VO L 2 2 / I S S U E 3 0 / 3 0 J U LY 2 02 0 / £ 4 .4 9
PROTECT YOUR
PORTFOLIO FROM THE NEXT
DOWNTURN
COCA-COLA SHARES ARE TRADING AT A RARE BARGAIN LEVEL
SHARE PRICE RECOVERY WIPED OUT FOR TUI, EASYJET AND IAG
CAUTION REPLACES OPTIMISM ON UK ECONOMY
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EDITOR’S VIEW
The signals that suggest it’s time to buy Unilever The consumer goods giant is making some interesting strategic moves
I
n a world where everyone seems to be obsessed with growth, it’s quite interesting when Unilever (ULVR) sees its share price jump 8.4% on reporting no growth at all (23 July). The consumer goods giant managed to avoid the second quarter decline predicted by analysts and deliver a resilient performance. The market liked the outcome and bid up the shares. However, there’s more to the positive share price reaction than simply beating forecasts for three months’ trading. Unilever is one of those seemingly boring companies that lacks the type of excitement provided by other parts of the market such as technology. It sells essential products around the world and owns some of the best-known household brands among the hygiene, food and drink markets. That helps its make billions of euros in profit each year, albeit earnings progress is limited. Failure to deliver decent growth has seen the share price mostly tread water since 2017. It has delivered 17.3% total return over the past three years, lagging the 25.2% achieved by the MSCI World index. However, there are reasons to positive. What strikes me as interesting is the fresh thinking from Alan Jope who took over as chief executive just over 18 months ago. Despite having been with the company since 1985 and therefore at risk of being too accustomed to the old ways, Jope is eager to breathe some new life into the business. This includes focusing on the best growth areas and being more relevant to young people, so they’ll not only buy today but also buy Unilever products for many years to come. The recent decision to abandon its dual AngloDutch corporate structure in favour of a single company based in London will give it more flexibility to make acquisitions and disposals easier and faster. The latest trading update included a decision to spin off most of its tea business into a separate
entity. This shows Jope is now being true to his word of taking action to reshape the company. The tea business has been struggling to grow for some time and a large chunk of its portfolio is in black tea, which is the preference of older people. To engage more with younger people Unilever will need to have a greater presence in the fruit and herbal tea market. Running a tea business on its own and not part of an effective consumer conglomerate should give management more freedom. Equally, it shows that Unilever is finally taking action to unlock value in its business and address growth issues – and that’s a good reason to start buying the shares, alongside the fact that it continues to be a monster cash machine. High cash generation is a key reason why many fund managers like the stock. Unilever has a strong ability to keep churning out dividends and any investor who can reinvest those payments into buying more shares should enjoy good compounding benefits over a longer period. While the stock has lagged in recent years, looking over the past 10 years it has delivered 237% total return which is considerably more than the MSCI World index (165%). Definitely one to tuck away so it can quietly enhance your wealth for the future. By Daniel Coatsworth Editor
30 July 2020 | SHARES |
3
Contents
News Provider of the Year (Highly Commended) CFA UK Journalism Awards 2020
EDITOR’S 03 VIEW
The signals that suggest it’s time to buy Unilever
06 NEWS
Share price recovery wiped out for TUI, EasyJet and IAG / Caution replaces optimism on UK economy / Analysts calculate value of Vodafone‘s mobile towers business / Games Workshop and Greggs: A tale of two consumer-facing stocks / Why gold has reached an all-time high
GREAT 12 IDEAS
New: Coca-Cola / Knights Updates: Kainos / Tristel / Texas Instruments / AG Barr
20 FEATURE
Protect your portfolio from the next downturn
28 RUSS MOULD
The silver price is cheap relative to gold
30 FUNDS
Why growth and income are both big in Japan
MONEY 36 MATTERS
How do I use my pension in retirement?
39 ASK TOM
How much can I claim for pensions tax relief?
41 CASE STUDY
How i invest: Profiting from the stock market dip
FIRST-TIME 44 INVESTOR
Finding out what’s moving up and down in the markets
46 INDEX
Shares, funds, ETFs and investment trusts in this issue
DISCLAIMER IMPORTANT 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
4
CFA UK Publication of the Year CFA UK Journalism Awards 2019
| SHARES | 30 July 2020
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, self-select 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 seven working 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 seven working days after the on-sale date of the magazine.
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NEWS
Share price recovery wiped out for TUI, EasyJet and IAG Consumer confidence in foreign holidays looks severely dented following quarantine news
T
he share price recovery in many travel stocks has been wiped out by the UK Government’s decision to impose a two-week quarantine on everyone arriving from Spain. Tour operator TUI (TUI) and airlines EasyJet (EZJ) and International Consolidated Airlines (IAG) are now trading around, or lower than, the level in midto-late March when global markets bottomed out. They had all previously seen a sharp rebound in April and May as investors took the view that leisure demand would recover quickly. Ryanair (RYA), Wizz Air (WIZZ), On The Beach (OTB) and Dart (DTG:AIM) are still trading well above their March lows. The UK/Spain quarantine decision stands to knock consumer confidence over taking holidays abroad in the near-term, particularly for people who cannot work from home and so do not want to risk being stuck indoors for a fortnight when they return from their travels.
TRAVEL-RELATED STOCKS SINCE UK IMPOSED QUARANTINE RULES ON PEOPLE ARRIVING FROM SPAIN EasyJet
-10%
TUI
-9%
International Consolidated Airlines
-7%
Dart
-5%
Wizz Air
-4%
On The Beach
-2%
Ryanair
0%
Source: SharePad. Data 24 July 2020 market close to 12pm 28 July 2020
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| SHARES | 30 July 2020
Analysis of web traffic data by investment bank Jefferies implies that any bounce for foreign package holiday firms after the Government eased travel restrictions was already losing momentum before the UK/Spain quarantine news. That might explain why many travel stocks have been drifting downwards since June. Its research showed that web traffic for the listed tour operators TUI, Jet2 and On The Beach in midJuly was down 40% to 50% year-on-year, while UK staycation Google searches in contrast remained high. For example, over twice the number of people searched for ‘Cornwall holiday’ than ‘Spain holiday’, according to the data. A preference for staycations this summer appears to be backed up by media reports of cottages, resorts and campsites reporting record sales and bookings for this year and next year. Premier Inn owner Whitbread (WTB) plans to have reopened most of its hotels and pub restaurants by the end of July in anticipation of a staycation summer. In a trading update earlier this month, the company said it had seen good demand for the summer months in traditional regional tourist destinations, though in big cities like London demand remained subdued. Analysts at HSBC point out the firm could be in line to benefit from the troubles affecting rival hotel chain Travelodge. As well as hotels, pub operators could also benefit from a staycation boom. City Pub Group (CPC:AIM) has seen its shares rise 10% since revealing (27 July) that it had been trading profitably since reopening half its pubs on 4 July.
NEWS
Caution replaces optimism on UK economy Now is not the time to take excessive risks with stock selection
T
his week saw the publication of the latest EY Item Club forecast for the UK economy, and it doesn’t make for happy reading. The group uses the Treasury model of the UK economy, but it is free of political or business bias and it certainly isn’t looking at a V-shaped recovery. EY’s chief UK economist Mark Gregory says that while the changes caused by the pandemic were very visible, there wasn’t the hard data to make predictions. As lockdown was eased, ‘more optimistic voices could be heard,’ he says. Given the GDP numbers for April and May it’s now clear that a return to pre-Covid levels of activity is a long way off. EY has cut its growth forecast for the UK economy this year to a fall of 11.5%, much worse than the 8% decline it predicted in June and the 6.8% decline it saw at the end of April. And as it points out, this isn’t even the worst-case scenario – there are still UK aggregate earnings revision upgrade/downgrade
30 20 10 0 -10 -20
2020
2018
2016
2014
2012
2010
2008
Source: M23 Research
2006
2004
2002
2000
-30
downside risks from a second wave of the virus and a sharp rise in unemployment. Last week’s second quarter Red Flag Alert Report from insolvency and business advice group Begbies Traynor (BEG:AIM) predicted ‘a dam of company financial distress waiting to break on the UK economy’ in the second half of the year as Government support for businesses is withdrawn. Particularly at risk are commercial property and retail firms, but the damage isn’t confined to brick and mortar brands as many online retailers are also suffering significant financial distress. The best news so far is that companies are tending to beat earnings estimates, but according to analysts at Morgan Stanley this is likely because the bar has been set so low as to allow firms to hop over it. From their analysis of UK and European company results, a small majority (58%) have beaten earnings forecasts by 5% or more, while 24% have missed estimates. Despite a net 30%-plus beating the consensus, however, second quarter earnings per share for the median stock are still 38% lower than the same period a year ago. Even those firms that have surprised positively on earnings have flagged that costs are set to rise over the second-half due to supply chain reorganisation, counter-Covid measures such as enhanced hygiene regimes, or provisions for job losses later this year. Investors will need to stick with companies with strong balance sheets and good cash flow generation in order to weather the coming storm. 30 July 2020 | SHARES |
7
NEWS
Analysts calculate value of Vodafone‘s mobile towers business Vantage Frankfurt IPO spin-off is already ‘priced in’, according to one expert
A
nalysts have run the numbers on Vodafone’s (VOD) European mobile masts business and believe that investors should not anticipate significant share price upside from the mobile network being spun-out. Vantage Towers, as the masts business has been named, owns around 68,000 towers around Europe, generating an estimated €1.24 billion of revenue and €680 million of earnings before interest, tax, depreciation and amortisation (EBITDA). That implies an EBITDA margin of 55%. Vodafone hopes to merge its UK towers unit, CTIL, into the Vantage business. This depends on striking a deal with joint venture partner 02, having agreed to a network sharing deal to save on operating costs in 2012. CTIL would add between €50 million and €70 million of EBITDA to the Vantage business. The FTSE 100 telecoms giant has been chewing over the idea of demerging its mobile masts arm for several years as a route to unlocking value it perceived was buried in the operation. A dedicated towers business with shares traded on a stock market would be more transparent to investors and could potentially attract a higher valuation. The towers operation will join the stock market in Frankfurt rather than the London Stock Exchange. The news didn’t go down well with UK investors who have already had to contend with Vodafone’s share price being stubbornly in decline for the past five or six years. The company is believed to have been encouraged by foreign mobile tower business valuations in recent months. This was highlighted by Spanish-listed towers company Cellnex, which recently raised €4 billion of extra cash from investors to pursue acquisitions. That cash call implied that Cellnex was trading
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| SHARES | 30 July 2020
on an EBITDA multiple of 21-times, according to analysis by Megabuyte analyst Philip Carse, versus Vodafone’s 6.9-times valuation. But Carse believes that any share price upside for Vodafone spinning off the asset is already priced in. ‘A similar multiple to Cellnex for Vantage (circa €14.3 billion) would imply around 5.5 times EBITDA for the rest of Vodafone. That’s in line with European peers, such as Deutsche Telekom, Orange and Telefonica, and well above the 4.0 times EBITDA of BT (BT.A),’ he says. Any tower value upside may have to be earned by sweating its mobile masts estate to greater effect. This would include initiatives such as driving up third-party tenancies, says Carse, or the average number of third-party mobile service providers renting space on towers for their own network equipment. ‘Vodafone’s current 1.5-times tenancy ratio compares with Cellnex’s 1.6,’ according to Carse. Ultimately, Vodafone needs to demonstrate real value from its large 5G investment to reignite its share price.
