Shares magazine 20 June 2024

THE FUTURE OF TRACKERS

How ETFs can offer more choice and flexibility

FIDELIT Y INVESTMENT TRUSTS

Truly global and award-winning, the range is supported by expert portfolio managers, regional research teams and on-the - ground professionals with local connections

With over 450 investment professionals across the globe, we believe this gives us stronger insights across the markets in which we invest This is key in helping each trust identify local trends and invest with the conviction needed to generate long-term outperformance

Fidelity’s range of investment trusts :

• Fidelity Asian Values PLC

• Fidelity China Special Situations PLC

• Fidelity Emerging Markets Limited

• Fidelity European Trust PLC

• Fidelity Japan Trust PLC

• Fidelity Special Values PLC

The value of investments can go down as well as up and you may not get back the amount you invested Overseas investments are subject to currency fluctuations The shares in the investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand

The investment trusts can gain additional exposure to the market, known as gearing, potentially increasing volatility. Investments in emerging markets can more volatile that other more developed markets Tax treatment depends on individual circumstances and all tax rules may change in the future

To find out more, scan the QR code, go to fidelity.co.uk/its or speak to your adviser.

Three important things in this week’s magazine

1 2 3

What does the future hold for investors in ETFs?

With assets in exchange-traded funds forecast to top $20 trillion in a couple of years we review the latest developments and pick four products offering exposure to key asset classes and themes.

Can a private equity-style approach to public markets add value?

Shares looks at how the returns stack up for funds which take big stakes in companies and engage first-hand with management teams.

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:

Has the tide finally turned in investors’ favour at BT?

With shares in the telecom operator seemingly having turned the corner we ask whether a brighter future is on the cards for this perennial stock market laggard.

Raspberry Pi pops again as ‘jam today’ growth story causes a ripple.

stocks make new all-time highs, Broadcom gets AI boost | Wall Street Week.

Vodafone

Why shareholders voted for Elon Musk’s $56 billion pay package

CEO compensation has increased almost 30% faster than stock market growth since 1978

Chief executive compensation has long been out of whack with the average worker. According to the Economic Policy Institute, US chief executive pay has increased 1,209% since 1978 compared with a 15.3% rise in typical worker’s pay.

Put another way, in 2022 CEOs were paid 344 times as much as the average worker, up from 21 times in 1965.

Elon Musk has taken the inequality debate to an entirely new level, after shareholders recently (13 June) approved his $56 billion pay package.

Even in the rarefied air of CEO compensation, Musk’s award is 35 times higher than Broadcom’s (AVGO:NASDAQ) boss Hock Tan, who topped an Associated Press survey of pay in 2022 with a package worth $162 million.

A Delaware judge initially threw out Musk’s pay award on governance issues, arguing there were insufficient independent directors and shareholders were not properly informed. Shareholders have now had their say.

Musk was given 10 years of performance targets to achieve with a maximum of 303 million shares up for grabs, equivalent to around 12% of Tesla’s (TSLA:NASDAQ) stock in 2018, when its market capitalisation was $65 billion.

There are 12 separate tranches each worth 1% of the company, and Musk needed to hit 28 targets to get the maximum payout. Twelve are tied to market capitalisation measured in $50 million increments up to $650 billion, eight are tied to earnings and eight to revenue.

In effect Musk was betting Tesla’s stock would rise by 983% and be profitable over the following 10 years.

Tesla’s market capitalisation reached $650 billion in 2020 and all eight earnings milestones have been hit together with all but one revenue goal. Each option has a strike price of $23 per share (adjusted for share splits)

CEO compensation at top 350 US firms by sales compared with typical worker

Chart: Shares magazine • Source: Economic Policy Institute, Compustat, Bureau of Labour Statistics, Bureau of Economic Analysis

compared with the current price of around $185 per share.

One weakness in the way the award is calculated is it doesn’t have a claw-back mechanism if the share price subsequently falls or profitability collapses. For example, at the current price of $185 the award would be worth around $49 billion (18523 x 303)

In other words, Musk is getting all the upside without taking on any downside risk. By contrast, in the world of fund management performance fees are structured with so-called high-water marks.

This means during a period of poor performance a manager cannot earn further performance fees until the prior highest net asset value has been surpassed.

From an investor standpoint, however, it may seem perfectly reasonable to pay Musk just over 9% of the incremental shareholder value he was arguably instrumental in creating. [MG]

US markets embrace better inflation narrative but Fed remains reluctant to declare victory

Stocks jump to new all time highs driven by rate cut hopes and AI excitement

The yawning gap between market expectations for interest rate cuts at the start of 2024 and now is stark.

From a market implied six quarter of a percentage point rate cuts, expectations going into the Federal Reserve’s latest policy meeting (12 June) have been cut to between one and two cuts before the end of the year.

Two back-to back ‘positive’ surprises on inflation have once again created a widening gap between the Fed and markets, although not to the same extreme as early in the year.

Fed officials held rates steady and revealed a new set of dot-plots spelling out the central bank’s latest summary of economic projections.

They strike a hawkish tone, with core PCE (personal consumer expenditures), the Fed’s preferred measure of inflation expected to tick-up to 2.8% at the end of the year from 2.6% seen in March.

Meanwhile the central bank sees a federal funds rate of 5.1% by the end of the year, implying just one cut, down from three cuts in March. The Fed also moved up its estimate of the neutral rate of interest to 2.8% from 2.6%.

While members of the FOMC (Federal Open Market Committee) appear to have been unmoved by improving inflation data, investors have embraced the better inflation data with both hands.

marched to new all-time highs, dragging the benchmark S&P 500 index along for the ride.

Analysts at Morningstar believe the Fed is being too pessimistic and instead see PCE at 2.4% by the end of the year. This is based on PCE inflation annualising at 1.7% in the last six months

If this proves correct, Morningstar predicts the first Fed rate cut in September with possibly two more cuts in the offing before 2024 is over. Chief economist Ian Shepherdson at Pantheon Macroeconomics is in the same camp, calling the Fed’s forecasts as ‘unnecessarily aggressive’.

This is fast becoming the consensus view with CME’s FedWatch tool pointing to chances of a September rate cut of 58%, up from less than 50% a month ago. Odds for further rate cuts in November and December have also crept up but remain nothing more than a coin-flip.

Bond yields dropped (prices moved up) the most since the end of 2023 with the 10-year treasury yield falling to 4.2%. Interest rate sensitive sectors like the technology-heavy Nasdaq Composite

The prevailing market narrative has flip-flopped several times over the last few months, so it would be unwise to rule out further surprises before the year is out. [MG]

Pub and bar operators are looking forward to a bumper summer of sport

Going

out may appeal more than staying in, but the supermarkets are countering with cheap deals

The UEFA Euro 2024 football tournament is likely to be one of the most-watched events of the year, on a par with the Olympic Games later this summer.

According to broadcaster ITV (ITV), more than 10 million viewers tuned in to watch the opening match between Scotland and Germany, the highest peak audience of any opening to a major football tournament in a decade.

The BBC reported the England vs Serbia match was watched live by a total of 10.5 million people, with total viewer numbers approaching 15 million including streaming services.

All of which augurs well for advertisers, pubs, bars, supermarkets, food and drink makers, food delivery companies and betting firms.

The latest BrandTrack survey by consultants CGA suggests pubs and bars will see a big upsurge in footfall with nearly 80% of respondents saying they expect to go out to pubs and bars more often while the tournament is on, and 40% saying they will go to the pub just to watch the matches.

CGA research shows consumers who watch games at pubs and bars spend on average 36% more than those who don’t go there for live sport, while nearly 90% of sports fans will stay longer and spend more in a venue if sport is on TV.

Two thirds of respondents said going out to see games was better than watching at home, but for many cost-of-living pressures means they will be looking for supermarket deals on food and drink so they can create a party atmosphere at home without breaking the bank.

For their part, the supermarkets are already geared up for the Euros with the Co-op offering two pizzas and four beers for just £5 for members and £6 for non-members while Tesco (TSCO) and Sainsbury (SBRY) have both expanded their Dine In ranges in the hope of attracting upmarket football fans.

Meanwhile, the betting industry is already rubbing its hands at the prospect of another 50% jump in activity similar to the previous Euros which generated more than £1 billion in revenue.

The industry has shifted even further towards digital and mobile platforms than three years ago meaning convenience and engagement levels are higher than ever.

We should add however that the scale of the Euros boost to the hospitality sector, supermarkets and the betting industry will depend on how far the England team get in the competition.

While England matchdays generate big spikes in activity, games involving other nations tend to have little effect on trading. [IC]

BP Marsh blows away forecasts with bumper returns

Shares hit a new record as portfolio value rises 36% in a year

Most investors won’t have heard of BP Marsh (BPM:AIM), the specialist investor in early-stage financial services businesses.

Formed over 30 years ago by current chairman Brian Marsh, the firm takes an ‘eyes-on, handsoff approach’ to investing, taking small stakes in new businesses where it knows the owners and allowing them to run their companies their way.

‘Investors should think of us as a mini-Berkshire,’ says chief financial officer Dan Topping, referring to the Warren Buffett backed conglomerate which takes a similar

approach and which is also heavily invested in the insurance sector.

Pre-tax profit for the year to January 2024 was up 58% to £43.6 million while NAV (net asset value) increased to just under £40 million or 629p per share thanks to a 36% increase in the value of the portfolio.

After a handful of highly successful exits in the last year the firm currently has a cash pile of £81.2 million, equivalent to more than 40% of its market value, which it will look to invest in new ventures, buy back shares or increase its dividend. [IC]

Serica shares hit 12-month lows on fears over licences and windfall tax

Sunak’s decision to call an early election has rocked investor confidence

Things were really looking up for North Sea oil and gas producer Serica Energy (SQZ:AIM) in May.

On 14 May, the firm announced that Chris Cox, formerly chief executive of Spirit Energy and currently a director at Caspian Basin-focused Nostrum Oil & Gas (NOG), would bring his considerable expertise and M&A know-how to the business starting in July.

On 20 May, the company said it had received the final go-ahead to develop the Belinda field, the fifth well in its Triton area, containing proven and probable reserves in

the region of five million barrels of oil equivalent, with production due to start in early 2026.

Just two days later, prime minister Rishi Sunak called an early general election, raising the possibility Labour could form the next government and put a freeze on all new development in the North Sea as well as raising windfall taxes on fossil-fuel companies’ profits to fund the ‘energy transition’.

Together with its partners the firm has now delayed production at the Buchan field, considered by analysts to be one of the most attractive undeveloped reserves in the North Sea in terms of scale and low risk, adding to the gloom. [IC]

UK UPDATES OVER T HE NEXT 7 DAYS

FULL-YEAR RESULTS

26 June: Liontrust Asset Management, Marks Electrical Group, AO World

27 June: Currys, Moonpig, Halfords

Halfords needs to slam the brakes on bad news

Tough markets and an operationally-geared model suggest scope for further downgrades when the retailer next reports

Given recent share price-denting profit warnings, the pressure is on motoring-to-cycling products retailer Halfords (HFD) to halt the cycle of downgrades with upcoming results for the year ended 29 March 2024 on 27 June.

Shares doesn’t hold out much hope for upgrades any time soon as the backdrop is tough, with the bicycles market highly promotional and the retail motoring market choppy, notably for tyres. Investors might even brace themselves for more bad news since Halfords is both weather-sensitive and operationallygeared, which means a small reduction in revenue can have a major impact on earnings.

