07 Chinese economic data piles pressure on leadership to take bold steps
08 Intel rolls the dice on foundry spin out, but will it be enough? 09 Shares in International Consolidated Airlines reach for the sky 09 Building materials group SIG hits rock-bottom on weak European sales
10 Can Raspberry Pi’s maiden results revive its stalling share price? 11 Can Costco continue to deliver the goods? 12 Week of rate cuts and central bank comments to dominate markets
14 Why the tide is about to turn for Diageo 16 HVIVO is in pole position to capitalise on increasing interest in human challenge trials
18 Trainline can regain momentum as it upgrades guidance 19 Why Trustpilot is a tricky call to make 20 MY PORTFOLIO
Why portfolio construction matters and how it can help you reach your investments goals
Three important things in this week’s magazine
1 2
25 years of bumper returns
As Shares marks its quarter of a century milestone, discover the best performing stocks, funds and trusts over that time.
Alphabet’s anti-trust challenge
The story behind the recent negative headlines for the Googleowner and how analysts see the situation.
3
Portfolio primer
In the first entry for a new section in the digital magazine, find out the basics of assembling an investment portfolio.
Visit our website for more articles
Did you know that we publish daily news stories on our website as bonus content? These articles do not appear in the magazine so make sure you keep abreast of market activities by visiting our website on a regular basis.
Over the past week we’ve written a variety of news stories online that do not appear in this magazine, including:
A quarter of a century of helping people with their investments
The focus over the last 25 years has been on you and that will continue to be the case
It’s time to break out the birthday candles as Shares marks 25 years since its first issue hit the newsstands in September 1999.
I’m just the latest custodian of this publication, having had the pleasure of editing Shares for a just under a year, and while there has been an enormous amount of change over the last quarter of a century both internally and in the broader financial markets, the one constant is you, the reader.
All our efforts, past, present and future, are about making investing easier for you. Whether by educating you on the principles behind investing, keeping you updated on the latest trends and themes or generating ideas to help you build your own portfolios.
In this anniversary edition we introduce a new section: My Portfolio. To kick things off, Martin Gamble will explain the basics of portfolio construction and management in a three-part series.
There’s no one-size-fits-all approach to investing, and after that it’s over to you to discuss how you manage your own investment portfolios. You can read more about how to get in touch in Martin’s article and the reward on offer for doing so.
You may also see some other small changes to this issue – very much evolution rather than revolution – including giving greater prominence to our Great Ideas section where we showcase our two best investment ideas of the week.
We are also planning some tweaks to our website to make it more useful and user-friendly and I’ll keep you posted on these developments in this column. We’re always keen to hear your feedback, positive and negative, and any suggestions you have
for potential article topics or areas we should cover. You can get in touch at shareseditorial@ajbell.co.uk.
One of the best calls we ever made in the magazine was on fast fashion business ASOS (ASC). It was flagged at just 4.5p in March 2003 when the idea of ordering clothes online was very much in its infancy.
At their all-time high in the late 2010s the shares had increased 1,679 times to more than £75, meaning a hypothetical £1,000 investment in 2003 would have been worth nearly £1.7 million.
However, you can never rest on your laurels in investing and ASOS is now worth just a fraction of its peak market value as industry trends, costs and the cost of borrowing have all moved against the company.
A lesson we can all take moving forward is to keep on top of our best ideas and when it might be time to change our mind.
Chart: Shares magazine•Source: LSEG
Chinese economic data piles pressure on leadership to take bold steps
Trillions of dollars wiped off the market since the peak three years ago
The mood music coming out of China hasn’t improved over the summer, with the latest figures showing factory output, consumption and investment all fell more than forecast in August.
At the same time, the decline in residential property prices seems to be accelerating with new-home prices in 70 cities dropping by 0.7% on a monthly basis in August after a 0.65% fall the month before and existing-home prices falling by 0.95% against 0.8% the previous month.
Although the Chinese market was closed on Monday due to holidays, the news added to the gloomy investor sentiment towards local stocks after a slump which has lasted since May and increases the pressure on the government to come up with some kind of stimulus package to rescue the economy.
‘The fear is the authorities are losing control of the economy and they won’t admit it,’ said Gary Dugan, chief executive officer of the Global CIO Office, in an interview with Bloomberg.
‘The market looks set to go to significantly lower levels in the absence of real, substantial new policies,’ added Dugan.
Chart: Shares magazine•Source: LSEG
‘The real problem is the entrepreneurial impetus is missing, with lots of businessmen unwilling to invest,’ he told Bloomberg.
‘It will be necessary for the government to loosen up on private enterprise restrictions and regulations so the private sector can be stimulated and help grow the economy.’
Meanwhile, measures to revive the property market such as a campaign to buy up unsold homes to ease the oversupply have had little effect as local authorities have dragged their feet over implementing them.
Current support measures such as interest-rate cuts and the buying of ETFs (exchangetraded funds) by state-owned funds have done little to change sentiment, with an estimated $6.8 trillion having been wiped off the value of Chinese and Hong Kong-listed stocks since the market peaked in 2021.
Renowned emerging-markets veteran Mark Mobius believes government stimulus can only do so much in the current business climate.
The fear is the authorities are losing control of the economy and they won’t admit it”
The government also rejected a call by the IMF (International Monetary Fund) to use public funds to complete and deliver unfinished properties, insisting it apply ‘market-base and rule-of-law principles’ instead.
In response, developers have cut the price of new homes, which in turn has sent shares in the Shanghai Property Index down roughly 25% since its peak in May, wiping out yet more investor wealth and compounding the problem. [IC]
Intel rolls the dice on foundry spin out, but will it be enough?
Chip maker Intel (INTC:NASDAQ) plans to split out its chip manufacturing operations from its design capabilities in a strategic move that it hopes will help reinvigorate growth and halt its dismal share price performance.
The Santa Clara-based business hopes that spinning out its Intel Foundry Services arm will provide external foundry customers and suppliers with greater separation from Intel’s core operations, while also allowing the unit to tap independent funding, spurring growth and shareholder value.
Pat Gelsinger, Intel’s chief executive officer, assured employees that the leadership team of Intel Foundry Services would remain unchanged and continue to report directly to him. An operating board, including independent directors, will be established to govern the subsidiary.
were ‘very encouraged’, by the move, praising Intel’s management for being proactive regarding the initiatives that it controls, or in other words, costs. ‘We’re encouraged by the decision to make Intel Foundry Services a separate independent subsidiary, which should reduce conflicts of interest between IFS and IDM (Integrated Device Manufacturing),’ they wrote in a note to clients.
But the move stops well short of the complete shift out of manufacturing that some analysts and investors had hoped for. In a recent analysis of Intel’s business, Citi analysts stated their belief that the company could significantly improve its profitability by exiting the foundry business.
Intel shares rose more than 7% on the announcement to $22.50.
Analysts at KeyBanc Capital Markets said they
‘We continue to believe Intel would be better off exiting the foundry business in the best interest of shareholders,’ Citi analysts wrote, citing the division’s massive losses. The foundry business, which lost $2.8 billion last quarter, is projected to lose at least $8 billion annually.
If Intel were to exit the foundry business, Citi estimates the company could see a substantial boost in both earnings and margins. ‘We estimate if Intel exits the foundry business, the company could ultimately see EPS (earnings per share) in the $3 to $4 range and gross margins somewhere in the lowto-mid 50% range,’ Citi noted.
In 2023, Intel reported $1.05 of EPS and consensus forecast data from Koyfin has EPS falling sharply in 2024 to just $0.26.
While one of the most familiar chip names to retail investors, Intel has struggled to adapt beyond its core PC and servers markets, crucially failing to capture meaningful share in the AI space. Intel shares have more than halved this year and Morningstar data shows the stock delivering negative total returns for investors over the past three, five and 10 years. [SF]
Shares in International Consolidated Airlines reach for the sky
Investors applaud the flag-carrier’s new-found financial discipline
With little fanfare, shares in British Airways and Iberia owner International Consolidated Airlines Group (IAG) have climbed 25% over the last two months to hit a new 12-month high of 200p.
In a surprise turn of events, the firm announced at the beginning of August it had terminated its agreement to buy the remaining 80% of Air Europa on the basis ‘it
would not be in the best interests of shareholders to continue in the current regulatory environment’.
The group returned to the dividend list last month with a small interim payout after first-half revenue rose 8.4% to €14.7 billion and pre-tax profit edged up to €1.05 billion.
A week later, IAG announced it would stop flying to Beijing, previously one of its most important routes, due to the cost, complexity and inconvenience to having to avoid Russian airspace.
Building materials group SIG hits rock-bottom on weak European sales
The insulation and roofing supplier cut full-year guidance at its interim update
Shares in Sheffield-based FTSE 250 building products firm SIG (SHI) hit their lowest level since the pandemic this month, bringing year-to-date losses to almost 40%.
In its interim trading update the company revealed sales in May and June were below forecasts, having failed to recover from the downturn of the first
four months of the year, and said it was ‘cautious’ in calling a second-half recovery.
As a result, it lowered its full-year operating profit forecast to between £20 million and £30 million against market expectations of £37 million to £43 million.
The firm blamed ‘prolonged’ weakness in the construction sector in the French and German markets for disappointing volume sales, as well as ‘softness’ in its UK interiors business.
Last month, SIG reiterated its lower full-
As one industry observer commented, ‘Why bother when you can send the same plane to the US instead where demand for premium cabins remains sky-high?’ Shares notes IAG is a recent addition to the JOHCM UK Equity Income Fund (B03KR50), with the managers flagging its low single-digit price to earnings ratio as one of the attractions. [IC]
year guidance but said hitting its targets would depend on a recovery in its European markets and its operational gearing – which means small changes in sales can translate into big moves in profits – while also noting prices had fallen partly as a consequence of lower inflation. [IC]
UK UPDATES
OVER T HE NEXT 7 DAYS
FULL-YEAR RESULTS
23 Sep: Transense Technologies
24 Sep: Close Brothers, Smiths
25 Sep: Time Finance
FIRST-HALF RESULTS
20 Sep: Biome Technologies
23 Sep: Real Estate Investors, Oxford Biomedica, Alphawave IP
Can Raspberry Pi’s maiden results revive its stalling share price?
UK tech play has lost momentum since blockbuster IPO
Affordable computer outfit Raspberry Pi (RPI) made an excellent debut on the UK stock market back in June but excitement around the stock has fizzled out.
While the shares are still up materially on their 280p issue price, they are some way below their 500p high. The company and its shareholders will hope it can revive enthusiasm for the story when it unveils its results for the six months to 30 June 2024 on 24 September.