NEWS
Games Workshop and Greggs: A tale of two consumer-facing stocks One is priced to perfection and the other faces a difficult recovery
R
esults from two of the stock market’s best-in-class consumer-facing companies triggered opposite share price reactions on the day (28 July), moves that demonstrated the contrasting fortunes of the pair. While fantasy miniatures maker Games Workshop (GAW) gained on the expectation its stellar growth will continue, food-to-go retailer Greggs (GRG) cheapened on uncertainty regarding when it will ever return to 2019’s earnings level in an era of social distancing. High-flying Games Workshop added another 10% to trade at £93.08 after the Nottinghambased company hailed the ‘best year’ in its history, leaving the company trading on more than 11 times the record sales generated in the year to May 2020. Despite the pandemic, Games Workshop delivered another year of record revenue, profit and cash generation, boosted by online success and customers spending lockdown painting its models and expanding their collections of wizards and warriors. However, there is now the very real danger that any disappointments will be harshly punished by the market. Put simply, optimistic investors are pricing in the flawless execution of a growth plan which focuses on generating royalties through the exploitation of intellectual property through the creation of computer games, TV shows and other media projects. Games Workshop is in the final stages of developing a TV project based on
one of its most popular Black Library novel series, Eisenhorn, for instance. Heading in the opposite direction was value sandwiches-to-sausage rolls retailer Greggs, which soured a further 5.8% to £13.75 after it served up downbeat results for the first half to 27 June, leaving the stock 44% off its 52-week high. This was a period during which Greggs’ stores were closed for weeks on end, so there were no real surprises here. Yet the forward-looking market is now concerned over the impact subdued footfall will have on the business, as many people continue to work from home and consumers remain skittish concerning the virus. Greggs has done everything it can to adapt to the new retail world whilst sensibly slimming down its product range to focus on best sellers, but the retailer expects sales to remain below normal so long as social distancing persists. The positive news is that Greggs pointed to an ‘encouraging’ sales trend since shops reopened and said it would continue to invest in new stores, albeit at a slower rate than planned pre-Covid. Company-managed shops – as opposed to franchised stores – saw sales reach 72% of 2019 levels in the week ended 25 July and at a group level the firm is now back to trading broadly at operating cash breakeven, which may hearten contrarian investors. 30 July 2020 | SHARES |
9
NEWS
Why gold has reached an all-time high The metal price has soared amid a cornucopia of investor concerns, and some believe the gold rally still has further to run 2000
GOLD PRICE – $ PER OZ
1400 800 200
2001
G
2016
old has hit an all-time high of $1,980 per ounce as increasing numbers of jittery investors look for a safe place to put their money amid rising US-China tensions and a worsening economic outlook from the coronavirus pandemic. At the time of writing, the spot price of gold stood at around $1,935 per ounce, eclipsing the previous all-time high of $1,921 per ounce set in September 2011, with the price of the shiny metal rising around 9% in the past month and 27% this year. As well as general coronavirus worries and nervousness over relations between the US and China, analysts at Commerzbank say a driving force behind the big upswing in the gold price is a weaker US dollar, which has sunk to a two-year low on heightened concerns about the American economy. When the dollar moves lower, gold often goes up as it becomes cheaper in other currencies. The Commerzbank analysts also point to other factors such as growing investor concerns about currency debasement following a sharp rise in the money supply, as well as negative real interest rates. In addition, highly valued stock markets – particularly ones in the US like the Nasdaq which hit an all-time high in June – have started to tail
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| SHARES | 30 July 2020
2011
2016
2019
off in the past week, prompting inflows into gold and silver exchange-traded funds (ETFs). While not always the case in recent months, gold typically does well when the stock market falls. DOWNSIDE RISKS TO CONSIDER Those looking to take advantage of the strength in the gold price should consider some of the downside risks. The Commerzbank analysts say the speed of gold’s upswing – its price has gained 5% in the past week – ‘should sound a warning bell’ as this can often precede a fall. While current momentum could persist, if gold goes above the $2,000 per ounce mark this could result in profit taking by investors, which could cause the price to dip again. There is also the consideration that economies around the world could recover in line with current expectations or perhaps even better than expected, and/or an effective coronavirus vaccine comes to fruition in the next few months. These factors could push the price of gold back down again, as such safe-haven assets wouldn’t be needed as much if the global outlook becomes rosier. But on the flip side, certain indicators do suggest there are still legs in the gold rally. The metal’s price only represents 0.59 times the
NEWS value of the S&P 500’s value, barely half the post1970 average of 1.14-times and pales next to the 1.6-times multiple gold reached at its previous alltime high in September 2011. Also, there’s the argument that we could be facing the return of high inflation in developed economies, due to record low interest rates, quantitative easing, global supply-chain disruption and firms increasing prices to meet the extra costs of staying in business. This is another factor which would support a higher gold price as the metal has historically been a good hedge against inflation. WAYS TO GET EXPOSURE For those looking to invest in gold, two ways to
get exposure are through an ETF or shares in a gold miner. Gold ETFs have certainly delivered strong returns this year, with iShares Physical Gold (SGLN) for example returning 28.6% in the year to date. Gold miners, a leveraged play on the commodity’s price, on the other hand have behaved differently, falling initially in line with the market but then rebounding stronger as gold jumped. When the gold price soars such miners usually do well, both from a share price point of view and in terms of their earnings. A high gold price can encourage junior miners to pick up projects that previously weren’t worth pursuing. While they may now be economically viable, investors should adopt a cautious stance towards any project that only works at the current high price. A pullback in the value of gold could quickly make these assets unappealing again.
EXAMPLES OF LONDONLISTED GOLD MINERS 2020 PERFORMANCE YEAR TO DATE Greatland Gold
689%
Pure Gold Mining
210%
Caledonia Mining
201%
Petropavlovsk
187%
Condor Gold
141%
Pan African Resources
116%
Ariana Resources
96%
Fresnillo
92%
Hummingbird Resources
88%
Shanta Gold
74%
Centamin
62%
Polymetal International
57%
Galantas Gold
51%
Hochschild Mining
48%
Highland Gold Mining
48%
Orosur Mining
42%
Serabi Gold
34%
Trans-Siberian Gold
30%
Resolute Mining
8%
Chaarat Gold
7%
Anglo Asian Mining
1%
Canadian Malartic mine is 50% owned by Yamana Gold
YAMANA GOLD Gold and silver producer Yamana Gold is set to return to the UK stock market in the coming months with a listing on the London Stock Exchange. Currently valued at just under £5 billion (based on its New York listing), the Canadian miner will trade on London’s Main Market but it won’t be eligible for the FTSE indices. Yamana joined AIM in 2003 and moved to the London’s Main Market in 2007. It delisted in 2013 as most of its shares traded on the Canadian and US markets. The London market now only has a few gold miners of size and Yamana believes there is enough interest to warrant returning to the UK market.
Source: SharePad, Google Finance. Data to 28 July 2020
30 July 2020 | SHARES |
11
Coca-Cola shares are trading at a rare bargain level History suggests they should revert back to a higher rating than the current one
S
hares in beverages behemoth The Coca-Cola Company (KO:NYSE) plunged with the wider market in March. Yet despite recovering from their 52-week low of $36.27, they remain some 20% off their $60 one-year high, having failed to join in with the rally led by the US technology giants and other stay-at-home beneficiaries. Shares believes this is an attractive entry point for a patient long-term investor, as this consumer defensive colossus has proven pedigree in surviving challenging periods and emerging stronger. Coca-Cola trades on a cyclically adjusted price-to-earnings (PE) multiple of 22 for 2021, falling to 20.8 for 2022, according to M23 Research. This is bargain territory for the stock. Looking back over the last 45
BUY
(KO:NYSE) $48.48 Market cap: $208.3 billion
25 years, Coca-Cola has traded on a cyclically adjusted PE of 29.1. Mean reversion suggests that asset prices will eventually revert to the long-run average and Coca-Cola has done this on many occasions in the past. It gives us confidence that over the next few years we could see the shares trading back towards 29 times earnings. If earnings remain static for the near-term, mean reversion implies a share price towards $60. However, analysts expect a decent recovery in earnings
Coca-Cola cyclically adjusted (trend) PE, 1995-2020
40 Trend PE (x)
THE COCA-COLA COMPANY
35 30 25 20
5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 l-9 l-9 l-9 l-9 l-9 l-0 l-0 l-0 l-0 l-0 l-0 l-0 l-0 l-0 l-0 l-1 l-1 l-1 l-1 l-1 l-1 l-1 l-1 l-1 l-1 l-2 Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju TPE
Average
+ 1 SD
- 1 SD
Source: M23 Research. TPE= Trend PE. SO= Standard deviation
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| SHARES | 30 July 2020
+ 0.5 SD
- 0.5 SD
during 2021. Consensus forecasts have pre-tax profit dipping to $9.72 billion in 2020 (last year: $11.31 billion). Next year they are expected to jump to $11.04 billion and hit $12.18 billion in 2022. This year’s earnings decline is already priced in by the market and investors are now more focused on what corporates will be doing in 2021 and beyond. COKE’S UNBREACHABLE MOAT Listed in New York, The Coca-
Cola Company is the business behind Coca-Cola or ‘Coke’, the world’s most recognised soft drink. The $208 billion cap manufactures and sells concentrates and syrups to its 300 bottling partners. It still owns the brands and controls brand marketing initiatives. The bull case is so much more than its eponymous brand, because Coca-Cola is a total beverage behemoth offering over 500 brands in more than 200 countries and territories. It is also a premium juice, organic tea and coconut water concern. Its brands include four of the world’s top five non-alcoholic sparkling drinks, namely CocaCola, Diet Coke, Sprite and Fanta and lesser-known names such as Dasani, Powerade and Minute Maid. The Coca-Cola Company also owns two UK household names: coffee brand Costa and mixers brand Schweppes. Long-term, Coca-Cola has been a market-beating investment with dividends forming an important part of the total returns for investors, although we acknowledge the business is challenged in the short-term. DEMAND BEGINS TO IMPROVE Coca-Cola’s sales fell 28% to $7.2 billion and earnings per share declined 32% to $0.41 in a coronavirus-impacted second quarter to 26 June. These declines were mainly driven by pressure in ‘away-fromhome’ channels, which speak for around half of Coca-Cola’s sales. Chief executive James Quincey believes the second quarter will prove to have been the most challenging of the year, suggesting the worst is now over.
Coca-Cola’s brand has been going strong for over 130 years Encouragingly, since CocaCola’s previous update three months ago, global unit case volume trends, a key demand indicator, have improved sequentially from a decline of roughly 25% in April to a decline of about 10% in June as lockdowns eased and with July also exhibiting signs of improvement. Coca-Cola said it was seeing improving trends in awayfrom-home channels, namely restaurants, cinemas and entertainment venues, along with sustained, elevated sales in at-home channels. Assuring the market that the balance sheet remains robust, and the company is confident in its liquidity position as it continues to navigate through the crisis, Coca-Cola is in a strong position to profit as the world reopens and thirsty populations emerge from lockdown around across the globe.
