Shares magazine 30 May 2024

Three important things in this week’s magazine

CHANGE

What should you do if a fund manager leaves?

With a number of top managers either retiring, moving to another firm or setting up their own business, we look at the options open to investors and talk to fund of fund managers to get their views.

Analysing the FTSE 100’s biggest company by market value

The pharmaceutical giant AstraZeneca has overtaken the big banks and Big Oil to become the UK’s most valuable company – we explain why.

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:

How parents are thinking about pocket money in the digital era

Shares digs deep and looks at how the amount we give our kids and the way we do it has changed over recent years.

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What will a general election mean for the markets and the economy?

Prime minister Rishi Sunak surprised investors with the 4 July date

Prime minister Rishi Sunak’s decision to call an early general election came too late for UK investors to respond, but the ‘day after the night before’ saw the the FTSE 100 close 30 points or 0.4% lower at 8,339 which is hard to read anything into as far as markets are concerned.

A more telling reaction was the bounce in sterling, which continued its month-long advance against the euro as any chance of a Bank of England rate cut on 20 June now looks highly unlikely whereas the ECB (European Central Bank) looks almost certain to cut when it meets next week.

In theory, markets should be pleased there is one less uncertainty to deal with in terms of the timing of the election but there is still a question mark over what a potential change of government means for the economy and for stocks.

James Henderson, co-manager of Henderson Opportunities Trust (HOT), Lowland (LWI) and Law Debenture (LWDB) believes the election could be good for the economy and for UK shares.

‘It could break log-jams on major investment decisions we’re seeing in several industries. The Labour commitment to house building maybe difficult with the planners but is real and could benefit companies with large landbanks.

‘Labour governments have traditionally been good for domestic infrastructure companies, but infrastructure investment is needed regardless of who wins. We need new schools, prisons and hospitals.’

Euro to British pound

Shares magazine • Source: LSEG

for Value for Money’ to oversee how taxpayers’ money is spent and cut government spending on consultancy by half, using the money instead to boost long-term staffing.

A Labour win wouldn’t be great news for consultants and outsourcers, however, as one of the party’s election pledges is to introduce an ‘Office

One short-term beneficiary of the early election is the tobacco sector as the Tobacco and Vapes Bill cannot be rubber-stamped before parliament is formally dissolved on 30 May.

Tobacco stocks were knocked down when Rishi Sunak proposed the bill last October, although any relief is likely to be short-lived whoever wins the election as the Labour party supports the motion in principle.

An early casualty of the election is the mooted NatWest (NWG) share sale although the ‘British ISA’, announced in the Spring Budget, which is aimed at boosting investment in UK companies by allowing individuals to buy up to £5,000 in UK shares on top of their existing £20,000 ISA allowance, may be backed by Labour. [SG]

Chart:

AstraZeneca shoots for the stars, GSK wins first Zantac trial and PureTech Health launches tender at a premium

AstraZeneca initiated around 30 late-stage clinical trials in 2023

The long-awaited investor day at AstraZeneca (AZN) on 21 May delivered a punchy increase in the pharmaceutical giant’s long term growth ambitions inviting further upgrades to analysts’ revenue and profit forecasts.

After achieving its prior target of generating in excess of $45 billion of revenue by 2023 set a decade ago, management is aiming for more than $80 billion in annual revenue by 2030 and adjusted operating profit margins in the mid-30s percent range.

Long-serving chief executive Pascal Soriot is predicting a ‘new era of growth’ and believes the company can reach its new goal organically through a combination of ‘significant’ growth from AstraZeneca’s existing portfolio of medicines and by launching 20 new medicines by the end of the decade.

peak revenue.

Analysts were anticipating an upgrade to sales and profit guidance, but not to the magnitude delivered which implies a 25% increase to consensus $64.2 billion revenue forecasts and a 12% increase to adjusted operating profit estimates.

Shore Capital’s healthcare analyst Sean Conroy conceded long-term upgrades to earnings could be in the cards ‘assuming the $80 billion looks deliverable based on the information conveyed’.

Assuming the $80 billion looks deliverable based on the information conveyed”

Many of the new launches are expected to have the potential to generate more than $5 billion in

Sceptics could argue Soriot is trying to justify his controversial £1.8 million pay increase which takes his annual salary to £18.7 million, making him one of the highest-paid CEOs in the FTSE 100.

Meanwhile, pharmaceutical firm GSK (GSK) is showing signs of getting its mojo back following a period of operational hiccups and litigation worries surrounding its heartburn drug Zantac.

The first legal case to make it to trial saw GSK handed a victory by a Chicago court after it dismissed the plaintiff’s claim that Zantac had caused colorectal cancer.

Separately, GSK said it welcomed news of a court ruling which dismissed a Zantac trial due to start on 23 May on the grounds the UK firm was not the brand manufacturer of the generic over-the-counter drug at the time the plaintiff allegedly used it.

Receding fears of multi-billion-dollar settlements and a string of better-than-expected trading updates have helped the shares climb back to the £18 level they traded at before news of the litigation broke in July 2022.

Finally, there was further good news for investors in biotechnology company PureTech Health (PRTC) after it announced a $100 million tender offer pitched at £2.50 per share, or a 10% premium to the current price.

PureTech is a running 2024 Shares tip of the year, currently 50% in the money. [MG]

Why Marks & Spencer can maintain its momentum

The retailer’s turnaround strategy is delivering results and improving consumer confidence offers a tailwind

Retail bellwether Marks & Spencer’s (MKS) latest results (22 May) suggest the food, fashion and furniture seller has finally embarked on the turnaround which has been long in the making with many false dawns down the years.

Shares in the FTSE 100 retailer are at a fresh fiveyear high of 300p following the delivery of forecastbeating full-year figures and a first final dividend since 2019. Yet despite the scope for further earnings upgrades, Marks & Spencer’s valuation remains undemanding and a re-rating could drive the next upward leg in the share price.

Encouragingly, the UK consumer backdrop is improving, as demonstrated by May’s two-point increase in GfK’s Consumer Confidence Index to -17, with interest rate cuts still to come thanks to moderating inflation.

As Ian Lance, co-manager of Marks & Spencer shareholder Temple Bar Investment Trust (TMPL), enthuses: ‘What is so exciting is it feels like this turnaround strategy still has some way to go yet this is not yet being reflected in the share price as many investors remain sceptical of the Marks recovery story.’

Results for the year ended 30 March 2024 revealed a forecast-busting, near-60% surge in adjusted pre-tax profit to £716.4 million, demonstrating Marks & Spencer’s effective cost management and operational efficiency.

Led by chief executive Stuart Machin, who believes ‘we are at the beginnings of a new M&S’, the retail stalwart’s new and renewed stores are attracting new customers and returns on investment have been strong.

Marks & Spencer

Chart: Shares magazine•Source: LSEG

in the best financial position since 1997.

Having invested hard into price and product quality, Marks & Spencer’s Food and Clothing & Home arms have both now generated 12 consecutive quarters of sales growth and the retailer continues to take market share. M&S is also

Shore Capital’s upgraded estimates point to pretax profit of £755 million and earnings per share of 25.7p for the year to March 2025, rising to £801 million and 28.1p for full year 2026, leaving the shares on a forward PE (price to earnings) ratio of 10.7 based on next year’s forecasts. That is undemanding and leaves room for a re-rating towards close peer Next (NXT), which trades on north of 15 times earnings. Marks & Spencer is in good shape but there is still more to do to make the business fighting fit. AJ Bell investment director Russ Mould says the Ocado (OCDO) joint venture ‘needs to pull its socks up’, while Machin sees a ‘substantial opportunity’ to improve the online and M&S App experience. [JC]

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

AI chip champ Nvidia adds $230 billion in a day

Value of intra-day move 21% more than UK’s largest company, AstraZeneca

Blowing consensus estimates out of the water has become habitual for Nvidia (NVDA:NASDAQ), fuelling an astonishing eight-fold jump in the share price in less than two years. It’s most recent near-9% rally in the wake of more forecast-thumping earnings added an extra $230 billion to its market cap as investors continue to pile in on the promise of rampant revenue and profits growth from an AI revolution that looks increasingly real.

At the start of the year Nvidia already had a trillion-dollar market cap yet that has proved no barrier to investors or the stock, with it rallying 115% since then.

It’s not just the growth being

Watches

reported by the Santa Clara-based company, it’s the optimism of lots more to come that has really lit the touchpaper. ‘The next industrial revolution has begun,’ confidently predicted Jensen Huang, founder and chief executive of Nvidia last week.

‘AI will bring significant productivity gains to nearly every industry and help companies be more cost- and energyefficient, while expanding revenue opportunities.’

More hubris, sceptics might say, yet the numbers are increasingly difficult to argue with. 262% year-onyear revenue growth, net income up from $2 billion to almost $15 billion,

of Switzerland shares fall on flagging demand for luxury goods

Jan 2024 Apr

Chart: Shares magazine•Source: LSEG and free cash flow that increased nearly sixfold to $14.9 billion yearon-year. [SF]

Watches of Switzerland

Luxury watch retailer Watches of Switzerland (WOSG) is one of the worst performers in the mid-cap FTSE 250 index over the last six months, with its shares falling by around a third.

Chief executive Brian Duffey highlighted good momentum in US sales which grew 14% year-on-year The company is building a presence in the luxury branded jewellery sector

The bulk of the share price losses came in January after the timepiece retailer downgraded full year 2024 revenue guidance by 8% at the mid-point of the range and reduced operating margin expectations to a range of 8.7% to 8.9%.

A volatile trading performance over the festive season and early 2024 prompting management to issue a cautious outlook for the rest of its financial year to the end of April 2024.

The shares ticked up in May after the company gave a more reassuring fourth quarter trading update.

Jul 2023 OctJan 2024 Apr

Chart: Shares magazine•Source: LSEG

driven by an exceptionally strong performance of Rolex Certified PreOwned’ watches.

Full year group revenue grew 2% to £1.54 billion and adjusted operating profit is expected to be between £133 million to £136 million, down 19% year on year.

The company said it remains committed to its target of more than doubling sales and profit by the end of 2028. [MG]

UK UPDATES OVER T HE NEXT 7 DAYS

FULL-YEAR RESULTS

5 June: Discoverie Group, Ninety One VP, Workspace Group

6 June: Mitie Group INTERIMS

3 June: Hollywood Bowl

4 June: Chemring Group, Gooch & Housego

5 June: Paragon Banking Group, Ramsdens Holdings TRADING ANNOUNCEMENTS

6 June: Seraphim Space Investment Trust

Seraphim chimes once again with investors

Year-to-date Seraphim shares have gained 74%

The world’s first listed SpaceTech fund, Seraphim Space Investment Trust (SSIT), is due to report third quarter results for the three months ending 31 March 2024 on 6 June.

Seraphim shares have rallied sharply in recent months, coming off a 52-week low of 26p on 12 July last year to hit a 52-week high of 75p on 14 May after renewed investor interest in the sector.

So, what’s been grabbing investors’ attention?

For starters, aerospace and defence companies are making forays into the sector with BAE Systems (BA.) recently buying Ball Aerospace of the US, a maker of ‘mission-critical space systems’, for $5.6 billion.

Also, talk that Elon Musk’s SpaceX may carry out its next share tender at a price which could value the unlisted company around $200 billion, has raised Seraphim’s and the space sector’s profile.

Seraphim’s last set of interim results (13 March) for the six months to 31 December 2023 showed the company making three new investments and

Seraphim Space Investment Trust

three follow-on investments. Importantly, one of its largest holdings, micro-satellite manufacturer ICEYE, moved into a profit at the level of EBITDA (earnings before interest, taxation, depreciation and amortisation) during the period. Analysts at Stifel believe the company’s underlying performance is healthy with ‘significant growth potential over the long term helped by tailwinds related to increased defence and climate-change prevention spending’. [SG]

DISCLAIMER: The author (Sabuhi Gard) owns shares in Seraphim Space Investment Trust.

4 June: Crowdstrike Holdings,

5 June: Brown

6 June: JM Smucker

Pressure mounts on cybersecurity hot stock Crowdstrike

June.

Cybersecurity industry investors have been experiencing the jitters after Palo Alto Networks’ (PANW:NASDAQ) quarters of soft guidance. It’s certainly put pressure on large sector ETFs, with firm early year gains for £1 billion-plus ETFs Cyber Security (ISPY) Digital Security (LOCK) wiped out in.