Founded by chief executive Eben Upton in 2012 with the premise of ‘making computing more accessible to young people’, Raspberry Pi designs and develops low-cost SBCs (single board computers) and computer models for industrial customers, enthusiasts, and educators around
the world.
Since the company began trading in 2012, it has sold more than 60 million SBCs and computer modules, 7.4 million of which were sold in the year to December 2023, when revenues ripened up 41% to $265.8 million.
Pre-tax profit powered 90% higher to $38.2 million in 2023. However, the company has flagged volatility in customer demand in 2024-todate, which has led to ‘higher than usual levels of inventory’, although management expects this to normalise over the course of 2024 ‘resulting in stronger results in the second half of the year than in the first half’. Investors will be hoping for reassurance on this second-half improvement when the company reports. [TS]
Raspberry Pi (p)
Chart: Shares Magazine•Source: LSEG
Can Costco continue to deliver the goods?
Commentary around the US consumer and the reaction to a recent membership fee hike will be in focus when the warehouse membership retailer reports
Disappointing results from US discounters Dollar Tree (DLTR:NASDAQ) and Dollar General (DG:NYSE) have confirmed the US consumer is under pressure, but the quest for value is playing to the strengths of retail goliaths such as Walmart (WMT:NYSE) and high-flying Costco Wholesale (COST:NASDAQ), whose compelling value propositions are enabling them to gain market share.
Shares in the latter, which posts fourth-quarter earnings on 26 September, are testing fresh all-time highs north of $900 and trade on a forward PE (price to earnings) multiple approaching 60 times, which reflects the warehouse membership retailer’s winning proposition for cash-strapped consumers and the earnings visibility arising from its membership model.
Costco offers low prices to members, including individuals and cash-strapped small- and mediumsized businesses, by focusing on a small number of items and eliminating all the frills
and costs historically associated with conventional wholesalers and retailers. By selling a limited range of cheap items, Costco can pass through any price increases to the customer and makes additional money via the annual membership fee, which it recently hiked for the first time in seven years.
On 5 September, Costco reported a 7.1% rise in net sales to $19.83 billion for the month of August, and said sales edged up 1% to $78.2 billion for the fourth quarter ended 1 September 2024, which included 5.3% US comparable sales growth as well as an 18.9% surge in e-commerce revenues.
Having already announced Q4 sales, investors’ attention will be focused on management’s utterances around the consumer outlook and any resistance to the membership fee increase. [JC]
UPDATES OVER THE NEXT 7 DAYS
QUARTERLY RESULTS
24 Sep: Cintas, AutoZone
25 Sep: Micron, Paychex
26 Sep: Costco, Accenture, Carnival Corp, CarMax
Week of rate cuts and central bank comments to dominate markets
We expect the Fed to take a softly-softly approach to lowering rates
We aren’t in the habit of betting on central bank decisions but it seems a racing certainty the Federal Reserve will cut interest rates this week as more evidence emerges that the US economy and inflation rate are slowing.
The only question in investors’ and economists’ minds was by how much the Fed is likely to cut, with the odds favouring a 0.25% reduction in the Fed Funds rate rather than 0.5% which
might be seen as a panic response. There will have been particularly close attention paid to central bankers’ comments for clues as to how far and how fast (or more likely how slowly) rates might come down.
Some commentators have called for a 100 basis point or 1% cut by the end of this year followed by a further 100 basis points next year, but we can’t see the Fed, which has trodden cautiously every step of the way, lowering the cost of borrowing so far in such a short space of time.
In fact, the opposite is true – what the Fed really doesn’t want to see is inflation heading back up again in a year’s time because lower rates have encouraged people to spend with impunity.
Looking at the week ahead, most of the economic data is what we would call ‘soft’ as in it consists of surveys like consumer confidence and PMI (purchasing managers’ index) surveys.
The US and the Eurozone both show a clear divergence between confidence in the services sector and that in the manufacturing sector, with 50 being the dividing line between expansion and contraction.
The one piece of ‘hard’ data which will be of interest is the revision to US second-quarter GDP (gross domestic product) and the extent to which prices rose, which come out in a week’s time. [IC]
Temple Bar Investment Trust is managed by Redwheel’s Ian Lance and Nick Purves, who have more than fifty 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 most attractively valued assets that investors can buy anywhere in the world, they are currently very excited about the potential opportunity that lies ahead for the Trust.
Think value investing Think Temple Bar
“UK stocks look very attractively valued in a global context and when compared to history. Overseas businesses are already recognising this potential through acquisitions, and management teams are buying back shares at a record pace. These could represent meaningful catalysts for unlocking the inherent value in UK stocks. The long-term opportunity for UK value investors is significant.”
Ian
Lance,
Portfolio Manager
Temple Bar Investment Trust
For further information, please visit templebarinvestments.co.uk
Why the tide is about to turn for Diageo
The Johnnie Walker-to-Don Julio produceris a quality pick to quench investors’ growth and income thirsts
Diageo (DGE) £25.12
Market cap: £55.9 billion
Investors seeking a high-quality consumer staple that is currently on sale should consider buying Diageo (DGE), the world’s largest premium spirits company which is growing its market share around the globe. Shares in the premium drinks maker behind iconic brands Johnnie Walker whisky, Smirnoff vodka and Guinness stout are down 20% over one year. This reflects disappointment around its performance in the Latin America and Caribbean (LAC) region, and concerns over China’s slower than anticipated post-Covid recovery and a cautious consumer environment in North America.
The sell-off has left the shares looking cheap relative to their historical average and it feels as though the point of maximum pessimism has now passed with a margin of safety built into the stock. Admittedly, recent news flow from Diageo has been downbeat, but the company is delivering productivity savings and CEO Debra Crew is confident that ‘when the consumer environment
improves, organic net sales growth will return’. Diageo could even be a takeover candidate for a bidder looking to snap up an industry giant at a big discount.
DISTILLING DIAGEO’S STRENGTHS
Guided by Crew, successor to the late Ivan Menezes, Diageo is a veritable beverages behemoth whose unrivalled portfolio of brands span the likes of Captain Morgan rum, Tanqueray premium gin, Baileys cream liqueur, the Don Julio and Casamigos tequila labels and Chinese white spirit Shui Jing Fang.
This formidable strong portfolio confers pricing power on the business, which is key during inflationary periods, while the drinks giant’s myriad strengths also include its worldwide distribution footprint, massive marketing clout and a cash generative business model that has enabled the FTSE 100 group to establish
Chart: Shares magazine • Source: LSEG
Diageo key metrics
an enviable dividend growth record, while investing in the organic growth opportunities and acquisitions and returning additional capital to shareholders through earnings-enhancing share buybacks. Diageo also has scope to expand its operating margin thanks to ‘premiumisation’, the consumer trend towards quality over quantity and drinking better, not more.
DOWNGRADES HAVE LEAVE SOUR TASTE
Diageo’s shares are still nursing a hangover from a surprise November 2023 profit warning followed by downbeat results for the year ended 30 June 2024, which undershot consensus expectations with group sales declining for the first time since the pandemic.
who aren’t traditionally Guinness drinkers. Despite facing numerous challenges, Diageo’s free cash flow jumped 18% to $2.6 billion last year, which allowed the company to increase the annual dividend by 5% to $1.0348 per share and complete a $1 billion share buyback programme. Having always traded on a price to earnings comfortably above 20 times, Stockopedia data shows Diageo’s shares currently swapping hands for 18.7 times forecast 2025 EPS (earnings per share), falling to below 18 times for fiscal 2026.
One fund manager convinced the shares are undervalued is Nick Train, who holds Diageo in the Finsbury Growth & Income Trust (FGT). Train has long held the view that ‘a company with brands of Diageo’s calibre and, crucially, half of its earnings generated in the world’s biggest, and most dynamic economy, the United States, could be valued on up to 33 times EPS, for an earnings yield of 3%.
The company was unable to give an indication when its current period of poor trading will end, again given the difficult outlook for consumer spending, and reported an operating profit decline in four out of its five operating regions, while organic net sales were down 3% in North America, which accounts for 40% of the group’s global sales. Nevertheless, Crew noted that excluding LAC, organic net sales grew by 1.8%, driven by ‘resilient growth’ in the Africa, Asia Pacific and Europe regions, and the company ended the year with 75% of its brands gaining or holding market share.
Encouragingly, two of Diageo’s big long-term growth drivers, Guinness and Tequila outside the United States, grew their revenues at a double-digit clip. Bears will flag that spirits consumption is down among younger, more health-conscious drinkers, but Diageo has a secret weapon in Guinness Zero, which is selling hand over fist including to those
‘Or put differently, we would not even consider selling out of an asset as advantaged as Diageo at anything less than a 30 times or more multiple.’
One sticking point to a bid is the fact such a takeover deal would require a significant cash outlay, even if the bidder got a bargain price, since Diageo is currently worth the best part of £56 billion. One route might involve breaking up Diageo, with a beer company taking on Guinness and another company taking on the spirits brands. [JC]
Delivering productivity gains
H VIVO is in pole position to capitalise on increasing interest in human challenge trials
The contract research organisation sector has seen increasing M&A activity in recent years with average takeover premiums of around 30%
H VIVO (HVO:AIM) 28.2p
Market cap: £191.9 million
FluCamp does not sound like much fun for volunteers, but for leading CRO (contract research organisation) HVIVO (HVO:AIM) it represents a flagship service which is attracting growing interest from big pharma and biotechnology companies.
The company is at the forefront of HCTs (human challenge trials), a fast-growing niche within the large CRO industry which experts predict will grow from its current size of between $100 million and $150 million to between $700 million and $1 billion.
Having reached breakeven, HVIVO has ambitious plans to grow revenue to £100 million by 2028 from £62 million expected in 2024.
Increasing efficiencies and greater utilisation of new facilities is expected to lead to profitable growth. In the first half of 2024 generated £37.1 million of cash, up from £31.3 million in 2023, and the business is debt free.
The shares trade on a 2026 EV (enterprise
Chart: Shares magazine•Source: LSEG
value) to EBITDA (earnings before interest, tax, depreciation and amortisation) of eight times according to Panmure Liberum’s estimates, an unjustified discount to CRO peers and not reflecting growth prospects and high barriers to entry.
WHAT IS A HUMAN CHALLENGE TRIAL?
HVIVO specialises in conducting HCTs and has deep experience in testing infectious and respiratory disease with a heritage dating to the 1940s
Common Cold Unit.
HCTs differ from traditional clinical trials in that they involve infecting a healthy group of carefully selected volunteers with a specific virus in a controlled environment rather than testing safety and efficacy on participants who are sick.
