AJ Bell Youinvest Shares Magazine 08 March 2021 by Shares Magazine

VOL 23 / ISSUE 13 / 08 APRIL 2021 / £4.49

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EDITOR’S VIEW

What AstraZeneca’s woes say about ESG investing The company has seen its share price slump and reputation tarnished despite its best efforts to help tackle Covid

lobal multi-national businesses with billions of pounds in revenue and profit aren’t obvious candidates for sympathy but it’s hard not to feel a bit sorry for AstraZeneca (AZN) after its experience over the last six months. In partnership with Oxford University, AstraZeneca has developed a Covid jab in record time which can be easily stored and transported and, unlike other vaccine developers, agreed initially to produce it at cost. Yet the Anglo-Swedish firm has found itself a political football, as prominent politicians in the EU in particular have cast aspersions on AstraZeneca and its vaccine, and seen its share price slump over the last six months. In some respects the company has been the author of its own misfortune. Its communication has been poor in some areas, heightening legitimate concerns over possible side effects associated with the vaccine and its overall efficacy. The latest blow for the company came amid reports the medicines watchdog in the UK is set to follow the example of European countries and restrict the use of the jab in younger populations over concerns about rare blood clots. UNDERPERFORMING OTHER VACCINE DEVELOPERS It has also struggled to deliver on what it promised in terms of doses, though it is hardly alone in this, others have grappled too with the inevitably highly complex process of producing vaccines. Yet its shares have come in a distant third behind other prominent vaccine names Moderna and Pfizer, both of which are set to book big profits

000'S 22 20 18 16 14 12 10 8 6

ASTRAZENECA MODERNA PFIZER

OCT

NOV

DEC

JAN

FEB

MAR

from their own jabs in 2021. Astra has even said it will sell doses on a non-profit basis to the developing world in perpetuity. Given the need for every country to be inoculated if we are going to get out of the pandemic this is a critical pledge. Against such a backdrop executives and employees at AstraZeneca may be left wondering where the rewards for good corporate behaviour promised by the growing prominence of investing along ESG (ethical, social, governance) lines, a topic discussed in our recent feature, have disappeared to. The spotlight put on public companies and the pressure from shareholders to do the right thing has been a very positive development in the past few years and has been reinforced by the better returns delivered by ESG-compliant businesses. It would feel like a significant step backwards if this link was undermined by a high-profile example of a company looking to do its bit for the good of the world and getting brickbats instead of plaudits. By Tom Sieber Deputy Editor

08 April 2021 | SHARES |

Contents

News Provider of the Year (Highly Commended) CFA UK Journalism Awards 2020

EDITOR’S 03 VIEW

What AstraZeneca’s woes say about ESG investing

06 NEWS

Europe powers ahead in 2021 as banks and carmakers beat tech / Beverages sector poised for summer of socialising, sodas and snacks / Investors upbeat on holidays return but analyst shares TUI fears

GREAT 09 IDEAS

New: Medica / TeamViewer Updates: Micron Technology / Bloomsbury / Volution / Renewi

17 FEATURE INVESTMENT 22 TRUSTS

Our simple, no stress ISA portfolio

26 FEATURE SECTOR 28 REPORT 32 FEATURE

Oxford Nanopore set for blockbuster IPO

35 FEATURE

Dual-class share structure may be an imperfect but necessary option

MONEY 38 MATTERS

Give your portfolio a spring clean

41 ASK TOM 43 INDEX

Trusts regularly raising cash to invest in assets can hamper returns

The case for cannabis: how to access an emerging investment opportunity Our stock picks for 2021 are outpacing the market

What are the benefits of deferring my state pension? 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

CFA UK Publication of the Year CFA UK Journalism Awards 2019

| SHARES | 08 April 2021

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 30 days before the publication of an article that mentions such interest. Reporters who have an interest in a company they have written about should not transact the shares within 30 days after the on-sale date of the magazine.