Which piles the pressure on Crowdstrike (CRWD) of cybersecurity’s hottest and most highly-rated stocks, due to report quarterly earnings on 4

Last time out (5 March), Crowdstrike blasted past consensus estimates on both the earnings and revenue front, feeding the view that as AI (artificial intelligence) shapes the tech landscape, the Austin, Texasbased has scope to leverage new

Nvidia (NVDA:NASDAQ) is doing in the chips space.

Analysts have certainly had their own hopes raised that the company can post knockout results right through fiscal 2025. This time round consensus anticipates earnings per share in the $0.89 ballpark on $904.8 million revenue, implying eyepopping year-on-year growth of 75% and 34% respectively.

So far, investors have continued to back Crowdstrike –the stock has rallied more than 40% this year – but any sign that demand might be slowing or shifting to the right could have significant consequences. [SF]

Falling UK inflation and rising consumer confidence are welcome developments

News of a snap election has derailed hopes of an early rate cut, however

Last week got off to a positive start on the economic front with the headline rate of UK inflation dropping to 2.3% in April, a whisker above expectations and the Bank of England’s official 2% target.

The main driver of lower prices was the household energy cap, added to which goods price inflation turned negative – although food prices went up slightly – which should have set the scene for the Bank to provide more clarity on its

plan for interest rates this year at its next meeting on 20 June.

However, the decision by the prime minister to call a July election prompted ‘The Old Lady of Threadneedle Street’ to say it wouldn’t make any comment on interest rates until after the election, so it seems safe to assume there will be no change to UK interest rates in the next month.

April’s UK retail sales figures were fairly miserable – down 2.7% by volume on April 2023 and 3.8% below their pre-pandemic level – but it’s unlikely anyone was surprised given the atrocious weather and the impact that had on footfall.

More encouraging was April’s GfK consumer confidence report, which showed a continued improvement in overall sentiment thanks to slowing inflation, lower energy bills and the recent round of national insurance cuts.

Looking ahead, US first-quarter GDP (gross domestic product) later today will be closely scrutinised, as will PCE (personal consumption expenditure) prices as they are key input for the Fed when it comes to the timing of rate cuts.

Next week sees the release of manufacturing PMI data in the US, the UK, Europe and China, which are all moving at different speeds, as well as services PMI data where it is a much more uniform picture with all zones in ‘expansion’ territory. [IC]

Time to invest in chips beyond Nvidia

Analysts are confident of a widespread sector rally, and an ETF is the way to get access

VanEck Semiconductor ETF (SMGB) £34.34

Fund size: £1.62 billion

‘We have no doubts that Nvidia (NVDA:NASDAQ) is going to become the biggest company in the world in time.’ So says Stephen Yiu, manager of the Blue Whale Growth (BD6PG78) fund, which has consistently upped its stake in the AI chip champion since first investing in 2021.

Blue Whale doesn’t publicly disclose its stake sizes but data from Trustnet shows Nvidia to be the fund’s biggest single holding worth around 8.75% of assets. Wall Street has consistently raised the estimates ante and Nvidia has kept on beating, its most recent figures (22 May) showing quarterly revenues ballooning 262% versus the 241% expected, while net income and free cash flows around the $15 billion mark also rocketing year-on-year.

Plainly speaking, anyone who has invested in the Santa Clara-based AI (artificial intelligence) chips champion over the past 18-months has made a mint, with the stock surging from $112 to more than $1,000 since October 2022, the stock accounting for more than 5% of the Nasdaq Composite’s near-15% gains this year alone.

Yet analysts see positive investment returns incoming from across the semiconductors space

VanEck Semiconductor ETF (p)

Chart: Shares magazine•Source: LSEG

through the rest of 2024 and beyond, and that’s why Shares believes more broad-based sector investment could pay off.

ANALYSTS WARMING TO THE THEME

For example, earlier this month Jefferies’ analysts initiated coverage on the US semiconductors sector with a long-term bullish outlook, indicating that the current upcycle in the space is expected to be strong and lengthy. Analysts note that historically, the market is still early in the cycle, being just 14 months removed from the lowest year-on-year growth point, compared to over 30 months in the past nine cycles, implying 12 to 18 months of ‘growth ahead.’

‘We saw peak-peak Semi revenue growth of 20% to 40% over the last two cycles and our forecast includes 50% growth through 20’28 given the influx of $200 billion of AI spend, which suggests 30% to 60% upside remaining in the SOX based on historical cycle multiples,’ they wrote.

The SOX is the nickname for the PHLX Semiconductor Sector Index, the sector benchmark market capitalisation-weighted index composed of 30 semiconductor companies, which of course includes Nvidia.

The investment bank believes that AI investment is poised to grow significantly, potentially accounting for 25% of semiconductor revenues by 2027, up from approximately 5% in 2022. With rising cloud computing capital expenditure budgets, the growth trajectory for AI remains robust, aided by billions of dollars in grants being handed out by the US Government to keep the most advanced technology development within its sphere of influence.

the headlines and the lion’s share of capital investment, other arguably less exciting areas are seen rebounding too, promising robust growth for nuts-and-bolts chip players too.

Memory chip manufacturer Micron Technology (NASDAQ:MU) is Citi’s top sector pick this year, who believe the DRAM (dynamic random access memory) upturn has begun, highlighting the recent commentary and guidance from the likes of South Korea’s SK Hynix (000660:KRX).

Analysts at the bank note stable demand in PCs, handsets, servers (which is 53% of the semiconductor total addressable market), and inventory replenishment. ‘We look for at least 11% year-on-year growth in global semiconductor sales in 2024,’ Citi has said, although they still see AI leading the way, and why Citi remains firmly supportive of further upside for Nvidia, plus peers like Advanced Micro Devices (AMD:NASDAQ) and Broadcom (AVGO:NASDAQ).

Key Banc Capital Markets analyst John Vinh predicts auto companies such as Tesla (TSLA:NASDAQ) will be the largest source of demand this year, potentially driving several billion in revenues, but the analyst also anticipates sovereign AI deployment to start to inflect, contributing highsingle-digit billion-dollar revenue this year.

Analysts at Citi are also ‘wildly bullish’ on semiconductor stocks, based on current demand trends. But while AI will continue to capture

Biggest US grants to chips firms

WHERE TO GET EXPOSURE

Now, many investors might feel they have plenty of semiconductor sector exposure already through S&P 500 or Nasdaq ETFs, for example. Shares estimates roughly 23% of the Nasdaq 100 is chip firms. That’s fair enough, but those that would like greater exposure have some very good options, including our preferred VanEck Semiconductor ETF (SMGB) For a 0.35% ongoing charge, you get access to a concentrated portfolio of 25 of the industry’s most significant stocks, where most of the industry’s cyclical growth is expected to land. As well names already mentioned, it offers exposure to TSMC (TSM:NYSE), the world’s largest contract chip manufacturer and Nvidia’s most crucial partner, plus the likes of ASML (ASML:ASM) and Lam Research (LRCX:NASDAQ), which design and supply technology kit crucial to the chip manufacturing process.

It has chalked-up year-to-date gains of more than 30% compared to the Nasdaq’s 15% and S&P 500’s 12%, demonstrating the potential for semiconductor returns far beyond market averages. [SF]

DISCLAIMER: The author of this article (Steven Frazer) has a personal holding in Blue Whale Growth.

Buy quality compounder CVS while its shares remain under a cloud

Vet services group’s low valuation more than compensates for the risks of an adverse CMA decision CVS (p)

Market cap: £760 million

Veterinary services specialist CVS Group (CVSG:AIM) is under a cloud at the moment following confirmation by the competition watchdog CMA (Competition and Markets Authority) it would investigate the pet care market for unfair practices after its initial look into the market in September 2023.

The CMA is concerned pet owners are overpaying for medicines and local markets are too concentrated, allowing large companies to act in ways which reduce competition.

CVS shares went up on the day of the news (23 May), confirming our view that most if not all the bad news is now priced into the valuation of the business.

The shares trade around 60% below their September 2021 peak and the PE (price to earnings) ratio has dropped by 70% to 10.6 times from around 35 times two years ago.

The risk-reward proposition looks attractive, presenting long term investors with a great opportunity to buy a quality growth business trading on an undeserved single-digit PE multiple.

CVS is 18 months into a five-year plan aimed at doubling EBITDA (earnings before interest, tax, depreciation and amortisation) through a

The company highlights Australia’s low level of corporate consolidation, favourable market dynamics and strong similarities with the UK as key attractions”

Chart: Shares magazine • Source: LSEG

combination of higher organic growth and improved margins.

The objective is to drive organic sales growth by between 4% and 8% per year while adjusted EBITDA margins are expected to see a step up to between 19% and 23% compared with a five-year average of around 17%.

Acquisitions are a key driver of the company’s growth strategy, with a focus on Australia and the UK after the disposal earlier this month of its noncore Irish and Dutch operations.

CVS entered Australia in July 2023 and management sees an opportunity to repeat the success they have achieved in the UK by consolidating the market through targeted acquisitions.

At the first-half results in February, management confirmed a strong pipeline of acquisitions in Australia with another 10 deals lined up for the second half of the financial year. Four acquisitions were made in the UK in the first half following submission papers to the CMA.

The company highlights Australia’s low level of corporate consolidation, favourable market dynamics and strong similarities with the UK as key attractions.

CVS has built a strong track record of growth with operating profit growing eightfold since 2014, equivalent to a CAGR (compound annual growth rate) of over 26% a year.

The business is conservatively financed with net debt to EBITDA of 1.1 times at the end of the first half and it earns an attractive 18% return on equity. [MG]

SharkNinja is proving to be a global growth star

The household appliance innovator is gaining market share around the globe and has positive forecast momentum

SharkNinja (SN:NYSE)

Market cap: $75.16

Gain to date: 53.5%

We highlighted the attractions of SharkNinja (SN:NYSE) at $49 last December and shares in the cleaning-to-cooking appliances designer have soared 53.5% higher since. Riskaverse readers may be tempted to take profits off the table, but Shares believes this would be a mistake given the massive market share opportunity ahead for the Shark and Ninja brands, which are achieving global appeal driven by investment in innovation and an exciting product line-up that is clearly delighting consumers.

WHAT HAS HAPPENED SINCE WE SAID TO BUY?

SharkNinja, which designs household appliances ranging from smart vacuum cleaners and air fryers to hairdryers, followed up strong full-year results (15 February) with forecast-beating results for the first quarter to March 2024 (9 May).

Sales surged 27.6% higher year-on-year to the best part of $1.07 billion, breezing past the $905 million Wall Street was looking for. Gross margins hit 50.8% for the first time too, thanks to supply chain tailwinds and cost optimisation efforts. SharkNinja also raised its full-year sales growth guidance from a 7% to 9% range to between 12% and 14%, whilst upgrading its adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) estimate to $840 million to $870 million, above the previously communicated $800 million to $830 million range.

WHAT SHOULD INVESTORS DO NOW?

Hold onto the stock for dear life. SharkNinja is at the foothills of its expansion into new categories and geographic regions and has even persuaded David Beckham to sign on as a Ninja brand ambassador.

Jefferies shares our bullish stance, with a ‘buy’ rating and $100 price target implying 33% upside from current levels. The broker stresses that SharkNinja’s industry-leading margins are both predictable and stable, positioning the company as a consistent grower.

‘This reliability supports further multiple expansion and a higher valuation, in our view.’ [JC]

Could now be the time to ‘go large’ on UK

commercial property?

One fund is raising capital with the aim of doing just that

Given the depressed valuation of the UK stock market – and the even more depressed valuation of UK commercial property – it was only a matter of time before someone came up with a fund to seize on the opportunities on offer.

Enter Special Opportunities REIT, a new internally-managed real estate investment trust aimed at capitalising on the abundance of value in the UK commercial property sector ‘at scale’ to deliver double-digit returns.

THE PRICE IS RIGHT

Chaired by Harry Hyman, founder and chief executive of Primary Health Properties (PHP), the £1.25 billion FTSE 250 healthcare REIT, the new vehicle is targeting between £250 million and £500 million from subscribers in the biggest IPO (initial public offering) in the real estate sector for over a decade.