When it published its latest update

(28 February), Halfords bemoaned a ‘further material weakening’ in three of its four core markets (cycling, retail motoring, consumer tyres) and slashed its full year 2024 underlying pre-tax profit guidance from £48 million to £53 million to between £35 million and £40 million.

Another downgrade-induced stock price plunge would heap massive pressure on the board to push through major changes or even seek a buyer for the business. Keep in mind, last year Halfords was the subject of whispers about a takeover approach from ZIGUP (ZIG), formerly Redde Northgate, which ultimately came to nothing. [JC]

Nike looks to get the front foot as it readies earnings

particularly China, where tensions with the US are unhelpful.

Shares in US sportswear giant Nike (NKE:NYSE) briefly found some air in the latter part of 2023 but a pre-Christmas warning on revenue and evidence of weak trading in the interim have left investors feeling deflated.

This is the unpromising context for the company’s yearend and fourth-quarter trading update on 27 June.

Back in March, thirdquarter earnings actually came in ahead of forecasts at $0.77 against the expected $0.73 but the company’s weak sales outlook dominated the agenda. Nike has seen soft demand in Europe, the Middle East and

The firm has felt pressure from smaller more agile specialist brands like Brooks, Hoka and On Running, and heritage brands like New Balance have been cutting into its market share, even if only at the margins. Nike’s reliance on its Jordan brand and basketball shoes in general may mean it have lost some of its

UPDATES OVER THE NEXT 7 DAYS

QUARTERLY RESULTS

21 June: FactSet Research, CarMax 25 June: FedEx, Jefferies Financial, 26 June: Micron, Paychex, General Mills, Blackberry, National Beverage, Unifirst 27 June: Nike, McCormick & Co, Walgreens Boots, Acuity Brands, Apogee

focus in other areas.

The market will be hoping for signs of improvement as Nike enters a new financial year and also for progress on the $2 billion cost saving plan unveiled at the end of 2023.

There may be some concern that the athleisure trend, which saw people wear sportswear for work, play and exercising and was therefore supportive to sales, has started to ease. [TS] US

With no surprises on the cards markets seem set to drift higher this month

Expectations for interest rate cuts have been pushed out without harming stocks

While there was no surprise last week in terms of the Federal Reserve’s position on interest rates, there was a positive development in the shape of US inflation which came in surprisingly softer than expected.

May’s CPI reading showed inflation slowed to 3.3%, below April’s reading and below the consensus forecast of 3.4%, sending US shares up on the week.

Macro

Grocery prices were flat month-on-month, while car insurance, gasoline prices and air fares also fell, although Fed chair Jerome Powell warned investors against making too much of the numbers.

‘Readings like today’s are a step in the right direction, but it’s only one reading. You don’t want to be too motivated by any single data point’, cautioned Powell.

21 June to

21 June

This week’s highlight should have been the Bank of England’s rate-setting meeting, but the bank said it would not make any changes to interest rates ahead of the general election so the focus has shifted to the September meeting where economists expect the first of two 0.25% cuts taking rates from 5.25% to 4.75% by year-end.

The tail end of this week sees the release of manufacturing and services PMI (purchasing managers’ index data) in the UK, Europe and the US showing the contrasting fortunes of the three regions, with the UK and the US firmly in ‘expansion’ territory on both measures while core Europe is still struggling with industrial sentiment cemented in ‘recession’ territory.

After a heavy fortnight of economic releases, the calendar eases somewhat next week with the odd consumer confidence reading and US housing market indicators and culminates with the latest ‘core’ inflation figure which is one of the Fed’s key inputs making it keenly anticipated. [IC]

Get exposure to quality stocks with Guinness Global Equity Income

A focus on excellent businesses delivering solid dividend growth should help this fund weather market turbulence

Guinness Global Equity Income

(BVYPP13) £21.59

Net assets: £4.6 billion

Despite a fairly decent start to 2024 for markets there’s a lot for investors to fret about right now. The timing of interest rate cuts, sticky inflation, a looming US election this November, the ongoing Israel-Hamas war in the Middle East and the conflict in Ukraine, to name but a few worries.

A great way of protecting against uncertainty is to invest in Guinness Global Equity Income (BVYPNY2). A quality-focused collective which has been run by managers Ian Mortimer and Matthew Page since launch in December 2010.

The fund, which was launched in the wake of the global financial crisis, has an impressive track record returning 36.9% over three years to investors, 75% over five years and 193.1% over 10 years. This is ahead of its benchmark – the IA Global Equity Income sector – which returned 121.5% over the last decade.

WHAT

IS

THE SECRET OF THE FUND’S SUCCESS?

The fund has several qualities which make it stand out. Unlike its peers it has a concentrated and equal weighted portfolio consisting of 35 holdings selected from extensive research by managers Ian Mortimer and Matthew Page.

Global Equity Income

Shares magazine • Source: LSEG

it gives the fund more of a growth bias; an equally weighted portfolio naturally gives greater weight to small- and mid-caps relative to a broad index where large companies dominate.

By having 35 stocks of the same weighting in the portfolio stock specific risk is reduced and it also instils a strong sell discipline. Another advantage of an equally weighted portfolio is that potentially,

Manager Ian Mortimer tells Shares: ‘We have a one in and one out stock policy We take a bottom-up approach when selecting stocks. Picking the best ideas from different sectors [whether that is from] healthcare, industrials, and information technology sectors. We avoid sectors like banking and utilities.’ Companies like Danish drug maker Novo-Nordisk (NOVO-B:CPH) and contract semiconductor maker Taiwan Semiconductor Manufacturing Company (2330:TPE) can be found in the fund’s top 10 holdings. Novo-Nordisk is the company behind weight-loss drugs Ozempic and Wegovy and reported a trading update in May beating market expectations.

The fund’s geographical allocation is skewed to the US – which is the largest allocation of 54% followed by Switzerland and the UK. Although

Chart:

this is below the weighting of the US market in the MSCI World index.

METICULOUS SCREENING

The managers aim to create a portfolio of quality, attractively valued companies which offer a moderate dividend yield and good potential dividend growth. This all starts with a disciplined screening process.

Mortimer says: ‘When we are selecting a company, we look at its history over 10 years. The

Guiness Global Equity Income

Before we select the company for our portfolio, we need to assess is it better than something we already own?”

company must have a market capitalisation of over $1 billion and be high quality.

‘We ask questions like “does the company pay a dividend? Is it growing?” We look at the share price to assess the company’s valuation. We carry out our own due diligence.’

Mortimer says: ‘Also, before we select the company for our portfolio, we need to assess is it better than something we already own? If it is not currently better than what we have in our portfolio we put the company on our watchlist.’

Mortimer says the portfolio is reviewed quarterly not more frequently as they believe in the longterm growth of their holdings.

The emphasis on dividends is important even if the yield on the fund is relatively modest at 2.6%. Besides delivering a gradual but powerful contribution to long-term returns, dividends can help to counter the effects of market falls and inflation.

If there were to be a deterioration in the global economy and stock markets, we would expect this collection of quality names, which can deliver growth whilst generating cash that can be returned to shareholders, to prove popular. Ongoing charges on the fund are 0.79%. [SG]

Used car retailer Motorpoint is well on the road to recovery

Self-help measures, market share momentum and rate cuts should fuel the rally at the nearly-new car retailer

Motorpoint (MOTR) 139p

Market cap:

£123.4 million

Risk-tolerant investors seeking a recovery stock with an exciting market share opportunity ahead of it should hop behind the wheel of Motorpoint (MOTR).

Admittedly the used car dealer has just had its toughest year in a quarter of a century, but with market conditions improving the business has returned to profitability and has a brighter road ahead of it.

UK interest rates look to have peaked, while key competitors, notably collapsed online car dealer Cazoo, have exited the marketplace.

Shares believes investors can buy ahead of the swing back into the black forecast for the new financial year, safe in the knowledge Motorpoint has a balance sheet strong enough to absorb unforeseen shocks.

The Derby-headquartered firm sells nearly-new vehicles and delivers industry-leading net promoter scores, since its consumers benefit from prices often 10% to 20% cheaper than comparable cars sold by peers.

Steered by Mark Carpenter, Motorpoint skidded to an £8.2 million pre-tax loss on sales down roughly 25% to £1.09 billion in the year to 31 March 2024, ‘the most difficult in our history’ according to the chief executive. Performance was impacted by constrained used car supply, price deflation and depressed consumer demand in a higher interest rate environment.

Encouragingly, however, the ‘strong and positive trading momentum’ seen in last year’s final quarter, where Motorpoint returned to profitability as customer sentiment and margins improved, has

flowed into the new financial year. April and May were both profitable with the company enjoying double-digit retail volume growth amid stable nearly-new car prices.

Motorpoint, which has right-sized its cost base and is benefiting from technology investments made over recent years, finished the last financial year with net cash of £9.2 million driven by strong free cash flow of £3.9 million, supporting an ongoing £5 million share buyback.

Although the tough market backdrop has restricted progress towards some bold targets set in 2021, Carpenter believes the size of Motorpoint’s opportunity has in fact grown and analysts now see the focus shifting towards market share growth and physical site expansion.

For the year to March 2025, Shore Capital forecasts adjusted pre-tax profit of £3 million on £1.14 billion of sales ahead of £8 million of taxable profits on £1.2 billion-plus revenue in full year 2026.

Although the shares trade on a forward PE (price to earnings) ratio north of 50 times based on this year’s 2.5p earnings forecast, that rating falls to more forgiving multiples of 19.9 and 13 times for 2026 and 2027 based on Shore’s conservativelypitched earnings estimates of 7p and 10.7p respectively.

Numis sees ‘further upside when visibility of supply begins to improve’ for one of the few remaining London-listed automotive retailers. [JC]

Unloved it may be, but Ultimate Products can still clean up

We are sticking with the value-focused homeware products play despite tough short-term trading trends

Ultimate Products

We flagged Ultimate Products (ULTP) on 18 April 2024 as a compelling way to play the UK consumer recovery on the basis the market was undervaluing the group’s brand strength, resilient business model and multiple growth opportunities.

Our bull case for the homeware products brand manager behind the likes of Salter and Beldray also hinged on hopes of revenue growth resumption as customer overstocking issues eased, with Ultimate Products’ attractive dividend and ongoing share buyback supporting our thesis.

WHAT HAS HAPPENED SINCE WE SAID TO BUY?

Ultimate Products’ shares are down 15.7% from our 156p entry price. They plunged following an unexpected profit warning on 10 May, which

UP Global Sourcing

revealed that tougher short-term trading trends were now likely to persist into the group’s fourth quarter.

A more recent leg down in the share price likely reflects a negative read-across from DFS Furniture’s (DFS) latest earnings alert on 12 June, in which the sofa seller bemoaned delivery delays and higher freight costs caused by ongoing Red Sea disruption.

WHAT SHOULD INVESTORS DO NOW?

Patient investors should hold their nerve and stick with Ultimate Products, since longer-term trends are more positive. The Oldham-based firm’s order visibility from larger customers is growing as the overstocking issues brought about by the pandemic subside, and Ultimate Products is well-placed to profit from an uptick in consumer confidence amid a return to real wage growth with inflation coming down and interest rate cuts on the horizon.

A planned sales-boosting Beldray brand refresh, showcased at a capital markets event on 11 June, offers a potential upgrade catalyst looking forwards. ‘Despite some sales and profit disruption so far in full year 2024, we continue to expect above-trend organic growth in full year 2025,’ says Equity Development, whose forecasts point to a 5% drop in revenue to £157.4 million for the year to 31 July 2024, ahead of a strong rebound to £172 million in full-year 2025. [JC]

Is BT now an investment worth considering?