RISKS TO WEIGH Admittedly, Coca-Cola competes in a mature industry and fizzy drink consumption is reducing in developed markets due to the increase in health-conscious consumers and governmentimposed taxes on sugar-laden products. Covid-19 has also disproportionately impacted people who are overweight and government initiatives, such as Boris Johnson’s new antiobesity strategy, could present a headwind. Nevertheless, it is worth remembering Coca-Cola’s brand resonance in the non-alcoholic beverage category has been going strong for over 130 years and low and no-sugar products, notably Coca-Cola Zero, have proved successful. As part of a balanced diet, a can of Coke represents an affordable treat, as does the equity of The Coca-Cola Company. 60
COCA COLA
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30
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2015
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30 July 2020 | SHARES |
13
Knights set to lure top lawyers and their clients from rival law firms Competitors’ big fee earners could be tempted to move jobs instead of having to keep their current workplace afloat with cash support
T
he crisis has created something of a structural shift in the legal sector, with many traditional Top 100 law firms having to ask partners to put up cash to keep their businesses going. This has provided legal and professional services business Knights (KGH:AIM) with a unique opportunity to tempt senior fee-earners away from the big law firms, together with their client base. Knights was one of the first UK law firms to move away from the old-fashioned partnership model to a corporate structure in 2012. It has a strong presence outside London, particularly in Birmingham and the Midlands, where the market is highly fragmented and under-supplied. It used the cash raised from its stock market listing in June 2018 to consolidate, taking over nine regional firms and increasing its number of fee earners from 350 to more than 930 at the last count. Knights specialises in corporate and commercial law and has a roster of over 18,000 clients. Its average case size is £3,000, which paired with its geographic spread and its diversified client base means revenues are not highly dependent on a single
14
| SHARES | 30 July 2020
KNIGHTS
BUY
(KGH:AIM) 398p Market cap: £326 million
sector or client. As chief executive David Beech is keen to point out, Knights is highly focused on cash collection with an industry-leading time until it gets paid of just 85 days against an average for the UK Top 100 law firms of 145 days. In the year to 30 April, turnover grew by 40% to £74.3 million with 10% organic growth and 30% coming from acquisitions. On an underlying basis, pre-tax profit rose 45% to £13.6 million as the firm moved quickly to cut costs. Having deferred all nonessential capital spending as well as stopping all discretionary spending, reducing staff numbers and salaries, Knights is set to emerge from the nearterm uncertainties in a strong position, according to chairman Bal Johal. The market for legal services stabilised in June after an initial fall in April and the firm is seeing early signs of a recovery. Its recent acquisitions
are integrating faster than management expected, but the focus for the first half of the current financial year is on organic growth. Analysts at Numis see revenues to April 2021 growing more than 35% to £102 million and pre-tax profits also rising by more than 35% to £19.4 million, while cash generation is set to improve as management bring the speed at which recentlyacquired companies are paid by clients down sharply to the group average. Analyst Rachel May at Shore Capital points out that the regional legal market is worth £2.6 billion per year, so there are plenty of ‘interesting opportunities’ going forward. 500 450
KNIGHTS
400 350 300 250
2019
2020
LISTEN TO OUR WEEKLY PODCAST Recent episodes include: Mark Slater on growth opportunities, the rampant rise in biotech stocks, silver rally, and spending habits in lockdown US stocks, Tesla, capital gains tax shock and small cap guru interview Mini-Budget special: what the Chancellor’s giveaways mean for your money
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KAINOS
TRISTEL
(KNOS) £10.75
(TSTL:AIM) 427p
Gain to date: 49.7%
Loss to date: 12.9%
DIGITAL TRANSITION company Kainos (KNOS) had struck a tone of cautious optimism through lockdown, but its latest trading blew the cautiousness out of the water and set the share price alight. ‘We expect revenue to be well ahead and adjusted profit to be substantially ahead of current consensus forecasts for the full year ending 31 March 2021,’ the company told investors. Analysts at Stifel increased revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) forecasts by more than 10% and nearly 60% respectively, to £188.95 million and £34.9 million. Net cash of over £62 million and no debt meant Kainos was also able to declare a special dividend of 6.7p per share. Popping 25% on the day (27 July), it means the share price is now nearly 50% higher on our original buy price of 718p. It is a little too simplistic to see Kainos as a digital transformation beneficiary through lockdown, although its public sector/government space has proved hugely resilient. Investors have wised up to the opportunity that lies ahead for the Belfast-based business even if spells of weaker client spending materialise.
IT’S NOT often you see shares in a company fall on a statement that says full-year results will be ahead of market expectations. Sadly that is what happened with infection prevention specialist Tristel (TSTL:AIM) which dropped nearly 10% on 22 July after publishing what initially looked like a very bullish trading update. Tristel said for the 12 months to 30 June 2020 it expects to report a 21% increase in both sales and adjusted pre-tax profit. It said the business has no debt, and cash at the end of the recent financial year was £6.2 million (2019: £4.2 million). The small cap also said it would keep paying dividends. Normally such messages would have been welcomed with open arms by the market. So why did its shares fall? Travel restrictions to the US have delayed the appraisal of a product for the North American market. It has also seen a decline in the use of its medical device decontamination products as hospitals postponed non-critical patient appointments. Uncertainty over when hospitals will see more normal levels of activity is a negative from the market’s perspective. FinnCap forecasts pre-tax profit of £7 million and 6.5p dividend for the year to June 2021.
Original entry point: Buy at 718p, 19 December 2019
Original entry point: Buy at 490p, 27 February 2020
1100
KAINOS GROUP
550
TRISTEL
800 400 500 2019
2020
SHARES SAYS: Significant upside from here may be asking too much from a price-to-earnings multiple of 47.4, but as a longer-run investment, Kainos continues to look attractive. Stick with the shares. 16
| SHARES | 30 July 2020
250
2019
2020
SHARES SAYS: Don’t be put off by the recent pullback in the shares. Tristel is a long-term winner from increased disinfection usage. Keep buying.
TEXAS INSTRUMENTS
AG BARR
(TXN:NDQ) $132.12
(BAG) 437.21p
Gain to date: 15.5%
Loss to date: 12.5%
WE CALLED US-listed Texas Instruments (TXN:NDQ) a resilient technology business for a diversified investment portfolio in our original analysis in May, and it has lived up to that reputation and more so far. The company reported second quarter earnings of $1.48 per share on 21 July, beating consensus estimates of $0.88 per share and last year’s equivalent $1.29 per share, albeit inflated by a one-off $0.33 per shares tax gain. Having a vast spread of markets at which to aim its power control chips is exactly what makes Texas so reliable, even in these testing times. Modest growth from industrial demand and 10% increase from consumer electronics offset under pressure automotive sales, which fell 40%-plus year-on-year. The company is another to confirm what increasingly looks like a sustained work and learn from home trend, yet inventory build is a potential fly in the ointment and worth watching. Many of its customers have been building stocks of vital components just in case something nasty emerges in the second half. This is a natural part of the semiconductor industry, but inventory builds never last long, so it’s something to monitor during the coming months.
WE SAID to buy the Irn-Bru maker in May, believing that its share price didn’t warrant being so low. A new trading update confirms that the initial lockdown period wasn’t good for sales, which shouldn’t be a surprise. More encouraging is news that sales from both the hospitality sector and consumers ‘on the go’ are starting to pick up. Anyone investing should really take a longterm view of a business and not simply base their decision to buy or sell on just a few months’ trading. AG Barr continues to generate positive cash flow and we have faith in it getting through the current difficult period. Liberum says the 8% decline in first-half revenue to £113 million was much better than its forecast for £94.6 million in sales. ‘The material beat versus our expectations appears driven by a strong performance in the impulse channel as AG Barr helped independents navigate the shift to takehome occasions from immediate consumption,’ says the broker. Assuming there are no major flare-ups of the virus in the UK, Liberum believes AG Barr could think about restarting dividends when it reports half-year results on 22 September. ‘The share price fall (-25% year to date) is at odds with this strong update,’ it adds.
Original entry point: Buy at $114.42, 21 May 2020
Original entry point: Buy at 499.5p, 7 May 2020
700
BARR (AG)
140 550 115 400
TEXAS INSTRUMENTS 90
2019
2020
SHARES SAYS: A solid start from a well-balanced business. Still a buy for the longer-term.
2019
2020
SHARES SAYS: AG Barr is getting back on its feet so use the ongoing share price weakness as a reason to buy more shares as a long-term investment.
30 July 2020 | SHARES |
17
VALUE INVESTING MAY BE PART OF THE REMEDY FOR PANDEMIC-HIT PORTFOLIOS
ADVERTORIAL
RARE MARKET ENVIRONMENT After a long period of relatively stable markets, the last few months serve as a stark reminder of how volatile markets can be. During a bear market, the more markets fall, the more fearful we become. We see big portfolio losses as a threat to a comfortable retirement, so we cut our losses and run. Our emotions are too strong to allow us to rationalise the situation. But while the circumstances clouding the market are dark, the falls should create opportunities for investors who can take a long-term view. In simple terms, many companies will likely be significantly cheaper to buy now than they were six months ago. We believe this value-oriented strategy of adding selectively to assets which are assessed to be undervalued will give us an advantage on the market’s recovery.
VALUE IN A DOWNTURN As value investors, we cannot control how participants in financial markets choose to price the assets we own on a day-to-day or quarter-to-quarter basis. What we can do is attempt to determine the value of the assets we invest in on your behalf and decide if today’s price is attractive, relative to that value. Our assessment of that value may be overly optimistic, so we look to pay significantly less than this amount to give ourselves a margin of safety. In today’s markets, what we can offer is a sober analysis of value, and the courage to act on our views.
VALUING THE INVESTMENT OPPORTUNITY The relative outperformance of ‘growth’ as an investment style versus that of ‘value’ has been well documented in recent years. At the end of June, the 10-year total return of the ‘value’ style lagged the ‘growth’ style by its largest margin in 35 years, surpassing that of the underperformance witnessed during the dot-com bubble at the end of the 20th century. On a price-to-book basis, value stocks now stand at some of their deepest discount to growth stocks for the data we have available. While this may seem bleak on the face of it, there are now real value opportunities for investors across a range of markets and sectors. Rather than worry about market events outside of our control, the sole focus of a
value investor should be focused on assembling a collection of assets that we believe to be significantly undervalued.
CONVICTION WILL PAY IN FUTURE Investor confidence has been significantly reduced over this period and we have been working hard to position portfolios in a way that our investors can benefit significantly when we enter the next bull market. To do that requires remaining rational when those around you are at their most irrational. Our belief is that bottom-up, value managers are well suited to take advantage of the current market environment.
GLOSSARY Price to Book – Ratio of the markets share price of a company compared to the audited value of the company accounts. Bear Market – Market decline of 20% or more over at least a two month period. Bull Market – Market rise of 20% or more over at least a two month period.
The views expressed are those of Steve Hunter at the time of writing and are subject to change without notice. They are not necessarily the views of Seneca Investment Managers Limited and do not constitute investment advice. Whilst Seneca Investment Managers has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment. Seneca Investment Managers Limited (0151 906 2450) is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at Tenth Floor, Horton House, Exchange Flags, Liverpool, L2 3YL. FP20 175
STAND OUT FROM THE CROWD The Seneca Global Income & Growth Trust plc aims: • A multi-asset approach seeking returns from a wide range of investments • Targetting a long term annualised investment return of 6% plus inflation* • Grow dividends in line with inflation
Find out more about Seneca Investment Managers at senecaim.com or call us on 0151 906 2450 The value of investments and any income may fluctuate and investors may not get back the full amount invested.
* Seneca Investment Managers Ltd defines long term in relation to a typical investment cycle as one which averages 7-10 years, and in which returns from various asset classes are generally in line with their very long term averages. Inflation is measured by Consumer Price Index (CPI). There is no guarantee that a positive return will be achieved over this or any other period. There is no guarantee that the above aims will be achieved. Seneca Investment Managers Ltd does not offer advice to retail investors. If you are unsure of the suitability of this investment, take independent advice. Before investing you should refer to the Key Information Document (KID) for details of the principle risks and information on the trust’s fees and expenses. Net Asset Value (NAV) performance may not be linked to share price performance, and shareholders could realise returns that are lower or higher in performance. The annual investment management charge and other charges are deducted from income and capital. The KID, Investor Disclosure Document and latest Annual Report are available in English at www.senecaim.com. Seneca Investment Managers Limited is the Investment Manager of the Trust (0151 906 2450) and is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at Tenth Floor, Horton House, Exchange Flags, Liverpool, L2 3YL All calls are recorded. FP20 139.
