even some parts of the creative arts – the Sony 2023 World Photography Award was unwittingly given to an AI-generated picture. Machines have the speed, raw computing power and massive data-handling superiority to outperform humans in more and more fields.

And that includes investments.

But as Ruffer’s Head of Investment Strategy Teun Draaisma notes in the Ruffer Review 2024, machines are already better at investing – but only over the short term. And, perhaps counterintuitively, this is creating market distortions which translate into opportunities for active human investors with a longerterm focus.

Why are machines better at short-term investing? Machine driven – or systematic – strategies generally focus on short-term drivers of markets, such as momentum, reversal and dispersion. And investment success depends on two things: the ability to pick winning bets; and the number of bets you can make. Machines excel in the shorter term because humans simply cannot compete on the volume and frequency of trading.

However, over longer periods, the fundamentals still matter most. For example, valuation and long-term

growth are both closely linked with stock performance over a ten-year view. And machines can’t spot the long-term wood for the short-term trees. So we believe long-term investing is where human investors have the greatest edge – for now, at least. And the opportunities are possibly being amplified by systematic strategies. For example, many such strategies base their position sizes on volatility: if recent volatility has been artificially low, they automatically increase their risk positions.

And we believe volatility has been artificially low. So, if ever volatility returns to the natural undisturbed level suggested by our model, many systematic strategies would have to reduce position sizes. This would increase volatility and thus spark further selling, potentially creating a 1987-style crash.

Another weakness of machines is that they can’t see outside the data sets they use. That was demonstrated recently when many models failed to anticipate the recent inflation shock because the last major inflationary episode – the 1970s – fell outside their data histories.

Technology is essential to how we invest at Ruffer. We use it in an increasing number of ways, aided by AI. And it’s our firm belief, for now and the foreseeable future, skilled active human investors can harness the rise of machines to outperform them over the long term.

For an in-depth exploration of this topic, read Teun’s article Gravity Always Wins in the 2024 Ruffer Review.

Find out how to ask for a pay rise

Looking for more money from your employer can be tricky and there is still a significant gender pay gap

The start of the new financial year tends to be when many of us really think about our own financial circumstances.

Increases in average wages have finally overtaken inflation, those on the National Living Wage have enjoyed chunky pay increases and employees will feel the benefit of the cut to national insurance when they receive their April pay.

While prices haven’t been rising as quickly as they were last year and some things like the energy price cap have actually come down, many of us are still finding the cost of living a bit of stretch so its understandable that many of us might be thinking about ways to have that awkward conversation with the boss.

PUSHING FOR A PAY RISE

Employers have their own sums to add up and a survey carried out by the Chartered Institute of Personnel and development at the start of the year found that most expected to increase pay by less than they did the previous couple of years.

So how do you go about persuading your boss to stretch a little further for you? It’s a question that’s

especially important for women.

Recently released figures showed the gender pay gap has fallen to a record low, now 11.6%. This equates to women earning 88p for every pound a man makes on average.

Progress is slow, seven years ago when it became mandatory for companies to publish the information the gap stood at 12.8%, but the figures are least trending in the right direction.

With a narrowing of the gender pay gap should come a narrowing of the gender investment gap which came in at an incredible £1.65 trillion according to research carried out when the AJ Bell Money Matters campaign was launched.

Every pay rise over the company-wide increase helps narrow both gaps. And yet three in five women have never asked for a pay rise and only a third of the women who have taken that step were actually successful (according to an Opinium/AJ Bell nationally representative survey of 4,000 UK adults carried out in June 2023).

It’s never going to be a comfortable conversation but there are a few key steps you can take to help bolster your confidence and hopefully increase the chances of success.

STEPS TO SUCCESS

1. TIMING IS IMPORTANT

If your employer is in financial difficulty, you are unlikely to find a responsive ear but there are other dates which might help you take that difficult step.

Ahead of your company’s new financial year, when budgets are being set, can be an opportune moment as can your work anniversary.

2. KNOW YOUR VALUE

industry standard and provide you with a solid argument for a pay increase.

3. BE PREPARED AND BE REALISTIC

You might know that you’ve put in extra hours to successfully deliver a big project but does your boss? If your responsibilities have changed or if you’ve completed additional training those are things which make your more valuable.

Don’t be shy about spelling out all the reasons you’re worth more. It might feel uncomfortable but if you write everything down it makes it easier to make the pitch.

It’s also worth taking time to look at starting salaries for comparable roles to find the

If you manage to secure a little bit extra in your pay packet could you do more with it than watch it vanish into your monthly expenditure.

For someone on an average median salary of £32,604 a 1% increase equates to just a few hundred pounds a year – or the equivalent of a tasty takeaway for two people once a month.