Sponsored content

EMERGING EMEA: THE EMERGING MARKET REGION YOU CAN’T AFFORD TO MISS

Matthias Siller, Head of EMEA at Barings, explores why the region deserves greater investor attention LOOK INSIDE THE average emerging markets investment portfolio and – chances are – China is the largest weighting. But being overexposed to any one market has its risks. It can also mean missing out on potential elsewhere. An area that investors can often overlook is what we call ‘Emerging EMEA’ – the developing markets across Eastern Europe, the Middle East and Africa. A diverse collection of countries with unifying characteristics that are compelling for any investor. Let’s take a look at a few of them: Start of the e-commerce revolution: We’ve seen how the seismic shift to living, working and shopping online has driven many aspects of stock market growth over the past decade. But many markets in Emerging EMEA are only at the start of this journey. What’s more, it’s not just the big global tech names that are benefiting. So-called ‘local champions’ are too – from the e-commerce platform Allegro in Poland to TCS, the first fully online bank in Russia. Heart of the global energy transition: Russia and the Middle East’s dominance in fossil fuel production may seem to put them at a disadvantage. But a global transition to natural gas as a cleaner, ‘bridging’ energy source will benefit Russia and Qatar. This is relevant in the context of the current energy transition sought by the European Commission, in

Barings Emerging EMEA Opportunities PLC Finding quality companies from emerging Europe, Middle East and Africa.

which natural gas represents an alternative to reduce greenhouse emissions. Positioned for growth and income potential: By focusing on cash-generative companies and sectors, we believe we are able to target an attractive level of income without compromising on long-term growth potential. In addition, our fundamental bottom-up investment approach helps to unearth opportunities in what we think is an under-researched region. Of course, these markets still present political, currency and market risks – and demand a longterm investment view. But they also offer valuable diversification for any global portfolio. To find out more, visit www.bemoplc.com and for news and views, sign up at bemoplc.com/preferencecentre

Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Changes in currency exchange rates may affect the value of investments. This article is for illustrative purposes only, is not an offer or solicitation for the purchase/sale of shares in the Company and are not indicative of any future investment results or portfolio composition. Prospective investors should seek independent advice as appropriate. The Key Information Document (KID) must be received and read before investing. Although every effort is taken to ensure that the information contained in this document is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information. Baring Asset Management Limited, 20 Old Bailey, London, EC4M 7BF, United Kingdom. Authorised and regulated by the Financial Conduct Authority.

NEWS

Europe powers ahead in 2021 as banks and carmakers beat tech Germany’s DAX has hit an all-time high while the UK and China lag behind, along with the US’ tech-heavy Nasdaq index

espite a troubled vaccine rollout programme in both countries, Germany’s DAX 30 and France’s CAC 40 have been the stock market stars on the global stage so far in 2021 as investors move away from tech stocks and into cheaper industrial names. A 9.4% first quarter rise in the DAX has led it to hit all-time highs thanks to its significant weighting towards banks and carmakers, with the latter particularly causing excitement among investors as a cheaper alternative to Tesla. Some of the biggest names in the DAX include BMW, Mercedes-Benz maker Daimler and Volkswagen, three car manufacturers that have seen big gains year-to-date as they transition towards electric vehicles. Volkswagen in particular has shone with a 62% gain to €239 year-to-date, with the shares soaring after its Tesla-like ‘Power Day’ where it unveiled grand plans to investors for a big push into electric vehicles. France’s CAC 40 has also had a standout quarter with a 9.3% gain despite a third wave of coronavirus infections in the country and another national lockdown, thanks to both unexpected rises in French consumer confidence and the rise in bond yields, which investors think will be good for its banking stocks. The likes of AXA, BNP Paribas, Crédit Agricole and Société Générale make up a significant chunk of the index. Away from Europe, Japan has been the next best performing developed market with a 6.3% first quarter gain from its benchmark Nikkei 225 index, as the country’s vaccine rollout gathers pace and continued monetary and fiscal stimulus reassures investors. In the US, improving sentiment over an economic

| SHARES | 08 April 2021

Major stock markets’ 2021 first quarter performance DAX 30 (Germany)

9.4%

CAC 40 (France)

9.3%

Euronext 100 (Mainland Europe)

8.3%

Dow Jones (US)

7.8%

Nikkei 225 (Japan)

6.3%

S&P 500 (US)

5.8%

Hang Seng (Hong Kong)

4.2%

FTSE 100 (UK)

3.9%

Nasdaq (US)

2.8%

Shanghai Composite (China)

-0.9%

Source: SharePad

recovery and various stimulus plans including on infrastructure from the Biden administration have helped the Dow Jones and S&P 500 record strong quarters, while the tech-heavy Nasdaq has lagged behind with investors rotating into industrials and financials as cheaper options for earnings growth. On the home front, the FTSE 100 has had an underwhelming first quarter with a 3.9% gain, one of the lowest among the world’s major stock markets, having been held back by its miners and oil companies, which make up a big chunk of the index. Chinese stocks, lauded by global investors for their multi-decade growth potential, have not done well in the short-term and are down this year as rising regulation, a crackdown on Chinese firms with overseas listings and more tensions with the US all dampen sentiment. [YF]