PROTECT YOUR PORTFOLIO
FROM THE NEXT
DOWNTURN
I
n recent weeks US indices have traded higher than at the start of the year, almost as if a global pandemic never happened. A few other markets have recovered nearly all of this year’s lost territory, such as Germany’s DAX index. Markets are forward looking and are now eyeing the prospects for recovery and the capacity of a vaccine or new treatment to help lift us out of a Covid-19-induced malaise. However, it would be naïve to think there is no chance of another correction either linked to coronavirus and its aftershocks or some other issue like rising unemployment, ballooning corporate debt, the US presidential elections or escalating tensions between the West and China. We don’t feel it is time to sit back and relax about markets. As such, more nervous investors might appreciate some insight into how to protect their portfolios from another downturn. A summer or autumn correction looks plausible so rejigging your investments now could help to preserve some of your wealth and also give you the means by which to snap up any good stocks or funds if their price suddenly becomes a lot cheaper, just like we saw earlier this year. HOW TO PREPARE FOR A DOWNTURN
In this article we discuss some ways of protecting your portfolio against further volatility. We talk about traditional things in which to invest for uncertain times as well as what you should be avoiding at all costs. We also consult some experts on how they 20
| SHARES | 30 July 2020
By Tom Sieber Deputy Editor
DAX 30
000'S
NASDAQ
FTSE 100
14 11 8 5 JAN
FEB
MAR
APR
MAY
JUN
JUL
go about managing clients’ money in a volatile market and how you should think about asset allocation. A crucial point to remember is that you shouldn’t overreact to events. Anyone who sold equities in a panic when markets sold off in earnest in March would have crystallised a loss ahead of an extremely rapid recovery for much of the market (though not all). For most of the stocks which didn’t enjoy a recovery there are some key factors at play. Their area of business is likely to have been irreparably damaged or disrupted by the pandemic and/ or they have a weak balance sheet and are therefore unable to weather a period of depressed demand. If this is true for any names in your own portfolio you need to think carefully about whether they should still have a place within it. The shares may now be cheap but there’s a good chance they will remain so or get even cheaper (potentially into oblivion) unless they
can demonstrate that balance sheet problems can be fixed or, if necessary, adapt to the new post-corona realities. A ROLE FOR CASH One simple thing every investor could consider, beyond finding specific safe havens or long-term winners, is to build a pot of cash which can be used to buy into future dips in the market. Selling off stocks which aren’t fit for the future could be a good start in terms of amassing some funds. If the recent sell-off was any guide then indiscriminate selling created lots of opportunities to buy quality investments at knockdown prices. Despite being seen as a beneficiary of coronavirus due to its focus on health and hygiene products, even Reckitt Benckiser (RB.) sold off heavily, hitting a low of £51.30 in mid-March. At the time of writing it has recovered very well and trades at nearly £80.
PORTFOLIO PROTECTION – WHAT TO BUY BUY a capital preservation fund Some of these products have a very good track record of protecting investors against loss. A great example is Personal Assets Trust (PNL) which delivered a 5.3% increase in net asset value in the year to April 2020 when the wider UK market fell 20%. BUY a gold ETF Gold has solid safe-haven credentials, particularly when measured over months or years. You can get low cost exposure from iShares Physical Gold ETF (SGLN) which has an ongoing charge of 0.19%. BUY a quality-focused fund
8000
While quality stocks don’t tend to be cheap there is a reason they perform well over the long term. Typically, they invest in companies delivering a product or service for which there is significant and growing demand. These companies should also enjoy strong barriers to entry and generate lots of cash flow to reinvest in the business, build a cash buffer for tough times and return to shareholders through dividends. Investors looking for diversified exposure to quality firms with growth potential could consider mid-cap specialist Smithson (SSON), run by asset manager Fundsmith.
RECKITT BENCKISER
7000 6000 5000
2019
2020
Equally you shouldn’t be buying into the momentum enjoyed by every perceived coronavirus winner. Vanguard’s head of product specialism Mark Fitzgerald says: ‘Buyer beware, be careful of being attracted by short-term performance. You want to have a look at the situation over three, five, seven, 10 or even 20 years to get a real sense of where to place your risk.’
BUY a strategic bond fund When it comes to fixed income, flexibility is a good idea with some parts of the bond market offering very low returns. We like Allianz Strategic Bond Fund (B06T936) which leans on the significant expertise and resources in this area enjoyed by asset manager Allianz.
30 July 2020 | SHARES |
21
UPDATING ASSET ALLOCATION FOR THE MODERN WORLD
70 60 50 40 30 20 10 0
From 60:40
Equity
Bond
To 40:30:20:10
Equity
Source: Berenberg
ASSET ALLOCATION Some observers think investors should change the way they think about asset allocation and that the traditional approach of having 60% of the portfolio in stocks and 40% in bonds might no longer be relevant. Berenberg’s equity strategist Jonathan Stubbs says a 40:30:20:10 approach might work better. This involves 40% in select equities, 30% in bonds, 20% in a ‘liquidity’ hedge like gold or bitcoin, and 10% in alternative assets such as industrial metals, renewables, lumber or certain categories of real estate. In terms of the equity component, Stubbs adds: ‘We see three key ways to future-proof portfolios: 1) fiscal activism; exposure to government spending plans; 2) ESG (environmental, social, governance) strategies; and 3) digital revolution covering existing applications and emerging technologies (video games, AI, cloud, VR, cyber security, etc).’ On the other side of the argument Vanguard’s Fitzgerald thinks a 60/40 approach might prove more durable pointing out that by investing in a globally diversified portfolio of a large number of stocks and bonds you should gain exposure to businesses which are involved in the ownership and production of alternative assets like property and gold anyway. You could consider a middle road between the 22
| SHARES | 30 July 2020
Bonds
Liquidity Hedge (Gold/ Bitcoin)
Alternative Assets (Lumber, Real Estate, Ind. Metals, Renewables)
two with perhaps a 60% allocation to equities, 30% to bonds and 10% in alternative assets. If you’re feeling more nervous perhaps have 5% in alternatives and 5% in cash. INFLATION-PROTECTED PRODUCTS Lucy Coutts, investment director at wealth manager JM Finn, believes the best way to protect a portfolio is to hold companies with lots of free cash flow and high returns on capital. ‘That was true before Covid-19 and it remains true today,’ she remarks. ‘In terms of asset allocation, I tend to have between 10% and 14% of my portfolio in indexlinked gilts and US TIPS (treasury inflationprotected securities). I don’t buy TIPS directly because of the tax treatment but instead use a hedged ETF which removes currency risk.’ Coutts believes the best performing asset classes in a downturn tend to be index-linked gilts, TIPS and farmland. ‘If I’m feeling nervous, I will raise the cash level, typically I would have around 2% in cash.’ As a wealth manager, Coutts she says tends to have clients’ portfolios fully invested because she expects them to have cash reserves elsewhere. ‘If I’m feeling particularly nervous though I might move to 7% in cash – which along with around 14% in TIPS and index-linked gilts means I have 20% that isn’t equity related.’
STEER CLEAR OF INDEBTED COMPANIES AND THOSE WHICH ‘BURN’ CASH When markets turn south, investors have a natural tendency to look for cheap stocks which haven’t been part of the bull run to use as a hiding place rather than sell out of the market completely. However, stocks which look cheap on traditional measures such as price-to-earnings or dividend yield may be harbouring large amounts of debt which makes them much riskier than they seem at first glance. We have previously discussed the need to avoid companies with both high levels of operational gearing – that is high fixed costs compared to their revenue – and high levels of financial gearing or debt. When a company with high fixed costs doesn’t get enough revenue to offset its costs, high debt levels mean the problem is compounded by high costs to service the debt. Eventually the firm will fail and
the debt holders will end up owning the equity while existing shareholders get nothing at all. We suggest you screen the market to identify companies with high levels of debt compared to their equity capital and high levels of interest payments compared to the operating profits before interest costs. Such companies represent a risk of permanent loss of capital if they end up being owned by the bondholders. We would ignore investment trusts and financial firms including banks as customer deposits are effectively liabilities. We would also make allowances for firms with lots of leases as IFRS 16 now classifies them as debt rather than an operating cost. As an example, pharmaceutical firm Indivior (INDV) – whose shares are up 124% year to date – would not be on our ‘safe to buy’ list.
EXAMPLES OF NET DEBT RELATIVE TO MARKET CAP Market Cap
Net Debt
Proportion of net debt to equity
Finablr
£77m
£285m
370%
Rockrose Energy
£241m
£306m
127%
Indivior
£638m
£627m
98%
Gulf Keystone Petroleum
£216m
£89m
41%
Seeing Machines
£99m
£40m
40%
Xaar
£62m
£21m
33%
Allergy Therapeutics
£91m
£29m
32%
XLMedia
£53m
£16m
30%
Company
Source: Sharepad, Shares
30 July 2020 | SHARES |
23
INVESTING IN THE WEALTH PRESERVERS Capital preservation trusts have delivered positive total returns over the ups and downs of the past 10 years, as the table shows, building on their formidable long-run performance records. These specialist wealth preservers are not to be confused with so-called ‘absolute return’ funds. In theory the latter should protect your capital better than traditional funds or trusts given their ability to ‘short’ the market, yet many have failed to live up to their mandate of reducing downside risk during falling markets. Capital preservation plays include RIT Capital Partners (RCP), a defensive growth portfolio boasting an exceptional record since listing on the stock market in 1988, albeit down 12.8% year to date. Ruffer Investment Company (RICA) has fared the best among capital preservation trusts in 2020 so far. It has delivered against its objective of preserving shareholder capital regardless of the market conditions, while also eking out some much-needed growth. Despite significant market stress and economic uncertainty, its all-weather portfolio generated a net asset value total return of 10.1% for the 12 months to 30 June 2020. Ruffer not only protected capital in the sell-off in February and March, but also managed to capture the rebound since April, posting one of its strongest three month periods ever in the second quarter of 2020. Though its shares were hit hard in early 2020, positive portfolio contributions came from credit protection, gold, index-linked bonds and option protection. Another master at protecting and growing investors’ money is Capital Gearing Trust (CGT), which has a good track record of holding up during market sell-offs, including during the financial crisis. The trust’s stated objectives are to preserve shareholders’ real wealth (i.e. accounting for inflation) and achieve absolute total return over the medium to longer term. Though there could be spells where the trust sees scant growth, it also means that when there’s a market correction, shareholders’ wealth should be in safe hands. Capital Gearing’s secret sauce is its defensive mix of assets split between equities (via other investment trusts and exchange-traded funds), index-linked government bonds, and cash and short-duration bond-like securities. 24
| SHARES | 30 July 2020
CAPITAL PRESERVATION VEHICLES TOTAL RETURN DURING MARKET DOWNTURNS 1 Jan 2020 - 23 July 2020 Ruffer
8.0%
Personal Assets Trust
6.1%
Capital Gearing
3.6%
RIT Capital
-12.8%
MSCI World
-0.6%
FTSE All-Share
-16.7%
1 May 2015 - 30 April 2016 Personal Assets Trust
8.1%
RIT Capital
6.2%
Capital Gearing
3.4%
Ruffer
-5.4%
MSCI World
-5.3%
FTSE All-Share
-6.0%
1 June 2007 - 28 February 2009 Ruffer
35.3%
Capital Gearing
12.9%
Personal Assets Trust
-14.1%
RIT Capital
-22.0%
FTSE All-Share
-40.6%
MSCI World
-50.6%
CAPITAL PRESERVATION VEHICLES TOTAL RETURN OVER PAST 10 YEARS RIT Capital
89.9%
Personal Assets Trust
78.9%
Capital Gearing
70.6%
Ruffer
41.4%
MSCI World FTSE All-Share
169.7% 79.7%
Source: FE Fundinfo
Elsewhere, Personal Assets Trust (PNL) focuses on high quality companies that generate sustainable returns over the long run. Its stated investment policy is ‘to protect and increase (in that order) the value of shareholders’ funds per share over the long term’. Aimed squarely at the cautious investor, the wealth preserver maintains high levels of liquidity, with substantial exposure to cash, gold bullion, UK gilts and US Treasury inflation-protected securities. During a tumultuous financial year to April 2020, the fund’s net asset value per share rose 5.3%, comfortably outperforming a 19.8% fall for the FTSE All-Share Index. We suggest you buy Personal Assets Trust.