HCTs have been around a long time, but it was only after the company led the first successful Covid HCT, funded by the UK government, that interest from regulators and drug manufacturers began to stir.
There are several factors driving demand. The US FDA (Food and Drug Administration) recently increased the rate at which it grants Breakthrough and Fast Track designations, to drugs supported by HCTs.
This has resulted in more drug developers adopting HCTs to speed up routes to regulatory approval, creating a surge in demand. Demonstrating the traction being achieved, HVIVO has expanded its order book six-fold over the last three years.
In drug discovery, identifying failure early can sometimes be as important as drug discovery itself.
WHAT IS THE GROWTH STRATEGY?
Yamin Mo Khan became chief executive in February 2022 and is the architect of the company’s growth strategy. Mo has 25 years’ industry experience, during which he transformed Pharm-Olam from a specialist clinical monitoring firm to a global full-service CRO.
His priority is to expand the order book, increase revenue visibility and promote cross-selling into broader capabilities while increasing utilisation of resources.
A high proportion (around 70%) of fixed costs in the business means increasing scale can drive profitable growth and margin expansion.
Signs are already visible with the firsthalf EBITDA margin expanding to 24.5% from 19.1% in 2023.
HVIVO is the world’s only specialised HCT CRO and is uniquely positioned to capitalise on the expected growth. The company has conducted around 70 trials and performed more than 4,000 volunteer inoculations, and claims to have more than 90% market share in the commercial HCT market.
Effectively HCTs derisk the route to market for new drugs and help refine optimal dosing levels.
Management has stated that HCTs can cost around 20% of conventional phase two trials. They require fewer volunteers (10s) compared with the thousands enrolled in conventional trials and can be completed in a shorter timeframe.
This is crucial because drug development costs tend to escalate, with phase two trials accounting for between a third to a half of total trial costs.
The company opened the world’s largest purpose-built challenge trial facility this year in Canary Wharf with 90% of the build costs funded by its clients to accelerate their studies.
The high-level three biosafety containment facility will unlock new revenue streams and increase the breadth of challenger models, increasing potential revenue by 50% to £90 million.
The flexible space will allow transmission studies designed to test whether a vaccine or drug can prevent transmission to a recipient volunteer.
The company is increasingly looking to leverage its world-class database of 300,000 volunteers, which can screen an additional 1,000 per week.
In summary, HVIVO is well-positioned to capitalise on the growth stemming from higher demand for HCTs and use its unique assets to broaden its revenue stream and diversify risk. [MG]
Trainline can regain momentum as it upgrades guidance
Shares rise as the rail app confirms it is now the most downloaded in Europe
Trainline (TRN) 333p
Gain to date: 2.1% Market cap:
£1.5 billion Trainline
We first flagged rail and booking site and app Trainline (TRN) in February, excited by the potential of a business which has already acquired a 60% share of the UK online market and has tapped into the growing European market.
It is now the most downloaded rail app in Europe with international consumer net ticket sales recently surpassing £1 billion.
WHAT HAPPENED SINCE WE LAST SAID BUY?
Trainline shares have endured a mixed showing. On 3 May the company reported a positive set of results for the year ending 29 February – revenue was up 21% to £397 million and net ticket sales were up 22% year-on-year to £5.3 billion, at the top end of guidance.
Despite ongoing rail strikes in the UK, Trainline unveiled a strong outturn in the six months to 31 August (12 September) with performance tracking ahead of expectations, helping to give the stock a meaningful lift.
Trainline raised its full year 2025 guidance – which translated into a rough 5% upgrade to Shore Capital’s adjusted EBITDA (earnings before interest taxation, depreciation, and amortisation) forecast for the 12-month period.
Shares magazine•Source: LSEG
WHAT SHOULD INVESTORS DO NOW?
We remain upbeat about Trainline due to the rapid progress it is making into Europe, particularly in Spain and Italy, and would back it to regain some of the momentum it lost earlier in the year.
Group revenue increased by 16% to £229 million for the six months ending 31 August and net ticket sales increased year-on-year by 13% to £3 billion.
France and Germany are in decline, with net ticket sales falling by 3% year-on-year in the first half of its financial year, but that’s due to a previously flagged pause in marketing and deprioritisation of the countries by the group.
Trainline has been able to position itself as a straightforward way to navigate the complex travel system and get good deals. Shore Capital analysts said that Trainline has an unmatched presence in the UK which will grow further due to the digitalisation of the industry. There are also opportunities for the company to increase its market share in Europe and tap into inbound foreign travel. [SG]
Chart:
Why Trustpilot is a tricky call to make
Still an attractive long-term play, but taking profit seems like a reasonable decision right now
Trustpilot (TRST) 222p
With more and more of us buying stuff online, is it any wonder that we are increasingly reaching out to fellow consumers for their seal of approval (or gripes) about products and services, and that’s great news for reviews business Trustpilot (TRST).
The platform now hosts more than 300 million consumer reviews of products and services across hundreds of thousands of websites, according to half year results. Thousands of businesses now turn to Trustpilot for customer transparency and the underlying consumer data analytics it provides to clients, and its value to them is being proved by client retention rates of 101%.
WHAT HAS HAPPENED SINCE WE SAID TO BUY?
Plenty of growth, and happily, that’s being reflected in the share price, which continues to rally. The latest sharp jump followed management’s upping of guidance (11 September).
‘Management now expects adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) to be at the top end of market expectations ($18 million to $22 million)’, noted Berenberg in a note to clients. ‘Current full year 2024 (to Dec) adjusted EBITDA consensus is at $20 million, so we would expect a circa 6% to 10% upgrade.’
That revenue, bookings and ARR (annual recurring revenue) increased 18%, 16% and 16% respectively is great news for investors, as are plans for a £20 million share buyback, around 3% of the shares in the market.
WHAT SHOULD INVESTORS DO NOW?
Up nearly 40%, we must recognise the temptation to lock in gains, especially now that the 12-month rolling PE (price to earnings) multiple has shot beyond 80, according to Stockopedia data. If that suits your investment remit, you might consider selling a partial stake – a two-thirds sale should cover your outlay and leave you with a free ride on any further upside.
The consensus price target ahead of today’s results was 230p, according to Stockopedia data. Berenberg was already ahead of that at 260p, and has now lifted its projection to 270p, implying another 20%-odd upside from current levels.
We still like the long-term Trustpilot growth story, and if you agree, it’s probably best to let the investment run. But for our purposes here, taking a profit looks like a reasonable risk-adjusted decision.[SF]
Why portfolio construction matters and how it can help you reach your investments goals
Diversification smooths out investment returns and ensures you get the best bang for your buck
This feature marks two new beginnings.
The first is a three-part-series exploring portfolio construction, management and how to adapt for major life milestones.
It is also the start of a brand-new section in the magazine. We want to find out how readers approach their own investment portfolios and the methods they use to construct and manage them. You can read more about how to get involved at the end of this article.
To kick things off we explain why portfolio construction is important and will run through an example of how to construct a portfolio using passive ETFs (exchange traded funds).
Whether you are a complete beginner starting out on your investment journey or a more experienced investor, we hope the series will become a helpful resource.
At first glance portfolio construction can appear a bit dry, but its importance cannot be overstated. AJ Bell’s investments managing director Ryan Hughes puts it succinctly: ‘One of the mistakes that beginners make is that they act like a collector, buying investments without regard to the way that each fit into the portfolio.
‘Each investment should bring something different. The aim is to achieve the highest returns with the lowest risk.’
UNDERSTANDING THE RISK
In the context of investing, risk refers to the amount of uncertainty associated with an investment’s return.
Some asset returns are more uncertain than others, so it is best to think about uncertainty or risk, as a spectrum, from very certain to highly uncertain.
Risk and return are inextricably linked. Safer assets such as cash in the bank have historically
delivered the lowest returns. Riskier assets like stocks have historically produced the highest returns. The catch is that stock returns are far more variable and can inflict painful losses over shorter periods.
Many decades ago, some clever academics discovered an answer to this thorny issue. It turns out that combining assets with different risks and expected returns can reduce the overall variability of a portfolio’s return.
They invented a mathematical framework which, in theory, allows investors to maximise expected return for a given level of risk. Each investor should aim to define their own risk appetite which sits at the core of an investment plan.
For example, James may be comfortable seeing the value of his portfolio moving up and down by around 10% a year while Jane isn’t flustered if her portfolio value swings around by 15% to 20%. James would ideally own a bigger proportion of lower risk, lower return assets than Jane.
The idea of spreading risk is referred to as diversification. Nobel laureate Harry Markowitz described diversification as the only free lunch in investing. Diversification principles can also be
applied to the stock portion of a portfolio, which we discuss later in the article.
THE RISK SPECTRUM
Government bonds (a type of I.O.U issued by the state) are close to risk-free investments because the state can always raise taxes to service its debts. Bonds provide a relatively safe, fixed income.
Bonds have another feature which makes them potentially useful in portfolio construction. During periods of stock market volatility, when stocks are often falling, investors tend to flock to bonds for their relative safety and positive return.
Increased demand for bonds pushes up their prices which offsets some of the losses incurred by stocks. That is the theory.
In practice, this relationship does not always hold. It can flip around with bonds prices dropping at the same time as stock prices.
The steep rise in interest rates since the pandemic is a good example with government bonds inflicting bigger losses than stocks in 2023. It is worth bearing in mind that bonds are very sensitive to changes in inflation because the income they pay is fixed.
Stocks are towards the riskier end because most of their potential return comes from rising share prices. These in turn, are linked to unknowable factors like profit growth and dividend income.
Not only are stock prices unpredictable, but
there is no protection for shareholders if things go wrong. Another reason not to put all your eggs in one basket. By contrast bonds have legal protection for bond holders.
DIVERSIFICATION IN A STOCK PORTFOLIO
Not all stocks have the same risk and return characteristics, so investing in a variety of stocks can be beneficial. The most common way to achieve stock diversification is to spread investments across different industries, sectors and geographies.
On top of that, it is also worth considering key factors like size, cheapness and momentum which are known to drive stock returns over the long run. Studies have shown that small-cap value stocks tend to outperform.
Remember, investment styles come into and out of favour, so it might be better to have a mixture or
A RISK LADDER Source: Shares
be style agnostic.
How many stocks do you need to achieve most of the benefit of diversification? There is no precise answer, it depends on the portfolio. If you tend to invest in large cap stocks which pay dividends, as few as 15 names should be enough.
If you prefer small caps, then 25 names might be needed to account for the higher volatility of small cap shares.