‘Cornerstone’ investors, who have yet to be revealed, are expected to account for around a third of the fund, while management will subscribe for £3.6 million giving them proper ‘skin in the game’. The expected launch is June.

The company is targeting a return of between 12% and 15% per year in its base case scenario, and up to 20% per year in an upside scenario, while running costs are estimated to be no more than

7% to 5% of EPRA (European Public Real Estate Association) income.

Leverage is projected at 25% loan-to-value with a cap of 35%, while the dividend is pitched at 6%-plus based on the IPO price and a guaranteed minimum of 3% in the firstyear after IPO.

Management consists of the former team at the helm of LXi REIT, which was acquired last year by LondonMetric Property (LMP), led by chief executive Simon Lee and chief financial officer Freddie Brooks.

Together with former LXi colleagues John White and Rob Ward, the team has an impressive track record having acquired over £4 billion of assets and generated an average IRR of 20% per year on disposals.

The managers believe the UK property market is at or near the bottom of the cycle and there is an opportunity to acquire good-quality but poorly-managed assets from distressed sellers at a significant discount.

Starting with a clean sheet of paper and no ‘legacy investments’ or leverage, the company aims to acquire a portfolio with lot sizes ranging from around £5 million to £50 million ‘at scale’ while existing REITs are struggling with enormous discounts to NAV (net asset value) and unable to raise funding to capitalise on the opportunities on offer.

On top of the undervaluation of commercial property, rents are well below ERV (estimated

Great Portland Estates

Chart: Shares magazine•Source: LSEG

rental value) meaning there is significant upward reversion potential which could boost earnings and dividends.

COMPETITION HEATING UP

In a further sign that not only could the price be right but the timing could also be right, Great Portland Estates (GPE) announced last week it had acquired the long leasehold interest in The Courtyard, Alfred Square – just off Tottenham Court Road, north of Bedford Square – which it will refurbish with best-in-class work spaces, a roof terrace and re-configured retail space.

The building is in a prime West End location and is opposite another GPE office development which is due to come on stream in the fourth quarter, forming a cluster of fully-managed buildings totalling over 100,000 square feet.

GPE also launched a fully-underwritten £350 million rights issue to ‘capitalise on the compelling new investment opportunities in central London’ as it put it.

‘Higher interest rates have disrupted the commercial property investment market, creating significant near-to medium-term acquisition opportunities in central London with values approaching their trough and assets trading broadly in line with 2009 real capital value levels,’ said the firm.

With prime office demand remaining robust and current levels of vacancy remaining low, GPE sees market conditions remaining favourable and expects new office supply within London to tighten, underpinning future rental growth, and it believes now is the time to raise cash for further acquisitions and developments.

MORE CONSOLIDATION ON THE CARDS

On the same day GPE launched its cash raise, retail and leisure REIT Capital & Regional (CAL) revealed it had been approached by two different suitors briefly raising the prospect of a bidding war.

On 19 April, the company received an indicative proposal from South African-based Vukile Property Fund (VKE:JSE) regarding a possible cash and share offer.

Vukile subsequently announced on the 23 May that it had no intention of making a bid. Also in April, Capital & Regional said its majority shareholder Growthpoint Properties had received a preliminary approach involving a cash and shares offer from Londonlisted NewRiver REIT (NRR), which is also retail-focused.

NewRiver, which admitted it hadn’t communicated its proposal to Capital & Regional but only to its major shareholder, argued the two firms had a complementary mix of assets, while the acquisition of The Gyle outside Edinburgh had led to an improvement in the overall quality of the latter’s portfolio.

A combination with NewRiver would create a business with assets under management of £1.7 billion and would benefit from increased share trading liquidity, a bigger index weighting, better debt optionality and potential cost of capital improvements, said the firm.

By Ian Conway Deputy Editor

CHANGE WHAT TO DO WHEN YOUR FAVOURITE FUND MANAGER LEAVES AT THE TOP

There’s no doubt the shock departure of a star fund manager or well-followed stock picker is a red flag, but there are various reasons why successful portfolio managers choose to leave their investment management firm and therefore their funds.

And, as with most aspects of investing, there are no hard and fast rules about what investors should do when their fund manager ups sticks. Much depends on the nature of the exit: is it retirement

By James Crux Funds and Investment Trusts Editor

after a long and successful stint managing a fund or investment trust? Is the manager seeking a fresh challenge and moving on to pastures new? Has he or she been poached by a competitor, or resigned to set up their own fund management boutique? When a fund manager who has forged a stellar track record exits stage left, it is tempting to immediately sell your fund units or investment trust shares. However, it is important not to panic and to take your time and assess the situation.

ALL CHANGE

Management change is a hot topic in the collectives industry, with numerous top stock pickers across the fund and investment trust sectors retiring, moving to rival asset managers or leaving their current employer to strike out on their own.

In the funds patch, highly-rated contrarian value manager Ben Whitmore, who has longsteered Jupiter UK Special Situations (B4KL9F8), is leaving Jupiter Asset Management in July to set up ‘Brickwood’, his own value boutique firm.

Given Jupiter UK Special Sits is ranked first quartile over one, three and five years, having returned a cumulative 49.1% over the latter period versus 28.4% for the IA UK All Companies sector, the news triggered outflows and holders face a conundrum – stick with the fund or follow Whitmore out the door.

His surprise departure prompted Alliance Trust (ATST) to replace Jupiter with global value manager ARGA to manage part of its global equity portfolio. As Craig Baker, chief investment officer at Alliance Trust’s investment manager Willis Towers Watson, explained: ‘While we continue to have high regard for Ben’s skill as an investor, this change of circumstances introduces potential risks which will take time to fully assess. We have therefore decided to replace Ben’s allocation with one run by another stock picker with a similar value-investing philosophy.’

Reassuringly for those sticking with Jupiter UK Special Situations, the fund will be taken over by Alex Savvides, manager of the successful JOHCM UK Dynamic (B4T7HR5) fund; the latter’s new team of Vishal Bhatia, Tom Matthews and Mark Costar are maintaining the robust, disciplined investment

process Savvides put in place.

Elsewhere, prominent fixed income manager Mike Riddell is leaving Allianz Global Investors to assume responsibility as lead manager for Fidelity’s strategic and total return bond strategies in what is a appreciable blow to investors in Allianz Strategic Bond (BJ1DZT4), while investors in Royal London Global Equity Select (BF93W97) fund also have a decision to make following the resignation of star manager Peter Rutter from RLAM (Royal London Asset Management), alongside several of the firm’s global equities team, in order to set up to set up his own shop in partnership with Pinnacle Asset Management. If one manager leaves, the asset management firm can soothe investor sentiment by emphasising a fund’s team-based approach, but in this case a whole team is leaving, which means the entire process could change.

In the investment trust sector, a number of new managers have taken up the reins following the retirement of incumbents. With Bruce Stout bowing out as lead manager in June 2024, Martin Connaghan and Samantha Fitzpatrick are now comanagers of Murray International (MYI)

Also retiring in June is Peter Ewins, with Nish Patel now the new lead manager of The Global Smaller Companies Trust (GSCT). ‘As with Murray International, this reflects the promotion of a manager who has been familiar with the trust and portfolio over many years,’ says Stifel. ‘Mr. Patel has 16 years of experience in the investment industry with the small cap team at Columbia Threadneedle. He is also able to draw on the experience of eight other portfolio managers, in addition to a large team of research analysts.’

Also retiring this year is Witan’s (WTAN) longserving chief executive Andrew Bell, and here the board has used it as an opportunity to review the global multi-manager trust’s management arrangements.

STEPS TO TAKE WHEN YOUR MANAGER UPS STICKS

When a successful manager leaves, you should think carefully about how the fund was managed. Was it managed using a team approach, in which case the departure might not have a major impact on the overall strategy? Or did the manager run the fund on their own, which is what you often get with so-called ‘star managers’, meaning their departure is a more serious threat.

If the portfolio in question will continue to be managed in the same way, it may be suitable to stay with the fund. However, if you feel the investment

approach will change it may be worth considering selling your units or shares.

‘If the fund manager of a long-term holding you’ve got is about to leave, it does cause you to reevaluate,’ says Peter Hewitt, manager of CT Global Managed Portfolio Trust (CMPG), which invests in other global investment trusts. ‘Most of the time it’s right not to have a knee-jerk reaction but sometimes you do, perhaps you don’t like the look of who’s coming through.’

Hewitt says it is mainly a positive that many fund management houses emphasise team-based approaches, although it can sometimes be a negative ‘because you just wonder who actually takes the decisions’.

Nick Greenwood, manager of MIGO Opportunities Trust (MIGO), which also invests in other trusts, says ‘every individual situation is so different. You’ve got situations like star managers and that doesn’t seem to work out too well if you follow the star manager to another firm. A lot of people followed Neil Woodford and that didn’t work out too well.’

William Heathcoat Amory, managing partner at Kepler Partners, says it is important to consider the circumstances under which a manager is leaving,

for example ‘whether there is a contentious issue at play or whether they feel it is simply the right time to move on’.

In the case of Murray International, Heathcoat Amory believes Stout’s retirement should cause minimal disruption. ‘He has managed the trust alongside Martin Connaghan and Samantha Fitzpatrick since 2004, and the trio have a longstanding, strong team dynamic and collaborative management style. The existing level of process and experience built into the management team should ensure continuity and give investors a good degree of comfort when the lead manager departs.’

Hewitt, who holds Murray International in CT Global Managed Portfolio’s income portfolio, stresses that Connaghan and Fitzpatrick have been in meetings ‘for years now, so I don’t think there’s going to be a significant change in overall approach. I’m not selling, absolutely not’.

Also weighing in is Peter Walls, who manages Unicorn Mastertrust Fund (3121801), which invests in investment trusts. When it comes to retirement situations, Walls generally recommends a ‘hold’ approach, as long as the succession planning has been well flagged to investors in advance.

WHY TRUSTS ARE BETTER PLACED

Ryan Lightfoot-Aminoff, investment trust analyst at Kepler Partners, points out that as closed-ended funds, investment trusts are better placed to navigate manager departures than openended structures.

‘In the case of an openended fund, if management changes trigger investor nervousness and redemptions then the new manager could find it challenging to follow a consistent investment strategy whilst contending with a wave of outflows. But investment trusts have a fixed pool of capital, meaning managers can continue to focus on making investments and pursuing their

intended strategy without disruption.’

Since investment trust shares are subject to the forces of demand and supply, manager departures can cause sell-offs which open up wide discounts investors can capitalise on.

‘Sometimes we actually play these situations,’ says Greenwood, manager of MIGO, a specialist in exploiting the pricing of other closed-end funds. One example he cites is Philip Rodrigs’ 2018 dismissal from River & Mercantile, ‘slightly under a cloud’. Small cap investor Rodrigs had forged a strong reputation for his stewardship of River & Mercantile UK Micro Cap

(RMMC), so his departure rattled investors.

‘A very young replacement (George Ensor) was announced at short notice and the market didn’t like it. The thing with investment trusts is the market reacts very quickly, completely different from open-ended funds, and the shares took a big hit,’ recalls Greenwood, who was able to chat to a few people in the know who were ‘very bullish’ on Ensor’s abilities. ‘We took the view that this probably wouldn’t pan out too badly and bought the stock, having not owned River & Mercantile UK Micro Cap before. That proved to be exactly the right thing to do.’

AVOID STYLE DRIFT

Darius McDermott, managing director at FundCalibre, explains to Shares that when a manager leaves, it is not always a certain sell, but, overwhelmingly, he tends to see this as a negative event.

‘If the intellectual property that underlies a process goes with the manager – or he/she leaves with their analyst team –it is an instant sell. Sometimes a manager will retire and be replaced by a capable incoming manager – in this case we will maintain a watching brief,’ says McDermott.

‘What we try to avoid is “style drift” from the fund’s stated objective - losing a manager central to the process

or a team is normally bad news. Sometimes, the manager may leave to set up his or her own boutique or be poached by another manager. If they have the appropriate resources and risk oversight, we will consider moving our assets.’

McDermott continues:

‘For example, Jonathan Golan delivered spectacular performance in his fund management career, firstly on the Schroder Sterling Corporate Bond fund, between February 2017 and March 2020. When he left

‘If someone has done a pretty good job for at least a decade or two, you would have to assume that both the manager and the management group would be eager to ensure that the good times continue to roll,’ he explains. ‘Any successor will be unlikely to bring about radical change so investors can probably reflect at their leisure before incurring the costs of deciding to sell.’