ALTERNATIVES TO EQUITIES A STRATEGIC APPROACH TO BONDS 220
ALLIANZ STRATEGIC BOND FUND
200 180 160
2019
2020
Historically bonds have provided investors with some protection during periods of falling share prices. This is due to central bank actions to loosen monetary policy and lower short-term interest rates during recessions. Bond prices move in the opposite direction to yields, so lower yields provide investors with capital gains. However with UK Government bond yields negative all the way out to five years and the 10-year gilt yielding only 0.14%, the prospect for further capital gains looks slim according to fund managers at Artemis. A better option is to look at strategic bond funds because these generally have a more flexible mandate to search out opportunities across global sovereign bonds as well as invest in corporate bonds. Effectively the risk of the portfolio can be dialled up or down according to the perceived opportunities. One example is the Allianz Strategic Bond Fund (B06T936) managed by Mike Riddell and Kacper Brzezniak and backed up by the significant resources of Allianz Global investors, one of the largest bond managers in the world. The managers have a clear goal to position the £1.7 billion portfolio to ensure it provides good diversification benefits. Over the last three years the fund has delivered an average annual return of 9.2% compared with 3% for the benchmark. We suggest you buy Allianz Strategic Bond Fund. WHY YOU MAY WANT TO BUY A GOLD ETF RATHER THAN A GOLD MINER Gold has proven to be a reliable safe haven in tough times. This is often not the case in the initial stages of a sell-off when people are keen to convert to cash and gold is quite an easy thing
to sell but measured over a longer timeframe it can deliver. In the financial crisis gold actually fell initially but by 2011 had hit a new record level of $1,920 per ounce. As we write the precious metal is above $1,890 and threatening to set a new high. For the more cautious investor it makes sense to access this market through an exchangetraded fund than a gold miner in order to avoid operational, financial and geopolitical risk. While the risk could go both ways – you could benefit if a miner grows production, for example – it is probably more important to limit your exposure to anything going wrong given you are buying gold specifically for the downside protection it offers. 2000
Gold Bullion $/oz
1400 800 200
01
03
05
07
09
11
13
15
17
19
There are several gold ETFs listed in London, many of which offer the added security of being backed by gold bullion stored in a vault. We suggest you buy iShares Physical Gold (SGLN). DISCLAIMER: Editor Daniel Coatsworth owns shares in Smithson referenced in this article 30 July 2020 | SHARES |
25
THIS IS AN ADVERTISING PROMOTION
RESILIENT INCOME IN TOUGH TIMES BLACKROCK INCOME AND GROWTH INVESTMENT TRUST PLC
David Goldman and Adam Avigdori, Co-Managers of the BlackRock Income and Growth Investment Trust plc, believe these are tough times for dividend seekers in the UK, but active management can help navigate this difficult environment. David Goldman and Adam Avigdori Co-Managers, BlackRock Income and Growth Investment Trust plc Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. These have been uncertain times for those who need an income from their investments. Many companies have postponed or cancelled their dividend payouts in the wake of the COVID-19 outbreak. The economic outlook remains uncertain even as the immediate crisis has passed, with other issues such as US/China tensions and Brexit coming to the fore once again. In general, the companies in our portfolio have been more resilient in their payouts than the market as a whole. Many have postponed dividends until their earnings situation is clearer, but we remain confident that many will return to the dividend list. Our focus on stock selection has significantly helped the resilience of the portfolio. FREE CASH FLOW For us, it is vitally important that a business is able to generate cash consistently over time. This dictates its ability to pay an attractive and growing dividend over the longer term. Inflation-beating dividend growth is best achieved from companies that are able to grow free cash flow. If companies have high levels of free cash flow, they can reinvest back into the business, ensuring long-term growth. Too many companies in the UK market pay dividends at the expense of growth, or – worse still – from debt. We want to see companies investing for the future. This should not be incompatible with paying a dividend. SELECTIVITY Dividends are a promise from companies, not an obligation. There needs to be a willingness to pay a growing dividend
on the part of the management team. In the current environment, they also need to be allowed to pay. We are seeing this today in the financial sector, where banks and other companies have been prevented from making dividend payments, either because of government intervention or because they have taken government support. Selectivity is vital. We want companies with strong barriers to entry, with something in the products and services they provide that differentiates them. This type of business has been able to maintain and grow its dividend, some of them even through the crisis. As it stands, we have a higher weighting in consumer goods and consumer services. We like companies that can compound cash flow over time, and this is an area where we find many stocks that meet our criteria. INVESTMENT OPPORTUNITIES This crisis and the dislocation in the market from the selloff we saw in the first quarter provided us with significant opportunities to buy high quality franchises at lower valuations. Undoubtedly, some companies were hit hard by the crisis, but often raising additional funds has provided the balance sheet support they have needed to get them through this challenging period. The key, though, is to invest in those businesses with cyclical as opposed to structural problems; the former is likely to survive and could produce accretive returns for the portfolio, the latter will not. More recently, the Board took the decision to allow up to 5% of the trust to be invested in companies listed outside the UK. There is a multitude of reasons why we proposed to invest in international equities. Firstly, it allows us to access attractive themes unavailable in the UK, to invest in more attractive international competitors than their UK peers, as well to benefit from other yield enhancers for the income of the portfolio. ENVIRONMENTAL, SOCIAL AND CORPORATE GOVERNANCE (ESG) Sustainability is a crucial consideration for us. We believe that ESG factors and practices are intrinsic to a company’s long-term profitability, cash generation and risk profile. Our fundamental research incorporates our assessment of ESG factors and trends, such as decarbonisation, as well as the risks and opportunities that result from a company’s ESG practices. Our search for sustainable free cash flow leads us to companies that account for ESG trends when allocating capital, promote sustainable relationships with all their stakeholders and operate with clear processes to mitigate risks.
THIS IS AN ADVERTISING PROMOTION
One big certainty for us is that post this crisis, the role and importance of ESG will be enhanced. Already in meetings, and as a team, we have been in contact with approximately 760 companies year-to-date, management and boards are far more aware of their role in society and their ability to affect change. Even for those significantly financially impaired like Whitbread are still embracing good behaviours by opening up their empty hotels to house essential workers and NHS staff. Unilever has committed a huge financial package of nearly US $500m in goods and cash to help deliver essential items to places where it is needed most. They have also brought forward all their payments to small or medium-sized enterprises (SMEs) to help them with working capital. We expect that this crisis will deepen the corporate world’s role in their employees’ lives, in their communities and in society. INVESTMENT TRUST STRUCTURE The investment trust structure adds flexibility in a crisis. For example, we have used gearing – borrowing to invest – effectively during this crisis. We took gearing lower in early 2020 because we were worried about market valuations, but have since pushed it up to 4-5%, which may help with both dividend and capital growth. The Board is committed to using the Trust’s reserves to Risk Warnings Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. Trust Specific Risks Liquidity risk: The Fund’s investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Fund may not be able to realise the investment at the latest market price or at a price considered fair. Gearing risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall. Important Information Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. The Company is managed by BlackRock Fund Managers Limited (BFM) as the AIFM. BFM has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited. The Company’s shares are traded on the London Stock Exchange and dealing may only be through a member of the Exchange. The Company will not invest more than 15% of
support dividends to shareholders. The Trust has one of the strongest reserves in equity income sector. We have built this over time to ensure that we can sustain payouts to our shareholders during difficult times, just like the one we are experiencing today. Risk: Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy and should not be construed as investment advice or investment recommendation of those companies. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. Unless otherwise stated all data is sourced from BlackRock as at July 2020. For more information on this Trust and how to access the opportunities presented by the income and growth sector, please visit: www.blackrock.com/uk/brig
TO INVEST IN THIS TRUST CLICK HERE its gross assets in other listed investment trusts. SEDOL™ is a trademark of the London Stock Exchange plc and is used under licence. Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance. The BlackRock Income and Growth Investment Trust plc currently conducts its affairs so that its securities can be recommended by IFAs to ordinary retail investors in accordance with the Financial Conduct Authority’s rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future. The securities are excluded from the Financial Conduct Authority’s restrictions which apply to non-mainstream investment products because they are shares in an investment trust. Any research in this material has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our product is suitable, please read the fund specific risks in the Key Investor Document (KID) which gives more information about the risk profile of the investment. The KID and other documentation are available on the relevant product pages at www. blackrock.co.uk/its. We recommend you seek independent professional advice prior to investing. This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer. © 2020 BlackRock, Inc. All Rights reserved. ID: MKTGH0720E-1238041-4/4
RUSS MOULD
AJ Bell Investment Director
The silver price is cheap relative to gold But silver miners aren't quite the bargain relative to the metal
T
he Silver Surfer was the creation of Marvel Comics legend Jack Kirby and the character acted as the herald of Galactus, the devourer of planets. This intergalactic super-being was usually fended off by the Fantastic Four or The Avengers. From the point of view of investors, inflation devours wealth as scarily as Galactus consumed solar systems. Rather than turn to superheroes for protection against this potential threat, markets are turning toward something else known for being nearly indestructible, precious metals – principally gold and silver. At the time of writing gold is setting new record highs above $1,900 an ounce but at $24 an ounce silver is still trading way below its prior peaks of 2011 and 1979, even if silver’s 34% year-to-date gain in 2020 outpaces that of gold by several percentage points.
2.00% 1.50% 1.00% 0.50% 2020
2019
2018
0%
2017
| SHARES | 30 July 2020
2.50%
2016
28
INFLATION EXPECTATIONS ARE STARTING TO TICK HIGHER AGAIN
2015
PRECIOUS HAVENS Precious metals tend to arouse strong feelings among investors. Some investors love them as a potential hedge against inflation, some against deflation and some against unforeseeable disasters and market dislocations, while others detest them, viewing gold in particular as a barbarous relic or inert useless lump. But bulls are putting bears to flight right now and there may be three possible reasons why gold and silver are both doing well. First, the market may be pricing in the almost unthinkable return of inflation, thanks to rampant central bank money creation through quantitative easing (QE) schemes, governments’ accumulation of ever-higher deficits, supply-side dislocation thanks to Covid-19 and possibly firms putting up their prices to help the meet the additional costs of
staying in business in a post-pandemic world. A five-year forward expectation for inflation of 1.67% in the US is hardly earth-shattering stuff, compared to the double-digit rates of the 1970s and early 1980s, but it does seem as if investors are becoming more wary of inflation.
US 5-year, 5-year forward inflation Expectation rate (%)
Source: FRED – St. Louis Federal Reserve database
Second, so-called ‘Austrian school’ economists do not define inflation by price changes, but change in money supply, relative to the volume of services and goods produced. The 24% year-onyear surge in US M2 money stock will have anyone who follows their theories on a state of high alert. Third, related to the money supply, central bank money creation and higher government deficits could be driving fears of monetary debasement, prompting a rush to perceived havens and stores of value such as gold and to a lesser degree silver. The US Federal Reserve has ramped up QE in 2020 in response to the pandemic, taking its total assets from $4 trillion to $7 trillion, through a
RUSS MOULD
AJ Bell Investment Director BIG INCREASE IN MONEY SUPPLY 30.0%
20,000
25.0%
16,000
20.0%
12,000
15.0%
8,000
to gold. The gold/silver price ratio has average 56 since 1970 but an ounce of gold currently trades at 80 times the price of an ounce of silver.
SILVER LOOKS CHEAP RELATIVE TO GOLD
100
US M2 money stock ($ billion)
2018
0.0%
2012
0
2006
120
2000
5.0% 1994
4,000 1988
140
1982
10.0%
Year-on-year change in US M2 money stock (%)
Source: FRED – St. Louis Federal Reserve database
80 60 40 20 2020
2010
2000
1990
1980 Gold / Silver ration
Average
Source: Refinitiv
While the HUI Golds Bugs index trades below its average ratio to the metal price, silver miners do not look especially cheap compared to the physical commodity, based on the relationship between the metal and the Solactive Silver Miners index. That benchmark has a fairly limited history and silver miners traded a lot more expensively relative to the metal in 2008 and 2011, so investors who prefer miners to metal still have much to ponder.