Investors have been wooed by recent optimism, but it could remain a dog with different fleas

Is BT (BT.A) finally worth owning? For years it has been a complete dog of a stock and despite spinning back through our archives, Shares struggled to find the last time we had anything positive to say about the company or its shares.

Yet suddenly in May 2024, the stock jumped, chalking up rough 30% gains within days and now at roughly 138p. ‘There is a surge of energy running through BT after the telecoms group announced it had reached an inflection point,’ wrote AJ Bell investment director, Russ Mould.

New guidance for significantly increased cash flow, more cost savings and a higher dividend for shareholders all combined to deliver a bumper package of good news alongside March end 2024 full year results.

‘Many people assumed BT would continue to be weighed down by the hefty investment into upgrading its infrastructure and that ongoing takeover speculation would be the only catalyst to move the share price higher,’ wrote Mould, but ‘instead, it has knocked the market for six with one of the most bullish statements from the company in a long time’.

BT had produced the kind of statement that could encourage large numbers of investors to start reappraising the business, Mexican billionaire Carlos Slim recently taking a 3% stake in the business in an endorsement of the new strategy, and left some significant institutional investors with bloody noses. That’s because there had been a notable increase in institutions betting against BT since September 2023, with the amount of stock on loan to short sellers rising from 0.5% to 2.74% over this period.

BlackRock, the Canada Pension Plan Investment Board and AKO Capital were among the biggest short sellers of BT, according to FCA data last month. But it may be too early for short sellers to throw in the towel, and they by and large haven’t, and here’s why.

HOW DOES BT MAKE ITS MONEY?

WHILE THE NAME will be familiar to almost everyone reading this, they might not be as up to speed with its current business model and structure. BT provides mobile and fixed broadband communications services to individuals and companies through its Consumer and Business arms, supported by its internal Digital and Networks units. The Openreach fibre broadband business is a legally separate company but it is wholly owned subsidiary of the BT Group. It connects homes, mobile phone masts, schools, hospitals, broadcasters and a variety of different businesses to its fibre broadband infrastructure.

DECADE OF DISMAL RETURNS

The company has been consistently criticised in the past for poor levels of growth and service and having high levels of debt, elements that tend to attract short sellers. It has led to a lost decade of shareholder returns.

More than £3 billion of revenue has been lost (based on March 2024 results) since income peaked at a bit more than £24 billion in 2017, both operating and pre-tax profits have shrunk over the past decade (9% and 54% respectively) and net profit has fallen from more than £2 billion to £855 million last year.

OK, you might say, but BT is an income stock not a growth business, with reliably crucial dividends. Only, that’s not necessarily the case. Having risen to 15.4p per share in 2018, the payout then flatlined before being axed

completely in fiscal 2021, as it conserved cash as the Covid pandemic ripped across the world, and sensibly so.

Yet when dividends were re-established, it was at a massively rebased level, paying shareholders 2.31p per share in 2022 and then 7.7p (2023) and 8p (2024), showing that the payout cut was permanent. Analysts at Berenberg forecast the dividend to incrementally grow in future but it will take years before getting back to pre-pandemic levels on current expectations. This year’s forecast yield is 5.8%.

As we explained in our income feature (‘Big dividends: the high yields you can trust, 12 October 2023), there are more reliable, higher yielding stocks on the London market.

British American Tobacco (BATS), for example, has an almost unblemished payout growth record over the past 10 years, barring 2018. FTSE 100 insurer Aviva (AV.) also lowered its dividend on Covid caution in 2020 but has since returned the payout to pre-pandemic levels and more with last year’s 31.8p per share payment (versus 29.9p in 2019), and it’s forward yield also trumps BT, at 7.4%.

Other important investment metrics have also been dismal when we dig into BT’s numbers. Returns on capital and equity are just 5% and 6.3% respectively, based on Stockopedia data. Operating margins were at a reasonably respectable 10% in fiscal 2024 but have been in decline for years – they were 21% in 2015.

Under the Bonnet: BT

What this ultimately means for shareholders is that BT stock has consistently lost them money. Morningstar data shows average total returns (capital and income combined) of -5% a year over the past decade, bettered by even a simple FTSE 100 tracker at roughly 5.9%.

Even a basic savings account would have done better, despite interest rates stubbornly below 1% for most of the last decade. To put it bluntly, for every £1,000 of BT shares an investor has owned since 2015, they would today have £599.

HOW MIGHT THINGS IMPROVE?

This year, BT has focused on expanding its fibre broadband network and boosting its 5G infrastructure, very sensible we would argue, considering the surging demand for more, faster data services from consumers, enterprise, and public sector organisations. By investing in digital infrastructure, BT aims to strengthen its market position and drive long-term growth.

One of the most significant developments for BT this year has been the rollout of its full fibre broadband network. The company aims to reach 25 million premises by the end of the decade, making substantial progress this year. This ambitious project is expected to enhance customer experience and drive future revenue growth.

BT has also been exploring partnerships to improve its service offerings. A notable partnership with Alphabet’s (GOOG:NASDAQ) Google Cloud aims to leverage AI (artificial intelligence) and machine learning to improve customer service and operational efficiency. This collaboration is expected to bring significant benefits in the coming years.

This all sounds promising yet the acid test is on execution, something BT hasn’t been great at. And lavish infrastructure capital expenditure means there’s limited scope for returns on that investment to improve much in the near term, in our opinion, and Berenberg seems to agree.

‘We note that BT’s RSP award (restricted share plan) for management has a ROCE (return on capital employed) underpin of at least 7% over the next three years, in order for the share awards to vest.’

Hardly demanding. Berenberg’s long range forecasts, out to fiscal 2030, imply patience will be rewarded down the line despite almost zero top

line growth projected. The investment bank sees net profit doubling by then to about £1.56 billion, implying net profit margins going from 4% last year to 7.5%. The dividend by them is seen at close to 10p per share. But it’s a long line and trying to predict things more than five years ahead is fraught with risk.

Put frankly, even if things go well BT’s returns profile does not stand out. This is a highly regulated industry and a savagely competitive one. Cash flows are strong and reliable, and on a rolling 12-month PE (price to earnings) of 7.4 (as per Stockopedia data), the shares are inexpensive.

Yet it is difficult for us to see catalysts that could power the stock significantly higher, while competitive and execution risks remain entrenched.

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

By Steven Frazer News Editor

By Sabuhi Gard Investment Writer

THE FUTURE OF TRACKERS

How ETFs can offer more choice and flexibility

Over the coming years investors in ETFs (exchange-traded funds) can expect further flexibility and choice as actively managed products move into the mainstream and a broader range of themes and investment areas are captured by the industry.

In this article we will look at some of the emerging developments in the ETF space and highlight four products tailored to different investment objectives and asset classes.

Rob Oliver, head of Europe at ETF provider Global X ETFs, sees potential opportunities around themes like cloud computing, data centre and digital infrastructure in the future as the adoption of AI grows. While there are existing products which track these themes, often there are only a handful so an increase in their breadth and depth would be

meaningful and could also help drive down charges which tend to be higher than for more vanilla products tracking mainstream indices like the FTSE 100.

AI could itself be employed in the construction of products to identify and react to market events. Greater responsiveness could be significant given a key risk with thematic ETFs is that by the time they have been launched a lot of the smart money has already been made.

With ETFs’ assets under management (AUM) set to reach $20 trillion by 2026, according to global accountancy firm PwC, the number of ETFs being traded has already come a long way since the first product launched in the US in the 1990s.

At the end of August 2023, there were 9,904 ETFs globally, an increase from 729 in 2006 and 6,952 in

2019, according to industry research firm ETFGI.

Strong competition between providers is expected keep ETF fees low. New technology is also expected to lead to increased market liquidity and prompt a reduction in management fees and commissions which will play a role in keeping ETFs fees low for investors in the future, says asset manager JP Morgan.

ACCESS TO POPULAR THEMES

Pierre Debru, head of quantitative research & multi asset solutions at ETF provider WisdomTree, tells Shares: ‘The thematic ETFs available in Europe cover 40 themes according to WisdomTree’s ongoing monitoring. The themes are grouped into four clusters: demographic & social shifts, geopolitical shifts, environmental pressures, and technological shifts.

‘The majority of AUM was in environmental pressures (38%) and technological shifts (55%). The top five themes, all from the last two clusters, are cybersecurity ($5.12 billion), sustainable energy production ($4.93 billion), artificial intelligence & big data ($4.91 billion), robotics & automation ($4.84 billion), and sustainable resource management ($4 billion).’

Some of the broadening of choice in terms of

WHAT IS AN ETF?

ETFs or ‘exchange-traded funds’ are exactly as their name implies, funds that trade on exchanges, generally tracking a specific index. ETF costs are typically lower than funds and investment trusts – although pressure from the emergence of ETFs has also dragged down costs for traditional funds and trusts.

Largely ETFs are cheaper because they are not actively managed by a fund manager which means lower fees. Standard fees for ETFs can range from 0.35% to 0.5%, with annual fees as low as 0.05%.

They can be bought and sold like ordinary shares and can be held within a SIPP, ISA or dealing account.

thematic ETFs reflects investor appetite. Global asset manager Franklin Templeton has recently launched a new MSCI World Catholic Principles UCITS ETF (FIDE) for European investors due to ‘client interest’.

Caroline Baron, head of ETF distribution, EMEA

INVESTING IN ESG FOR THE LONG TERM

Over the next decade or so, global professional services firm EY notes the theme of ESG (environmental, social and governance) ESG will ‘come of age’ as more investors take an interest in these issues.

Although inflows to ESG ETFs dropped globally in 2023, after coming heavily into fashion during the pandemic, EY believes that ESG-focused ETFs will remain a long-term investment theme, ‘especially in Europe, which leads the global market and accounted for a quarter of all ESG ETF flows in 2023’.

At the end of 2023, $345 billion had been

invested into European ESG ETFs. ETF provider WisdomTree has recently launched its first sustainable global equity ETF –WisdomTree Global Sustainable Equity UCITS ETF (WSDG) in collaboration with Irish Life Investment Managers.

This new ETF combines popular themes like sustainability as well as catering for investors looking to invest around the world. Alexis Marinof, head of Europe at WisdomTree, said: ‘The new article nine ETF provides a differentiated approach to global developed market equities by integrating

11 of the 17 United Nations Sustainable Development Goals (SDGs) in the investment process.’

The Sustainable Development Goals framework adopted by the WisdomTree Global Sustainable Equity ETF classifies 11 of the 17 UN SDGs into 4 pillars: climate action: affordable and clean energy, climate action, circular economy: responsible consumption and production, healthy ecosystems: clean water and sanitation, life below water, life on land social equity: zero hunger, good health and well-being, quality education, reduced inequalities and sustainable cities and communities.

Franklin Templeton, says: ‘With this new fund we wanted to offer investors an ESG-focused global equity strategy within an ETF structure that incorporates specific Catholic values.’

Two years ago, Franklin launched the Franklin Catholic Principles Emerging Markets Sovereign Debt UCITS ETF (CPRI)

REGULATORY DEVELOPMENTS

US financial services giant Charles Schwab said it was ‘closely watching’ the UK’s regulatory landscape”

Under the PRIPS (packaged retail investment and insurance products) regulation, investors cannot trade US registered ETFS in Europe because they do not contain a KID (key information document), so fund groups would need to launch funds specifically for the European market. So, will UK and European investors ever be able to buy US ETFs and benefit from the much broader choice of available products?