Beyond a certain level of diversification, the costs start to outweigh the benefits. Summing up, we have discovered that spreading investments across many risk factors creates portfolio stability and helps to maximise return for a given level of risk.
bonds while adventurous types will want more equities exposure. Those in the middle will aim for a balance between the two.
Age is another important factor in defining risk appetite. Younger investors have a longer investment runway and therefore can take on more risk.
Finally, remember to define your investment goals and timeframe and never lose sight of the fact investing is a marathon and not a sprint.
DISCLAIMER: AJ Bell, referenced in this article, owns Shares magazine. The author (Martin Gamble) and editor (Tom Sieber) own shares in AJ Bell.
By Martin Gamble Education Editor
WE WANT TO HEAR FROM YOU
We are looking for individuals or couples to share their experiences of managing their own investment portfolios.
BUILDING A PORTFOLIO WITH ETFS
Next, we look at how to build a portfolio using passive funds. ETFs track major stock and bond indices and, increasingly, popular investing themes.
They are an effective way to achieve broad diversification at a competitive price. They enable an investor to get exposure to thousands of companies and bonds by buying just a few products.
This approach also means you do not need to take any risk backing an active fund manager or go through the stress of analysing and picking individual companies.
The first step is to figure out your own individual risk appetite. Are you the type to get nervous when markets take a fall amid scary headlines about recession, or the cool, calm and collected individual who takes it all in their stride?
Referring to the risk spectrum mentioned earlier, cautious types will probably feel more comfortable allocating a bigger proportion to safer assets like
If you would like to take part, we want to know why you chose certain stocks, funds or bonds, why you might have subsequently sold some of them, and what you hope to achieve from investing.
We will pay £50 in John Lewis vouchers as a thank you to anyone whose story is published in the digital magazine.
Drop us a line with your name and two lines describing your investment experience. For those picked to feature in the magazine, we’ll be in touch to get the full story.
CONTACT: shareseditorial@ajbell.co.uk with the words My Portfolio in the subject line.
DISCLAIMER: Shares/AJ Bell does not provide advice or personal recommendations. The My Portfolio articles are for information only. You must do own research and consider your own personal circumstances before making investment decisions.
PORTFOLIO CONSTRUCTION IN PRACTICE
Karen's asset allocation profile
Karen is 36 years of age, married with two children and works as a dental hygienist. She has a happy-go-lucky approach to life and feels comfortable taking a little more risk to bag a potentially better long-term return.
STOCKS
Karen is pursuing a global approach to investing in stocks and researched some popular ETFs which track the MSCI World index. Karen applied the same thinking to other assets which comprise her total portfolio.
The stock product she landed on is the iShares Core MSCI World ETF (SWDA) which is the largest ETF tracking the index with assets of £61 billion. It gives exposure to more than 1,400 stocks across 23 developed stock markets for a cost of 0.2% a year.
The manager tracks the MSCI World index by buying a selection of the most relevant constituents.
BONDS
The broadest index which tracks global bond markets and is used by fund managers as a global benchmark is the Bloomberg Global Aggregate Bond index.
It is comprised of more than 15,000 investment grade (higher quality) bonds issued in developed and emerging markets across the globe. An
efficient way to track the index is via the Vanguard Global Aggregate Bond ETF (VAGS) which is the largest tracker with assets of £1.6 billion.
The ETF gives exposure to around 9,000 bonds by selecting the most relevant constituents and has a total expense ratio of 0.1% a year.
PROPERTY / INFRASTRUCTURE
Property and infrastructure funds aim to provide some inflation protection and a stable, reliable income. Karen believes they are a good diversifier for her portfolio.
A relevant property benchmark for UK investors is the FTSE EPRA/NAREIT index which tracks UK listed real estate companies and trusts. The £627 million iShares UK Property ETF (IUKP) tracks the index by using the full replication method.
This means it invests in all 40 constituent stocks of the index it tracks and has a total expense ratio of 0.4% a year. The fund has a yield of 3.8% and dividends are paid quarterly.
The iShares Global Infrastructure ETF (INFR) tracks the FTSE Global Core Infrastructure index which invests in the largest global infrastructure stocks across the globe.
The £1.2 billion fund fully replicates the underlying index for a total expense ratio of 0.65% a year giving investors exposure to nearly 260 companies. Dividends are distributed quarterly, and the fund has a yield of 2.3%.
25 YEARS OF BUMPER RETURNS
Anniversaries are often an opportunity to take stock so the Shares team has had a look at the best performing shares, funds and investment trusts since the magazine’s first issue in September 1999.
Read on to discover the identity of the top performers and find out names we think will continue to impress in the years to come and those where we think the good times might be over. But first, Ian Conway provides a personal perspective on the last 25 years in financial markets.
TWENTY-FIVE YEARS OF CHANGE BUT MUCH REMAINS FAMILIAR
As the two Ronnies – in this case Lane and Wood –put it so succinctly, I wish that I knew what I know now, when I was younger.
Twenty-five years ago, we were in the midst of the tech bubble, when ‘clicks’ and ‘sticky eyeballs’ were enough to justify sky-high PE (price to earnings) multiple, although in honesty most of the companies coming to market back then had no earnings to speak of.
If memory serves, at one point National Grid (NG.) was co-opted into the tech rally on the basis it was going to send broadband ‘waves’ through its power lines. So much for that idea.
There was without question a colossal misallocation of capital and many of the firms which were purported to be the biggest beneficiaries of the internet ‘revolution’ ended up going bust, losing investors
Discover the superstar stocks and funds of the last quarter century
By Ian Conway Deputy Editor
25 years of ups and downs for UK stocks
FTSE All-Share
25 years of ups and downs for UK stocks
Chart: Shares magazine•Source: LSEG
billions of pounds.
Yet the over-investment in high-speed networks paid off, paving the way for much of what we take for granted today – low-cost 4G mobile, data centres, streaming services, even video conferencing and remote working.
In 1999, five years after it was founded, Amazon (AMZN:NASDAQ) was still a book seller in Seattle with its headquarters nestled between a needle exchange and a porn shop and Jeff Bezos was driving a Honda. Allowing for stock splits, if you had invested $1,000 in Amazon at its IPO (initial public offer) in 1997 your shares would be worth just shy of $2.5 million today.
Similarly, Google, launched in 1998 by Larry Page and Sergey Brin, was a pure search engine with ‘no weather, no news feed, no links to sponsors, no ads, no distractions, no portal litter’, according to the
trade press of the time.
An investment of $1,000 at Google’s IPO in 2004, again adjusting for stock splits and allowing for Alphabet (GOOG:NASDAQ) shares having fallen over 20% from their recent highs, would now be worth around $1.7 million. Ho hum.
FOREVER BLOWING BUBBLES
As the tech rally deflated through the mid-noughties, another bubble was forming in US real estate, helped partly by aggressive rate cuts from the Fed and by compliant banks, who were playing both sides by lending willy-nilly to buyers and securitising those loans to sell on to yield-hungry institutions.
Eventually the whole house of cards came tumbling down in 2007, as author Michael Lewis captured so well in The Big Short’, but not before hundreds of billions more dollars had been misallocated.
The fall-out from the housing crash led to the demise of several eminent Wall Street institutions and presaged another round of Fed rate cuts, but it would be a long time before the US economy found its feet again. Meanwhile, on the other side of the world, China had emerged as a new economic powerhouse.
Its insatiable appetite for raw materials, especially copper and other metals, led to a creeping bubble in commodity stocks which culminated in the mining sector becoming the largest component of the FTSE 100 index.
Miners reached their apotheosis in 2011 when South African-based producer and distributor Glencore (GLEN) came to market in the biggest UK IPO in history, generating a fortune for its founders and traders, many of whom made personal windfalls
Asset classes over 25 years
How major global indices have fared
How major global indices have fared
of more than $500 million, yet within five years its stock price had collapsed almost 90%.
In the last decade we have seen more minibubbles – in the shares of electric vehicle makers, in crypto-currencies, in government bonds (remember negative real yields?), in leverage itself and arguably in the valuation of AI (artificial intelligence) and obesity-related stocks.
SAME AS IT EVER WAS
So, 25 years after Shares first rolled off the press, what hasn’t changed? Human nature, for one – there will always be those who love to speculate, and no matter what ‘guard rails’ are put in place to try to stop the worst excesses of over-trading, we are still going to get booms and busts, of that much we are sure.
In terms of assets, shares have continued to outperform bonds on a total return basis over the last quarter-century and we can’t see that changing, but as ever price is what you pay, value is what you get, so if you overpay for a stock you still face the possibility of losing capital.
Despite regular claims that the era of fiat money is over, the dollar remains the world’s reserve currency and we don’t see that changing either. For the same reason, speculators are always going to look for a ‘carry’ trade, where they can borrow heavily in one currency and invest the proceeds in another, and as recent experience has shown, when these trades eventually unwind they can cause massive volatility.
Finally, markets today are just as inefficient as they were 25 years ago, which is good news for professional stock pickers and those with the skill and the knowledge to know where to look for bargains.
BEST PERFORMING UK STOCKS OF THE LAST 25 YEARS
Ashtead (AHT)
£52.30
When considering which of the winners of the past 25 years to back for the future we weighed up a variety of factors – not just the quality of the company in terms of its return on capital employed and how it allocates that capital but its ability to set prices, the markets in which it operates and the big drivers of its business.
For equipment hire firm Ashtead (AHT), that means the US and Canada where it does most of its business, and the infrastructure market which drives demand for its products and services.
In the US the firm operates close to 1,200 hire centres, while in Canada it has 135 outlets, and it grows that number each year by reinvesting its cash flows into opening more centres and buying small local rivals which it quickly absorbs.
On top of a multi-billion-dollar annual hire market which is continually growing, the firm is seeing an accelerating structural change from ownership to rental as well as increased demand from nonconstruction sectors and new markets.
The shares are priced at around 15 times forward earnings, which we believe it can continue to grow by around 15% per year, making the valuation appear reasonable.
JD Sports Fashion (JD.)
The self-styled ‘King of Trainers’ has been a stand-out performer over the last 25 years and has grown its earnings at a compound annual rate of around 18%, but we can’t see it maintaining a similar growth rate going forward.
144p
given it pricing power over retailers and wholesalers. In August, JD confirmed full-year earnings would be in the bottom half of the range of estimates, despite what should have been a strong 2024 due to the Euros and the Olympics, and while the rating isn’t overly demanding we think the risks are to the downside.
Top
performing UK stocks of the last 25 years
Retailing is a difficult market at the best of times given changing consumer tastes, and the athletic footwear market is incredibly competitive, especially in the US which is JD’s big bet following the acquisition of rival Hibbett.