SILVER MINERS DO NOT LOOK UNDULY CHEAP RELATIVE TO THE METAL, ACCORDING TO HISTORIC NORMS 12.00 x 10.00 x 8.00 x 6.00 x 4.00 x 2.00 x 2020
2018
2016
Solactive silver miners / silver price ratio (x)
2014
2012
2010
2008
0.00 x
2006
HOT STUFF There is a fourth angle which pertains to silver only. Unlike gold, silver has industrial uses and as such is a more ‘cyclical’ play, because it is the best conductor of all metals and has antimicrobial attributes which make it a perfect biocide. Demand from the traditional film photography industry is probably all but gone but these chemical properties means silver is ideal for the medical equipment, electronics, water purification and solar power industries. As the world focuses more on renewable energy, solar panels could be a driver of silver demand. Whether this proves more potent than demand for a haven remains to be seen, but historical data does suggest silver is trading cheaply relative
0
1970
series of programmes designed to buy a wide range of financial instruments. Gold and silver surged between 2008 and 2011 as the Fed ran its first three rounds of QE but they then lost ground as it looked like the monetary authorities had regained control of the economic situation. The pandemic may have changed all that, and the cost of keeping the show on the road this time around has already been much higher. One question that buyers of gold may already be asking themselves is what action will be taken by the Fed and other central banks next time a recession hits, as the system will feature even more debt and potentially be even more susceptible to an unexpected shock.
Average
Source: Refinitiv
There is no guarantee that silver’s run will continue – if Covid-19 is beaten and the economy bounces back more strongly than hoped then the appeal of haven assets might not be anywhere near as strong. 30 July 2020 | SHARES |
29
Why growth and income are both big in Japan We look at funds and investment trusts that can help you invest in the best firms the Japanese stock market has to offer
A
lthough the Japanese economy and its corporates haven’t escaped the effects of coronavirus, the number of COVID-19 cases has been relatively contained in Japan and the government has not had to resort to the extreme lockdown measures seen elsewhere. This likely explains why the Japanese stock market has been relatively resilient compared to others globally. Yes, the pandemic-driven postponement of the Olympics is not ideal and will impact sectors such as hotels and advertising, but the effects are likely to be far milder than the full cancellation of such a massive sporting event would have been. As Hisashi Arakawa, a manager of the Aberdeen Japan Investment Trust (AJIT), informed Shares: ‘Whilst fiscal and monetary stimuli will help to support the economy, the more important factor will be
how quickly infections have been contained and economic activity can be restored. ‘The outlook therefore remains uncertain, at least in the near term, but Japanese corporates generally retain strong balance sheets with businesses generally being cash rich. We believe most of them will be able to survive the crisis.’ REASONS TO LIKE JAPAN Japan is overlooked by many investors, some with hangups about its ageing, falling
JAPAN’S STOCK MARKET HAS OUTPERFORMED THE UK OVER THE PAST DECADE 000'S 40
NIKKEI 225 FTSE 100
35 30 25 20 15 10
30
2011
2012
| SHARES | 30 July 2020
2013
2014
2015
2016
2017
2018
2019
2020
population, others put off by the preponderance of banks, car makers and office equipment companies that populate the stock market. But this is a shame since the Japanese market is home to many thriving world-class companies in fields such as robotics, automation, medical innovation, semiconductors and consumer goods. ATTRACTIVE VALUATIONS AND YIELDS Japanese shares are cheap by historic metrics and many have attractive dividend yields which offer greater surety than in other developed economies, where dividends have been cancelled or cut by cash-strapped companies. Rather than select individual Japanese stocks, UK investors should invest in the region through funds, particularly actively managed portfolios whose managers have
boots on the ground, access to management and an understanding of Japanese business culture. They include country specialist investment trusts, nearly all of whom trade on a discount to net asset value (NAV) in both the Association of Investment Companies’ (AIC) Japan and Japanese Smaller Companies sectors. INVESTMENT TRUST OPTIONS The big beasts by total assets are Baillie Gifford Japan (BGFD), the best 10-year performer on a share price total return basis, and JPMorgan Japanese Investment Trust (JFJ), a recent Shares Great Ideas selection trading on an attractive 9.6% discount. JPMorgan Japanese is first and foremost a capital growthfocused fund and boasts a five-star Morningstar rating. Managers Nicholas Weindling and Miyako Urabe seek the most attractively valued Japanese
investment themes and companies in what remains an under-researched stock market. Weindling says the pandemic has accelerated many of the themes to which JPMorgan Japanese already had exposure. The managers focus on quality companies with strong cash flows and ones that boast strong future growth prospects and bring investors exposure to Japan’s new products, technologies and markets. UNTAPPED POTENTIAL Another option among Japanesefocused investment trusts is the Nicholas Price-managed Fidelity Japan Trust (FJV), which uses local know-how to spot untapped potential in the country. With around 90% of Japan’s small and mid-sized companies receiving little or no analyst coverage, Price and his team of analysts carry out detailed research that allows them to
INVESTMENT TRUSTS Discount/ Premium (%)
5 year share price total return (%)
Fidelity Japan
-9.8
109.5
JPMorgan Japanese
-9.6
88.1
Baillie Gifford Japan
-5.6
70.7
Aberdeen Japan
-13.4
22.4
Schroder Japan Growth
-17.3
14.6
CC Japan Income & Growth
-13.2
n/a
Discount/ Premium (%)
5 year share price total return (%)
Baillie Gifford Shin Nippon
-2.4
128.1
JPMorgan Japan Smaller Companies
-12.5
101.5
Atlantis Japan Growth
-18
64.1
Nippon Active Value
-5.2
n/a
AVI Japan Opportunity
1.2
n/a
Sector: AIC Japan
Sector: AIC Japanese Smaller Companies
Source: The AIC/Morningstar, 24 July 2020
pick stocks that are often under the radar. The trust offers exposure to market share gainers that are well positioned to emerge from the current pandemic-driven downturn in better shape than their competitors. Names in the portfolio include factory automation business Keyence and musical instruments-toelectronic devices maker Yamaha. Two relatively new trust launches are AVI Japan Opportunity Trust (AJOT), managed by Asset Value Investors’ Joe Bauernfreund, who looks for asset-rich companies with the ability to increase shareholder returns through improved corporate governance, and Nippon Active Value (NAVF), an activist investor in smaller Japanese companies. SOURCES OF INCOME CC Japan Income & Growth (CCJI) trades on a 13.2% NAV discount and offers a 3.8% dividend yield underpinned by a tighter focus on shareholder returns in Japan. The wide discount is a feature of a disappointing recent NAV performance. The only Japanese equity income-focused trust on the London market, CC Japan Income & Growth seeks to provide dividend income combined with capital growth from companies listed in Japan. Manager Richard Aston focuses on shareholder-friendly, high-quality companies with resilient cash flows and strong management teams. He sees significant scope for future income growth as ongoing corporate governance reforms in Japan have improved 30 July 2020 | SHARES |
31
conditions for income investors in what has traditionally been a challenging market. CC Japan Income & Growth this year intends to at least match the previous year’s 4.5p dividend. Holdings include mobile phone operator Softbank, optical technology company Hoya and Sumitomo Mitsui Financial. Also trading on a wide discount to NAV (13.4%) is Aberdeen Japan Investment Trust (AJIT), which has recovered nearly all the share price losses caused by the global market selloff earlier this year. It is focused on high-quality businesses with tried-and-tested management teams, wide competitive moats and solid balance sheets. Portfolio holdings include Elecom, a maker of keyboards and cables. ‘The fabless maker has always had a good procurement system in place and during the pandemic it has been able to switch suppliers and modes of transportation flexibly to meet the surge in demand for its products as more people worked from home,’ explains Aberdeen’s Hisashi Arakawa. The trust is also invested in Nippon Paint, the number one paints maker in many countries across Asia including China. Arakawa says it is well known for treating employees well. ‘This time around it was quick in securing employee safety as well. This helped it resume operations quickly as demand in China begun to recover.’ Aberdeen Japan holds work-from-home beneficiaries that have delivered positive earnings growth through the pandemic such as network 32
| SHARES | 30 July 2020
OPEN-ENDED FUNDS SECTOR: IA JAPAN - TOP 5 BEST PERFORMERS
5 YEAR TOTAL RETURN (%)
Legg Mason IF Japan Equity X in GB
154.6
Comgest Growth Japan U Acc GBP in GB
124.2
Lindsell Train Japanese Equity B Sterling Quoted GBP TR in GB
113.8
Nomura Japan High Conviction I JPY in GB
106.4
JPM Japan C Acc in GB
101.7
SECTOR: IA JAPANESE SMALLER COMPANIES - TOP 5 BEST PERFORMERS
5 YEAR TOTAL RETURN (%)
Baillie Gifford Japanese Smaller Companies B Acc in GB
122.6
Invesco Japanese Smaller Companies (UK) Z Acc in GB
101.2
BNY Mellon Japan Small Cap Equity Focus W GBP in GB
86.3
Janus Henderson Horizon Japanese Smaller Companies H2 Acc USD in GB
72.5
BlackRock GF Japan Small & MidCap Opportunities D2 JPY in GB
67.1
Source: FE Fundinfo, 24 July 2020
integrator NEC Networks & System Integration, IT solution provider Otsuka, online business contact management service provider Sansan and furniture maker Nitori. The trust also holds Chugai Pharmaceutical, which delivered 57% operating profit growth in the first quarter of 2020. One of the company’s drugs is being trialled as a potential treatment for critical cases of COVID-19. INVESTMENT FUNDS In the open-ended funds universe, IA Japan sector star performers on a five-year view include Lindsell Train Japanese Equity (B3MSSB9), a fund awarded a five-crown rating by FE fundinfo for its superior performance in terms of stock picking, consistency and risk control. Also adorned with a quintet of FE Fundinfo crowns is Comgest Growth Japan (BYYLQ08), ranked first quartile on a one, three and five-year view, while the sector’s
other strong performers include Nomura Japan High Conviction and Legg Mason IF Japan Equity. Within the IA Japanese Smaller Companies sector, the stand-out five-year performer is Baillie Gifford Japanese Smaller Companies (0601492), according to Fe Fundinfo data. Managed by Praveen Kumar, this £860 million OEIC generates growth by investing in innovative business models, companies disrupting traditional Japanese business practices, or Japanese companies growing fast outside Japan. As at 30 June the fund’s active share, a measure of how much a fund differs from the benchmark, was 95%, demonstrating that Kumar dares to be different in terms of picking long-term winners for the fund. By James Crux Funds and Investment Trusts Editor
This is an advertising feature
An investment rose by any other name In an unprecedented period of low-to-no growth, equity income has been the sanctuary of many an investor portfolio. Even then, good returns come down, largely, to good stock picking. How many investors long for the halcyon days – finding an undervalued market with near double-digit dividend growth increases year-on-year, mid-thirty percent growth in payout ratios and buyback activity on the up? We can all dream of course… yet this market does actually exist and it is, of course, Japan, yet mention that before detailing the aforementioned fundamentals and some investors baulk. It is understandable to a certain extent. After all, for decades, many have been citing Japan as the land of investment opportunity only to be disappointed time and time again. However, more and more investors are beginning to look to Japanese equities in the search for income. So what has caused this apparent turnaround?