Earlier this year the Financial Times reported that the FCA (Financial Conduct Authority) consulted with asset managers on plans for its postBrexit OFR (overseas funds regime) which will allow fund managers to apply and sell non-UK funds to UK investors.

US financial services giant Charles Schwab said it was ‘closely watching’ the UK’s regulatory landscape.

Global X’s Rob Oliver says he doesn’t expect to see a trend of asset managers registering US ETFs in Europe, even if there is a change of regulation, as it is easier for a US ETF provider to have a presence in Europe through European vehicles.

Even if the blocks on US-domiciled ETFs are cleared in the future there are several other pitfalls including: foreign exchange costs, extra taxes, additional regulations and legal issues.

ACTIVELY MANAGED ETFS

Traditionally exchange-traded funds have just tracked the performance of an index but recent innovation has seen actively managed vehicles launched. The US has led the way on actively managed ETFs. US data firm Morningstar found that of the 543 new ETFs launched last year, approximately 75% of them were actively managed.

Caroline Baron, head of ETF distribution, EMEA, Franklin Templeton tells Shares: ‘In the US there has been a dynamic uptake in active ETFs among investors. In Europe, the active

ETF market is more nascent. There are only 90 active ETFs available to European investors – about 2% of the market.

‘These active ETFs are available holistically through an ETF wrapper. Franklin Templeton is one of the top ETF providers – providing fixed income, green bond, and euro short maturity ETFs.

‘Overall [we’ve found] the uptake in [active] ETFs has been slow as investors are need to [build on their] knowledge base about what they are buying. The active ETFs are an area to watch [in the future].’

These active ETFs are available holistically through an ETF wrapper. Franklin Templeton is one of the top ETF providers – providing fixed income, green bond, and euro short maturity ETFs”

There has been nothing necessarily stopping providers from offering active ETFs since the inception of these products more than two decades ago but one big obstacle was removed in the US with a regulatory change in 2019.

Fund managers often like to closely guard a full list of their holdings for fear a rival or individual investor might simply piggy-back on their success by copying their approach. In other words, they do not want to give away the secret ingredients behind their success.

This is at odds with ETFs’ mandated transparency, where they must disclose all their holdings on daily basis. In 2019 the US flexed the rules to allow semi-transparency, with the underlying holdings obscured by proxy holdings. There is currently no such flexibility in Europe.

Amundi Prime Global (PRIW) £27.66

The Amundi Prime Global ETF (PRIW) tracks the performance of the Solactive Developed Markets Large- and Mid-Cap Dollar Index but is priced in sterling and has a competitive 0.05% annual fee.

The fund, which is four-star-rated by Morningstar, is 70% weighted to US equities with Europe, the UK and Japan making up the balance, and has returned roughly 12% per year over five years, 10% over three years and 11% year-to-date.

Unsurprisingly, the largest sector weighting is in technology, which makes up 26% of the portfolio, with the top three holdings Microsoft (MSFT:NASDAQ), Apple (AAPL:NASDAQ) and Nvidia (NVDA:NASDAQ) accounting for 14% of the fund.

Amazon.com (AMZN:NASDAQ), Alphabet (GOOG:NASADAQ) and Meta Platforms (META:NASDAQ) are also in the top 10 holdings, along with Broadcom (AVGO:NASDAQ), Eli Lilly (LLY:NYSE) and JPMorgan Chase (JPM:NYSE). [IC]

iShares Core Global Aggregate Bond (AGBP)

452p

The tracks the Bloomberg Global Aggregate Bond index which is comprised of over 15,000 investment grade bonds issued in emerging and developed markets worldwide.

The index is broad-based and used by fund managers as a benchmark to measure relative performance. The ETF has a total expense ratio of 0.1% a year, making it one of the cheapest ways to track global bonds across all maturities.

The manager replicates the performance of the target index by sampling, which involves buying a selection of the most relevant index constituents. Around a fifth of the fund is invested in the US, while Japan is the second largest region comprising around 10% of the fund’s assets.

The fund has an average weighted maturity of 8.4 years which represents the average length of time until the maturity of the bonds in the portfolio. The yield to maturity is 4%. Ongoing charges are a modest 0.1% [MG]

Bond

SPDR S&P Global Dividend Aristocrats (GBDV) £24.50

A great low-cost way to tap into the payouts from high-yielding shares around the world is S&P Global Dividend Aristocrats (GBDV), which has delivered solid 10-year annualised total returns of 6.1%.

Diversified across 99 holdings, the ETF replicates the S&P Global Dividend Aristocrats index, which tracks high dividend yielding equities globally, by buying all the index constituents.

The index is designed to measure the performance of high-dividend-yielding companies that have increased or maintained dividends for at least 10 successive years and also boast positive cash flow from operations and a positive (ROE) return on equity.

Dividends from the £802 million ETF with an attractive 4.2% dividend yield are sourced from dependably cash-generative sectors including utilities, financials, real estate and telecommunications and paid out to investors quarterly.

Top holdings range from chemicals concerns Solvay (SOLB:EBR) and LyondellBasell Industries (LYB:NYSE) to US telco conglomerate Verizon Communications (VZ:NYSE) and Getty Realty (GTY:NYSE), a REIT (real estate investment trust) specialising in convenience and automotive retail property. The ongoing charge is 0.45%. [JC]

WisdomTree Artificial Intelligence (INTL) £50.67

If you were looking for an example of how narrow AI (artificial intelligence) performance is right now, the Wisdomtree Artificial Intelligence ETF (INTL) offers a perfect illustration. While leading stocks like Nvidia (NVDA:NASDAQ), Advanced Micro Devices (AMD:NASDAQ) and Microsoft (MSFT:NASDAQ) have rallied this year, it has put up total returns of less than 6%.

That Nvidia, up 205% over the past 12 months, represents just 2.5% of the portfolio is a major reason, but then thematic ETF investors are looking for a diversified approach to an investment trend, with capped risk.

On that basis, this is a good option on the ongoing emergence of AI. Chip stocks feature heavily in the portfolio, accounting for pretty much the entire top 10 stakes, and including picks and shovels companies like Micron Technology (MU:NASDAQ), TSMC (TSM:NYSE) and Teradyne (TER:NASDAQ), which makes tech testing equipment.

Five-year total returns performance (123%) has comfortably beaten global stock market returns of 70% (as measured by the MSCI World Index), and given AI’s direction of travel, we would expect that performance gap to widen. Pretty good value, we think, for a total expensive ratio of 0.4%. [SF]

Using a private equity approach to public markets

The fund managers who look to take big stakes and really engage with their holdings

There are several fund managers who run extremely concentrated portfolios with the aim of having meaningful stakes in companies allowing them to actively influence and support management.

This strategy is broadly akin to that of a private equity investor putting money into an unlisted firm. The lack of diversification means this approach comes with a different risk profile to funds which spread their money more widely, but in the right hands it can be a successful one.

UK RIPE FOR THIS APPROACH

There is an argument the UK market, particularly at the small- and mid-cap end of the spectrum, is particularly ripe for this kind of gameplan given depressed valuations. A similar dynamic in Japan has enabled specialist trusts like Nippon Active Value Fund (NAVF) and AVI Japan (AJOT) to benefit from being highly-engaged investors in recent years.

As Ben Mackie, a fund selector at investment manager Hawksmoor, notes, there are two names which fit this bill most closely operating in the UK market: Odyssean Investment Trust (OIT), run by Stuart Widdowson, and Strategic Equity Capital (SEC), steered by Ken Wotton.

‘The real similarity with private equity is they are aiming to effect change. A big part of what they do is try to influence management teams and they can do that because of their [large] stakes’, says Mackie.

‘That’s more important today than it has been in a long while because the UK equity market is in something of a malaise and actually having a manager who’s willing to engage, willing to influence, willing to try and drive self-help and realise value is really important.’

Mackie explains his investment in both funds is heavily predicated on the two men involved and their respective track records. On a five-year view there’s not much to choose between them:

Strategic Equity Capital top 10 holdings

Holding Weighting

Table: Shares magazine • Source: Gresham House Asset Management, 31 March 2024

Odyssean has achieved an annualised total return of 10.9% while Strategic Equity Capital has chalked up 10.5%.

The more engaged management style comes at a cost, however: Odyssean has an ongoing charge of 1.45% and Strategic Equity Capital’s is 1.22%.

Odyssean trades at a slight premium to NAV (net asset value) while Strategic Equity Capital is at an 8.7% discount.

Team17, featured in Equity Capital’s portfolio, developed the successful Worms franchise

How the private equity approach to public markets has translated into strong returns...

Chart: Shares magazine • Source: Morningstar, Google Finance

at a cost

Table: Shares magazine • Source: Morningstar, Google Finance

NOT ACTIVIST INVESTORS

Strategic Equity Capital’s Ken Wotton is keen to stress to Shares there’s a big difference between his approach and that of an activist investor but he is more comfortable with the comparison with private equity, logically given his background.

Wotton spent 12 years at Livingbridge, which he describes as a ‘quality, growth-focused private equity house’ with a ‘hands on’ approach.

Livingbridge was acquired by Gresham House in 2018 and in September 2020 the asset manager took over the running of Strategic Equity Capital with Wotton taking the helm on the trust.

This is now a highly-concentrated portfolio. According to its latest factsheet, Strategic Equity Capital has just 16 holdings.

‘We are looking at businesses as businesses not just as a share,’ says Wotton. ‘So, we have that philosophy, the private equity heritage and crossover of capability in the business as well as a focus on the fundamentals and doing due diligence on the right stuff, and the last bit is we’ve got this very well-developed network built over the last 17 years of people we know.

‘Think of it as the aggregate networks of all the public investment team at Gresham but also the private equity team, the investment committee the management team, all the people they know.

‘Those people come from all sorts of sources they can be advisors, they can be consultants, M&A advisors, people who’ve run businesses we’ve

backed, both public and private, chairs, non-execs, specialist subject matter experts.’

Wotton explains this means there is a deep pool of objective expertise which they can tap into. ‘We use that on every investment to try and reference people, understand niche areas better and, importantly, test the critical judgements we’re trying to make on investments to make sure we’ve thought of everything properly.’

Wotton says: ‘We’re trying to find companies where we think it’s a good business, in a good market with a good team and a sensible strategy and we can back them as a constructive, large shareholder.

‘We can have a debate about strategy and we can be provider of capital if they’re going to do acquisitions or other investment activity, we can help support management incentives which are aligned with long-term value creation and introduce people which can help them, potentially as nonexecutive directors.’

As well as taking large stakes, the trust looks to hold stocks for at least a three-to-five-year time horizon with the aim the company might double its profit over that period, thereby helping to support a re-rating. By having a larger stake, the company is in a position to help fight off takeover interest if it feels a company is in danger of being acquired for a low-ball price.

In terms of carrying out due diligence on investee companies, Wotton says it’s all well and good doing the homework, particularly on the downside risks, but ultimately you have to make a judgement. ‘If you spend too long kicking the tyres in the public markets the opportunity might be gone,’ he says.

The trust avoids sectors like banking, oil and gas and mining. Instead, Wotton likes areas like technology, although only profitable firms not those with blue sky potential, healthcare services and people-based businesses where companies are capital-light and can generate plenty of cash.

‘The single most common thing that blows up an investment thesis is the wrong acquisition for the wrong price, especially if funded with debt,’ Wotton observes.