But things get trickier when managers move to a competitor or set up on their own. ‘For manager moves I have not seen any evidence that adequately answers the question of hold or sell,’

Schroders, he joined Man GLG with experienced analysts and was given the resources to build a dynamic team to undertake the intensive research required by his range of strategies. We have a high degree of confidence that he and his team can continue to outperform. We currently have an Elite Rating on Man GLG Sterling Corporate Bond (BNLYQX6) and an Elite Radar rating on Man GLG Dynamic Income (BR89P80). Jonathan remains one of the most exciting managers in the bond space.’

says Walls. ‘If I had to roll the dice, I’d say follow a manager that you really believe in, but don’t get sucked into hubris and make sure the manager sticks to their fundamental process going forward.’

WHAT IF I STICK WITH THE FUND?

In this situation you’ll need to evaluate the new fund manager, be it an internal or external hire. Ask yourself, has the investment management firm drafted in a seasoned manager with a strong reputation in the industry and experience with a similar strategy, or has the firm decided to give the opportunity to a young internal hire?

Many asset management firms like to promote analysts to fund managers as the next part of their career development. Yet while they will be familiar with the investment philosophy of the firm, managing money for investors requires a different skill set to pure equity analysis.

You should also weigh up whether the new fund manager’s style fits snugly with the vehicle’s existing investment strategy or not. If it doesn’t, you might see changes in the investment approach in the months and years ahead, which may result in the fund deviating from your objectives, which means it might be better to sell up and move on.

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Discover how AstraZeneca has turned around its fortunes

Keeping the drug development pipeline stocked up is key to delivering consistent growth

It is 10 years since the board of AstraZeneca (AZN) rejected a cash and share takeover proposal from US rival Pfizer (PFE:NYSE) worth £53.50 per share on the grounds the price did not reflect the true value of the business.

Since rejecting the offer, AstraZeneca’s shares have appreciated three-fold while Pfizer’s shares are trading 5% below where they were trading a decade ago.

Credit must be given to the board of AstraZeneca and chief executive Pascal Soriot for steering shareholders in the right direction.

Soriot took over in 2012 and set about turning around the company’s fortunes. At the time, the group was facing an uncertain future due to many of its leading drugs going off-patent, opening them up to competition from low-cost generic drug makers.

REJUVENATING THE SCIENCE-BASED CULTURE

Soriot set about rejuvenating the science-based culture of the company in the belief scientific leadership would lead to long-term commercial success. The company redesigned its R&D (research and development) processes in order to increase productivity, and by 2016 nearly a fifth of its candidate drugs were making it through to latestage clinical trials compared with only 4% in 2010.

A decade on, and AstraZeneca has achieved its goal of generating more than $45 billion of annual revenue by 2023, although a sceptic might argue the job was made easier by the $39 billion acquisition of rare disease specialist Alexion in late 2020 which brought in $5 billion of additional revenue.

Moving forward to today, at its investor day on 21 May, AstraZeneca announced a new ‘era of growth’ and an ambition to achieve revenue of at least $80 billion by 2030 and deliver a core operating margin in the mid-30s in percentage terms by 2026.

The new revenue target is around 25% higher than consensus analysts’ forecasts and the implied

ASTRAZENECA

Fast facts

Ticker: AZN

Share price: £123.02

Market cap: £188.6 billion

core profit target of $28 billion is 12% above estimates, suggesting upgrades are on the cards.

The company said it expects ‘significant’ growth from its existing portfolio of medicines and from the launch of 20 new medicines by the end of the decade, with several expected to achieve peak sales of more than $5 billion a year.

HOW DOES THE PHARMA INDUSTRY WORK?

AstraZeneca describes itself as a science-led business focused on the discovery, development and commercialisation of prescription medicines. The key to success is discovering effective medicines and bringing them to market before the patents which protect them expire.

A patent is a type of intellectual property which gives its owner an exclusive legal right for an invention and excludes others from making, using or selling it for a limited period in return for disclosing how the invention works.

This means every patent-protected medicine will go off patent at some point in the future and lose market share to cheaper-priced generic alternatives.

Patents usually run for 20 years, but it can take several years to subsequently prove efficacy and

AstraZeneca revenue by therapeutic area in 2023

Immune Therapies (10%)

Respiratory and Immunology (13%)

Rare diseases (17%)

Oncology (37%)

each in annual sales.

In addition to four blockbusters in the oncology space, AstraZeneca has three in rare diseases and three cardiovascular treatments which rake in more than a billion dollars every year.

One notable feature is AstraZeneca’s relatively large exposure to emerging markets, which represent around 26% of group sales, second only to the US which generates 42% of group sales.

Cardiovascular, Renal and Metablolic (23%)

safety in order to get regulatory approval to launch a new product. That can often leave a relatively small window in which to reap the financial rewards.

Running a pharmaceutical business must feel a bit like trying to keep as many plates spinning as possible. Ideally a well-run pharmaceutical company is aiming to achieve a good balance between successfully-launched drugs and new ones in the pipeline, ready to replace declining sales from patent expiries.

AstraZeneca has one of the strongest drug pipelines amongst its peers as well as robust growth from its existing portfolio of medicines.

WHAT IS THE SHAPE OF THE BUSINESS TODAY?

Over the last decade the company has built strong franchises and scientific leadership in fast-growing therapeutic areas with its industry leading cancer treatments leading the way.

AstraZeneca’s key therapeutic areas by revenue are oncology (cancer), which generates 37% of group revenue, cardiovascular, renal and metabolic diseases (23%), rare diseases (17%), respiratory and immunology (13%), and vaccines and immune therapies which together generate around 10% of revenue.

The company has assembled one of the most diverse drug portfolios in the industry with 12 socalled blockbusters generating more than $1 billion

This means the company is wellexposed to the world’s two largest economies and one of the fastest growing regions. In 2023, emerging market revenue grew 20% making it the fastest-growing geography for the company.

HOW DO THE FINANCIALS STACK UP?

Pharmaceutical businesses have high gross margins which reflects the effective legal monopoly they enjoy on products sold under patent. Gross profit is the difference between sales and cost of sales.

In 2023, AstraZeneca generated sales of $45.8 billion and had a cost of sales of $8.1 billion leaving a gross profit of $37.7 billion, representing a margin on sales of 82%. This is above the industryweighted average gross profit margin of 74%

THE HISTORY OF ASTRAZENECA

The company’s origins date to the 1988 AngloSwedish merger between UK firm Zeneca and Astra AB, with the latter’s shareholders holding 46.5% of the combined group.

British multinational pharma company Zeneca was formed after ICI (Imperial Chemical Industries) demerged its pharmaceuticals and agrochemicals businesses in 1993. Shortly afterwards Zeneca acquired Salick Health Care, an operator of cancer centres in the US.

The transaction meant the company’s largest therapeutic area became cancer, and that remains its largest area of expertise 30 years later. In 1988 Zeneca decided to sell its agrochemicals division, preparing the ground for a merger with Stockholm-based Astra AB.

Chart: Shares magazine • Source: Statista

Under the Bonnet: AstraZeneca

according to research group Hardman & Co.

SG&A (sales, general and administrative) expenses are deducted from gross profit to arrive at operating profit. The weighted average industry operating profit margin in 2021 was 32.5%.

AstraZeneca reported a core operating margin of 32% in the last financial year to 31 December 2023.

Looking at the bottom line, core EPS (earnings per share) has grown at a compound annual growth rate of 17% per year over the last three years. Strong profitability and double-digit growth are key drivers of shareholder returns.

Turning to the balance sheet, AstraZeneca ended 2023 with net debt to adjusted EBITDA (earnings before interest, tax, depreciation, and amortisation) of 1.6 times. This represents a modest level of financial gearing.

The company generated a return on equity of 29% in 2023 based on reported core EPS of $7.26 and shareholder equity of $25.50 per share.

On balance, therefore, AstraZeneca is a highquality business generating a healthy profit and looks well-positioned to continue growing supported by a deep pipeline of new drug launches.

The one caveat we would mention is the company’s use in its accounting of core profit measures which exclude restructuring

Select leading products by revenue in 2023

charges, exceptional legal costs and intangible asset amortisation.

RECENT TRADING AND OUTLOOK

The company grew its revenue by 19% to $12.7 billion for the three months to the end of March, around 7% higher than consensus forecasts, driven by 26% growth from the cancer franchise.

Core EPS was up 13% to $2.06 compared with market expectations of $1.92. The strong performance came after shareholders approved a controversial pay rise for long-serving chief executive Pascal Soriot.

AstraZeneca also hiked its annual dividend by 7% and reaffirmed 2024 guidance which calls for revenue and core EPS to grow by a low double-digit to low-teens percentage.

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THE INCREASING IMPORTANCE OF DIVIDENDS IN JAPAN

Dividends, as well as share buybacks, continue to rise in Japan thus improving shareholder returns for investors. With a focus on companies that can provide both a stable dividend AND can demonstrate the ability to grow, CC Japan Income & Growth Trust aims to capture the best ideas that corporate Japan has to offer across sectors, the full market cap spectrum and even geographical reach (domestic, regional & global leaders).

The income focus warrants a disciplined approach to valuation and detailed fundamental research prevents the

Trust from overpaying for high-growth companies that are often priced for perfection, whilst also avoiding cheap unloved stocks that are in-fact value traps.

The Trust’s consistent and disciplined approach has demonstrated that it can perform throughout the cycle having meaningfully outperformed the TOPIX Total Return (in GBP) since launch in December 2015.

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Source: Independent NAVs are calculated daily by Apex Listed Companies Services (UK) Limited (by Northern Trust Global Services Limited pre 01.10.17.) From January 2021 Total Return performance details shown are net NAV to NAV returns (including current financial year revenue items) with gross dividends re-invested. Prior to January 2021 Total Return performance details shown were net NAV to NAV returns (excluding current financial year revenue items) with gross dividends re-invested. Ordinary Share Price period returns displayed are calculated as Total Return on a Last price to Last price basis. Past performance may not be a reliable guide to future performance. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. All figures are in GBP or Sterling adjusted based on a midday FX rate consistent with the valuation point. Inception date 15.12.15. Investments denominated in foreign currencies expose investors to the risk of loss from currency movements as well as movements in the value, price or income derived from the investments themselves and some of the investments referred to herein may be derivatives or other products which may involve different and more complex risks as compared to listed securities. CC Japan Income & Growth Trust plc (the Company) does not currently intend to hedge the currency risk.

Sponsored by Templeton Emerging Markets Investment Trust

Discover what the biggest stocks on the Chinese market do

These five names span banking, e-commerce, food delivery and internet services

Despite a difficult post-Covid period for Chinese stocks, they still dominate the broader emerging markets space. China accounts for 26.7% of the MSCI Emerging Markets index. For context this is still significantly ahead of India on 18.1%. This article will briefly examine the five largest companies in the MSCI China index to provide a snapshot of the names which really drive the Chinese stock market and emerging markets more broadly. Some of these names have listings outside of China.

companies by market cap in MSCI China index

Shares magazine•Source: MSCI, data to 30 April 2024

Tencent

Tencent is an investment holding company that provides internet value-added services and online advertising across mainland China, Hong Kong and elsewhere internationally. Its platforms include QQ and WeChat.

Alibaba

Alibaba is one of the world’s largest e-commerce companies. It has been expanding into the media industry and has a big footprint in fintech through its Ant Group arm.

PDD Holdings

PDD is the owner of the rapidly growing international internet shopping platform Temu alongside its domestic counterpart Pinduoduo.

Meituan

The company is a leader in food delivery and provides services ranging from bike-sharing to ticket-booking and maps. There is an emphasis on offering deals and vouchers linked to local Chinese merchants.

China Construction Bank

One of the ‘big four’ banks in China, China Construction Bank was established in 1954. The company offers commercial and

and has a growing

This outlook is part of a series being sponsored by Templeton Emerging Markets Investment Trust. For more information on the trust, visit www.temit.co.uk

Chart:

Sponsored by Templeton Emerging Markets Investment Trust

Emerging markets: Chinese recovery, shifting rate expectations and commodities surge

Three things the Franklin Templeton emerging markets team are thinking about right now

1.