There have been notable improvements in shareholder returns in Japan since the early 2000s, as an upswing in the Japanese economy and business restructuring improved corporate free cash flows. Dialogue between corporate management and their shareholders has also markedly improved. Nowhere is this more evident than in the increasing distributions to shareholders in the form of dividends to share buybacks. With the Stewardship and Corporate Governance Codes in place, backed up by the policies of President Abe (Abenomics), simply retaining this cash is becoming less acceptable. As a result, the steady improvement in annual shareholder returns and the greater stability of these returns could justify a rerating of Japanese equities whose yields continue to grow faster than both their US and European counterparts. It is due to many years of management ‘inefficiency’ that the opportunity in Japan is now significant and corporate balance sheets, in aggregate, are healthy and supported by strong annual free cash flow. This is a financially secure underlying position providing the basis for many companies to offer improved returns. With annual corporate cash flow at record levels, at an aggregate level Japanese equities have delivered the fastest dividend growth within the major economic regions in the last six years.
We identify exciting investment opportunities as the consensus behaviour in Japan evolves to a more consistent trend more easily comparable to those historically associated with Western developed markets. We look for companies that complement expansive business strategies with the need of their shareholders to be rewarded with appropriate annual distributions; those that reflect the underlying growth but also recognise the value to investors of the sustainability of dividends and share buy backs. The opportunities are many and reflect the fact that Japan has a large number of internationally renowned industry leaders, as well as prominent participants in the growth of other parts of Asia and dominant domestic players across a wide range of industries. These opportunities are not confined to large cap companies, alone with attractive candidates identified in the mid and small cap areas where management incentives are often more closely aligned with those of minority shareholders. Financial sectors are also noteworthy of discussion. Over the past few years, the leading companies in the banking and insurance sectors have been at the forefront of the improvements in shareholder return and consequently offer a very different outlook. And finally, demographics have long been cited as unfavourable in Japan though the government has been encouraging companies to adopt counter measures to adapt to the changes under Prime Minister Abe’s watchful eye. Therein lie the investment opportunities. In the case of Japan, the ‘labour crunch’, as it is often called, has presented some compelling investment opportunities particularly in the outsourced labour market. Prime Minister Abe has also made increasing female participation in the Japanese workforce an essential element of his efforts to revive the Japanese economy.
Richard Aston Manager - CC Japan Growth & Income Trust
The information contained in this article does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investments, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.
EMERGING MARKETS OUTLOOK SPONSORED BY TEMPLETON EMERGING MARKETS INVESTMENT TRUST
The growth of China’s consumer economy The country could stoke domestic demand to become more self-reliant
I
n the last decade or more the Chinese economy has undergone a significant transition as it moves away from an infrastructure-driven and export-reliant economy to one fired by domestic consumption. This change can be tracked by looking at how the country’s current account surplus has moved to a deficit. Broadly speaking a current account surplus means an economy is exporting a greater value of goods and services than it is importing. Having peaked in 2008 when China truly lived up to its reputation as ‘The World’s Factory’ the surplus has declined significantly. There are several factors underpinning the growth of the consumer economy, one being a natural offshoot of the maturation of the Chinese
economy. A larger Chinese middle class is more likely to have disposable income to spend on products and services at home. In the short term at least, exports have been hit by the coronavirus crisis as demand has dried up and trade
CHINA CURRENT ACCOUNT BALANCE USD HML
1400 1000 600 200 -200 -600
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
Source: Refinitiv
This outlook is part of a series being sponsored by Templeton Emerging Markets Investment Trust. For more information on the trust, visit here
34
| SHARES | 30 July 2020
routes have been affected by lockdown restrictions. Chinese tourists who might have taken their renminbi overseas are also shopping domestically instead. There are signs China wants to move further in this direction as it looks to become more self-reliant. This may reflect pressure on the country and its businesses from other countries concerned about its growing global influence, and about its recent actions in Hong Kong and in the immediate aftermath of the Covid-19 outbreak. A report by the Chinese Academy of Social Sciences, a think tank closely affiliated to the state, suggests the next fiveyear policy plan – due for 2021 – should prioritise home-grown innovation and look to tap into a substantial domestic market.
EMERGING MARKETS OUTLOOK SPONSORED BY TEMPLETON EMERGING MARKETS INVESTMENT TRUST
Emerging markets: Views from the experts Three things the Franklin Templeton Emerging Markets Equity team are thinking about today
1.
Geopolitical risk returned to the forefront as border tensions between China and India heightened, with the latter imposing economic measures including banning 50 Chinese apps and cancelling government contracts with Chinese contractors. While geopolitical headlines relating to China have created noise and near-term uncertainty in recent years, they are unlikely to derail China from its path to recovery, in our view. The latest stimulus measures, including sizable fiscal spending, announced at the National Party Congress in late May, should provide positive catalysts to the domestic recovery in the nearer term. The government did not set an explicit growth target for China’s economy for 2020 due to the high level of uncertainty around the pandemic and global situation. However, it emphasised that employment as well as social measures (protecting basic livelihood) will be key priorities this year.
2.
The COVID-19 pandemic continues to add momentum to the discussion on deglobalisation. This term has many potential meanings. It could simply refer to the re-shoring of certain strategic businesses, a reduced reliance on foreign supply chains, or the creation and/or support of national champions. However, some portray it to mean something more material. For instance, the collapse of international trade agreements and the organizations and associations that oversee them.
So far, there is little evidence to suggest the latter is the case. Our view is that not all countries are keen to disrupt existing trade relationships.
͏
3.
As we continue to shift toward a knowledge-based global economy, we are seeing a rise in the importance of intangible assets. In fact, several emerging markets are now leading in terms of innovation in areas such as e-commerce, e-learning, digital payments and mobile banking.
TEMPLETON EMERGING MARKETS INVESTMENT TRUST (TEMIT)
Porfolio Managers
Chetan Sehgal Singapore
Andrew Ness Edinburgh
TEMIT is the UK’s largest and oldest emerging markets investment trust seeking long-term capital appreciation.
30 July 2020 | SHARES |
35
How do I use my pension in retirement? The essential points to consider with a decumulation strategy
P
eople spend most of their lifetime with their savings goals focused on building up their pension pots, but what about when it comes to drawing down that money in retirement? What changes do you need to make to your investment strategy and how do you manage the withdrawals? After 30, 40 or even 50 years of working, people aim to have built up a decent size pension pot, having contributed regularly and hopefully made some savvy
“Annuity rates are currently low so might not appeal to some people”
36
| SHARES | 30 July 2020
investment decisions along the way. But once you come to retire you need to work out how to use that pot most effectively. You’ll need to think about how you invest it, how much risk you want to take and how long you need it to last. One option is to use some or all the pot to buy an annuity, which gives you an income for life. Annuity rates are currently low so might not appeal to some people, and for the purposes of this article we’ll assume you don’t want to take that route. IF YOU’RE KEEPING YOUR MONEY INVESTED, YOU NEED TO THINK ABOUT A FEW THINGS: • How much cash? If you’re using this pot as your main (or only) source of income
you want to make sure you put enough cash to one side to pay yourself an income for a while. The last thing you want is markets falling and you having to sell down some investments in order to pay your electricity bill that month or pay for the food shop. You should have at least a year’s income set aside in a cash account for you to access but you might want to have more so you’re not at the mercy of falling markets. The more you have in cash the more money you have earning little interest – so it’s a balancing act. On top of this you should also have your emergency pot in cash – this is the money put to one side should the boiler blow up or the car break down, so you’ve got money to hand in a crisis. With this cash you want to try to
get the highest interest possible so it’s at least earning you some money until you spend it. However, don’t lock it away in a lengthy fixed term account where you must wait ages to access the cash. • How do I change my investments? Until now you will likely have been focused entirely on growing your pot as much as possible, within you own risk limits. But that might change now you’re relying on this money to pay the bills. One option is to switch to an income focus, whereby you invest a proportion of your pension in income-generating assets or funds. This means that you can draw off the natural income from your portfolio and leave the capital untouched. Another approach is to keep investing for the best growth you can find and just take a chunk of the capital out when you make your withdrawal. You could also do a combination of the two. But you also need to think about your risk tolerance. Now you rely on this money to cover living costs you might want to dial down the risk in your portfolio. If you’re worried about how a big fall in stock markets might affect your lifestyle then it could be smart to put more of the money in assets that are considered safer, such as gold, bonds and cash. This is an entirely personal decision and depends how long you need the money to last, what other sources of income you have and your risk appetite. For example, someone who
has a very low risk tolerance and doesn’t want to worry about their money falling in value might have around 50% in bonds, another 10% in gold, 20% in cash and the remaining 20% in the stock market. Clearly the returns on this portfolio might be lower over the long term than one invested 100% in equity markets, but that might be a perfectly fine tradeoff for someone. In contrast, someone else who doesn’t mind a bit more risk and exposure to stock markets might switch the bond and equity allocations to have 50% in stock markets and 20% in bonds. Inflation is the big thing you need to bear in mind, as you’ll want your money to at least keep pace with a rising cost of living. Failing to beat the rate of inflation effectively means losing money in real terms. Inflation is currently low, standing at 0.6% in June, but the Bank of England aims to have it at 2% so that’s
probably a better benchmark for you to consider. • How much should I withdraw? It’s tricky to know how much money to take as an income. Retirement can often last for longer than the time you spend building up the pot, so it’s a difficult balancing act to make sure you have enough money to enjoy retirement but not withdraw too much that you run out of money before you die. The previous rule of thumb was withdrawing 4% of your portfolio a year, which went on the premise that you could make your money grow by 4% a year and so you wouldn’t be depleting your pot. In order to come up with a more appropriate number, first you need to think about life expectancy, as we’re all living longer. Look at how old you are when you retire and the average life expectancy of someone your 30 July 2020 | SHARES |
37
age to give you a guide – clearly you live longer or shorter than this so don’t see it as gospel. Then you need to ask yourself whether you plan to exhaust every last penny of your pension or whether you plan to leave some to your children, spouse, family or the local cats home – this will have a big impact on how much you take. For example, someone with a £500,000 pension pot who is likely to live for another 30 years after retirement and plans for their money to grow at around 4% a year could take out £25,000 each year and still have £245,000 in their pot after 30 years to leave to beneficiaries.
Alternatively, they could take an income of £29,500 a year and spend every penny by the time they reach that 30-year mark. If someone had the same pot size and same life expectancy but wanted to take less risk and thought their money might only keep pace with inflation, at 2%, they could take £17,000 income a year and still have around half the pot left after 30 years. Or they could take £23,000 income a year and spend every penny in the pot. By Laura Suter AJ Bell Personal Finance Analyst
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How much can I claim for pensions tax relief? AJ Bell pensions expert Tom Selby explains the rules I previously worked for the NHS and decided a couple of years ago to leave and take my NHS pension at age 60. I then took on a role with a university. Over the last few years, I have been making SIPP contributions and used up most of my previous years’ carry forward allowances to claim tax relief at the higher rate through writing direct to HMRC. In tax year 2019/2020, my total income puts me in the higher bracket (41% Scotland), I have already made a contribution to my SIPP for that year which was less than my earned income (£23,000), and received basic-rate tax relief. As a higher-rate tax payer am I eligible to write to HMRC and claim the additional tax relief at the higher rate? Alan Tom Selby AJ Bell Senior Analyst says:
For most people the amount they can save each year in a pension is limited to the lower of 100% of ‘relevant UK earnings’ and £40,000. When you contribute to a SIPP, your provider will top up the money you pay in automatically via basic-rate tax relief. This means that, provided your relevant UK earnings are £40,000 or more for the tax year, you can
contribute up to £32,000 into a SIPP and this will be topped up by a maximum of £8,000 in basic-rate tax relief. Relevant UK earnings only includes certain sources of taxable income like salary, bonuses and commissions. They do not include earnings from buy-to-let property or pension income. Whether you’re eligible for additional-rate or higher-rate tax relief, however, is based on your highest marginal rate of income tax, which will be based on all sources of taxable income. It doesn’t matter whether or not your relevant UK earnings on their own were within the higher-rate tax band. It’s the overall picture that’s important. CARRY FORWARD You mention using carry forward previously to ‘claim tax relief at the higher rate’, so it’s probably worth clarifying how this works. Carry forward allows you to utilise unused annual allowances from the last three tax years in
the current tax year. This means, in theory, you could boost the amount you save into a pension in the 2020/21 tax year to £160,000 (3 x £40,000 allowances from the last three tax years plus 1 x £40,000 allowance in the current tax year). The amount you can contribute remains restricted to 100% of your relevant UK earnings, however, and you would reclaim any higher or additional-rate tax relief owed in the same way as before.