But if you invest that 1% into your pension you could plump up your pot by a healthy £10,008. That assumes you invest the extra 1% for 20 years, that your salary rises with inflation of 2% and investment growth of 6%.

If you can get your employer to up their contributions at the same time that sweetens the deal even

Don’t just send a quick email asking for more money that’s not the way to best make your case.

Ask for a face-to-face meeting, or, if you work remotely, schedule a video call. Present your evidence clearly and concisely and provide examples of when you’ve delivered over and above what your role requires.

4. BE BOLD BUT BE PREPARED TO COMPROMISE

Other businesses might be paying more for the role that you do but your employer might not be in a position to meet those levels right now.

Can you agree a time frame for additional pay rewards if you continue to hit your targets or take on more responsibility?

You’re unlikely to be successful every time you ask for a bit more cash, but if you’ve picked your moment and backed up your request with solid evidence you stand a good of chance of getting what you wanted.

more and because you’re adding to an existing pot the magic of investing is likely to make that 1% grow even more.

For more information about AJ Bell’s Money Matters campaign which is aimed at helping more women feel good investing please sign up for the newsletter here.

It’s hard to think about future needs when today’s budget needs a bit of TLC but when you consider that the pension policy institute recently reported that women would need to save for an extra 19 years to close the gender pension gap, every little really could help.

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

Beware the bear (steepener)

The bond market is sending a message equity investors may not want to hear

One of the most intriguing facets of financial markets of the past two years has been the differing messages offered by bond yields and share prices.

The bond market, via the so-called inverted yield curve, has been predicting a recession. The stock market has instead priced in a cooling in inflation, a gentle economic landing and a pivot to interest rate cuts from central banks, with the result that headline equity indices from America to Australia, France to Taiwan and Canada to Germany have set new all-time highs.

Usually, the yields on long-term bonds are higher than those on short-term paper. This is simply because lenders (or bond buyers) demand a higher

The US yield curve currently has the hump

return to compensate them for the increased risk of something going wrong during the additional time such as changes in interest rates, higher inflation or, at worst, a default by the issuer (or borrower).

The usual shape of the yield curve therefore goes from the bottom left of the screen to the top right, in a gently steepening path.

An inverted curve means long-term rates are lower than short-term ones. This means markets think that interest rate cuts are coming in response to a slowdown or recession. A shorthand version of this can be provided by comparing just the yield on two- and 10-year government bonds.

The US yield curve is starting to steepen and become less inverted

FOUR OPTIONS

The yield curve changes shape according to variations in the yield on each individual maturity, as it flattens or steepens, and there are four possible scenarios here:

• A bull flattener, when long-term yields (and interest rates) fall faster than short-term ones, so the yield spread shrinks. This is usually how markets discount interest rate cuts and can be seen as positive for bond prices (as yields fall) and share prices (as a recovery in profits, dividends and cash flow is anticipated). The longer the duration the more favourable it is, and this can include assets such as long-dated bonds and equity sectors with a big chunk of their earnings in the future, like technology and biotechnology.

• A bear flattener, when short-term yields rise faster than long-term ones, so the difference between the two again narrows. This is usually seen as a harbinger of recession, or at least interest-rate hikes and tighter monetary policy, and is thus potentially negative for share prices, especially for areas like banks and cyclicals.

• A bull steepener, when short-term yields fall faster than longer-term ones, so the spread, or differential between them widens. This is usually seen when markets are pricing in interest-rate cuts and is thus bullish for bonds and equities.

• A bear steepener, when both short- and long-term yields are rising but long-term ones are rising faster to widen the gap between the two. This can be bad news for bonds in particular, as prices fall when yields rise, and it can be a sign inflation is on the rise. It could be a challenge for share prices, too, as it combines higher discount rates (that lower the theoretical value of the long-term cash flows of long duration sectors like tech and biotech) with tighter monetary policy that hits the earnings power of short-duration, cyclical industries.

Right now, we have a bear steepener on our hands in the US.

FOLLOW THE BEAR

If the US economy slows down there could be

The US yield curve showing a ‘bear steepener’

trouble ahead for equities, but given the amount of fiscal stimulus being applied that does not seem so likely for now almost irrespective of who wins the US presidential election in November.

The issue at hand could therefore be inflation instead, especially as the Biden administration is on course to add $7 trillion to America’s national debt during its four-year term (and the total deficit only reached that level for the first time in 2003).

That does not mean it is game over for the stock market’s bull run. It could mean a more difficult environment for bonds and yield-offering bond proxy stocks like utilities and consumer staples, or it could mean a more difficult environment for longduration sectors like tech and biotech.

It could also mean a more interesting environment for companies with pricing power and for commodities, if investors repeat the 1970s’ strategy of looking toward ‘hard assets’ as a store of value relative to paper ones, such as cash and bonds, the real value of which may be eroded by the ravages of inflation.