China: Chinese equities have rebounded, reversing the negative returns recorded in the first quarter. Catalysts for the improvement in performance included positive developments in the real estate sector. A Chinese property developer announced agreement with its bond holders to restructure its overseas debt. In addition, Chinese authorities have been easing home purchase restrictions (these restrict buyers to purchases in their home province and/or limit the purchase of a second property) and lowering mortgage interest rate floor limits. No individual announcement is sufficient to turn the tide of negative sentiment; however, the emerging mosaic of positive news has contributed to a 7% gain in the MSCI China index in April, outpacing the gains in other global markets.

2.

US interest-rate expectations: Investor expectations for US interest rate cuts have reset. In January 2024, the market consensus was for six rate cuts and a cumulative 1.5% reduction in the fed funds rate. By the end of April, this changed to expectations of 1.4 rate cuts and a cumulative 0.35% reduction in the fed funds rate. Faster-than-expected inflation and increasing probability of a ‘no-landing’ economic scenario in 2024 have contributed to the change. For emerging markets, this could imply a higher-for-longer US dollar outlook, which has negative implications for fund flows and companies with large foreign currency debts.

3.

Commodity prices: The Commodities Research Bureau Index of commodity prices rose 7.4% year-to-date through the end of April. This reverses most of the 8% loss recorded in 2023. Rising energy and industrial metal prices, including copper, have contributed to the gains. Agricultural commodity prices are

also rising following a wet spring planting season in Europe and drought conditions in Asia caused by El Niño. Higher commodity prices are also undermining the narrative of falling global inflation, which investors should closely monitor. Higherthan-expected inflation has implications for interest rates in developed countries and purchasing power in emerging countries.

TEMIT is the UK’s largest and oldest emerging markets investment trust seeking long-term capital appreciation.

Chetan Sehgal Singapore

TEMPLETON EMERGING MARKETS INVESTMENT TRUST (TEMIT)

Portfolio Managers

Andrew Ness Edinburgh

Small world: our monthly roundup of goings on in UK small caps

Cheap valuations continue to attract bidders but UK plc is no pushover

We kick off this month with two more takeovers, or attempted takeovers, of UK small-cap firms.

On 21 May Singapore-based but UK-listed specialist engineer XP Power (XPP) rejected a bid from Denver, Colorado-based rival Advanced Energy Industries (AEIS:NASDAQ).

The firm said it had received a series of ‘highly conditional, opportunistic, indicative proposals’ from the US company, the latest at £19.50 per share, which it turned down as it ‘fundamentally undervalued’ XPP and its prospects.

Considering XPP shares were trading at £11.64 a few weeks ago, saying no to a 67% premium might seem somewhat hubristic, but in fairness to management prior to the approach the stock was trading not far off its 10-year lows, and not that long ago (2021) it was trading at over £55, so AEI’s bid was indeed opportunistic.

In April, XPP posted first-quarter results showing a 17% drop in revenue and a 29% drop in orders and warned second-quarter revenue was likely to be lower still due to customer destocking.

However, it said it expected second-half trading to improve as channel stock levels even out and demand for semiconductor manufacturing equipment picks up again, a key test of which will be the level of orders, so watch this space.

Chart: Shares magazine • Source: LSEG

MISSION IMPROBABLE

In the media sector, digital advertising and technology tiddler Brave Bison (BBSN:AIM) revealed it had made an all-share offer for its even smaller rival The Mission Group (TMG:AIM).

The combination could have created a business with pro-forma combined 2023 revenue of £120 million and EBITDA (earnings before interest, tax, depreciation and amortisation) of £14 million, excluding any potential cost synergies, and presented ‘a more attractive investment opportunity to institutional shareholders than either standalone company’ leading to the possibility of the enlarged group trading at a higher multiple of earnings.

It was not to be, however, after major TMG shareholder DBAY Advisors dissed the offer saying while it recognised the attraction of cash offers at significant premia, especially given the tiny trading volumes in TMG shares, the all-share proposal

Feature: Small caps

by Brave Bison was ‘highly unattractive’ and undervalued the marketing services company.

There was happier news in the pharmaceutical sector, where cash shell company Amur Minerals Corporation (AMC:AIM) announced it had agreed to acquire Extruded Pharmaceuticals (EPL:AIM) for £5.5 million in a reverse takeover and rename the business CRISM Therapeutics Corporation.

The deal provides support and funding for EPL’s innovative drug delivery technology to improve the clinical performance of cancer drugs as treatments for solid tumours.

ChemoSeed, the firm’s lead product, can be implanted directly into a tumour or the resection margin following the removal of a tumour, ensuring that effective therapeutic concentrations of chemotherapy drugs directly reach the tumour tissue.

‘Innovation in the UK requires support and funding, which this transaction will bring’, said EPL chief executive Andrew Webb. ‘I am looking forward to leading a public company and delivering on our strategy for the benefit of Amur shareholders and affected patients.’

A WING AND A PRAYER

In the media sector, marketing and data services firm Jaywing (JWNG:AIM) said it was taking down the ‘For Sale’ sign after the board decided that

trying to crystallise value through a disposal of the company was ‘not in the interests of stakeholders at this time’.

‘The very tough trading conditions over the last two to three years have begun to ease somewhat and the hard decisions on cost cutting coupled with increased business confidence give us some cause for optimism’, said the directors, so while it was too early to predict any sustained recovery they would soldier on, minus chief executive Andrew Fryatt who resigned with immediate effect.

BRINGING SOME GALLIC FLAIR TO GAUL

There was a small flurry of excitement at Caerphillybased EV (electric vehicle) battery and motor technology firm DG Innovate (DGI) as it announced ex-Tesla (TSLA:NASDAQ) motor design guru Pierre Pellerey was joining as a consultant.

Pellerey brings over 15 years of experience to the start-up firm and his designs are in more than three million Tesla vehicles, from the Model 3 to the Model S, Model Y and Semi, as well as in 10 million Dyson home appliances.

Steered by another former Tesla alumnus, Peter Bardenfleth-Hansen, DGI recently signed a memorandum of understanding with EVage Motors to set up an Indian joint venture to develop its proprietary drive system.

JAM TOMORROW?

Finally, we come to the ‘good news story’ of a small-cap engineering company hoping to join the market rather than leave it.

Raspberry Pi, known for its technology products which are aimed mainly at hobbyists and those in education and are produced in Pencoed, Wales, is looking to raise around $40 million and obtain a London listing with a valuation of around £500 million at some point in June.

Cornerstone investors are said to be hedge fund group Lansdowne Partners, which will take up $20 million of shares, and the investment division of chipmaker Arm Holdings (ARM:NASDAQ), which ironically ditched London for a New York listing but is said to be taking up $35 million of shares.

By Ian Conway Deputy Editor

How to assess the market cycle

Examining what we can learn from the performance of different super sectors

This column has no axe to grind with Nvidia (NVDA:NASDAQ) and – like everyone else – it continues to be both surprised and impressed by the growth that the semiconductor specialist is generating, thanks to the competitive position it is crafting itself in providing silicon chips that power the data centres that, in turn, drive the large language models that are so important to the development of AI (artificial intelligence). The company’s first-quarter results (22 May) were phenomenal, the guidance for the second quarter to the end of July was better than expected and the share price has surged to new highs.

A bigger challenge is to assess the stock’s valuation, given how Nvidia’s market capitalisation of $2.6 trillion equates to 20 times this year’s forecast revenues and 40 times its forecast profits (even allowing for how estimates for both keep on rising). Another way to look at it is how any one who has $2.6 trillion in cash lying around can either buy Nvidia, with its forecast net profits of $64 billion this year, or buy all 40 of the companies in Germany’s DAX-40 index, where aggregate post-tax earnings are estimated to be $137 billion this year, and have $400 billion in change left over.

Only investors can decide for themselves whether Nvidia’s growth and share price momentum or the potential relative value offered by the German DAX fit with their overall strategy, time horizon, target returns and appetite for risk. But this valuation equation does once more raise the issue of investor psychology and market sentiment and how investors can best build their portfolios in their quest for the best risk-adjusted returns.

FOUR PHASES

Regular readers will know that this column is a big fan of Sir John Templeton’s maxim that, ‘Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.’ The fund management legend’s point

here was the pessimism means low valuations (and thus potentially limited downside and a lot of upside, providing a business model or industry is not irretrievably broken) and euphoria means lofty valuations (and thus less upside and potentially a lot of downside if something goes unexpectedly wrong).

One way of identifying which stocks, industries and equity markets lie in which of Sir John’s four phases of the market cycle can be achieved through the crude tool of share price and index performance.

Of the 11 super-sectors represented by the S&P Global 1200 equity indices, it will surprise no-one, given Nvidia’s gallop higher, that Technology is the best performer over the last year. Telecoms is second, thanks to Alphabet (GOOG:NASDAQ), Meta Platforms (META:NASDAQ) and Netflix (NFLX:NASDAQ), while Financials is third, buoyed by Berkshire Hathaway (BRKA:NYSE), JP Morgan Chase (JPM:NYSE), Visa (V:NYSE) and Mastercard (MA:NYSE).

Tech and telecoms are the top performing sectors over the past year

Change in past 12 months (%)

Change in past 12 months (%)

How Templeton’s four market phases could be interpreted right now

PESSIMISM

ALL-TIME HIGHS

A different way to assess a sector’s popularity, and whether it may be unloved and potentially cheap or overloved and possibly expense, is to look at how far away it trades (if at all) from its all-time index high. Again, Technology trades at its highest mark ever and, intriguingly, Healthcare, Industrials, Consumer Staples and even Financials are not far away.

Three of 11 global industry indices set an all-time high in May S&P Global 1200 indices

Distance from peak

Technology

Healthcare

Industrials

Consumer Staples

Financials

Materials

Utilities

Consumer Discretionary

Energy

Telecoms

Real Estate

Date of alltime high

0.0% May, 2024

−0.8% May, 2024

−1.2% May, 2024

−4.7% Jan, 2022

−5.3% Apr, 2007

−6.6% May, 2021

−9.2% Dec, 2007

−15.9% Nov, 2021

−20.0% Aug, 2008

−24.7% Jun, 2000

−25.7% Dec, 2021

Table: Shares magazine • Source: LSEG Datastream data

Two other trends catch the eye. One is how long it has taken certain industry sectors to get back to prior peaks, most notably Financials and Utilities, in what could perhaps be a veiled warning against irrational exuberance in what are the most popular sectors today.

• Energy

Telecoms

Real estate

Consumer staples

Financials

EUPHORIA

Technology

Healthcare

Industrials

Consumer discretionary

The other is the identity of those sectors which remain in the doldrums, notably Real Estate, Telecoms and Energy. Investors of a contrarian inclination may be tempted to do further research here, perhaps in the view that there may be value to be had.

Energy demand continues to rise and there remains the possibility that oil and gas will be required for longer than we would like to assume, while Real Estate is very sensitive to interest rates – the UK property sector, for example, shot up like a rocket in 1993 in the wake of Black Wednesday when sterling’s ejection from the Exchange Rate Mechanism in autumn 1992 permitted the then chancellor, Norman Lamont, to cut the headline cost of borrowing.

By Russ Mould AJ Bell Investment Director

Source: AJ Bell

Pocket money: how much to give and

how to give it

New figures show what parents dole out across the UK

How much pocket money you should pay your children is a common dilemma among parents, but new data shows how much the nation is paying its kids.

The Natwest Rooster Money report shows how people using its pocket money app manage the payments and how much they pay their kids.

And children have felt the effects of the cost of living crisis, with their average pocket money reducing by £5.20 a year over the past year to £196.56. However, it’s not all doom and gloom, as the total amount handed over to kids rose from £478.40 a year to £479.96 in 2023/24 – up marginally over the past year. That includes pocket money and additional money given for chores, birthdays or extra treats.

a week for 17-year-olds. But with so much money being digital now, what’s the best way to sort out pocket money for your kids?

CASH AND A PIGGY BANK

This option has the benefit of giving children an idea of tangible money – they can count out their coins and it might help them to link the value of money to a physical object. Also, for younger kids it’s undeniably fun to put money in a moneybox.