NEWS

Beverages sector poised for summer of socialising, sodas and snacks The reopening of out-of-home channels should stir sales recovery for soft drink makers and suppliers

ith prime minister Boris Johnson sticking to his roadmap and jabs being injected into the arms of a grateful global population, the grand economic reopening that beverage businesses have been clamouring for since the pandemic clobbered the sector is upon us. As out-of-home sales channels such as hotels, restaurants, pubs, bars, cinemas and entertainment venues including sporting stadia spring back into life, soft drinks makers should profit as thirsty populations emerge from lockdown around across the globe and hot weather stirs sales recovery. Across the pond, shares in PepsiCo have perked up from $128.8 in early March to $143.2 at the time of writing as the market discounts the benefits of the reopening on the organic growth prospects of the snacks and drinks behemoth. While the social hibernation caused by the pandemic boosted sales of PepsiCo’s snacks including Doritos and Cheetos, a summer of sun, sport and socialising could drive strong sales Beverages reopening beneficiaries Company

Share price

Market cap

Forecast PE

Dividend yield (%)

PepsiCo

$143.2

$197.6bn

23.7

The Coca-Cola Company

$52.8

$227.6bn

24.6

3.2

Coca-Cola HBC

£23.38

£8.43bn

18.8

2.5

A.G. Barr

495p

£554.5m

20.6

2.6

Britvic

834.5p

£2.2bn

Nichols

£13.33

£491.7m

32.3

Source: Refinitiv, London Stock Exchange. PE=price-to-earnings.

of brands including Walkers crisps and PepsiCola, not to mention Gatorade, Mountain Dew and Tropicana. PepsiCo’s arch-rival The Coca-Cola Company has an even greater exposure to out of home channels and the James Quincey-steered drinks colossus has several brands positioned to benefit including Coca-Cola, Diet Coke, Sprite and Fanta as well as coffee brand Costa and mixers brand Schweppes. UK stocks connected to Coca-Cola include strategic bottling partners Coca-Cola HBC (CCH) and Coca-Cola European Partners (CCEP). Lower down the market cap spectrum, resilient soft drink-to-ready-made cocktail maker A.G. Barr (BAG) has seen a robust performance through major retailers during the Covid crisis and could also benefit from the reopening of the on-site hospitality market and the recovery in high street and hospitality footfall. Unsurprisingly, the Irn-Bru-to-Strathmore water supplier posted a fall in revenue and earnings for the year ended 24 January 2021 and said the immediate outlook remained ‘uncertain’, yet AG did suggest it plans to restart dividends during the current financial year. Other beverages names tied to reopening include Britvic (BVIC), the company behind Wimbledon’s signature tipple Robinsons, Fruit Shoot and Tango, which also produces and sells Pepsi, 7UP and Lipton Ice Tea in Britain and Ireland under exclusive agreements with PepsiCo, not to mention Nichols (NICL:AIM), the robustly financed company behind the Vimto brand. [JC] 08 April 2021 | SHARES |

NEWS

Investors upbeat on holidays return but analyst shares TUI fears Travel stocks gain on government’s traffic light system, while Berenberg shares big concerns over indebted operator

ravel stocks have reacted positively as the Government confirmed plans for a traffic light system to allow international travel to resume. The current restart date for international travel and holidays abroad is 17 May, and from that date there will be a list of green, amber and red countries whereby travel to and from green countries will require no isolation period, amber countries will likely require a 10-day quarantine but early release with a negative test and red countries where a 10-day quarantine will be mandatory regardless of Covid status. Given popular destinations like Portugal and Malta are set to be on the ‘green list’, investors were relatively upbeat on the return of holidays with shares in tour operators TUI (TUI) and Jet2 (JET2) and British Airways owner International Consolidated Airlines (IAG) up over 2% the day after the announcement, while online package holiday provider On The Beach (OTB) soared more than 7%. However, the reaction wasn’t as positive as it might have been with details over amber countries still unclear. Covid-19 and vaccination rates mean the likes of Spain, Greece and Turkey – where TUI and Jet2 in particular make most of their money – are likely to be put on the ‘amber list’. More details will be provided by the Government following the release of a report from the Global Travel Taskforce on 12 April, but travel industry bosses reacted with dismay to what they called a lack of clarity from Government. A lack of clarity is also what has led analysts at broker Berenberg to share significant concerns regarding TUI. The analysts say: ‘We continue to believe TUI