Established brands like Adidas (ADS:ETR) and Nike (NKE:NYSE), which form the backbone of JD’s business, face growing competition from newcomers like ON Holdings (ONON:NYSE) and Hoka, owned by Deckers Outdoor (DECK:NYSE)
In particular, On’s strategic partnerships with high-profile figures like Zendaya and Roger Federer and its investment in innovation have boosted its visibility and credibility as a premium sportswear brand, while its multi-channel strategy has
BEST PERFORMING FUNDS OF THE LAST 25 YEARS
Janus Henderson Global Select Acc (B68SFJ1) 466.4p
In existence for more than 40 years, over the last quarter of a century Janus Henderson Global Select (B68SFJ1) –previously known as Janus Henderson Global Equity – has chalked up an impressive performance which compares favourably with more illustrious counterparts.
The name change followed the appointment of Julian McManus as lead portfolio manager in 2023 with the portfolio becoming less concentrated than it had been historically, although at between 40 and 65 names this remains a fairly focused fund.
It is also a fund which deviates significantly from its benchmark, and we think a balanced approach with a mix of stocks from sectors like energy, financials and defence alongside technology could be a successful one in the years and decades to come.
The likes of Microsoft (MSFT:NASDAQ), Amazon (AMZN:NASDAQ) and Taiwan Semiconductor Manufacturing (TSMC:NYSE) will be holdings in lots of global funds but others, like Japanese insurer Dai-ichi Life (8750:TYO) and US power generation company Vistra (VST:NYSE), not so much.
The aim is to beat the MSCI All-Countries World index by 2.5% per year over a five-year period. This is underpinned by investing in stocks where McManus and fellow manager Christopher O’Malley believe free cash flow growth potential is being underestimated by the market. Ongoing charges are reasonable at 0.86%. [TS]
INDIAN FUNDS
Several India-focused funds populate the list of best performers over the last quarter century, but there are reasons to think the path ahead may not be so smooth, not least high valuations. India’s equity market has been on a relentless bull run since the pandemic, but recent lacklustre earnings and slowing GDP growth may mean stocks take a pause, for a bit anyway.
Since the low of the Covid outbreak in March 2020, the blue-chip NSE Nifty 50 index (the equivalent of the FTSE 100) has soared nearly 200%, lifting the total market cap of Indian equities to more than $5 trillion. In February 2024, the UK market was worth about $3.1 trillion.
‘ The attractiveness of the Indian stock market depends largely on whether earnings growth remains strong,’ says Herald van der Linde, head of Asia Pacific stock strategy at HSBC. He called India’s earnings in the second quarter of 2024 ‘worrying’, with earnings growing at double-digits, but slower than in the past few years.
While experts almost uniformly see India as a long-run growth opportunity, recent data might suggest that Indian stocks are a bit too hot to handle right now and there is the potential for growing pains in the economy.
This can partly be blamed on seasonal factors (heatwaves, monsoon season) while an election that dragged on for months crimped consumption and investment. India’s GDP growth for the April to June quarter, which clocked 6.7% year-onyear, was also shy of Reserve Bank of India’s (7.1%) and market consensus (6.9%) projections.
Sandeep Bhatia, head of equity India Macquarie Capital, doesn’t expect major earnings surprises for the next 12 to 15 months. No one is suggesting widespread selling of Indian stocks or funds. But geopolitical uncertainties are likely to trouble sentiment in the short to medium term and inflation needs careful managing. [SF]
BEST PERFORMING TRUSTS OF THE LAST 25 YEARS
Worldwide Healthcare Trust (WWH)
It is no surprise that the Worldwide Healthcare Trust (WWH) has performed so well over the last quarter of a century.
There is likely more to come given the sector continues to benefit from the structural growth drivers of ageing global populations and accelerating innovation which is boosting drug discoveries.
The trust’s portfolio manager, OrbiMed Capital, is one of the largest dedicated healthcare investment firms in the world which has managed the portfolio since launch in 1995.
Since inception lead managers Trevor Polischuk and Sven Horho have delivered an annualised total return in net asset value of just over 14% a year, comfortably outperforming the MSCI World Healthcare index return of 10.5% a year.
The investment team have a global focus and attempt to identify sources of outperformance across the whole sector from the early-stage start-ups to large integrated biopharmaceutical companies.
The fundamental investment approach is designed to unearth opportunities in companies
AVOID
with
products, with high quality managements and solid financial resources.
The manager has assembled a basket of companies it believes are likely to benefit from increasing mergers and acquisitions activity which represents the portfolio’s largest holding, worth around 8% of assets.
Weight-loss market leaders Eli Lilly (LLY:NYSE) and Novo Nordisk (NOVO-B:CPH) feature in the top 10 holdings. The trust has an ongoing charge of 0.9% a year. [MG]
Pacific Horizon Investment Trust (PHI)
569.7p
This Asia-focused fund has an enviable track record but, as it stands today, its large weightings towards India and China, accounting for more than 40% of the portfolio, make us unsure on its prospects of continuing to outperform in the future.
On a really long-term view performance is undoubtedly impressive but, more recently, the trust has found things more difficult. It is down 34.6% in total return terms on a three-year view. While it dominates Asia in economic terms, China is something of an outlier in one important respect. Unlike many other developing economies in that part of the world, the country has a demographic profile more akin to the West. In other words, its population is getting older, its working age population is shrinking and this could act as an obstacle to growth. In part this is a legacy of China’s one-child policy which was in place from 1980 to 2016. China is also enduring a fairly painful transition from an exportdriven economy to one powered by domestic consumption. Indian stocks, meanwhile, trade on very lofty valuations which, as discussed earlier in this feature, make us pretty nervous. [TS]
Top
Top performing investment trusts of the last 25 years
AVOID
Schroder Oriental Income Fund Capturing the artificial intelligence opportunity in Asia
Artificial intelligence (AI) has become a major force in global stock markets, driving significant returns over the past couple of years.
Although much of the attention has focused on Nvidia, the US technology company that designs the advanced chips which are essential for AI processing, there is a robust ecosystem of other technology companies that contribute at various stages of the AI value chain. Asia has become a pivotal hub in this AI revolution and whilst the AI related revenues for many of these Asian companies are starting from a low base it is a fast-growing area often utilising leading-edge products and technologies thus enhancing returns for companies that can successfully supply into the space. These include companies that not only fabricate and package the chips but also those that can supply the high-end servers required or fabricate parts
and components to meet the demands of AI. These include items such as the power supply for servers which have to be able to cope with much higher loads than for ordinary applications. The Schroder Oriental Income Fund is strategically positioned to capitalise on this growing opportunity and is currently exposed to all of those areas.
It should be remembered that whilst AI should continue to be a positive driver for the IT sector it is not the only driver and the industry should continue to benefit longer term from positive trends around digitisation, cloud and 5G.
With more than 30% of its portfolio allocated to the Information Technology sector, the Schroder Oriental Income Fund is well ahead of its benchmark index (MSCI AC Pacific ex Japan Index, 26.3%). In recent years, this positioning has added value through outperformance and as a strong source of dividends and dividend growth.
means it has exposure to the mobile, display and foundry sectors.
Elsewhere amongst the portfolio holdings is Hon Hai, not only a manufacturer of smartphones and other high end consumer products but also a manufacturer of servers key to the growth of AI and MediaTek, which has successfully forged a position as a global leader in mobile chipsets, which have the potential for greater AI-driven applications. As an asset light, cash generative business, it has also been steadily growing its dividend as it returns significant cash to shareholders.
CAN THE AI BOOM CONTINUE?
Although returns from Asian technology stocks have been strong in recent years, the key question for investors right now is, can the growth continue? Some industry commentators worry that the stock market’s enthusiasm for AI and technology may have fuelled an investment bubble, similar to the one that greeted the internet boom in the late 1990s.
For Richard Sennitt, portfolio manager of the Schroder Oriental Income Fund, there are reasons for cautious optimism.
“We remain positive about the role that Asian technology companies can play in AI’s continued development. We are still in the early chapters of the AI story, and there is plenty of growth and innovation still to come, with implications for all industries and, indeed, all parts of daily life. This will inevitably drive risk as well as opportunity. However, expectations in parts of the IT sector related to AI are now high and longer-term question marks around the monetisation of the technology remain. Therefore, one needs to be disciplined when assessing stocks associated with the theme. Whilst Asia remains an interesting way for investors to gain exposure to the AI theme the broader sector also has longer term attractions and on balance, valuations for Asian technology stocks as a whole have not yet responded to the extent that they have in the US.”
DISCIPLINE IS KEY
Nevertheless, investors should be mindful of potential volatility in the near term. Although Asian technology stocks have not risen as far or as fast as those in the US, they are unlikely to be immune should US technology stocks suffer a correction.
The best protection against this risk is a long-term, disciplined investment approach, such as the one that Richard adopts for the Schroder Oriental Income Fund.
“We are pragmatic stock pickers and aim to look beyond the day-to-day swings in sentiment to which markets have always been prone. We are looking for the genuine long-term winners across a wide range of sectors, and maintain a strong valuation discipline to ensure that, when we find them, we don’t overpay for them.”
Richard and his team focus on quality companies that have strong management, appropriate balance sheets and sustainable long-term competitive advantages. Richard draws on Schroders’ extensive research resources in Asia, where on-the-ground analysts engage directly with company management teams, ensuring that the fund remains focused on opportunities that can deliver attractive
Risk Considerations: Schroder Oriental Income Fund Limited
• China risk: If the fund invests in the China Interbank Bond Market via the Bond Connect or in China “A” shares via the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect or in shares listed on the STAR Board or the ChiNext, this may involve clearing and settlement, regulatory, operational and counterparty risks. If the fund invests in onshore renminbi-denominated securities, currency control decisions made by the Chinese government could affect the value of the fund’s investments and could cause the fund to defer or suspend redemptions of its shares.
• Concentration risk: The Company may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the company, both up or down.
• Counterparty risk: The Company may have contractual agreements with counterparties. If a counterparty is unable to fulfil their obligations, the sum that they owe to the Company may be lost in part or in whole.
• Currency risk: If the Company’s investments are denominated in currencies different to the
dividend profiles.
Having grown its dividend every year since its launch, this approach has served the Schroder Oriental Income Fund well in the past. Richard comments.
“We have a robust and repeatable investment process. The disciplined focus on valuation ensures we can adapt to evolving market conditions, allowing the portfolio to deliver its continued focus on income, while still being able to capture some of the best opportunities in Asia, in technology and beyond.”
currency of the Company’s shares, the Company may lose value as a result of movements in foreign exchange rates, otherwise known as currency rates.