Unsurprisingly, the amount parents give in pocket money rises as children get older, from £2.75 a week for a six-year-old up to £8.42 a week for 17-year-olds – with extra payments topping that up to £5.68 a week for six-year-olds up to £24.71

The downside? Lots of what they want to spend on is digital now – from ordering things on Amazon to digital credits for gaming. You’ll end up using your card to pay for these things and taking the cash back. Also, you’ll need to have cash each week to hand over their pocket money – which could be a hassle for parents who rarely have cash.

DIGITAL APPS

There are several digital apps and physical bank

cards you can use now to help manage your child’s pocket money online. GoHenry was one of the first, but there is Natwest Rooster Money, Osper and Nimbl, and Revolut has an under 18s offering too if parents are a customer.

These all work in a similar way, in that the child has a bank account that parents can transfer money to, and the child has a physical card that they can use to spend money in-store or online. It’s easier for parents to manage the money, as they can just transfer pocket money from their account to the child’s. And most will allow parents to see where their child is spending money. Equally the child can spend money both online and in shops, which should cover most of their spending needs. The other good feature of the apps is that quite a few offer financial help, money tips and the option to save money into different buckets. This can help to teach children good money habits. Although

Personal Finance: Pocket money

parents could do a similar thing with cash if they wanted to.

The downside is that these apps cost money. It varies but for example the basic account with GoHenry costs £3.99 a month per child – which if you have multiple children can really add up. Natwest’s offering is cheaper at £19.99 for the year. Some of them charge for you transferring money to the card, while others offer a certain number a month for free, while others charge for ATM withdrawals. It’s a good idea to think about how your child will use the account before you pick one. The other downside is that the apps are only for children six and older, so if you have young kids you’ll have to stick to old-fashioned cash.

POCKET MONEY FACTS

By Laura Suter AJ Bell Head of Personal Finance

The most common chore to be paid for is making the bed

Kids spent the most with Amazon

£15.61: the average amount paid to children for a good school report

The most popular thing kids save for is video games or gaming equipment

Hamster care generated an average of 83p each time

On average children save £45.60 a year

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Jean Roche, Fund Manager

Schroder UK Mid Cap Fund (SCP) invests in a conviction portfolio of around 50 companies they think are positioned for innovation, disruption and growth.

Will mid-cap stocks come back to the fore once more?

Afeature of the recent recovery in stock markets has been the leadership role played by large-caps. This represents a reversal of a longer-term trend, particularly in the UK, of medium-sized businesses setting the pace.

As the charts show, year-to-date the FTSE 250 has lagged behind the FTSE 100 while in the US the Russell 2000 (made up of the 2000 smallest companies in the broad-based Russell 3000 index of US stocks) has come a distant second-best compared with the large-cap S&P 500 benchmark.

Berenberg analyst Jonathan Stubbs notes:

‘Support for (UK) mid-caps remains in place, with plenty of companies trading at attractive valuation levels with high levels of cash generation and strong balance sheets.’

Beyond these short-term attractions, which are already proving a driver for M&A activity, there are several fundamental reasons why mid-caps might be of interest to investors:

• Growth potential: First, because they are smaller, mid-cap firms typically have more significant growth potential and can increase their profit at a rapid rate if things are going well.

• Choice: The FTSE 250 is more diverse than the FTSE 100 with areas such as engineering and technology more widely represented.

• Potential for earnings upgrades: Companies in the FTSE 250 are not as widely followed as those

in the FTSE 100 so analysts are more likely to underestimate (or overestimate) earnings. This can be both good and bad: earnings upgrades can lead to increases in the share price although the reverse is true if a company falls short of earnings forecasts.

Although mid-cap stocks can be more volatile than larger companies they are unlikely to see the wild share-price swings which can occur in smalland micro-cap companies. They are also much more likely to pay a dividend and can therefore offer a winning combination of growth and income.

Nick Train has been busily apologising again for the underperformance of his popular Finsbury Growth & Income Trust (FGT). Train has blamed this on a lack of exposure to the technology and energy sectors which seems a logical diagnosis.

However, the cure is less obvious. While Train points to additions to the portfolio since 2020 like Rightmove (RMV) and Experian (EXPN), these are not technology stocks as such – even if they apply technology in their respective property market listings and credit data business areas.

It would seem a mistake at this point to suddenly start buying lots of technology businesses, which he has previously acknowledged he does not understand, leaving him with little option but to sit tight and hope performance picks up.

Chart: Shares magazine

If I already have a salary sacrifice pension should I move to a SIPP?

Our resident expert helps with a question on different retirement saving options

If you already have a salary sacrifice pension from your employer, is there anything to gain by moving to a SIPP?

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

Before answering it’s probably worth quickly explaining what salary sacrifice is and how it works in relation to a pension.

Salary sacrifice is simply where an employee and an employer agree to reduce the employee’s salary and the employer pays the difference somewhere else. Employers like this because it allows them to save on NI (national insurance), while employees can reduce both their NI and income tax bills. Salary sacrifice can be done for a variety of things

including childcare vouchers, buying a bike to travel to work (often referred to as the ‘bike to work’ scheme), work-related training and paying into a pension.

Instead of you paying a pension contribution from your take-home pay, your employer will reduce your salary and pay the difference into your pension. This means you will end up with the same overall amount going into your pension but a higher take-home pay.

There are some situations where salary sacrifice isn’t beneficial, for example very low earners. There may also be implications for claiming benefits if you choose to reduce your salary.

IS IT

WORTH SETTING UP A SIPP ALONGSIDE A WORKPLACE PENSION?

If you are employed, your workplace pension should be your first port of call for retirement saving as it benefits from both an employer

Ask Rachel: Your retirement questions answered

contribution and tax relief.

However, the minimum contributions under automatic enrolment are just 8% of earnings between £6,240 and £50,270 for 2024/25.

Given that a very rough rule of thumb suggests you should aim to save around half the age you first joined a pension scheme as an annual percentage of your salary in a pension in order to build a decent retirement fund, for most people 8% will not be enough.

If you can afford it and don’t have any high-cost debts you need to pay off, you may therefore want to save over and above the amount offered by your employer scheme. If you do choose to go down this route, a SIPP could be a good solution for a number of reasons.

SIPPs deliver exactly the same tax advantages as a salary sacrifice workplace pension and will likely give you greater choice over your investments (workplace pensions are usually limited to a ‘default’ fund and possibly a few other funds chosen by your employer). You can also set up

regular contributions to a SIPP so you get into the habit of paying the same amount in every month. If you do choose to save in a SIPP alongside your workplace pension, it is important to make sure you are comfortable with the investment risk you are taking and keep your costs as low as possible, as even small differences in charges can add up to thousands of pounds over decades.

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.

NOVOTEL TOWER BRIDGE

LONDON EC3N 2NR

Registration and coffee: 17.00

Presentations: 17.55

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

• Discover new investment opportunities

• Get to know the companies better

• Talk with the company directors and other investors

Sponsored by

COMPANIES PRESENTING

LOWLAND INVESTMENT COMPANY (LON:LWI)

The Company aims to give shareholders a higher than average return with growth of both capital and income over the medium to long-term, by investing in a broad spread of predominantly UK Companies. The Company measures its performance against the FTSE All-Share Index Total Return.

EMPIRE METALS (LON:EEE)

An exploration and resource development company focused on the Pitfield Project in Western Australia, a globally significant titanium project contained within a giant, sediment-hosted, hydrothermal mineral system.

INCANTHERA (AQSE:INC),

A company specially focussed on innovative technologies in dermatology and oncology. Our current focus is Skin + CELL, its luxury skincare brand, utilising ground-breaking formulation and delivery expertise, to bring scientifically proven formulations to cosmetics and unmet skincare solutions.

OROCO RESOURCE CORP (TSX-V:OCO.V)

An exploration stage company, engages in the acquisition and exploration of mineral properties in Mexico. It explores for gold, silver, and copper deposits. The company primarily focuses on the Santo Tomas porphyry copper project located in Sinaloa State.

1SPATIAL (LON:SPA)

A global leader in providing Location Master Data Management (LMDM) software and solutions, primarily to the Government, Utilities and Transport sectors.

WHO WE ARE

EDITOR: Tom Sieber @SharesMagTom

DEPUTY EDITOR: Ian Conway @SharesMagIan

NEWS EDITOR: Steven Frazer @SharesMagSteve

FUNDS AND INVESTMENT

TRUSTS EDITOR: James Crux @SharesMagJames

EDUCATION EDITOR: Martin Gamble @Chilligg

INVESTMENT WRITER: Sabuhi Gard @sharesmagsabuhi

CONTRIBUTORS:

Daniel Coatsworth

Danni Hewson

Laith Khalaf

Laura Suter

Rachel Vahey

Russ Mould

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

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

Shares publishes information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters. Comments published in Shares must not be relied upon by readers when they make their investment decisions. Investors who require advice should consult a properly qualified independent adviser. Shares, its staff and AJ Bell Media Limited do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions.

Members of staff of Shares may hold shares in companies mentioned in the magazine. This could create a conflict of interests. Where such a conflict exists it will be disclosed. Shares adheres to a strict code of conduct for reporters, as set out below.

1. In keeping with the existing practice, reporters who intend to write about any securities, derivatives or positions with spread betting organisations that they have an interest in should first clear their writing with the editor. If the editor agrees that the

reporter can write about the interest, it should be disclosed to readers at the end of the story. Holdings by third parties including families, trusts, selfselect pension funds, self select ISAs and PEPs and nominee accounts are included in such interests.

2. Reporters will inform the editor on any occasion that they transact shares, derivatives or spread betting positions. This will overcome situations when the interests they are considering might conflict with reports by other writers in the magazine. This notification should be confirmed by e-mail.

3. Reporters are required to hold a full personal interest register. The whereabouts of this register should be revealed to the editor.

4. A reporter should not have made a transaction of shares, derivatives or spread betting positions for 30 days before the publication of an article that mentions such interest. Reporters who have an interest in a company they have written about should not transact the shares within 30 days after the on-sale date of the magazine.

and, as such, are written by the companies in question and reproduced in good faith.

Introduction

WWelcome to Spotlight, a bonus report which is distributed eight times a year alongside your digital copy of Shares.

It provides small caps with a platform to tell their stories in their own words.

The company profiles are written by the businesses themselves rather than by Shares journalists. They pay a fee to get their message across to both existing shareholders and prospective investors.

These profiles are paidfor promotions and are not

independent comment. As such, they cannot be considered unbiased. Equally, you are getting the inside track from the people who should best know the company and its strategy.

Some of the firms profiled in Spotlight will appear at our investor webinars and live events where you get to hear from management first hand.

Click here for details of upcoming events and how to register for free tickets.

Previous issues of Spotlight are available on our website.

Members of staff may hold shares in some of the securities written about in this publication. This could create a conflict of interest. Where such a conflict exists, it will be disclosed. This publication contains information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters. Comments in this publication must not be relied upon by readers when they make their investment decisions. Investors who require advice should consult a properly qualified independent adviser. This publication, its staff and AJ Bell Media do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions.

What opportunities exist in the smallest part of the UK market?

By Ryan Lightfoot-Aminoff, Kepler Trust Intelligence

WHAT’S SMALLER THAN SMALL?

As the name suggests, micro caps are those companies that are at the lowest end of the market-cap spectrum.

The definition of what classifies a micro-cap rather than just a small cap varies, though consensus varies around companies whose market capitalisations are in the bottom 1% to 3% of the whole market.

The MSCI UK Micro Cap Index which focusses on the space, includes approximately 400 companies, of which the largest (as of 29/03/2024) is £430 million, with a mean average size of around £96 million.

However, there are several investment trusts that focus primarily on micro caps

which typically invest below this.

They invest from as low as circa £20 million market cap up to a maximum of £150 million at the time of initial investment, though often holdings are allowed to grow if the investment thesis holds.

As a result of this low capitalisation, the trusts focussing on the space need to be conscious of their own asset base.

The average (Net Asset Value) NAV of the trusts in the AIC UK Smaller Companies sector is £319 million, according to JPMorgan Cazenove as of 04/04/2024.

If a theoretically average trust were to put 3% of its portfolio into the average company in the MSCI UK Micro Cap Index, it would mean the trust would own circa 10% of the share capital of the company.

This would allow them to

exert considerable influence but would also have implications for the ability to sell such a large position without having to take a haircut.