DO YOU HAVE A QUESTION ON RETIREMENT ISSUES? Send an email to editorial@sharesmagazine.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.
30 July 2020 | SHARES |
39
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HOW I INVEST:
Profiting from the stock market dip Having read in February about coronavirus threat, John from Reading took advantage of the market fall and subsequent bounce back
A
ware in February that the coronavirus pandemic could cause a severe market correction, John from Reading and his wife decided to shift around a quarter of their portfolio into cash. Having retired eight years ago, John says he and his wife would normally keep around two years’ worth of living expenses in cash. Their overall investment goal is to ensure they can enjoy retirement and pass on cash to their children and grandchildren on an annual basis. They use the FTSE 100 as a benchmark for their portfolio, and John says they are ahead of that index by about 60% over the last eight years, albeit not adjusted for any dividends received.
BUYING THE DIPS When in February it looked like an impending stock market crash was on the way, the couple decided to increase their cash position substantially, either to ride the storm without worrying too much or to be able to buy shares they liked at a lower price in the future. As it turned out for John, the dips certainly came, so he took advantage of the prices coming down, choosing companies that he had ‘hoped to invest in at some stage anyway, but where we had missed the boat’. Initially the idea was to buy and hold those shares – stocks like Greggs (GRG), Fevertree Drinks (FEVR:AIM), B&M European Value Retail (BME) and Wizz Air (WIZZ). John also bought exchange-
traded fund iShares Physical Gold (SGLN), ‘as every commentary said we should hold some gold’, though he only held the ETF for a month, realising a gain of around £3,600, which ‘seemed worth taking’, in his opinion. The couple say their usual investment strategy is to buy and hold momentum stocks, looking for capital gains and ignoring dividends completely. SELLING STRATEGY When judging when to take a profit, they consider not only the size of the gain, but also the time period over which it occurs, with the view that a 10% gain over one month is better than a 30% gain over a year. John concedes this means they sometimes get out too early but adds that they usually temper 30 July 2020 | SHARES |
41
this by top-slicing, i.e. selling some but retaining a stake at the original cost. He explains, ‘An example, we were lucky to buy Novacyt (NYCT:AIM) at 77p on 13 February. Having bought 13,034 shares initially, we then sold 4,396 shares at 455p on 9 April and a further 4,281 shares at 467p on 16 April. This provided a total gain of about £33,000 on an investment of £10,000, while still retaining 4,357 shares. That is a once in a lifetime event, surely!’ PORTFOLIO SIZE John and his wife currently hold around 60 shares in their portfolio, with another 40 on their watch list. Keeping tabs on the shares in their portfolio every day, John says he and his wife soon saw some very quick gains as the market recovered from its March low, and so they quickly banked profits. ‘For example, we bought housebuilder Vistry (VTY) on 15 April, then sold on 17 April, gaining 11% in two days.’ He then bought Vistry again on 21 April and sold on 23 April, gaining another 14% in two days that time. John stresses such rapid dealing is not his usual way of operating. INVESTMENT STRATEGY When he retired, to help manage his portfolio John devised a method of measuring a share’s momentum and volatility, which he calls ‘bandwidth’. Looking at a share price chart, bandwidth is defined as the width of the upper and lower average lines, measured in months, using the last three years as a reference. The narrower a bandwidth, the 42
| SHARES | 30 July 2020
We would not normally buy and sell quite so often. It does create quite a lot of time-consuming paperwork, but time is what we have plenty of at present steeper the incline and the less volatile the share, in John’s view. He sees momentum as a good way of achieving capital gains, believing that the selection of momentum stocks with low volatility improves the chances of achieving growth with the ‘minimum of rude shock’. WHAT HE AVOIDS The sectors he avoids are miners, oil, banks and utilities as he argues ‘events beyond their management’s control can distort their share prices significantly’, adding that they wouldn’t meet his criteria anyway as they currently lack momentum. John doesn’t invest in any funds, preferring UK-listed
shares. He says: ‘I see no real reason to pay charges when, as I hold about 60 shares, some of them will be held by funds too. I have used ETFs in the past but only if I am short of ideas.’ Whilst John says lockdown can be ‘tedious’ at times for himself and his wife, the extra time made available has been used to some effect. ‘We would not normally buy and sell quite so often. It does create quite a lot of timeconsuming paperwork, but time is what we have plenty of at present,’ he explains. By Yoosof Farah Reporter
WOULD YOU LIKE TO FEATURE AS A CASE STUDY IN SHARES? We are looking for individuals or couples who can discuss their experience with investing and some details about their portfolios. Anyone interested should email editorial@sharesmagazine.co.uk with ‘case study’ in the subject line. DISCLAIMER: Please note, we do not provide financial advice in case study articles and we are unable to comment on the suitability of the subject’s investments. Individuals who are unsure about the suitability of investments should consult a suitably qualified financial adviser. Past performance is not a guide to future performance and some investments need to be held for the long term.
WEBINAR
WATCH RECENT PRESENTATION WEBINARS Pensana Rare Earths Plc (PRE) - Paul Atherley, Chairman With Presidential approval and backing from the Angolan Sovereign Wealth Fund, recently LSE listed Pensana Rare Earths is bringing online the first major rare earths in over a decade to help meet the rapidly growing demand for magnet metals critical for electric vehicles and offshore wind turbines.
Quadrise Fuels International (QFI) - Mike Kirk, Chairman & Jason Miles, CEO Quadrise Fuels International is engaged in the manufacturing and marketing of emulsion fuel for use in power generation, industrial and marine diesel engines and steam generation applications.
ReNeuron Group (RENE) - Michael Hunt, CFO ReNeuron Group is a biotechnology firm. The principal of the business involves the research and development of stem cell technology for the treatment of motor disabilities and blindness-causing diseases.
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Finding out what’s moving up and down in the markets Where to see movements in stocks, commodity prices, currencies and bonds
I
t’s important to keep an eye on how the market is moving if you’re investing in stocks and shares. You can get a sense of what’s hot and what’s not, and how other investors are reacting to various bits of news and world events, as well as general sentiment towards equities. For a quick overview of what the FTSE 100 index is doing and which specific companies are going up or down, Shares’ website publishes various market reports throughout the day. As well as these useful news stories, Shares’ website also lets you analyse stock movements. You can search by various UK stock indices including FTSE 100, FTSE 250, FTSE All Share and FTSE Small Cap as well as filtering just the AIM market.
“You will be notified when the price hits your desired level”
44
| SHARES | 30 July 2020
The website shows each stock or indices’ current market level and change in percentage terms on the previous night’s close. You can also compare performance going back further, such as over one week or three months. A risers and fallers table shows the top 10 gainers and losers in the aforementioned indices, again in percentage terms. To monitor the performance of a group of stocks, Shares’ website has a ‘stockwatch’ facility where you can build lists of companies you want to monitor. The system shows prices, the change on the day, the cumulative volume, the high and low prices for the year to date and where the current price is in relation to the highs and lows. You can also write notes on each stock, such as why you’re interested in it, upcoming events you want to watch and so on. If you want to know when the price of a stock hits a certain level, when there is a news story on a company or one of the directors deals in its shares, you can set custom alerts. This allows you to get on with other things in the knowledge that you will be notified either when the price hits your desired level or there is relevant news. For those with a more general
interest, such as finding out which company’s shares are the most heavily traded on a given day, head to the website of the London Stock Exchange which displays both the biggest risers and fallers and the most active stocks in terms of number of shares traded. For a good snapshot of what’s going on in the markets via a single web page, the BBC’s news website shows movements for the main UK, US, European and Asian indices, exchange rates for the pound, euro, dollar and yen as well as oil, gold and natural gas prices. News and information firm Reuters also has prices and news on global stocks, currencies and commodities, as well as information on global bond yields. By Ian Conway, Senior Reporter
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INDEX KEY
Fidelity Japan Trust (FJV)
• Main Market • AIM • Fund • Investment Trust • ETF • Overseas Share
Games Workshop (GAW) Greggs (GRG)
31 9 9, 41
Indivior (INDV)
23
International Consolidated Airlines (IAG)
6
Aberdeen Japan Investment Trust (AJIT)
30
iShares Physical Gold (SGLN)
AG Barr (BAG)
17
JPMorgan Japanese Investment Trust (JFJ)
31
Kainos (KNOS)
16
Knights (KGH:AIM)
14
Legg Mason IF Japan Equity
32
Lindsell Train Japanese Equity (B3MSSB9)
32
Nippon Active Value (NAVF)
31
Nomura Japan High Conviction
32
Novacyt (NYCT:AIM)
41
On The Beach (OTB)
6
Allianz Strategic Bond 21, 25 Fund (B06T936)
11, 21, 25, 41
AVI Japan Opportunity Trust (AJOT)
31
B&M European Value Retail (BME)
41
Personal Assets Trust (PNL)
Baillie Gifford Japan (BGFD)
31
Reckitt Benckiser (RB.)
21
RIT Capital Partners (RCP)
24
Ruffer Investment Company (RICA)
24
Baillie Gifford Japanese Smaller Companies (0601492)
32
Begbies Traynor (BEG:AIM)
7
BT (BT.A)
8
Capital Gearing Trust (CGT)
24
CC Japan Income & Growth (CCJI)
31
City Pub Group (CPC:AIM)
6
Comgest Growth Japan (BYYLQ08)
32
Dart (DTG:AIM)
6
EasyJet (EZJ)
6
Fevertree Drinks (FEVR:AIM)
46
| SHARES | 30 July 2020
41
Ryanair (RYA)
21, 24
6
Smithson (SSON)
21
TUI (TUI)
6
Templeton Emerging Markets Investment Trust (TEM)
34
Unilever (ULVR)
3
Texas Instruments
17
The Coca-Cola Company
12
Wizz Air (WIZZ)
Tristel (TSTL:AIM)
16
Yamana Gold
Vistry (VTY)
41
Vodafone (VOD)
8
Whitbread (WTB)
6 6, 41 11
KEY ANNOUNCEMENTS OVER THE NEXT WEEK Full year results 31 July: Dillistone. 3 August: Argentex, Henderson Alternative Strategies, Tekmar. 4 August: Diageo, Science Group. Half year results 31 July: FBD, Intertek, NatWest, Rightmove, United Carpets. 3 August: Dialight, Hiscox. 4 August: Brave Bison, Calisen, Direct Line, Keller, Meggitt, Spectris. 5 August: Hill & Smith, Legal & General, Morgan Sindall, PageGroup, RHI Magnesita, William Hill. 6 August: AIB, ContourGlobal, Evraz, Hammerson, Mondi, Phoenix, Savills, Serco, Spirent Communications. Trading statements 3 August: Kosmos Energy. 5 August: UDG Healthcare. 6 August: Amryt Pharma. WHO WE ARE DEPUTY EDITOR:
NEWS EDITOR:
Tom Sieber @SharesMagTom
Steven Frazer @SharesMagSteve
EDITOR:
Daniel Coatsworth @Dan_Coatsworth FUNDS AND INVESTMENT TRUSTS EDITOR:
James Crux @SharesMagJames
SENIOR REPORTERS:
REPORTER:
Yoosof Farah @YoosofShares
Martin Gamble @Chilligg Ian Conway @SharesMagIan
ADVERTISING Senior Sales Executive Nick Frankland 020 7378 4592 nick.frankland@sharesmagazine.co.uk
CONTRIBUTORS
Russ Mould Tom Selby Laura Suter
PRODUCTION Head of Design Darren Rapley
Designer Rebecca Bodi
CONTACT US: support@sharesmagazine.co.uk
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.
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