• Derivatives risk: Derivatives, which are financial instruments deriving their value from an underlying asset, may be used to manage the portfolio efficiently. A derivative may not perform as expected, may create losses greater than the cost of the derivative and may result in losses to the fund.
• Emerging markets & frontier risk: Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty, operational and liquidity risk than developed markets.
• Gearing risk: The Company may borrow money to make further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase by more than the cost of borrowing, or reduce returns if they fail to do so. In falling markets, the whole of the value in such investments could be lost, which would result in losses to the Company.
• Liquidity Risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. In difficult market conditions, investors
may not be able to find a buyer for their shares or may not get back the amount that they originally invested. Certain investments of the Company, in particular the unquoted investments, may be less liquid and more difficult to value. In difficult market conditions, the Company may not be able to sell an investment for full value or at all and this could affect performance of the Company.
• Market Risk: The value of investments can go up and down and an investor may not get back the amount initially invested.
• Operational risk: Operational processes, including those related to the safekeeping of assets, may fail. This may result in losses to the Company.
• Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve.
• Private market valuations, and pricing frequency: Valuation of private asset investments is performed less frequently than listed securities and may be performed less frequently than the valuation of the Company itself. In addition, in times of stress it may be difficult to find appropriate prices for these investments and they
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The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as
may be valued on the basis of proxies or estimates. These factors mean that there may be significant changes in the net asset value of the Company which may also affect the price of shares in the Company.
• Share price risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. This means the price may be volatile, meaning the price may go up and down to a greater extent in response to changes in demand.
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amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.
Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
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Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.
Is Alphabet antitrust case a threat or an opportunity?
What analysts say about US government’s Search monopoly claims
Once peerless, there’s an argument that Alphabet (GOOGL:NASDAQ) is now facing its own ‘Hobson’s choice’. On the one hand, it is being threatened by enormous potential disruption as competitors like OpenAI and its SearchGPT chase share of its valuable search market, forcing it to throw billions of dollars at AI (artificial intelligence) infrastructure to stay ahead.
On the other, there’s a nightmarish labyrinth of tightening antitrust rules as regulators around the world show a willingness to bare their teeth to bring big tech to heel. On 10 September, the European Union’s top court backed a €2.4 billion EU antitrust fine for Alphabet after the Court of Justice said the company’s practice of favouring its own shopping search results over rival services ‘was discriminatory’. The ruling can’t be appealed.
This was just a taste of the bitter pill Alphabet could be forced to swallow if US regulators get their way. On the same day the EU fine was handed out, the US government launched a trial against Alphabet accusing the company of illegally monopolising the ad tech market.
The lawsuit, originally filed in 2023, comes after a combined investigation by the US government and more than a dozen states. The case focuses on a $31 billion component of Alphabet’s Google ad business responsible for placing banner ads on millions of websites, called Google Admob.
It’s a big deal. Search, which includes Google Admob, is Alphabet’s crown jewel, generating $237.9 billion of revenue in 2023, about 77% of its $307.4 billion total. For context, Google Play and Google Cloud produced $34.7 billion and $33.1 billion respectively last year.
TURNING UGLY
Alphabet will, of course, put up a stiff defence and it has already described the monopoly allegations as ‘unfounded’, claiming that it is just one of several hundred companies in the online ad business, including other tech giants like Meta Platforms (META:NASDAQ), Apple (AAPL:NASDAQ), Amazon (AMZN:NASDAQ), and TikTok, and that competition in the digital ad space is increasing,
not decreasing as the lawsuit suggests, as more companies enter the lucrative sector.
But rare extreme measures are said to be under consideration by US rule makers, including an enforced break-up of Alphabet, a move that would be Washington’s first to dismantle a company for illegal monopolisation since unsuccessful efforts to break up Microsoft (MSFT:NASDAQ) two decades ago.
Less severe options could include forcing Alphabet to share more data with competitors and measures to prevent it from gaining an unfair advantage in AI products, according to reports. Normally, markets tend to shrug off regulatory threats aimed at big tech firms, but not this time. Since the investigation findings were made public in July, Alphabet’s share price has fallen sharply, down more than 18%, a decline that has eaten away at much of the stock’s year to date gains and leaving the stock a poor relation to other big tech names.
Meta, Amazon, and Apple are up 51%, 24% and 19% respectively since the start of the year. Clearly, investors have been given plenty to chew over.
HOW
REAL IS BREAK-UP
THREAT
But would a break-up really be so bad? Not according to Needham analysts, who have argued that Alphabet is worth more in pieces than as a whole.
‘YouTube would be worth $455 billion to $634
billion if separately traded,’ they say, representing 25% to 35% of Alphabet’s current $1.87 trillion total enterprise value today, based on assumptions that investors typically pay more for pure-play assets. Additionally, increased disclosures and improved employee retention could further enhance shareholder value, says Needham.
Needham are far from alone in seeing Alphabet as an attractive opportunity even with daunting antitrust pressures. Target prices for the stock over the next 12 months range from $151 to $230, but consensus is pitch at $202, implying almost 30% upside from currently levels.
Analysts at Piper Sandler and Wolfe Research have also encouraged long-term investors to take advantage of the recent pullback in Alphabet stock. ‘The antitrust case, particularly regarding Google’s dominance in Search, poses near-term headline risks,’ said Piper Sandler, but the litigation process is lengthy, with appeals and potential changes in government mitigating the immediate impact.
‘We spoke with an antitrust lawyer to discuss Alphabet’s DoJ litigation and his view was that the government has successfully argued the merits within two of three cases, but time is on Alphabet’s side.’
The Search trial, which is most significant, has a lengthy remedies and appeals process ahead. Meanwhile, there could be a new administration in the interim and technology is advancing fast, they
ALPHABET Q2 FY24 INCOME STATMENT
also noted. The recent ruling by judge Amit Mehta is characterised as ‘measured’ by the antitrust lawyer that Piper Sandler spoke to, with findings of monopoly power in Search and General Text Ads but without evidence of consumer harm.
‘A break-up or forced divestiture of Android/ Chrome is unlikely,’ according to Piper Sandler’s legal expert. On this basis the investment bank argues: ‘Long-term investors should use recent weakness to accumulate shares.’
REMEDIES AT THE READY
Wolfe Research notes potential remedies that might include implementing choice screens and/ or Apple entering a distribution agreement with a competitor, likely Bing, which would become the default search engine. They said their ‘incrementally positive view’ on Alphabet stock is grounded in four key factors:
First, in the choice screen scenario, their base case analysis suggests a 10% upside to consensus EPS (earnings per share) estimates and a more than 35% increase in the current share price. Secondly, even in a severe scenario where Apple switches its default search engine and Google loses 20% of its market share, the analysts project only a 5% downside to consensus EPS and around a 12% decline in share price.
Third, changes in the Network business
are expected to have little effect on core EPS. Lastly, Wolfe points out that third quarter (to end September) Search revenue may exceed expectations, despite fears of a modest miss.
Alphabet shares are currently trading on about 21-times 2024 EPS and 18 2025 estimates, or 18.9 based on Stockopedia’s rolling next 12 months EPS. That’s a 16% discount to Meta stock (22.5) and a hefty 60% to Apple (29.9) with comparable growth expected to the former and twice that of the latter. The S&P 500 trades on a forward PE (price to earnings) of about 21, according to Wolfe Research.
Could the antitrust odour linger for a while yet? Potentially, especially if third-quarter results stink up the joint. They’re due 22 October with consensus forecasts pitched at $1.84 EPS on $86.3 billion revenue, based on Koyfin consensus data.
On the other hand, positive quarterly numbers could rally Alphabet supporters and drive a stock rally. It’s this latter outcome that Piper Sandler and Wolfe Research both back. The analysts view the antitrust case as more of a ‘distraction’ for longterm investors, with regulatory risks already priced into the stock.
By Steven Frazer News Editor
CC Japan Income & Growth Trust plc
Uncovering income & growth opportunities in Japan
Portfolio manager Richard Aston’s valuation-disciplined; total return approach is designed for investing in the Japanese stock market of today. With the strategy’s core focus on consistent and improving shareholder returns, Richard looks to provide a stable income via dividends and share buybacks from Japanese companies of all sizes. Richard’s high conviction and index agnostic portfolio aims to capture the key beneficiaries of Japan’s improving corporate governance and ongoing structural economic reforms.
THE INCREASING IMPORTANCE OF DIVIDENDS IN JAPAN
Dividends, as well as share buybacks, continue to rise in Japan thus improving shareholder returns for investors. With a focus on companies that can provide both a stable dividend AND can demonstrate the ability to grow, CC Japan Income & Growth Trust aims to capture the best ideas that corporate Japan has to offer across sectors, the full market cap spectrum and even geographical reach (domestic, regional & global leaders).
The income focus warrants a disciplined approach to valuation and detailed fundamental research prevents the Trust from overpaying for high-growth companies that
are often priced for perfection, whilst also avoiding cheap unloved stocks that are in-fact value traps.
The Trust’s consistent and disciplined approach has demonstrated that it can perform throughout the cycle having meaningfully outperformed the TOPIX Total Return (in GBP) since launch in December 2015.
To find out more visit: www.ccjapanincomeandgrowthtrust.com
Performance Track Record
Source: Independent NAVs are calculated daily by Apex Listed Companies Services (UK) Limited (by Northern Trust Global Services Limited pre 01.10.17.) From January 2021 Total Return performance details shown are net NAV to NAV returns (including current financial year revenue items) with gross dividends re-invested. Prior to January 2021 Total Return performance details shown were net NAV to NAV returns (excluding current financial year revenue items) with gross dividends re-invested. Ordinary Share Price period returns displayed are calculated as Total Return on a Last price to Last price basis. Past performance may not be a reliable guide to future performance. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. All figures are in GBP or Sterling adjusted based on a midday FX rate consistent with the valuation point. Inception date 15.12.15. Investments denominated in foreign currencies expose investors to the risk of loss from currency movements as well as movements in the value, price or income derived from the investments themselves and some of the investments referred to herein may be derivatives or other products which may involve different and more complex risks as compared to listed securities. CC Japan Income & Growth Trust plc (the Company) does not currently intend to hedge the currency risk.
My Financial Life - 70s
Looking at the different challenges women face in managing their finances starting with those in their eighth decade
AJ Bell’s Money Matters campaign was launched three years ago with the aim of helping women navigate the massive gender investment gap.
This is the first in a series of articles looking at the particular challenges women face at different stages in their financial lives.