At present, the trusts focussed purely on micro caps have assets of between £43 million and £65 million, meaning this is yet to be an issue of note, though it does present challenges for openended funds to invest in the space, given the potential for inflows to necessitate taking larger and positions, enhancing the attraction of investment trusts, in our opinion.

MICRO MANAGING

Micro caps have advantages from both fundamental and investing standpoints. One of the key fundamental advantages of small businesses is that they are nimble and flexible,

which allows them to adapt quickly to changing market conditions.

This can be a weakness of larger organisations which take a long time to make decisions.

Smaller companies often have quite flat structures meaning the time taken for a solution to be found for a problem may be shorter.

We think this is one of the key reasons why smaller companies can deliver higher growth than their larger peers over time.

This operational efficiency can have its drawbacks though.

With a slimmer organisational structure, the decisions of a small number of individuals can have an outsized impact on the company’s prospects.

Should these calls prove incorrect, it can cause trouble for the business.

This key main risk is still present in larger companies, although there is the potential for this to have a larger impact with smaller firms.

The smaller the company,

the more focussed their product or service offering tends to be, with micro-cap companies often having just one or two business lines.

This means that micro caps are more likely to operate in market niches which further supports their high growth potential.

However, this can create exposure to idiosyncratic factors such as losing a single contract, or from a big player entering the space and making for an uncompetitive environment.

From an investing point of view, several micro caps have unproven, pre-profit business models such as pharma companies working on new drugs which have

binary outcomes.

As such, this can add to the higher volatility often present in the micro-cap space.

Other market-based factors that increase the appeal of micro caps are that they are very underresearched, with little analyst coverage, and therefore weak price discovery.

As such, there are significant alphaopportunities for those who can identify the undiscovered gems in the universe.

CONCLUSION

Over the long term, micro caps have delivered on their ability to provide long-term growth opportunities.

However, acute weakness in the UK market stemming from negative sentiment and a weak economy has caused them to fall back in the past few years.

Despite this, there are reasons to believe they could recover, and investment trusts could provide an excellent vehicle for investors to take advantage of this, due to their fixed pool of capital negating the liquidity issues and allowing managers to take an active approach to the idiosyncratic space.

With several of these trusts available at very wide discounts, this could prove an extremely attractive entry point over the long term.

EnSilica sees exciting potential in the semiconductor space

It has now been two years since EnSilica (ENSI:AIM) listed on the AIM market of the London Stock Exchange, and management are pleased with the operational and financial progress delivered in that time, especially given the macroeconomic headwinds prevalent across the industry. As one of only a handful of tech IPOs in recent years, EnSilica notes it has been enjoying life as a listed company and is pleased to be performing in line with expectations.

Headquartered in Oxford, EnSilica is a designer and supplier of ASIC semiconductor chips which are essential components of electronic devices, from smartphones and TVs to  mineral mining detonation systems. They are a mainstay in electric vehicles and will continue to play a vital role in both the green transition and the development of satellite communications. They are essential to the progress of Industrial 4.0.

CHIP SHORTAGES

Since 2020, the global semiconductor market has experienced a well-publicised chip shortage. The shortage has highlighted the benefits of using custom silicon and led industrial powerhouses across Europe to seek

secure, local and simpler supply chains. The company is reaping the rewards of this shift in strategy and has signed contracts with a number of companies looking for innovation-led partners to provide or design high-quality chips for their products.

Notable recent new business wins include a supply project for a leading European industrial OEM worth more than $30 million, a contract with the European Space Agency to develop a new chip for the next generation of mass market satellite

broadband user terminals, and a $20 million deal across the pond with a major US electronics manufacturer. These contracts, amongst others, span over several years and further support a promising ARR (annual recurring revenue) outlook. EnSilica’s specialism is application-specific integrated circuits (ASICs) popular with high-growth markets including automotive and healthcare, as well as AI programmers. These industries tend to be heavy consumers of ASICs given their ability to support data encryption, signal processing and sensor interfacing, and the custom chips are also valued due to their reliability. The fast growth of the global ASICs chip market, currently valued at around $1.7 billion, is showing no signs of abating, and market commentators expect it to hit $25 billion by the end of 2030.

EnSilica’s core focus has shifted from consultancy to the design and supply of fabless ASICs. This move integrates EnSilica further into the electronics value chain, and results in the design cost being shared with the client, as well as a long-term recurring revenue stream for EnSilica as chips enter production.

The benefits of EnSilica’s IP have been recognised internationally, and its current sales pipeline of opportunities and potential contracts stands at around $423 million. This is a strong endorsement of the quality of EnSilica’s business output and its growing reputation in the chip sector. EnSilica not only licences its IP to other semiconductor companies but also leverages it in the development of custom ASICs which it supplies to clients. Having such IP is a key differentiator for EnSilica’s ASIC business given the markets it addresses, as well as for bringing in high margin IP licensing revenue.

AVOIDING CONTRACTION

Unlike many digital ASICs companies, the company has avoided contraction, a success which it credits to its unique IP, the strength and expertise

of its global team, and its clear growth strategy. As global digitalisation prevails, EnSilica’s IP suite covering cryptography, radar and communication systems has continued to grow. It recently achieved a new milestone by securing a first customer licence with a leading semiconductor supplier through release of its Post-Quantum Cryptography accelerators IP and are fully focused on further expanding its diferentiated IP portfolio.

EnSilica has developed know-how and IP making it a leading expert in a number of high growth fields of chipmaking, the company is now trusted by blue-chip companies to supply their key components. EnSilica’s full potential has not yet been unlocked. As demonstrated by the recent Nvidia boom, edge AI and enhancements in cybersecurity requirements are driving disruption across all EnSilica’s focus sectors driving further growth.

The company recently unveiled a multi-core AI edge processor for applications such as consumer audio, and in the past developed a medical AI chip for wearable sensors, but given its ability to significantly enhance efficiencies, the company anticipates AI will

become an ever-present influence in EnSilica’s future operations.

EXCITING POTENTIAL

Chipmaking, like the sectors EnSilica services, is fastevolving, and management sees this as incredibly exciting from both a company and investor perspective. Despite recent supply chain disruption and raw material shortages, the semiconductor chip industry is projected to be worth a staggering $1 trillion by 2030. EnSilica sees itself as ideally positioned to capitalise on this astronomical growth as it explores opportunities to further broaden a global IP footprint, increase exposure to AI, and, ultimately, consolidate a reputation as a best-in-class chipmaker and supplier. The company is very excited about the future of the industry and, of course, the future of EnSilica.

Biotech firm N4 Pharma is delivering cutting edge solutions to the UK

N4 Pharma (N4P:AIM) is a speciality biotech commercialising two novel delivery systems, primarily for nucleic acids in the fields of oncology, gene therapy and vaccines.

The first is a patented mesoporous silica nanoparticle with a unique spiky structure that traps the payload within its spikes. These spikes also protect the payload once inside the body and carry it to the cell before it is then effectively taken up into the cell where, once inside, the spikes dissolve and the payload is released.

The company has recently acquired a majority stake in a company called Nanogenics giving it a second delivery system this time using a combination of lipids and a peptide.

The lipid element encapsulates the payload and binding it with a peptide allows the targeting of specific cells.

N4 Pharma’s aim is to become a leading supplier of delivery systems which it intends to license to major pharma and biotech players who are developing their own products and to develop its own range of

products itself using its novel delivery systems.

NEW PRODUCT DEVELOPMENT

The first product it is developing, via Nanogenics, uses its lipid/peptide system to deliver a siRNA sequence targeting the MRTF-B gene to reduce scarring for Glaucoma patients who have undergone corrective surgery to reduce ocular pressure.

The product has undertaken both in vitro and in vivo studies demonstrating equivalence to mitomycin C, a chemotherapy agent which is used off label for this purpose despite its toxic side effects.

The company is now investigating orphan drug designation for this product and looking to get preIND approval for its safety, toxicology, and phase 1 clinical studies.

For its silica system the company has undertaken a range of different proof of concept studies for DNA, mRNA and latterly siRNA to showcase the versatility of this system. The current focus of this work is two areas, firstly multiple loading of siRNA and secondly oral delivery.

Multiple loading of siRNA opens the possibility of silencing multiple pathways in a single cell. This is important for oncology treatments as often a single siRNA can be used to target a tumour, but that tumour can escape and

build resistance through a second pathway. By attacking both pathways this can reduce that level of escape and lead to a more effective treatment.

Oral delivery of nucleic acids has proven difficult but N4 pharma has now shown that the protective nature of its silica system can achieve this.

It has shown that DNA loaded onto a pegylated version of its silica system and placed in an enteric coated capsule can be delivered to the intestine and if taken at regular intervals with a 21day booster a sustained level of protein expression and antibody production can be achieved.

Both these elements are in high demand across the biotech industry and N4 Pharma is actively presenting these results to potential collaboration partners.

HIGH GROWTH COMPANY TO WATCH

N4 Pharma has immense potential as a delivery system company yet currently has a low market cap as it is yet to strike a commercial deal. It is now focused on that as its next goal and has recently entered into a significant collaborative agreement with

US based SRI International which brings that possibility much closer.

SRI operates across a wide range of technical and scientific disciplines to discover and develop ground-breaking products and technologies, with a view to bringing new innovations and ideas to the marketplace.

Its SRI Biosciences division integrates basic biomedical research with drug/ diagnostics discovery, along with preclinical and clinical development. The team has advanced more than 200 drugs to clinical trials, of which 25 have commercialised.

The collaboration agreement with N4 Pharma will combine N4’s silica system with SRI’s Molecular Guidance System. The SRI system uses unique peptide delivery agents which are then attached to N4’s silica nanoparticle before loading the nucleic acid.

This allows the system to target a specific cell type to internalise its selected payload. Significantly, when an MGS binds to its identified target, the event triggers rapid cellular uptake of the attached payload.

The ability to selectively target specific (i.e., diseased)

cells with therapeutic payload while remaining broadly inert in plasma is a key ambition for next generation medication and should generate significant interest across the wider pharmaceutical industry.

SRI already collaborates with a broad range of partners, from small and virtual biotechnology companies to top ten pharmaceutical companies. The combined technology from this new agreement presents unparalleled access to a wide range of commercial partners for N4 Pharma.

In summary N4 Pharma is an innovative UK biotech developing innovative solutions in a highly attractive market and if it gets one of its delivery systems partnered with a major player will become a high growth stock to watch.

Blended seaweed additives in animal feed key to Ocean Harvest Technology’s success

Ocean Harvest Technology (OHT:AIM) is pioneering the use of blended seaweed additives for use in animal feed to improve performance and sustainability in livestock production and companion animals (pets and horses). The company has proven its technology, generated commercial traction with a global customer base and has multiple channels where it is targeting growth.

Ocean Harvest Technology has demonstrated that its products, blended from red, green, and brown seaweeds, have a pre-biotic effect in animals which it has shown can lead to higher growth rates, lower mortality, and improved feed efficiency in multiple species of animals.

The company has been granted a patent which protects these performance claims for a wide range of seaweed blends and for use in a wide range of animals. The granting of this patent demonstrates that Ocean Harvest Technology is the innovator in this area and has an important first mover advantage that it can protect.

The company sources its seaweed from several regions globally and processes them at its accredited facility in Vietnam. There it conducts quality controls, processes the raw seaweed, and then

combines the different seaweeds into products specifically formulated for each of the major animal species such as poultry, swine, cattle, and aqua.

The company’s product development has been based on years of research and development. This has demonstrated how its products generate improvements in an animal’s digestive system and has also shown that this leads to health, profitability, and sustainability benefits through the completion of dozens of animal trials. This research

and development function remains highly active and is continuing to demonstrate additional applications for its OceanFeed products.

WHY INVEST IN OCEAN HARVEST TECHNOLOGY?

DEMONSTRATED PRODUCT EFFICACY IN A LARGE GLOBAL

MARKET

Ocean Harvest Technology sells its OceanFeed blended seaweed additive to customers globally who use the product in a range of animal species.  The large-scale use of

antibiotics in livestock is increasing human resistance to antibiotics, costing many lives around the world.

OceanFeed is providing a 100% natural alternative for those farmers that want or need an ingredient to support higher growth and lower mortality in antibioticfree diets.