STRATEGY IN ACTION

Wotton flags teleradiology specialist Medica, which sells access to qualified radiologists to interpret medical imaging to the NHS and Irish health service and into the pharmaceutical sector, as a good case study for the Strategic Equity Capital approach.

Although it was a position he inherited when he took charge of the trust, having done the work on it the position was materially increased. He observes it was a growing business with high margins, high cash conversion, strong balance sheet, strong structural drivers (including an undersupply of radiologists) and good visibility of earnings through contracted revenue. It had a good-quality management team with a chair Wotton had previously backed elsewhere.

The trust bought in at an average EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation) ratio of eight to 8.5 times while similar private equity transactions for similar businesses were being bought for 14 to 15 times. The company was taken over for £269 million by private equity outfit IK Partners in July 2023.

Noting the lowly-valued nature of UK stocks, he says: ‘I find this market environment is perfect because, maybe you’re having takeovers but it’s quite easy to redeploy the cash into attractive ideas,’

Wotton also observes that being a closed-end fund, which unlike open-ended funds don’t have to sell investments to meet redemptions, is beneficial as it allows for larger, less liquid equity stakes.

Broadening the geographic horizons, Mirabaud Discovery Europe (BYZXMC7) pursues a pretty similar approach across Europe although within an open-ended structure. It has an ongoing charge of 1.08% and its five-year annualised total return is 6.7%. Manager Hywel Franklin explains the relationship the fund has with companies it holds.

‘We’re quite close to them and their underlying businesses. Sometimes we actively help the businesses, connecting them with other management teams and other businesses we know.

‘We might put them in contact with providers access different markets, there are cases where we suggest customers or suppliers they might want to

think about. It’s all from a connection standpoint – helping companies to develop or communicate better.

‘We’re not taking board seats, not being activists, it’s a close relationship and a much warmer relationship.’

Franklin explains the company likes to look at businesses which are a bit below most peoples’ radar, maybe because they don’t have much analyst coverage or they have fallen out of favour. ‘Targeting areas which are less attractive to other people is key to the approach,’ he adds.

RED FLAGS

The fund has a checklist based on the most expensive mistakes made in the past, which are then placed into different ‘families’. This includes things like the robustness or otherwise of the balance sheet, overpaying for the level of cash flow on offer, management teams acting against the interests of external shareholders and turnarounds. ‘If we see any of these clear red flags we move on,’ Franklin says.

The Mirabaud Discovery Europe portfolio currently has 42 holdings, at the top end of its usual range of between 25 and 40 names, out of a potential universe of 2,000 companies.

Most aren’t household names but small- and medium-sized firms and encompass a diverse mix of businesses including isotope technology group Eckert & Ziegler (EUZ:ETR) in Germany and Irish housebuilder Glenvaugh Properties (GLV).

Franklin adds: ‘What is really exciting is we have just seen the longest period of underperformance of small-caps versus large-caps on record and in combination with that investors have forgotten about Europe. There are signs things are turning, which makes it a pretty exciting time to be investing with some of these companies.’

By Tom Sieber Editor

Deliberately diverse: Henderson Opportunities Trust

Henderson Opportunities Trust aims to produce capital and dividend growth for investors, without excessive volatility. To achieve this, its managers use an eclectic blend of UK equities…

When seeking capital growth, investors are often pointed towards companies at an earlier stage in their development.

Sometimes that can be businesses only just commercialising their products. At other times, that could be companies transitioning to new models. However, these investments can come with heightened volatility in both their finances and share prices.

Henderson Opportunities Trust seeks to give its investors this sort of exposure, while dampening some of this volatility. To achieve this, we employ a distinctive strategy that combines two core types of shares: tomorrow’s leaders and stabilisers.

Tomorrow’s leaders

In our approach to tomorrow’s leaders, we seek to use the structural features of HOT. Its small size means that we can be flexible. We adjust the areas we focus on according to market conditions and opportunities.

And, as HOT is an investment trust, we can confidently allocate over the longer term. Investment trusts have ‘permanent capital’, which means that share sales by underlying investors do not force sales of investments.

As a result, the companies we invest in within this category vary broadly. They include very early stage companies, such as Creo Medical, which makes minimally invasive surgical tools. Also in this category are alternative energy producers like AFC, whose fuel cells could partially replace fossil fuels.

Companies at this stage are naturally riskier, so we limit our allocation.

However, we also invest in more established businesses that still have notable potential growth. An example is Tracsis, which provides software to the transport industry. This can include rail ticketing and timetabling. The company is profitable but is investing in new technologies that could expand its product offer.

Elsewhere, tomorrow’s leaders include companies that are transforming. A clear example is STV, the Scottish media business. It has put major investment and focus into its production business. While there is the risk of a transformation not being successful, it can also create meaningful growth.

Stabilisers

Tomorrow’s leaders represent companies with the potential for significant growth over the long

term. On the other hand, the ‘stabilisers’ are stocks that we believe provide diversification for the overall portfolio. Past data suggests they could outperform at different times to the often-smaller companies within ‘tomorrow’s leaders’.

Stabilisers fall within one of two areas. One is large, established businesses that we believe have underappreciated potential to grow. Or they are natural resource companies that could benefit when commodity prices rise.

An example of the larger businesses held in Henderson Opportunities Trust is GlaxoSmithKline, one of the world’s biggest pharmaceutical companies. Under a new management team, it

GLOSSARY

Capital

When referring to a portfolio, the capital reflects the net asset value of a fund. More broadly, it can be used to refer to the financial value of an amount invested in a company or an investment portfolio.

Commodity

A physical good such as oil, gold or wheat.

Hedge

A trading strategy that involves taking an offsetting position to another investment that will lose value as the primary investment gains, and vice versa. These positions are used to reduce or manage various risk factors and limit the probability of overall loss in a portfolio. Various techniques may be used, including derivatives.

Investment trust

An investment trust is a form of investment fund, specifically a publicly traded collective investment scheme that invests its shareholders' money in the shares of other companies.

Risk/risk taking

The acceptance of greater risk in exchange for potentially higher returns. This can apply to both individual investors and companies. An assessment of investors’ attitude to risk forms a fundamental part of identifying a suitable investment strategy for their objectives.

Volatility

The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. The higher the volatility the higher the risk of the investment.

has invested strongly in research & development. This is beginning to bear fruit with, for example, a new RSV vaccine recently brought to market.

One of the trust’s natural resources positions is Serica Energy, a largely gas producer focussed on the North Sea. When commodity prices rise, they can put pressure on earnings elsewhere in the portfolio, notably among the industrial companies held. The natural resource companies, therefore, help to provide a form of ‘natural hedge’ during these periods.

Click here to find out more about Henderson Opportunities Trust

DISCLAIMER

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions. Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Issued in the UK by Janus Henderson Investors.

Janus Henderson Investors is the name under which investment products and services are provided by Janus Henderson Investors International Limited (reg no. 3594615), Janus Henderson Investors UK Limited (reg. no. 906355), Janus Henderson Fund Management UK Limited (reg. no. 2678531), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Janus Henderson Investors Europe S.A. (reg no. B22848 at 78, Avenue de la Liberté, L-1930 Luxembourg, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).

Janus Henderson is a trademark of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc

How to judge actively managed funds and trusts

Scrutiny of the fund strategy and manager track record are key steps to make before pressing the ‘buy’ button

Whereas passive funds aim to track the performance of a key benchmark or index, active funds are run by a professional fund manager who selects what goes in the portfolio with the aim of outperforming the market. Active managers are paid a fee by investors for their stock picking expertise, benefit from face-to-face access to company management teams and unlike index trackers, can analyse qualitative data, but keep in mind that most actively managed funds

FUNDS OR INVESTMENT TRUSTS?

Before pressing the ‘buy’ button, brush up on the salient differences between investment trusts and open-ended funds, as one type of active fund may be more suitable than the other for your goals.

One of the key differences between investment trusts and funds is that the former are closed-ended, and the latter are open-ended. Open-ended means these funds create or cancel new shares depending on demand from investors.

Investment trusts also trade throughout the day, so when you buy or sell, you know precisely what price you’re getting. Open-ended funds work on a forward-pricing basis, so when you place a trade, it goes through at the price set at the next valuation point, often noon the following day.

investors, while open-ended funds can be used by novices and seasoned pros alike.

The existence of discounts and premiums to NAVs makes investment trusts more volatile, because as well as variation in the price of the underlying portfolio, there is movement in the discount or premium. Investment trusts can also borrow money to invest, which is known as taking on ‘gearing’ and can boost returns in the bull markets but exacerbate losses in bear markets.

Investment trusts trade on the stock market like ordinary shares and their share prices can sometimes deviate from the value of the underlying portfolio or NAV depending on investor demand.

Generally speaking, investment trusts are probably better suited to more experienced

Funds are suited more to liquid investments such as listed shares and bonds, while investment trusts are better for investing in illiquid assets like commercial property, infrastructure or unquoted private companies. That’s because open-ended funds might have to suspend trading if lots of investors want their money back at the same time. An advantage of the investment trust structure is it allows these companies to use their ‘revenue reserves’ of cash squirrelled away in good times to at least maintain dividends in bad times.

Another consideration is that, for most investment platforms, the cost of trading funds is typically cheaper than for trusts.

underperform their benchmarks after costs.

The universe of actively-managed funds is vast, with thousands of funds and hundreds of investment trusts available to UK investors; examples include Terry Smith’s Fundsmith Equity (B41YBW7) and Fidelity Global Special Situations (B8HT715) in the funds sector and Scottish Mortgage (SMT) and Alliance Trust (ATST) in the investment trusts patch.

This bewildering array of options can be daunting for the first-time portfolio builder, so to narrow the field, you’ll need to consider the suitability of the investment strategy and the quality of the fund manager and his/or her long-term track record.

WHAT IS THE FUND’S STRATEGY?

One of the major advantages of funds is they allow you to cost-effectively build a diversified portfolio. The many thousands of funds available to the retail investor allows you to choose a particular geographic market, a range of industry sectors or a specialist asset class such as bonds to suit your investment objectives.

Handily, industry trade bodies the Investment Association (IA) and the Association of Investment Companies (AIC) divide their funds into smaller groups or ‘sectors’, enabling you to narrow down choices and make like-for-like comparisons between funds in one or more sectors in terms of performance and charges.

Before kick-starting your actively-managed fund selection journey, you need to make sure the fund’s style and goals fit with your own investment strategy, time horizon and risk tolerance.

A key decision to make is whether to invest in a ‘growth’ or an ‘income’ fund. The most suitable option will depend on your investment goals, risk tolerance and also your age. Growth funds hold shares in companies that are expected to grow at a faster rate compared to the broader stock market heading into the future, whereas income funds seek to provide investors with a source of income right now through dividend payments.

In contrast, income funds target a steady stream of income and may suit the risk-averse investor or portfolio builder closer to retirement, as they tend to invest in more established companies that generate cash and pay dividends. Another style pursued by active managers is ‘value’, which involves buying stocks with low price to book and

low price to earnings ratios, or those trading on high dividend yields.

Your next consideration is geographic allocation. Many funds are global portfolios that put money to work in companies listed on the main international markets, whereas others focus on the UK or other developed markets such as the US, Europe and Japan. Other strategies focus on small caps, mid caps and large caps.

JUDGING PERFORMANCE & COSTS

Close scrutiny of past performance can help you to understand the characteristics of a fund and the pedigree of the manager making the asset allocation decisions, although past performance isn’t a reliable guide to future performance.