You might think that by the time you reach your 70s most of your life’s financial decisions are behind you, but actually this decade is a hugely important one, and 75 is a milestone that requires special consideration.
Women currently in their 70s are part of a generation where a whole lot changed for women’s rights.
A PERIOD OF CHANGE
These were the women who joined movements like Women’s Lib, demanding equal pay and opportunity. Thousands went to university, and there was a boom in
employment for young, single women.
My mum is from this generation; she embraced flower power, became an air hostess and built up a small private pension pot. They are the baby boomers and the first to have to properly navigate pension freedoms. Those additional choices have given people opportunities to make their pension pots work better for them. While they do still have the option of buying an annuity, a guaranteed income, with their pot, they also have the option of leaving the money invested and drawing down what they need when they need it, an amount that can fluctuate extensively.
At 75 my mum is energetic and vital; she travels all around the world visiting family and friends, and she enjoys taking her grandchildren out to rock climbing walls and swim centres.
Women currently in their 70s are part of a generation where a whole lot changed for women’s rights”
It’s a lifestyle that is quite expensive to maintain, but she’s already aware she won’t want to continue that level of activity into her 80s so she’s been able to budget accordingly and enjoy her chunk of tax-free cash to fund this part of her retirement.
A FINANCIALLY IMPORTANT MILESTONE
And 75 is a financially important milestone. If you die before you reach 75 your pension can be passed onto your loved ones without any income tax charges, so it makes sense to spend ISAs and other investments before spending your pensions.
It’s likely to be the first full decade when you need to live off your investments”
But once you reach 75 things change and beneficiaries will have to pay income tax on what they receive, so if you’ve not taken advantage of your tax-free cash before then you could end up leaving HMRC an unintended gift (though remember you can still access what’s left of that 25% at any time).
But overriding all that is the fact that pensions are free from inheritance tax and other investments are not. So, if you think IHT is going to be an issue, do make sure you think carefully about your estate and investments.
AN IMPORTANT DECADE
Your 70s is a really important decade and one which you have probably spent a lot of the previous years working towards. It’s likely to be the first full decade when you need to live off your investments, though more and more people are working at least part-time.
Investment decisions are likely to favour income funds, those that pay substantial dividends and allow investors to leave the majority of their pot untouched. Making sure whatever you’ve amassed lasts for as long as you need it, is enough to cover any care costs you might need in the future and that there is money left to be bequeathed to loved ones can become overwhelming, doubly so if you
have to cope with the loss of a partner or spouse.
Many widows find themselves having to deal with complex financial issues whilst they are grieving, something that’s made especially acute by the gender investment gap. Drawdown gives people more flexibility and whilst annuities guarantee an income for life, people considering buying one should think carefully about inflation protection, their health and their beneficiaries. Making whatever pot of money you’ve managed to amass work as hard as it can for you is especially important for women who, on average, have significantly smaller pots of cash than men despite the fact they live longer.
Your 70s should be a fresh and exciting page but it isn’t always straightforward. The key is to act smartly and act early, think of your finances in the same way you think of your body; healthy habits don’t have to be onerous but small actions can make a huge difference.
DISCLAIMER: AJ Bell, referenced in this article, owns Shares magazine. The author (Danni Hewson) and editor (Tom Sieber) own shares in AJ Bell.
MY FINANCIAL LIFE 70S CHECK LIST
1 Check benefits – are you getting everything you are entitled to?
2 Keep up with your finances – if your needs change will your finances give you the flexibility you need?
3 Plan ahead – make sure you’re aware of your partner’s finances and have your own estate in order.
4 Remember the tax man will still come calling – with the state pension getting ever closer to the personal allowance
threshold planning, when, how much and where you take your income from becomes increasingly important.
5 Don’t get stressed – there is a lot of help out there to make sure you enjoy the retirement you deserve.
Trump, tariffs and election trade-offs
Inflation in the United States has fallen a long way from its peak of 9% in summer 2022. Favourable conditions have enabled the Federal Reserve (Fed) to nurse the economy back to health, and its vitals are in good order, with reasonable growth and tolerably low inflation.
Because of the substantial improvement in the inflation outlook, financial markets are expecting a series of interest rate cuts. The Fed has all but told investors this will begin at its September meeting. Several members of the Federal Open Market Committee (FOMC) fear policy is already far too restrictive; that may soon become the consensus view of the committee.
But there is discord in the current market setup. Bond markets are pricing an aggressive cutting cycle over the next couple of years. Equity markets, meanwhile, are buoyed by the sugar rush of lower front-end interest rates. Yet they expect rapid growth in corporate earnings, forecasting 9.4% EPS growth over the next 12 months for the median S&P 500 stock.1 If the economy is strong enough to produce such profit growth, one wonders whether inflation will be sufficiently benign to permit the 150-200bps of rate cuts now expected by the end of 2025.
And this is without considering the policy platforms of the two candidates in November’s presidential election.
Joe Biden’s administration has been as hostile to China as the one that preceded it (even if the tone has been less inflammatory). Strategic rivalry with China – economic, technological, financial and geostrategic – is one of the few issues that commands bipartisan support, meaning Kamala Harris is unlikely to chart a different course. If Trump wins, Sino-US economic warfare could significantly intensify.
Neither Trump nor the broader Republican movement has laid out exact plans; but substantially higher tariffs on China look likely if Trump returns to the White House. The most vocal of Trump’s protectionist advisers have suggested across the board tariffs, on military foes and
Source: Barclays Research, US International Trade Commission, Census Bureau. Latest value assumes a 60% tariff on all Chinese imports and a 10% across the board tariff
allies alike.
The media are currently touting a 60% tariff on Chinesemade goods and 10% on goods from all other countries. As this month’s chart highlights, Trump implementing these tariffs would return the average rate to a level last seen in the 1930s.
Trump’s trade agenda faces considerable – but not insurmountable – political and legal hurdles. A second Trump administration may not be able to hike tariffs to the levels many people appear to anticipate. Even so, the risk of a trade war with China and other trading partners is material.
The inflationary dangers in 2025 and beyond are not limited to Trump’s trade agenda. A surge in immigration since the pandemic has helped tame inflationary pressures. A second Trump term could involve dramatically lower migrant flows, as well as intensified efforts to deport existing illegal migrants. Even under a Harris presidency, the threat of big losses in the midterm elections would exert considerable political pressure on the White House’s immigration policy.
If Trump does return to the Oval Office, the combination of sharply higher tariffs and squeezed immigration could reignite the inflationary dry tinder that remains in the US economy. And if the Democrats win, the toxic political atmosphere post-election may tie the hands of Kamala Harris, forcing her to pursue a different, but nonetheless inflationary, policy agenda.
Either outcome could bring the Fed’s cutting cycle to a premature end, dashing investors’ hopes of easier and more asset-friendly monetary conditions.
Jamie Dannhauser, Economist
Subscribe to receive a monthly email containing an interesting chart, plus a short commentary from Ruffer here.
The identity of the best performing US super sector may surprise you
This column is no adherent to ‘efficient market hypothesis’, not least because there would not be equity booms and busts, or even marked day-to-day volatility, if investors really knew what was coming around the corner – it simply would not be possible to make a profit if everything was perfectly priced. However, it does have a lot of sympathy with the argument that a security’s price is a very fair reflection of what is known, and thought, about what is happening to it now, especially given the number of very smart professional (hedge, pension and institutional funds) and retail investors who will
be looking at it, day in, day out.
In sum, the market may not always be right, but its views must be respected and so it is always worth paying attention to what the market is saying – either because the investor feels it is wrong, and there is a contrarian opportunity to be had, or because a subtle shift in sentiment that runs against the prevailing wisdom is underway.
In this context, a return to favour among more defensive equity sectors very much catches the eye, at a time when investors are grappling with whether central banks are getting it right with the timing of their interest rate and whether the US may be about to slowdown just when the world is relying more heavily than ever on its key economic engine for growth.
SHOCK TO THE SYSTEM
Given all of the headlines still grabbed by, and the $14.5 trillion aggregate stock market valuation attributed to, the so-called ‘Magnificent Seven’, it would be logical to assume that tech stocks are still doing rather well, even after the summer stumble. Nor it is far from the truth, as Technology is the second-best performer in 2024 to date among the eleven super-sectors which comprise the S&P 500 index. However, the best performer is Utilities.
This could be down to the possible boost to demand for electricity from data centres than run the large language models behind artificial intelligence and store vast swathes of digitised information and content. It could be because utilities are seen as so-called ‘bond proxies,’ and a sector that usually does well when interest rates (and bond yields) are falling, as this makes the yield on utility stocks seem more attractive on a relative basis. And it could be because investors are subtly looking for a haven, and industries where demand is relatively predictable and not too sensitive to the wider economy, just in case an unexpected slowdown is coming around the corner in the US.
The long-term chart for Utilities’ performance relative to the S&P 500 remains ugly, but it is worth noting how the sector’s defensive, economically insensitive characteristics enabled it to outperform during 1990-92, 2000-02 and 2007-08, just as the US entered a recession or encountered some form of financial market meltdown, or both.
Utilities have offered the best relative performance during recessions
BEST OF BRITISH
The presence of Financials among the leaders offers some reassurance, as does how every US sector is still in positive territory this year, but the presence of Consumer Staples and Telecoms in the top five is not necessarily what you would expect to see if investors were truly confident in America’s economic outlook. According to the official data from the Office for National Statistics, the UK is emerging from the shallow recession suffered in the second half of 2023, but it is making heavy weather of doing so, if the UK equity market is to be believed. Again, relatively defensive sectors are to the fore, in the shape of Health Care, Consumer Staples and Telecoms. Materials and Energy are the laggards, just as they are in the US, and commodity price weakness could speak of nerves regarding the global economic outlook.
Defensive sectors are also the fore in the UK
Source: LSEG Refinitiv data, based on S&P 500 sectors
Utilities have fared less well on this side of the Atlantic, and that could be down to uncertainty over the new AMP8 regulatory cycle for water companies than begins in April 2025, especially as water and waste treatment services providers are still the subject of much public opprobrium over the quality of their services, the prices they charge and the bonuses they pay. Utilities were also the subject of windfall taxes when Tony Blair’s Labour Government took over in 1997 and investors may have taken some evasive action with this year’s election in mind.
These trends could yet prove ephemeral, and sentiment could switch again – technology for one is unlikely to go down without a fight. If indeed summer’s ructions are the first signs of a top in the sector which, for the moment at least, peaked in mid-July there may be many attempted rallies before the bull market cracks, just as there were in 2000 when the tech bubble burst. The telling indicator back then was each rally failed to reach the prior peaks and that may be a trend to note this time around, too.