For example, it sells OceanFeed for inclusion in piglet diets to help support the animal in its early life, when it is most vulnerable, without having to rely on antibiotics. The multiple trials conducted by the company, its customers, and research institutions have demonstrated that OceanFeed can lead to materially lower mortality rates which improves both the returns to the farmer and the sustainability of rearing the pig.

The company estimates that its swine product is included in the diets of approximately 25% of the piglets in Canada and it is also growing its presence in the US, Asia, and the EU.

Ocean Harvest Technology’s OceanFeed additive is also included in cattle diets to promote increased milk production volumes and improved milk quality. Customers are using the product in layer hen diets to increase egg production and eggshell strength. The

product is also included in aqua diets to support higher growth and better disease resilience through improved gut health.

These are just a handful of examples of the product’s use cases that show how the improvement in the animal’s gut health can lead to improvements in profitability for Ocean Harvest Technology‘s customers and an improvement in the sustainability of their animal production.

The global animal feed additive market is worth over $40 billion per annum, providing Ocean Harvest Technology with significant growth opportunities as customers seek out new products which are natural and help to deliver improvements in performance and sustainability in their animal production systems.

GLOBAL LEADER IN SOURCING SEAWEED

Ocean Harvest Technology sources wild blooming seaweed from southeast Asia, Africa and the north Atlantic. These seaweed blooms are often invasive and therefore harvesting the seaweed restores the biodiversity in the waterways from where they are collected. If left unharvested, they tend to decompose at the end of their short lifecycle which then releases harmful carbon,

nitrates, and phosphates into the local environment.

Ocean Harvest Technology has established its supply chain in conjunction with communities and suppliers over many years in various regions where there is poor infrastructure and vast geographic collection areas. As such, the company has a leading position in sourcing these seaweeds that would be costly and time consuming for others to replicate.

LOW CARBON FOOTPRINT

Harvesting seaweed uses no arable land, fresh water, or fertilisers and hence it has a much lower carbon footprint than other ingredients and additives used in animal feed.  Furthermore, due to the carbon capture benefits of the seaweed and the reduced feed consumption benefits in animals using OceanFeed as an additive, Ocean Harvest Technology has calculated that every tonne of OceanFeed used leads to a ten-tonne reduction in CO2 equivalent emissions from the animal feed chain. This is a growing priority for Ocean Harvest Technology’s customers and hence provides real commercial opportunity.

REAL SOCIAL BENEFITS

Ocean Harvest Technology also points to the social benefits generated for those in its supply chain in remote

locations across southeast Asia and eastern Africa. These communities benefit from tens of thousands of euros in additional income per community each year, much of it to women who previously had little economic activity.

WHAT NEXT FOR OCEAN HARVEST TECHNOLOGY?

Ocean Harvest Technology has robust growth opportunities as it onboards new customers in this large global market. Its customers are looking for natural products which can help them deliver improved animal performance, improve the sustainability of their production systems, and address their profitability issues.

The company’s OceanFeed blended seaweed product is a unique solution for these customers as it is 100% natural and has a pre-biotic effect with demonstrated results which have been patented.

The products also have a lower carbon footprint

than most other animal feed ingredients and improves the sustainability of production animals when included in their diets.

The company continues to invest in its research and development to demonstrate

RESULTS

Ocean Harvest Technology listed on (the alternative investment market) AIM in April 2023 and recently reported a 28% increase in sales of its core OceanFeed product and grew its gross margin to 38%.

The research forecasts in the market have Ocean Harvest Technology reaching its (earnings before interest taxation depreciation amortisation) EBITDA breakeven phase next year.

additional benefits of using its OceanFeed products. The company will continue to report the results of these trials and then leverage them to further grow its addressable markets.

Ocean Harvest Technology is continuing investment in its three key focus areas of sales and marketing, supply chain development, and R&D to drive its sales growth and further protect its position as the pioneer who is leading the commercialisation of this exciting seaweed-based product in global animal production.

US-based PPHC now boasts half of Fortune 100 as clients for Public Affairs and Lobbying

Public Policy Holding Company (PPHC:AIM), through its nine wholly owned operating companies, operates a portfolio of independent firms that offer public affairs, crisis management, lobbying and advocacy services on behalf of corporate, trade association and non-profit client organisations.

Since its inception in 2014, the group has acquired, integrated, or organically created nine businesses. With circa 375 employees located throughout the US, Public Policy Holding Company now advises over 1,200 clients, including 44 of the Fortune 100, including Alphabet (GOOG:NASDAQ), Boeing (BA:NYSE), Ford (FORD:NASDAQ), Meta (META:NASDAQ) and Cigna Healthcare (CI:NASDAQ). Servicing clients across all industries, the group’s largest sectors are technology, healthcare, pharmaceuticals, energy, and financial services.

Public Policy Holding Company benefits from this broad client base, with the largest client representing only 1.6% of total revenue and boasts extremely high client retention rates which are typically above 85%.

In 2023, the group

maintained its position – for the fifth year in a row – as the largest provider of federal lobbying services in the US, according to the Bloomberg Government Ninth Annual Top-Performing Lobbying Firms Report

GROWING INDUSTRY

The role of government impacts everyone and, specifically for companies, government policy and spending commitments create both risk and opportunity.

The role of Public Policy Holding Company is quite simple – to ensure that clients communicate effectively with the political and regulatory authorities so that they have and retain all the necessary

information at their disposal to develop policy and legislate in the best interests of their citizens.

The increasing importance of government is present in every geography.

In the US, for example, the federal government’s spending has increased from $1.8 trillion in 2000 to $6.3 trillion in 2023.

Alongside this, total regulated federal lobbying spend in the US increased from $1.6 billion to $4.1 billion over the same period.

The US is the world’s largest market for lobbying, but it is not a service exclusive to the area and is of vital importance in many other regions, including the EU (over $2

billion estimated) and the UK ($750 million estimated).

In today’s world of crossborder business operations, multinational companies seek to ensure their voices are heard in a variety of jurisdictions, making international territories more relevant and important from a lobbying and public affairs perspective.

With a strong standing in the highly regulated US market, Public Policy Holding Company is well positioned to benefit as other geographies, including the UK and across the EU, look increasingly likely to regulate lobbying and related activities in the future.

CLEAR STRATEGY

Public Policy Holding Company’s strategy is focused on organic and M&A (mergers & acquisitions) based growth. Organic growth is delivered through sustained investments in its brands and in the holding company platform. One example of this is the recent launch of Concordant Advisory to support the broader strategic communications needs of the group’s clients.

Public Policy Holding Company has an excellent history of value accretive M&A and has a strong and active pipeline, focused on expanding into new geographies (both into key US states and international capitals, such as London and Brussels) and adding new capabilities that address today’s issues (health, sustainability, AI).

The criteria for M&A opportunities comprises best in class ethical and compliance standards; market share and diversification benefits; premium financial profiles and maintenance of group-

wide margin targets; long-term revenue synergy potential and opportunities; accretive to (earnings per share) EPS; and, for UK/EMEA expansion, sufficient level of scale to serve as a hub for international growth.

SHAREHOLDER RETURNS

Public Policy Holding Company has typically delivered a superior growth profile and excellent profitability throughout political and economic cycles and achieves strong free cash flow to support dividends and continued M&A.

Revenues have grown from $21 million in 2016 to $135 million in 2023, representing a total CAGR of 30%. In its most recent results, the group delivered record revenue and underlying profit of $135 million and $35.1 million, respectively. The company has a history of greater than 60% payout ratio of underlying net profit in dividend, with semi-annual payments.

The group reports revenues in three distinct segments, each with its own attractive characteristics: government relations and policy advocacy are resilient, profitable, and highly retained, diversified services (including research, policy monitoring services) has high growth potential and is

recurring in nature and public affairs provides stable growth and benefits from crossselling.

GROWTH PROSPECTS

Supported by a growing market and a holding company model designed to support organic and inorganic growth, the company’s medium-term guidance is to deliver organic revenue growth of 5 to 10% per year, incremental growth from future M&A and an (earnings before interest taxation depreciation amortisation) EBITDA margin of between 25% and 30%.

The demand for the company‘s services is enduring and not reliant on election cycles. With a high quality of earnings driven by strong client retention and repeatable revenues, the group is confident of delivering further growth in the future.

The provider of SaaS compliance platforms Skillcast is starting to see accelerated growth

Skillcast (SKL:AIM) has built over 400 compliance e-learning courses and compliance management products that sit on its own learning management platform and are currently sold to over 1,200 companies.

Skillcast was founded in 2001 by three co-founders that are still executive directors today and retain significant equity interests.

The company floated on AIM in December 2021 and raised £3.5 million to invest in commercial, technology and infrastructure and increase market awareness.

The company has 120 employees, with 80 in its London-based head office and the balance in its Maltese service office.

The company designs and builds both the content and technology for the hundreds of e-learning courses it offers that cover topics including (anti-money laundering) AML, bribery and corruption, (diversity, equality and inclusion) DEI, (environmental, social and governance) ESG, GDPR, health and safety, modern slavery, risk management and (senior managers & certification regime) SMCR for the financial services industry.

Skillcast delivers the courses

on its own flexible learning management system (LMS) platform for clients to deliver and track compliance e-learning programs that allow full corporate branding, integration to HR staff records, and dashboard reporting.

Many customers that start with digitising their compliance training on Skillcast‘s compliance platform often go on to deploy other features, such as its policy hub for delivering corporate policies and gathering employee attestations, anonymous surveys for collecting employee feedback, staff declarations for employee disclosures, and compliance registers for documenting various compliance-related activities such as gifts & hospitality.

With this, Skillcast helps clients save considerable time and money by consolidating all their compliance management onto one platform and helps to reduce the risk of compliance breaches.

Skillcast has over 1,200

customers that typically contract for a minimum 12-month subscription, invoiced up front on 30-day payment terms. Smaller clients with less than 50 employees subscribe through a recently launched self-serve e-commerce offer.

Skillcast has built a book of these software-as-a-service (SaaS) contracts whose annual recurring revenue (ARR) stood at £10 million in March 2024.

With a client churn rate of 7% and a net retention rate of 105%, the company has high revenue visibility and can build on the existing book with new clients that it acquires through its marketing and sales funnel.

It grew its (annual recurring revenue) ARR book by 37% in 2023 and reported a 36% yearon-year-on-year increase in March 2024.

In 2024, Skillcast received the Feefo Platinum Service Award for the fourth consecutive year based on a 4.9/5.0 rating in client reviews.

One of their financial services clients remarked: ‘Skillcast’s customer service team is one of the best I have worked with during my career. There is always a way to make the system do what we need; even if they‘ve not done something before, they reconfigure things and make it work.’

Clients can alternatively opt for a bespoke compliance learning solution from its professional services team which in 2023 represented 24% of total revenues at £2.8 million.

This proportion has been steadily decreasing over the last few years as Skillcast focuses on growing its SAAS business.

INVESTMENT OPPORTUNITY

The market for corporate compliance is growing fast despite the stagnant economy as firms struggle to comply with a myriad of laws and regulations covering money laundering, sanctions, bribery, data protection, equality and health and safety.

Kemi Badenoch, the Business Secretary, pointed out in a recent speech that compliance functions now account for about 10 per cent of the average workforce in UK financial services.

A study by the Centre for Policy Studies recently found that the cost of regulation on UK businesses has grown by £6 billion per year since 2010 alone.

The competitive landscape is heavily fragmented. Some of the bigger content providers in the space include Learning Pool, LTG, Access Group and Marlowe.

Skillcast differentiates itself by offering only compliance e-learning and management, a customisable platform, outstanding customer service and a transparent and value focussed pricing model.

Skillcast’s in-house technical and content teams continue to innovate to increase staff compliance awareness and reduce the burden on compliance teams. For instance, it plans to launch artificial intelligence powered

Skillcast key financials

£0.7m IPO costs in 2021

services this year to enable users to ask questions and find compliance training.

As a trusted supplier, it can provide ring-fenced AI solutions that rely solely on curated content, eliminating the risk of misinformation common with many AI products.

The company had a net cash of £7.2 million in December 2023 and pays a modest dividend. It does not capitalise any development or intellectual property.

WELL-PLACED TO RETURN TO PROFITABILITY

The

reduction in overhead growth rate in 2023 indicates the company is moving towards a return to profitability after its post-IPO investment phase.

It operates a proven, innovative, scalable, low churn SaaS model in a growing, resilient market.