| SHARES | 08 April 2021

700

TUI

600 500 400 300 200 100

2019

2020

2021

faces an uncertain future with a capital structure which is unsustainable, significant debt maturities rapidly approaching, doubt about the resumption of operations and continued meaningful cash burn.’ TUI currently has net debt of over €7 billion, putting it on a highly uncomfortable forecast net debt to earnings ratio of six times for 2021. Ratios of three or less are typically considered sustainable. The Anglo-German firm is betting heavily on a recovery in foreign holidays this summer but is a prime candidate to raise more cash to stay afloat. As of 3 February, it had €2.1 billion in liquidity and monthly cash burn between €250 million and €300 million. For all the concerns over TUI, there’s an argument in Germany that the company is seen as ‘too big to fail’, having been bailed out by the German government three times so far during the pandemic and received almost €5 billion in state support. [YF]

Medica is on a high quality growth path Teleradiology firm has invested in its technology platform to increase efficiency and accuracy

he new management team at teleradiology specialist Medica (MGP:AIM) have reinvigorated the business and energetically executed a clear growth path to diversify revenues and enhance earnings quality. Investors should buy into this story. Meanwhile, in the core teleradiology business, Covid-19 has caused a huge backlog in elective procedures and images. This pent up demand will almost double the shortage of NHS radiologists which in turn will drive growth in the outsourced radiology services that Medica provides. According to analysts at Liberum the company’s out of hours Nighthawk service, which is exclusive to Medica, and its Elective business will grow by a combined 14% a year out to 2025. Including contributions from recent acquisitions, Liberum reckons Medica could grow earnings at a compound annual growth rate of 22% a year to 2025 which is not reflected in the shares which trade at a 35% discount to peers. We believe the growth prospects for the business aren’t fully appreciated by investors and expect the discount to peers to narrow.

MEDICA

 BUY

(MGP:AIM) 150.2p Market cap: £182.4 million

BENEFITS OF SCALE NOT APPRECIATED Medica’s nationwide network of consultant radiologists perform outsourced interpretation of MRI and CT scans under contract for the NHS and private hospitals. As the largest player in the outsourced market, Medica offers scale and efficiency that other firms find hard to match which improves reliability and attractiveness to the NHS, creating a virtuous circle. It also makes Medica more attractive from the perspective of independent radiologists because the firm can offer higher visibility of work and an unrivalled national footprint. A new operating system should create greater productivity for radiologists and more granular 3D imaging to improve accuracy to the NHS. IMPROVING EARNINGS QUALITY The diversification strategy has quickly taken shape. In late 2020 Medica purchased market leader Global Diagnostics Ireland

which as well as providing traditional radiology services also generates eye-based health scanning revenues. In February the company signed a joint venture with Integral Diagnostics which operates in the Australian and New Zealand markets. The deal will allow both companies to offer NightHawk services to each other at lower cost to take advantage of the time difference. The company’s latest move was the proposed £16.1 million acquisition of US based RadMD which specialises in the imaging contract research business. This market is valued at around $1 billion, some three-times larger than the UK radiology market. RadMD operates a high-quality platform and achieves around 90% repeat business while it is growing fast with an order book worth four times 2020 revenues. A strong rebound in UK elective procedures and increasing international exposure lays the foundation for growth and better-quality earnings, which are less reliant on the NHS. [MG] 160

MEDICA

140 120 100

2020

2021

08 April 2021 | SHARES |

Buy remote IT connector TeamViewer at a pre-pandemic price The German software company is a quality tech growth business

sk a Manchester United fan where they’re from and the least likely answer will be Manchester, or so the football joke goes. The club now has a new fan after German technology company TeamViewer announced a five-year shirt sponsorship deal with the club worth a rumoured €275 million. We have no idea whether this will be an astute bit of marketing, but the deal sparked a sell-off in the stock that we believe presents a fantastic entry point, an opportunity to buy TeamViewer at prepandemic prices. Investors were left in a huff because of the drag on profit margins in the near term. Management admitted that the Man Utd deal will cut its adjusted earnings before interest, tax,