Or the bond market could just be flat out wrong. It has wrongly been predicting a recession. It is now predicting inflation. But the signals emanating from bonds still do not sit easily with the equity markets’ preferred narrative of cooling inflation, slow growth and interest rate cuts. Someone is going to be wrong somewhere.

By Russ Mould AJ Bell Investment Director

Source: LSEG Datastream data

Get the lowdown on NS&I’s new British savings bonds

We explain how they work as well as the investing pros and cons

In the Spring Budget, the chancellor announced the launch of new British savings bonds with the promise of a three-year cash account intended to raise more money for the government. The new products have been launched, so we’ll explain what they are and when you might want to use them.

WHAT ARE THE NEW BONDS?

Despite being branded as ‘British savings bonds’, the money raised will go into the general government coffers in the same way as other investments in NS&I (National Savings & Investments) products. In reality, the bonds are the same as the previous Guaranteed Income and Guaranteed Growth bonds. They are a three-year fixed-rate cash account paying 4.15% AER (annual equivalent rate) interest a year. You can save between £500 and £1 million in the accounts and the rate is guaranteed for the three years.

One major point to note is there is no option to access your money early. Under previous versions of these bonds, NS&I allowed holders to exit them early if they sacrificed some interest but that is no longer allowed meaning your money is tied up for the full three years with no possibility of exiting early.

HOW DOES THE INTEREST RATE STACK UP?

The 4.15% interest rate on the British Savings Bonds is a long way from top of the tables. According to MoneySavingExpert, the top provider in the market is Zenith Bank paying 4.67% for its three-year bond. That account lets you pay in between £1,000 and £2 million, so a higher minimum saving than NS&I. If you have a smaller sum to invest, Hampshire Trust Bank pays 4.65% on its three-year bond and the minimum saving is £1.

Before the launch, NS&I admitted it wasn’t planning to be top of the table with this interest

Personal Finance: British savings bonds

rate. It wanted to price the bonds so they’d stick around rather than selling like hot cakes, and this middle-market offering may just do that.

It’s tricky for NS&I to get the interest rate right on these products – too high and they’ll attract swathes of cash and have to pull the accounts from sale, too low and savers will go elsewhere meaning it will have to crank the interest rate up later.

The bottom line is you will be sacrificing returns in order to save with NS&I, so you need to weigh up whether that is a sacrifice worth making.

Based on the top three-year bond of 4.67%, if you have £5,000 to save you’ll be giving up £26 per year or just over £2 each month in interest by sticking it in British savings bonds. At the maximum savings of £1 million you would be giving up £5,200 in interest per year.

HOW DO THE INCOME AND GROWTH OPTIONS DIFFER?

If you pick the Income Bond version you’ll get the interest paid into your bank account each month, meaning you can spend it.

This is a good option if you need a regular income to live off, making it ideal for retired people, for example. Someone who invested £100,000 in these bonds would get just over £4,000 of interest each year.

If you don’t need a regular income, pick the ‘Growth’ option, which means the interest is rolled up and added to the bond each year. That way you’ll benefit from compounding, as your interest will earn interest which will help to increase your pot size.

You also need to think about tax. While NS&I’s premium bonds are tax-free, these bonds aren’t which means you could pay tax on the interest you earn.

The personal savings allowance gives most people a tax-free limit for the interest they can earn on their savings before they’re taxed. It currently stands at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. Additional rate taxpayers get no tax-free allowance. Once you breach the limit, you’ll pay tax on the interest at your income tax rate.

This means you need to consider two things. Is your money better in an ISA, where it’s protected from tax, and if you do pick the income bond is it better to have the interest paid monthly so it’s spread out and falls into different tax years?

With the growth option, all your returns will be paid out after three years, meaning all the interest falls into one tax year which could take you over your personal savings allowance that year.

DO YOU ACTUALLY NEED GOVERNMENT BACKING?

A big appeal of NS&I is they are backed by the government so they are seen as the safest place to keep your money. However, other banks and building societies are protected by the Financial Services Compensation Scheme, which covers up to £85,000 of money per person, per financial institution. This means your money is theoretically as safe in any other bank with FSCS protection as it is with NS&I.

However, some people prefer the ‘security’ of having their savings with the government. Also, those with a large amount of savings may prefer to put their money with NS&I rather than split it into separate £85,000 ‘pots’ with different providers.

By Laura Suter AJ Bell Head of Personal Finance

Join Shares in our next Spotlight Investor Evening webinar on Wednesday 24 April 2024 at 18:00

Register to hear the following companies presenting their plans for

EDINBURGH INVESTMENT TRUST (EDIN)

Seeks to grow capital and income by investing in UK companies, with the ability to invest up to 20% of the portfolio in international stocks. The portfolio manager and his colleagues aim to achieve this through a flexible approach because investment styles come in and out of fashion, with economic and market cycles impacting them positively and negatively.