You’ll still need to assess how the portfolio has performed relative to its benchmark and how is it performing versus other funds in its sector.

You’ll also be looking for absolute performance, rather than relative to a benchmark and also to find out whether the past performance shown on the factsheet is the fund manager’s entire track record; the current manager may only have been running the portfolio for short while, rendering historical, long-run data largely irrelevant.

The majority of fund factsheets show total return figures, signifying the return you would have received from reinvesting the fund’s income into the fund. Normally, performance data is provided for one, three and five year periods,

Education: Actively-managed funds

stretching to 10 years for more established funds, as well as the performance since launch and in individual years.

Fund factsheets also supply ‘cumulative’ and ‘discrete’ performance data, on a percentage growth basis, the former presented as a graph and the latter as a bar chart on the factsheet. Cumulative performance shows the aggregate performance from a fund from launch over various time periods from launch and represents the portfolio’s overall long-term performance. Discrete performance refers to a specific series of periods.

Don’t rely solely on a fund’s long-term past performance record, since this can potentially lead to a misreading of the bigger picture. For example, a fund with a strong 10-year performance track record may have delivered exceptionally strong performance for the first two years post launch, then produced poor or below average performance for the subsequent eight years.

A manager that beats their benchmark six or seven years out of 10 is doing well and is more likely to deliver consistent outperformance in the future. And before making an investment decision, you should compare the charges that you will pay to cover the costs of running the fund with peers in its sector, since high charges will eat into your returns.

WHERE DO I LOOK?

First port of call for investors assessing performance in the investment trusts sector is the AIC website. Ways of measuring performance include NAV total return, a measure showing how the NAV per share has performed over a given period of time, taking into account both capital returns and dividends paid to shareholders.

Crucially, NAV total return shows performance which isn’t affected by movements in premiums and discounts and also accounts for the fact that different investment companies pay out different levels of dividends. Another measure is share price total return, which shows how the share price has performed over a period of time, taking into account both capital returns and dividends paid to shareholders.

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

WHERE CAN I FIND IDEAS?

There are fantastic online sources of information on funds and investment trusts to help with the selection process. For those beginning with funds, the Investment Association’s website is first port of call for the lowdown on fund sectors and statistics, while the AIC website is jam-packed with data, documents, articles and research to keep you informed.

Using data from Morningstar, the AJ Bell website enables you to filter funds and investment trusts performance and the site is flush with fund-related articles and fund manager videos. Here you will also find the AJ Bell Favourite funds list, the platform’s pick of funds offering the combination of excellent fund management, low charges and best long term potential performance. Trustnet is a fantastic resource for factsheets and fund performance data and topical articles, while investment trust aficionados should check out the Kepler Trust Intelligence and QuotedData websites for in-depth research notes.

USEFUL WEBSITES

www.ajbell.co.uk/investment-ideas/ favourite

www.theia.org www.theaic.co.uk

www.trustnet.com

www.ajbell.co.uk

www.quoteddata.com

www.trustintelligence.co.uk

By James Crux Funds and Investment Trusts Editor

Could higher taxes derail the share buyback gravy train?

Buying back stock continues to be a major catalyst for a company’s share price to rise

Announcing a new share buyback programme has been one way to trigger a share price boost. The ease at which companies have made such capital allocation decisions has naturally caught the attention of politicians, thus buybacks are increasingly a target for tax collectors.

Joe Biden has already pushed through a 1% tax on buybacks in the US and wants to raise that level to 4% if he gets a second term as US president. That has UK politicians thinking along the same lines, particularly as it is one way to boost the public purse.

Raising tax can be emotive issue with the general public but the nation is unlikely to shed a collective tear if companies on the UK stock market must cough up a bit more money to the government.

The Liberal Democrat Party has called for 4% tax on share buybacks by FTSE 100 companies. While the general election polls do not suggest the Lib Dems have a chance of getting into Number 10 on 4 July, the mere idea might plant the seed for whoever does form the next government to follow suit. Indeed, while there was no mention of buyback taxes in either the Conservative or Labour election manifestos, one cannot rule it out.

The next prime minister and chancellor might want to give this serious thought, particularly as

there is a clear need to improve the country’s finances. This looks like an easy win and whoever is victorious at the general election will need to scoop up the low hanging fruit from a tax perspective as quickly as they can.

The FTSE 100’s members returned £58.2 billion to their shareholders through buybacks in 2022 and £52.6 billion in 2023. With £36.7 billion worth of FTSE 100 buybacks already announced in 2024, it looks like another bumper year. The next government could raise £1.5 billion on buybacks purely based on the amount declared year-to-date, so it is a meaningful source of tax.

WHY COMPANIES BUY BACK SHARES

Share buybacks are one way for a company to deploy surplus cash. Companies often refer to buybacks as a way of returning cash to shareholders but they are not physically paying money to investors in the same way as dividends.

They buy the shares in the market – certain companies keep them in treasury for share-based payments to staff, but most cancel the shares. The latter reduces the number of shares in issue which increases the earnings per share. That in turn can improve the market value of a company.

While this is straightforward to understand, it is important to question if there is a better use

Daniel Coatsworth: Buybacks

for the spare cash. Businesses should constantly reinvest money so they can stay ahead of the competition. That does not mean back-to-back acquisitions, it is about allocating capital sensibly and strategically.

Splashing the cash on buybacks might please investors near-term, but this action might be to the detriment of the business longer term. It is like gorging on chocolate – an instant sugar high but with regret later on.

Sometimes buybacks are a way of deploying unusually elevated levels of surplus cash alongside special dividends, principally from asset disposals. For example, HSBC (HSBA) and Vodafone (VOD) are going down that route after selling parts of their business.

Others might splash cash they could use in a better way elsewhere. For example, pharmaceutical group Merck (MRK:NYSE) unveiled a $10 billion buyback programme in 2000, despite its pipeline of new treatments looking slim and important patents approaching their expiration date which means rivals could launch generic copycat versions. As one analyst said at the time, ‘$10 billion would have funded a lot of research and development.’

MORE TAX ON BUYBACKS = MONEY REDIRECTED TO DIVIDENDS?

Joe Biden’s decision to impose a 1% tax on buybacks in 2022 started the debate over whether the share buyback trend would lose momentum. This does not appear to have happened.

Big technology companies might have become more generous with dividends, but most dividends from these types of companies are token payments and sit second place to share buybacks. You are certainly not going to see any of the Magnificent Seven group of companies show up on a filter of high-yielding stocks. The most generous dividends come from Microsoft (MSFT:NASDAQ) and its prospective yield is a meagre 0.7%.

At its currently stands, share buybacks look like they are staying on the menu, despite the prospect of greater tax rates. Investors certainly welcome this strategy.

Just look at how Apple’s (AAPL:NASDAQ) shares

Source: AJ Bell, Stockopedia. Prospective dividend yields. Amazon and Tesla do not pay dividends, hence n/a (not applicable).

jumped 6% after unveiling a $110 billion share buyback at the start of May, the largest buyback programme in US corporate history.

The electronics giant has come under fire in recent years for sluggish performance as iPhone sales struggle in China and a perceived lack of new, innovative product launches. Yet the buyback was enough to win back the market’s favour.

DO BUYBACKS TRANSLATE INTO SHARE PRICE GAINS?

To answer this question, it is worth looking at the world of ETFs (exchange-traded funds). There are ETFs everything imaginable these days and investors can tap into them to find investments relevant to certain themes.

Amundi and Invesco are among those offering ETFs that track an index of companies actively buying back shares. Their list of holdings effectively gives investors a starting list when researching relevant names.

While it is impossible to draw any firm conclusions from a single investment product, it is worth flagging the performance of the pounddenominated version of Invesco Global Buyback Achievers (SBUY) which has generated more than twice the total return of the FTSE 100 since it launched on 28 October 2014 (199% versus 86% respectively, according to FE Fundinfo data). While impressive, it is a tough lighter than the 211% from widely used global equities benchmark MSCI World index in sterling over the same period.

The Invesco Global Buyback Achievers ETF tracks an index of companies that have reduced the number of shares in issue by 5% or more in the trailing 12 months via buybacks. Current holdings include oil producer Shell (SHEL), pharmaceutical group Novartis (NVS:NYSE) and healthcare giant Johnson & Johnson (JNJ:NYSE).

NO GUARANTEES OF A BOOST

used spare cash to fund dividends but on 12 June it outlined a new capital returns structure including a move to start share buybacks.

You might have thought the latter news would have fired up the share price, but investors did not like the fact buybacks are happening at the cost of lower dividend growth over the long term. The shares tanked on the announcement.

It is hard to predict how UK-listed companies would react in the event of a buyback tax. They could, in theory, increase their dividend payments and return cash via that mechanism instead. However, that could raise the stakes during the next economic downturn as shareholders tend to take news of a dividend cut harder than they do the announcement of a postponed or cancelled share buyback.

Where we go next is uncertain, but the fact buyback taxes are a live issue either side of the Atlantic on buybacks means this is something to watch closely, whether it happens in the near-term or in the future. The more companies buy back shares, the more a government will spot it as an opportunity to generate more tax income.

While there are examples of stocks racing ahead on buyback news, there are exceptions. For example, life insurer Legal & General (LGEN) has historically

By Daniel Coatsworth AJ Bell Editor in Chief and Investment Analyst

Country Spotlight: South Africa

The possibility of a cooperative ANC that’s prepared to push through reforms with coalition partners, improving operational prospects for the mining sector, and a growing array of financially disciplined corporate players could make South Africa a compelling investment prospect once more. Please read on for your guide to this key market in Emerging EMEA…

Key themes:

Largest public market in the diverse sub-Saharan region and home to a growing range of companies with strong management and compelling earnings in sectors including finance, consumer discretionary and materials.

• The mining sector, the backbone of the South African economy, could benefit from a trough in the price of the commodity basket and improving operations.

• 2023’s electricity rationing was emblematic of South Africa’s deep infrastructure disintegration. The government’s incapacity to drive reform is leading to private-sector solutions that, for example, have led to electricity supply improving dramatically.

Given the political uncertainty and ongoing economic challenges, investors need to continue to be selective in equity holdings in South Africa. We maintain a focus on well-managed companies in a position to capitalise on an improving macro-economic picture.

Companies to watch: CAPITEC

Capitec is the largest digital bank in South Africa, and has achieved strong brand loyalty among retail customers. At the same time as looking to move customers to online self-service, it still retains its branch network to focus on service delivery and selling more complex products. Its online app has increased its user base by over 180,000 per month and has registered over 11 million daily logins

NASPERS

Naspers is a South African multinational internet, technology and multimedia company, with interests in online retail, publishing and venture capital investment. Listed in South Africa, the company is one of the largest technology investors in the world, and has investments across a number of geographies with more than two billion customers using their products and services.

Emerging EMEA: A diverse collection of countries with unifying characteristics

Barings Emerging EMEA Opportunities focuses on the under-researched markets of Emerging Europe, the Middle East and Africa. Managed by Barings’ highlyexperienced EMEA Equity Team, located in London.