Technology investors will be looking for new highs for reassurance
By Russ Mould AJ Bell Investment Director
Money & Markets podcast
featuring AJ Bell Editor-in-Chief and Shares’ contributor Dan Coatsworth
LATEST EPISODE
State pension changes, potential capital gains tax shake-up and how Apple’s shares move before and after iPhone launches
Source: LSEG Refinitiv data
WATCH RECENT PRESENTATIONS
EnSilica (ENSI)
Mark Hodgkins, Chair
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 world-class expertise in supplying custom RF, mmWave, mixed signal and digital ASICs to its international customers in the automotive, industrial, healthcare and communications markets. And offers a broad portfolio of core IP covering cryptography, radar and communications systems.
ANGLE (AGL)
Andrew Newland, Chief Executive & Ian Griffiths, FD
ANGLE (AGL) is a world-leading liquid biopsy company commercialising a platform technology that can capture cells circulating in blood, such as CTCs, intact living cancer cells, even when they are as rare in number as one cell in one billion blood cells, and harvest the cells for analysis. ANGLEs cell separation technology is called the Parsortix system and is the subject of granted patents in multiple jurisdictions.
The Company’s investment objective is to achieve capital growth, principally through investment in emerging and frontier equity securities listed or traded on Eastern European, Middle Eastern and African (EMEA) securities markets.
Five ways retirees can cut their investment tax bill
Why it is worth taking advantage of allowances, transfers, capital gains potential and more
Many retirees rely on income from a mix of pensions, investments, and property. While retirement may bring lifestyle changes, the tax rules remain the same as if you were employed. This means income from investments or pensions is taxed just like any other earnings.
If your total income exceeds £125,140, you’ll pay tax at the additional rate of 45%, whether that’s from a salary, dividends, or rental income. But there’s another tax trap lurking at the £100,000 mark, which could see you facing an effective tax rate of 60%.
Once your income goes over £100,000, you start to lose your personal allowance – the amount of income you can earn tax-free. For the 2024/25 tax year the personal allowance is £12,570. For every £2 you earn over £100,000, you lose £1 of your personal allowance, and by the time your income reaches £125,140, it’s completely gone. This means that the effective tax rate on income between £100,000 and £125,140 is 60%.
However, there are steps you can take to reduce your tax bill legally and ensure more of your hardearned money stays in your pocket.
FIVE WAYS TO REDUCE THE TAX ON YOUR INVESTMENTS
1.Maximise
tax-free allowances
No matter what tax bracket you fall into, any income you generate within an ISA is completely tax-free. You can contribute up to £20,000 into an ISA, which means a couple can shield up to £40,000 from the taxman each year.
If you have a £100,000 ISA and it generates 5% income annually, that’s £5,000 of tax-free income.
You can also withdraw lump sums from your ISA to supplement your income, and you won’t pay a penny in tax.
2.Transfer investments to a spouse in a lower tax bracket
If you have investments outside of an ISA, and your spouse is in a lower tax band, you might want to consider transferring some of those assets to them. By doing so, they could pay tax at a lower rate on the income, or if they have spare ISA allowance, they can shelter the assets tax-free. No capital gains tax is due on transfers between spouses, making this an efficient way to reduce the overall tax bill.
3.Increase pension contributions
If your income has crept above £100,000, consider contributing to your pension. Pension contributions effectively reduce your taxable income, and this can help bring your income back under the £100,000 threshold, avoiding the 60% tax trap. For example, if your income is £110,000, putting
£10,000 into your pension would bring your taxable income down to £100,000, helping you keep your personal allowance. In 2024/25, the standard annual allowance for pension contributions is £60,000, though it reduces to £10,000 if you’ve already accessed your pension.
It’s worth double-checking that you don’t exceed your annual allowance and that you have enough earnings from employment or self-employment to make the contribution. Remember, you can only contribute up to the total amount of your earnings each year.
4.Consider capital gains over income
Investments that generate income are taxed at income tax rates, which can be as high as 45%. However, if you focus on investments that generate capital gains, you’ll likely pay less tax. For example, an additional rate taxpayer would pay 45% tax on income but only 20% on capital gains (or 24% for property).
Everyone has a CGT-free allowance, which for 2024/25 is £3,000 per person. While this has been reduced from previous years, it still provides an opportunity to cut your tax bill by favouring investments that deliver capital growth over income.
5.Take Advantage of other tax breaks
Beyond ISAs and pensions, there are other taxefficient strategies that can help reduce your taxable income. For example, you can make use of charitable donations or explore tax-advantaged schemes like the EIS (enterprise investment scheme) or VCTs (venture capital trusts), both of which offer significant tax reliefs on income and capital gains.
With careful planning, retirees can make the most of these strategies to manage their income, shelter their investments, and minimise the amount of tax they pay. It’s all about understanding the rules and taking advantage of the options available to you.
By adopting these strategies, you can ensure that you’re making your retirement savings work as hard as possible, while keeping the taxman at bay.
By Laura Suter AJ Bell Head of Personal Finance
Can we put the proceeds from a property sale into a SIPP?
Answering a question from a couple about contributions to their retirement pots
My wife and I are both pensioners receiving state pensions. We are both self-employed earning between £5,000 and £10,000 a year each, plus we both receive income from renting a commercial property (total around £20,000 per year).
My wife receives a pension from the NHS of around £7,500 a year.
We both have personal SIPPs in drawdown (after taking out our 25% tax free), which we sometimes draw income from, if needed.
If we sell our commercial property, having paid capital gains tax, would we be allowed to put some or all of our net proceeds of sale (around £300,000) into our SIPPs?
Can we add surplus income to our existing SIPPs and if yes what would be the upper limits? Would we have to set up new SIPPs?
Graham
Rachel Vahey, AJ Bell Head of Public Policy, says:
Pensions are an extremely tax-advantageous way of saving for later life. Pension contributions receive tax relief, and pension pots receive tax-advantaged investment growth. Plus, someone can usually take up to 25% of their pension pot as a tax-free lump sum when they retire.
Because of these tax advantages there are rules on how much money people can put into pensions. One of the main ones is that someone can only contribute up to 100% of their earnings and receive tax relief.
When discussing this limit on contributions, the tendency is usually to over-simplify and refer to someone’s income as their employed or selfemployed earnings.
WHAT ARE ‘EARNINGS’?
But life is not that simple. Money coming into
our ‘wallet’ comes from various sources. So, it’s probably a good idea to take a step back and think about what ‘earnings’ are.
The ‘100% of earnings limit’ applies to ‘relevant UK earnings’. HMRC gives us a list of income that falls into this definition. As you would imagine it covers employed earnings, including bonuses, overtime, and commission. Self-employed earnings are also included and are defined as the income derived from carrying on a trade, profession, or vocation.
Redundancy payments may also count towards relevant UK earnings; but only the part of the payment over the tax-exempt threshold of £30,000.
So that’s what counts towards relevant UK earnings. What doesn’t?
Pension income whether it comes from a private pension or as a state pension benefit does not count towards relevant earnings. (But some other state benefits such as statutory sick pay and maternity pay do count.)
Dividends and most rental income are also on the
Ask Rachel: Your retirement questions answered
‘no’ list. The exception is that some rental income may be included if it’s in respect of a UK or EEA furnished holiday lettings business. Capital made on selling assets – such as property – would also not be included.
Once someone has worked out what relevant earnings they may have, they also need to be aware of a couple of other limits on their contributions. The other main one is the annual allowance which is set at £60,000 a year and includes both employer and gross individual contributions.
OTHER ALLOWANCES
There are two other annual allowances which can apply instead. One is the money purchase annual allowance (MPAA), which is set at £10,000, and is triggered if the individual ‘flexibly accesses’ their pension, say by taking a taxable income through drawdown. The other is the tapered annual allowance which applies to very high earners. The taper can reduce the £60,000 annual allowance to as little as £10,000, depending on the individual’s income level.
Another key point is that tax relief on pension
about retirement?
Rachel Vahey, AJ Bell Head of Public Policy,
is here to answer your questions
contributions is only available up to age 75. After that people, in theory, can continue to contribute to a pension, say a SIPP, but they won’t receive tax relief on that contribution. In practice, however, many pension providers won’t accept these contributions.
Finally, whether someone can pay into the same SIPP account as they are drawing income from will depend on the pension provider and how they administer the pension. Some may allow it, but others may ask you to set up a new pension account.
DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?
Send an email to askrachel@ajbell.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares
Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.
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WHO WE ARE
EDITOR: Tom Sieber @SharesMagTom
DEPUTY EDITOR: Ian Conway @SharesMagIan
NEWS EDITOR: Steven Frazer @SharesMagSteve
FUNDS AND INVESTMENT
TRUSTS EDITOR: James Crux @SharesMagJames
EDUCATION EDITOR: Martin Gamble @Chilligg
INVESTMENT WRITER: Sabuhi Gard @sharesmagsabuhi
CONTRIBUTORS:
Dan Coatsworth
Danni Hewson
Laith Khalaf
Laura Suter
Rachel Vahey
Russ Mould
Shares magazine is published weekly every Thursday (50 times per year) by AJ Bell Media Limited, 49 Southwark Bridge Road, London, SE1 9HH. Company Registration No: 3733852.
All Shares material is copyright. Reproduction in whole or part is not permitted without written permission from the editor.
Shares publishes information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters. Comments published in Shares must not be relied upon by readers when they make their investment decisions. Investors who require advice should consult a properly qualified independent adviser. Shares, its staff and AJ Bell Media Limited do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions.
Members of staff of Shares may hold shares in companies mentioned in the magazine. This could create a conflict of interests. Where such a conflict exists it will be disclosed. Shares adheres to a strict code of conduct for reporters, as set out below.
1. In keeping with the existing practice, reporters who intend to write about any securities, derivatives or positions with spread betting organisations that they have an interest in should first clear their writing with the editor. If the editor agrees that the
reporter can write about the interest, it should be disclosed to readers at the end of the story. Holdings by third parties including families, trusts, selfselect pension funds, self select ISAs and PEPs and nominee accounts are included in such interests.
2. Reporters will inform the editor on any occasion that they transact shares, derivatives or spread betting positions. This will overcome situations when the interests they are considering might conflict with reports by other writers in the magazine. This notification should be confirmed by e-mail.
3. Reporters are required to hold a full personal interest register. The whereabouts of this register should be revealed to the editor.
4. A reporter should not have made a transaction of shares, derivatives or spread betting positions for 30 days before the publication of an article that mentions such interest. Reporters who have an interest in a company they have written about should not transact the shares within 30 days after the on-sale date of the magazine.