2024

SCHRODER ASIAPACIFIC FUND (SDP)

Aims to invests in high quality companies, across all countries and sectors of the Asian economy, that offer the greatest return potential. The portfolio managers draw upon the extensive resources of Schroders’ Asia Pacific equities research team with 40+ analysts based across the region, as well as Schroders’ London-based global sector specialists.

SOLID STATE PLC (SOLI)

Is a value-added electronics group supplying commercial, industrial and defence markets with durable components, assemblies, manufactured units and power units for use in specialist and harsh environments. The Group’s mantra is - ‘Trusted technology for demanding environments’.

WARPAINT LONDON PLC (W7L)

Sells branded cosmetics under the lead brand names of W7 and Technic. W7 is sold in the UK primarily to major retailers and internationally to local distributors or retail chains. The Technic brand is sold in the UK and continental Europe with a significant focus on the gifting market, principally for high street retailers and supermarkets. In addition, Warpaint supplies own brand white

Can I leave some of my pension to my favourite charity when I die?

It pays to discuss your options in advance with loved ones

I would like to leave my favourite charity some money from my pension when I die. My husband will inherit my other assets through my will, and he will have enough money to be comfortable. We don’t have any children.

Can I do this? I thought there was a lot of flexibility to leave my pension money to whomever I want.

Emma

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

Pension freedoms were introduced nearly 10 years ago and completely changed the way pension wealth can be passed on when someone dies.

An individual has the freedom to nominate whoever they want to receive their pension fund when they die, meaning these funds can be passed easily to children and grandchildren rather than always having to go to the living spouse or dependant.

A pension scheme is usually held in trust. Trustees look after the pension money on behalf of the beneficiaries – in this case the members of the pension scheme. When a pension scheme member dies the trustees normally have the ultimate decision who to pay the pension fund money to.

This trustee ‘discretion’ is the reason why pension funds aren’t usually subject to inheritance tax.

When making this decision, the pension scheme trustees will consider if there are any dependants still living such as a spouse or partner. A member should also fill in an expression of wish or nomination form putting down who they would like to inherit the funds, and trustees will take this into account as well.

An individual could, for example, nominate an adult child if they are happy any surviving dependant would have other financial assets to rely on. The trustees may then look at the evidence and agree to the adult child inheriting the pension funds.

People can also nominate a charity to inherit their pension funds. If they don’t have any dependants, then the lump sum will be paid completely tax-free to the charity. This is irrespective of how much pension wealth the person had built up or their age when they died.

However, where the pension saver does have a living dependant, the trustees will need to first consider whether they are financially secure before they decide to pay any money to a charity. If the trustees are happy the dependants don’t need the money from the pension, they may agree to the charity donation.

In this situation the tax treatment of the lump sum is different. If the pension saver died before

age 75, then it will be free of tax if all other taxfree lump sums paid out in life or on death are less than, usually, £1,073,100.

Any excess over this may be taxable if the charity is not exempt from tax. If the pension saver was aged 75 or over, then the entire lump sum paid to the charity will be taxed at a rate of 45%.

If the charity lump sum is to be taxed, then the pension saver could nominate someone to receive their pension funds and they then pay the money onto the charity. They will probably also have to pay tax on the lump sum, but if they are working, they could claim gift aid which may increase the amount of money the charity receives, so the charity doesn’t lose out. That said, the pension saver would have to be confident their wishes would be carried out.

Pension freedoms offer many options in terms of how to pass on your wealth. Perhaps the most important thing is to discuss these options with loved ones to make sure they know what you want to happen to your pension money after you die.

WATCH RECENT PRESENTATIONS

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Foresight Solar Fund Limited (FSFL)

Ross Driver, Managing Director

Foresight Solar Fund Limited (FSFL) aims to deliver sustainable investment returns to investors alongside strong environmental, social and governance (“ESG”) benefits. The Company pursues its investment objective by acquiring ground-based, operational solar power plants.

Good Energy Group (GOOD)

Nigel Pocklington, CEO

Good Energy Group (GOOD) is a developer and supplier of electricity in the United Kingdom. It is engaged in the purchase, generation, and sale of electricity from renewable sources, the sale of gas, services relating to micro-renewable generation, and the development of new electricity generation sites. Its segments are Electricity Supply, FiT Administration, Gas Supply, Energy as a Service (including Zap-map, nextgreencar. com, and Igloo Works Limited), and Holding companies.

EnSilica (ENSI)

Mark Hodgkins, Chairman

EnSilica (ENSI) 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 worldclass expertise in supplying custom RF, mmWave, mixed signal and digital ASICs to its international customers in the automotive, industrial, healthcare and communications markets.