Matthias Siller, CFA Head of EMEA Equities 26 years investment experience

Adnan El-Araby, CFA Investment Manager, EMEA 14 years of investment experience

To read more Country Spotlights from the Barings EMEA equity team, visit bemoplc.com

Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Changes in currency exchange rates may affect the value of investments. Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. Coupled with less developed regulation, this means your money is at greater risk. Any investment results, portfolio compositions and or examples set forth in this document are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The document is for informational purposes only and is not an offer or solicitation for the purchase or sale of shares in the Company. It is recommended that prospective investors seek independent advice as appropriate. The Key Information Document (KID) must be received and read before investing. This and other documents, such as the prospectus, latest fact sheet, annual and semi-annual reports, are available from www.bemoplc.com Although every effort is taken to ensure that the information contained in this document is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information. Baring Asset Management Limited, 20 Old Bailey, London, EC4M 7BF, United Kingdom. Authorised and regulated by the Financial Conduct Authority. Date of issue: June 202413231.

Halma reveals the value of consistency again

Lauding one of a number of great engineering companies for which the London market doesn’t get enough credit

Specialist engineering company Halma (HLMA) demonstrated its unerring dependability with its latest full-year results on 13 June.

For the uninitiated, Halma is a global manufacturer of safety, health and environmental technology products. It employs around 6,000 people in roughly 50 individual small- to mediumsized enterprises, and operates across more than 20 countries.

It has a pretty vast product portfolio that includes things like radiation hazard detectors, water quality monitors and fire safety kits and sensors. By operating in these areas it can tap into nondiscretionary spending often backed by regulatory and legislative drivers.

This has enabled it to put up more than 20 years

Great UK engineering companies

of dividend growth and, apart from 2021 when the company felt an impact from pandemic, earnings growth across a similar timeframe too.

Halma shares are not cheap – trading on a price to earnings ratio of nearly 30 times. Yet that’s often been the case and the only time investors would have been really caught out by buying at a premium price is in the latter half of 2021, with the stock yet to reach the highs above £30 it attained then.

Beyond that debate it’s a reminder that for all the criticism thrown the way of the UK market for its lack of breadth and quality, it does have some really excellent niche engineering businesses which have been rewarded by the market with premium valuations. The table shows several of them with a brief description of what they do.

Because these companies operate in specialist areas they are typically less exposed to the cyclicality which industrial firms experience and, while these are not technology companies per se (the lack of tech another thing thrown at London’s stock market), they often operate at the cutting edge of their specific area of expertise.

DISCLAIMER: The editor (Ian Conway) owns shares in Halma

Marking IBT’s 30-year anniversary with a look at the transformation of cancer therapy

International Biotechnology Trust (IBT) recently celebrated its 30-year anniversary, having launched as a pioneering investment trust dedicated to the nascent opportunity in biotech back in 1994. In this article, we explore the key developments in cancer treatment during this time and the outlook for future breakthroughs, which are collectively profoundly changing the prospects for many patients.

International Biotechnology Trust (IBT) recently celebrated its 30-year anniversary, having launched as a pioneering investment trust dedicated to what was then a nascent opportunity in the biotech industry, back in 1994. One key therapeutic area which has consistently been a focus of interest for the trust is oncology. In this article, we explore the key developments in the treatment of cancer over the last 30 years, which have profoundly changed perceptions of – and, ultimately, the survival rates of patients with –what was once seen as an insurmountable disease.

THE FOUNDATIONS OF MODERN CANCER THERAPY

When IBT launched back in 1994, cancer therapy relied heavily on well-established methods of treatment such as surgery, chemotherapy and radiation therapy. While these treatments were

effective to an extent, they lacked the ability to be targeted with precision, and often caused significant damage to healthy cells in the process.

However, in the late 1990s, we saw pivotal advancements that have ultimately paved the way for the more targeted approaches to cancer treatment that we see today. Drugs such as ICI/AstraZeneca’s Tamoxifen (approved in 1977), targeting oestrogen receptors in breast cancer cells, and Novartis’ Imatinib (approved in 2001), targeting the genetic mutation behind chronic myeloid leukaemia, were early examples that showcased the future promise of targeted therapies in achieving better outcomes for patients, with fewer side effects.

UNLOCKING THE SECRETS OF THE HUMAN GENOME

As the understanding of the science of cancer deepened, so too did the ability to develop more targeted and personalised treatment strategies. The decoding of the human genome in 2000 was a key breakthrough in this regard and was followed in the mid-to-late 2000s by the approval of a range of targeted therapies designed to exploit specific genetic mutations or molecular pathways driving cancer growth.

Drugs like Genentech/Roche’s Herceptin (approved in 1998), which targets a protein in certain breast

cancer cells, and Plexxikon/Roche’s Zelboraf (approved in 2011), which inhibits a mutated protein in melanoma, exemplified the promise of targeted therapy in improving treatment outcomes. By specifically targeting cancer cells while sparing healthy tissue, these drugs offered much greater precision and limited the damaging side effects that came with more traditional treatments.

Furthermore, the advent of molecular profiling and genetic testing allowed clinicians to identify specific mutations in cancer cells, enabling more personalised treatment approaches. By tailoring treatment regimens based on the unique genetic makeup of a specific patient’s cancer, precision medicine has revolutionised cancer care, leading to better outcomes and improved quality of life for patients.

2018 for $9bn) both of which were CAR-T cell therapy companies.

Checkpoint inhibitors, meanwhile, work by blocking the cancer cell’s ability to protect itself against the host’s immune system, thereby releasing the brakes on the immune system and allowing it to mount a more effective attack against cancer cells. An example from within the IBT portfolio is the Chinese company Beigene’s Brukinsa, which is a best-in-class Bruton’s tyrosine kinase (BTK) inhibitor which has been approved for use in certain blood cancers. Ongoing clinical trials could expand Brukinsa’s application across a broader range of haematologic conditions and BeiGene’s broader pipeline contains other innovative therapies targeting different key cancer pathways. IBT previously owned Pharmacyclics which was acquired by Abbvie in 2015 for $21bn, which was the first successful BTK inhibitor on the market.

CURRENT LANDSCAPE AND FUTURE DIRECTIONS

As IBT passes its 30-year anniversary, the speed of progress in cancer therapy shows no sign of slowing down. Indeed, as we regularly report, the pace of innovation in biotechnology more broadly continues to accelerate.

Recent progress in targeted therapies, immunotherapy and early cancer detection technologies continue to hold promise for further improving outcomes and transforming the way we approach cancer treatment.

THE RISE OF IMMUNOTHERAPY

The 2010s witnessed a flurry of ground-breaking developments that continue to reshape the landscape of cancer therapy. Among the most notable advancements were the introduction of CAR-T cell therapy and checkpoint inhibitors, which represented significant leaps forward in the field of immunotherapy.

CAR-T cell therapy involves reprogramming a patient’s own immune cells to recognise and destroy cancer cells. This approach has shown remarkable success in treating certain types of leukaemia and lymphoma, offering the potential for long-term remission and even cure. For example, IBT is invested in Legend Biotech, a CAR-T cell therapy company that has launched Carvykti in multiple myeloma, following its regulatory approval in 2022. It also has a range of other exciting opportunities in its pipeline, focusing on cancers that have hitherto been considered intractable and incurable. IBT previously had holdings in Kite Therapeutics (acquired by Gilead for $11.9bn in 2017) and Juno Therapeutics, (acquired by Celgene in

Cell therapies like CAR-T still rely on harvesting a patient’s own cells and modifying them, which has side effects for the patients meaning that it is only available to the sickest patients for whom other treatments have failed. Sadly the complexity and time it takes to prepare the treatment from their own cells can mean that the patient often fails to survive long enough to benefit. Biotech companies are now working on allogenic cell therapies which use “off the shelf” donated cells, but have yet to find a way of creating a durable response in patients to this type of therapy. This next generation of cell therapies could radically simplify the treatment of advanced cancer, making it more readily available to these very sick patients.

While biotech companies have been reasonably successful in developing targeting therapies for certain cancers such as blood, lung and breast cancer, other solid tumour cancers such as liver and pancreatic are still treated in the same way they have been for decades. Finding a targeted treatment that is effective in solid tumours would represent a huge breakthrough for our sector and many companies are working on potential solutions. In IBT’s portfolio Immatics and Immunocore are both seeking to

develop an “off the shelf” cell therapy and Immatics is focussing particularly on the harder to treat solid tumours.

The future, therefore, looks encouraging for cancer patients, and for investors in biotechnology. Patent protection allows the developers of genuinely lifeenhancing therapies to be ultimately well-rewarded for the risks involved with developing their technology through to commercialisation.

The expiry of patents means more patients can access generic drugs globally and makes them cheaper for society as a whole. Patent expiries fuel pharmaceutical companies’ hunger to replace lost revenues by investing in new drugs either by buying or licensing in individual projects or acquiring biotech companies. This ecosystem ensures the flow of pharmaceutical revenues into biotech companies which ensures access to funding for the next generation of innovation. Investors in biotech companies also benefit from the premium paid by pharmaceutical companies eager to add exciting new treatments to their pipelines.

Risk considerations

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

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

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

possibility of managing cancer as a chronic condition rather than a terminal illness. Clearly, the many complexities of cancer in all its forms, mean not all patients have yet seen such an improvement in treatment outcomes, survival rates or quality of life. On balance, however, the progress in oncology has been –and indeed continues to be – overwhelmingly positive. Looking ahead, the accelerating pace of innovation in oncology, and biotechnology more broadly, holds great promise for patients and investors alike. With continued investment in oncological research and development, we should hope to see even greater breakthroughs in cancer therapy in the years to come. IBT’s long experience in this sector has shown that investing in this area requires a nimble approach to ensure that we invest only in those companies which we believe hold the greatest potential for success. This requires careful monitoring of all companies in this space as incumbent drugs or even drugs still in development can quickly be outclassed by a newer drug with better potential.

Click here to find out more about the trust >

• Gearing risk: The Company may borrow money to make further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase by more than the cost of borrowing, or reduce returns if they fail to do so. In falling markets, the whole of the value in that such investments could be lost, which would result in losses to the Company.

• Liquidity risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. In difficult market conditions, investors may not be able to find a buyer for their shares or may not get back the amount that they originally invested. Certain investments of the

Company, in particular the unquoted investments, may be less liquid and more difficult to value. In difficult market conditions, the Company may not be able to sell an investment for full value or at all and this could affect performance of the Company.

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

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

• Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve.

• Share price risk: The price of shares in the Company is determined by market supply and

IMPORTANT INFORMATION

For help in understanding any terms used, please visit www.schroders.com/en/insights/invest-iq/investiq/ education-hub/glossary/

We recommend you seek financial advice from an Independent Adviser before making an investment decision. If you don’t already have an Adviser, you can find one at www.unbiased.co.uk or www.vouchedfor.co.uk. Before investing in an Investment Trust, refer to the prospectus, the latest Key Information Document (KID) and Key Features Document (KFD) at www.schroders.co.uk/investor or on request.

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

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

The data has been sourced by Schroders and should

demand, and this may be different to the net asset value of the Company. This means the price may be volatile, meaning the price may go up and down to a greater extent in response to changes in demand.

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

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

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

Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

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

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

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.

How to invest as you approach retirement

When you’re building your pension up, what you’re looking for from your investments is well defined: growth. Likewise in retirement, for most people, the goal is simply to generate income. But there is a period in the lead up to retirement, when things are a little more nuanced.

During the financial crisis the typical global equity fund fell by 30%. That’s not something you want to happen just at the point you’re about to draw your pension. So, you want to protect your pension from big market downdrafts. But at the same time, you’ll still want to experience some growth in your pension in your final years of working, as well as preparing for drawing an income in retirement. This can create a bit of head scratching when it comes top setting an investment strategy in the retirement runway.

THE LIFESTYLING APPROACH

The traditional approach to this conundrum is called lifestyling. As you approach your chosen retirement date, your assets are gradually moved out of equities and into bonds, in order to hedge against annuity rate movements. Bond prices move in the opposite direction to annuity rates, and so the idea is by investing in these ‘annuity hedging’ funds you can reduce your retirement income volatility. While that might be true if you’re buying an annuity with your pension pot, this doesn’t actually reflect what most people are now doing with their pension.

Only around 10% of people are currently buying an annuity with their pension, compared to around 90% before the pension freedoms were introduced almost a decade ago.

This opens investors up to a big risk. Over the course of 2022, the typical annuity hedging fund used as part of a lifestyling strategy fell in value by 36%. Annuity rates went up at the same time, but if you’re not buying an annuity, that 36% decline represents a pension hit every bit as bad as being invested in a global equity fund during the financial crisis. For many then, the traditional lifestyling approach is now an inadequate, outdated strategy.

Nonetheless many older pensions, such as group personal pensions or individual personal pensions like stakeholders, still automatically implement a lifestyling approach on behalf of investors. If you have an older pension, typically provided by an insurance company, you might want to check if it’s programmed to start investing in annuity hedging funds as you get closer to retirement.

THINKING ABOUT THE FUTURE

What the widespread failure of traditional lifestyling throws into focus is that in order to plan an investment strategy that leads into retirement, you do need to think about how you’re going to draw your pension when the time comes. If you’re one of the minority of people who are planning on buying an annuity, then the traditional lifestyling approach

Dialling down on risk on the path to pensionable age

Personal Finance: How to invest as you approach retirement

might well work for you. But many more people are now taking the two other options opened up by the pension freedoms: cash and drawdown.

For those who are taking their entire pension as a cash lump sum it makes sense to have their pot held in cash, or cash-like money market funds, as they approach retirement. This protects them from large market falls just as they are about to cash in their chips. One of the things we can salvage from the traditional lifestyling approach is the idea of a gradual shift in your assets as you approach retirement.

This helps smooth the journey and means you aren’t caught out by a big market repricing just as you leap from one investment to another. For those taking their entire pension as cash, this would mean slowly shifting towards having 100% of your pension held in cash. Even for those buying an annuity or taking drawdown, building up some cash makes sense if you’re planning to take your 25% tax-free lump sum at retirement.

DRAWDOWN OPTIONS

For those taking drawdown, where you keep your pension fund invested in retirement and take an income from it, the thinking cap needs to stay on for a bit longer. It’s still probably prudent to gradually shift your pension pot, but the question of what you are moving towards depends on your risk

appetite and how you want to invest in retirement. It’s probably a good idea to put together a target portfolio, which is how you want your pension to look at the point of retirement, and steadily move your investments across to the new strategy.

You might actually end up keeping some of your holdings though. That’s because you’ll almost certainly want to retain some exposure to shares in a drawdown account, though most likely with a greater focus on income rather than growth. Even so you may still want to hang on to some more growthorientated shares and funds in the interests of having a diversified portfolio, and you can always generate an artificial income from these assets by taking profits and withdrawing the proceeds.

If you’re going to transition your investment strategy in the approach to retirement, you also need to decide when to start the switch. There’s no hard and fast answer here but conducting a pension review 10 years before retirement is normally a good idea, first to check you’re on course to meet your retirement goals, but also to consider your investment strategy going forward. By the time you hit five years to retirement you should really be starting to transition your investment strategy, if you haven’t already. Giving yourself more time allows you to adjust to market conditions. If there’s a big drop in share prices you can delay shifting out of equities until there’s some recovery, provided you haven’t boxed yourself in by leaving things till the last minute.

DO-IT-YOURSELF

It’s perfectly possible for investors to navigate the transition into retirement themselves if they are willing to roll up their sleeves a bit. It might help to consolidate pensions in one place to make things simpler on this front. It’s quite common to accumulate multiple pots spread across different providers, and it’s hard to implement a joinedup investment strategy across so many different pensions. If you want a helping hand, you can always seek out the services of a professional financial adviser, who for a fee will provide recommendations tailored to your particular circumstances.

By Laith Khalaf AJ Bell Head of Investment Analysis

Why I wish I’d saved more for my children

A personal perspective on the merits of squirrelling money away to fund university education

Big milestones in our lives usually coincide with big personal finance decisions, or at least give us a nasty reminder that we should have been considering our financial futures when it would have made a difference to the here and now.

Hindsight, as they say, is a wonderful thing. I had my first child two weeks after the collapse of investment bank Lehman Brothers.

That recession was tough for many people including my family and when that envelope dropped through the door explain that the government had stuck £250 into a Child Trust Fund and inviting us to add to the pot, I’m afraid I just threw the letter away.

Fast forward almost 18 years and I’m wishing I’d given that a bit more thought. I didn’t work in financial services at the time and money was tight.

But we still spent a small fortune on plastic tat that we ended up donating to the local play school once the kids grew out of it.

We could have spent a bit less on ‘stuff’ for birthdays and Christmases or even set up a small monthly direct debit that we wouldn’t really have missed.

Just £25 a month or £100 twice a year in place of stocking fillers or a birthday treat could have turned into a bijou but incredibly useful pot of cash that would have assisted us with our daughter’s next chapter.

PARENTS FACE HUGE UNIVERSITY COSTS

Because it’s just beginning to dawn on me how expensive that next chapter is likely to be. When I went to university tuition was free. My parents helped cover my meagre accommodation and living costs and I took out a very small student loan and I had a part time job which pretty much covered drinking expenses.

Fast forward a few decades and my daughter (well both my daughters but I’m trying to ignore that at the moment) want the university experience too. It had penetrated my brain that they would have to take out a loan to cover tuition fees (you can hear more about those expenses on our next Money Matters podcast) but I hadn’t considered how much we as parents would have to fund.

Students from households with a combined income of just over £70,000 a year can only access the minimum level of maintenance loan, for the

Danni Hewson: Money matters

2024/25 academic year that equates to just £4,767 if you are living away from home, slightly more if you study in London. (Students from households with a lower combined income are eligible for bigger loans).

Whilst accommodation costs vary widely a quick look on university websites, I’m fast realising that loan is unlikely to fully cover those costs in most of the locations my daughter is considering and even if there were a few pennies left over, they won’t come close to covering basic sustenance.

And of course, any maintenance loans are wrapped up with tuition fees – a huge weight of debt I was spared.

WHY DON’T WE HAVE US-STYLE COLLEGE FUNDS

While there would have been no guarantees that my daughter wouldn’t have blown a chunky Child Trust Fund or nicely padded JISA on a wild summer of post-exam debauchery, I’d like to think she would have been sensible enough to use it in place of running up more debt.

That quirk, the fact that 18-yearolds get control of their pot of cash,

is something that has put off some parents from investing for their kids but as few of us ever max out our own ISA allowances, that could have been a smart compromise.

I have found myself wondering why college funds haven’t become a thing in the UK. I can’t count the number of Hollywood movies or streaming dramas that talk about the family with 2.4 kids putting cash away in college funds.

Perhaps it’s because American’s have always had to pay for further education, whilst here in the UK it’s not something parents had to contend with and in fact it wasn’t until 2012 that the current £9,250 a year tuition fee rate came into effect.

Before that, taking out a loan to cover the modest fees and certainly board and lodging seemed manageable, whilst today those additional maintenance loans just swell an already eyewatering debt.

So, I can be forgiven for not having a crystal ball back in 2006, but the situation is different for those of you with younger children, especially if you find yourself able to access free childcare hours, eligible for child benefit where you weren’t before, or your kids start primary school and you only have to fork out for wrap-around care.

Don’t just have those dreamy conversations about the fact your five year old is clearly destined to become a financial whiz because they can already count the number of skittles they delicately drop into their open mouths, consider the long slog it will take for them to get that economics degree, and the cash needed along the way – and open that Junior ISA, or stick a few extra pennies in your own ISAs.

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Danni Hewson is a founding ambassador of AJ Bell’s Money Matters campaign aimed at helping women become more confident with their financial lives

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

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THE BANKERS INVESTMENT TRUST

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CAKE BOX HOLDINGS

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Should I transfer my workplace pension scheme to a SIPP?

What to think about when moving or consolidating your pension funds

I am currently considering my retirement options and have a question regarding transferring my pension from a workplace scheme to a SIPP (selfinvested personal pension).

I’m wondering if it’s possible to make such a transfer and what considerations or steps might be involved in the process.

Diego

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

Over the last 11 years, more than 11 million people have been automatically enrolled into their workplace pension. Today, every time someone joins a new employer, they also join their pension scheme if they are aged 22 or over and earn over £10,000 a year.

The government estimates the average person has 10 jobs in a lifetime, so that could mean building up 10 different pensions. And that’s where it gets complicated: 10 different pension schemes to keep track of, probably all with different providers..

It’s no surprise many people decide to combine their older pension plans into one. Doing so can offer many advantages. It makes it easier to manage pension savings if they are all in one place, and to work out if your pension is on track to get the income you want in later life.

There’s a lot less admin and paperwork such as statements to plough through, and only one log in to remember. Transferring to a SIPP could offer greater investment choice than is available in many workplace pensions. And finally, combining pensions may mean potentially lower charges.

TRACKING DOWN OLD PENSIONS

The first step to combining pensions is to track them down. And that probably means digging out log-in details and paperwork. One idea is to go through work history and match the pension to the job. If there are any missing, then people can get in touch with old employers to check if they paid into a pension. If going back is difficult – perhaps the employer no longer exists – then there is a free state-backed pension tracing service available.

Before people rush in to combine pensions there are a few checks to do beforehand. Some older style of pension plans will apply a penalty if pension savers move their money away before a set date. This could be a with profits pension or an exit penalty.

Others offer valuable benefits such as a guaranteed annuity rate – a special deal on prices if the individual chooses to buy an annuity with the fund.

For both these situations it doesn’t mean that people cannot transfer their pensions. But they need to be aware of the consequences of doing so and consider whether that is the outcome they want.

It’s almost always best to leave a pension where it is if the individual’s employer is also currently paying into it. There’s a strong possibility the employer contributions would stop if it was

Ask Rachel: Your retirement questions answered

transferred, and obviously that should be avoided. Another situation where caution is needed is if someone has a defined benefit pension scheme. Most people have to get regulated financial advice before they can transfer these valuable benefits, and the FCA believes it’s usually in people’s best interests not to transfer.

A POTENTIAL SHORT CUT

Once an individual has established which of their pension schemes they want to transfer, then all they have to do is give the details to their pension scheme.

However, to make life even easier, some providers now offer a pension finder tool. This cuts out some hard work. All individuals have to do is give their provider details of their past employments, and the provider will track down the old pension plans. They will then check and let the individual know if there are any reasons they may want to pause before transferring – for example, if there are any exit penalties.

If you need a hand finding old pensions, AJ Bell has a free Pension Finder tool that can help.

Questions about retirement?

Rachel Vahey, AJ Bell Head of Public Policy, is here to answer your questions

Transferring to a different pension scheme can offer many advantages to pension savers, such as lower charges and better investment options. And having a single combined pension can help people manage their pension schemes easier, making it simpler for them to plan for their future.

DISCLAIMER: Financial services firm AJ Bell referenced in this article owns Shares. The author (Rachel Vahey) and editor (Tom Sieber) own shares in AJ Bell.

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

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Danni Hewson

Laith Khalaf

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Rachel Vahey

Russ Mould

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