TEAMVIEWER

 BUY €37.38

Market cap: €7.55 billion

depreciation and amortisation (EBITDA) margins to around 49% to 51% this year (to 31 December) having previously guided for a 55% to 57% range. Yet this is part of a wider investment in growth that should pay-off handsomely down the line, using the pandemic’s work from home new normal to drive home its

advantages. And it has plenty of those. The German company has built a real-time remote connectivity platform that lets IT experts take control of devices (PCs, laptops, smartphones etc) to solve problems or to enable people to connect and collaborate from home, different office locations or anywhere else, while the organisation maintains control of its core IT. REMOTE ACCESS BOOM If you’ve ever had to call your work IT support team for help and had them take over your device virtually to find a fix, you may well have used TeamViewer, even if you didn’t know it. Founded in 2005, TeamViewer’s remote software has been installed in more than 2.5 billion

| SHARES | 08 April 2021

devices worldwide and its tools are in action on up to 45 million users at any given time. Private equity firm Permira brought the company to the Frankfurt Stock Exchange in September 2019 with a €5.25 billion price tag, selling 42% of its stake to investors at €26.25 per share. Permira has continued to release shares into the market over the past year or more, most recently last month, leaving it with a stake of just below 20%. Like so many tech firms, Covid has made investors suddenly appreciate TeamViewer’s digital growth potential, with the stock hitting a record €51.48 last July, and rallying to close on €50 again earlier this year, before investors went off growth stocks thanks to inflation fears. That the company is willing to plough significant sums into innovation is encouraging because remote IT support is far from competition-free. Industry heavyweights like of Microsoft, Citrix, LogMeIn and others operate in this space.

Many analysts, however, think TeamViewer leads the way as the high-quality, large bandwidth, all-in-one platform to connect, manage and interact. A study by independent global quality assurance company Qualitest found TeamViewer compatible with significantly more device types than peers, and the internet bandwidth scale to send large raw data files at significantly faster speeds. The wider remote support market is also rapidly expanding, not least because of the scope for enormous connected device expansion as the Internet of Things world gets bigger. A McKinsey report estimates that the size of the remote connectivity platform market will triple by 2023 from €10 billion in 2018. Analysts at Berenberg believe TeamViewer’s total addressable market will expand to €40 billion over the same timeframe. This will be driven by the company widening its customer base, deepening its sales and marketing pool, and adding new tools around areas like augmented reality, such as its recent acquisition of Ubimax. SCALABLE BUSINESS MODEL This is an easily scalable business

model that should throw off lots of free cash flow and deliver very attractive 50% average profit margins over the longrun. That should mean strong growth, excellent cash flows and an improving track record when it comes to using that cash for value creation. Return on capital employed, a measure of how effectively the company spends its cash, has more than doubled on 2018’s 7.3%, and is forecast to improve to nearly 30% over the next couple of years. Things like cybercrime, changes to data privacy regulation and IT infrastructure faults could potentially slow TeamViewer’s growth, yet managing these sorts of risks are part of TeamViewer’s knitting. Given the recent slide, the stock is trading on a 12-month forward price to earnings multiple of 56, according to Refinitiv data, although that will fall to 34 by 2022 if Berenberg numbers are right. [SF] TEAMVIEWER

56 50 44 38

2020

2021

08 April 2021 | SHARES |

$93.75

BLOOMSBURY PUBLISHING (BMY) 298p

Gain to date: 16.1%

Gain to date: 5%

THE MICROCHIP industry has been on a tear for months but the backcloth promises to get even better for semiconductors powerhouse Micron Technology Micron is among the world leaders when it comes to memory, both dynamic random-access memory which helps digital devices work faster, and flash memory, used for storage. In a world moving ever more swiftly to the cloud, better, bigger, faster and cheaper memory will be a vital enabler, so the Biden administration’s commitment to spend $50 billion to address supply constraints, and maintain global leadership in the face of Far East competition, comes as a real boost. The announcement was well-timed, with Micron also reporting second quarter (to 28 February 2021) earnings that beat estimates thanks to particularly strong demand in mobile, industrials, and automotive sectors. The company forecast a strong Q3 as DRAM demand continues to outpace supply. Interestingly, the company does not plan to throw its money willy-nilly into capacity expansion, sticking to its ‘conservative’ capex plenty of demand down the line and firm pricing. Up more than 16% in only a little more than two months, we continue to believe there is further 2021 upside to be had.

OUR POSITIVE CALL on publishing group Bloomsbury (BMY) is off to a solid start thanks to a bullish trading update on 24 March. The company said it expected annual revenue and profit to be ‘significantly ahead’ of upgraded market expectations on exceptional sales performance in February as the reading boom continued. ‘The popularity of reading during lockdown is a ray of sunshine in an otherwise very dark last year,’ the company said. ‘February, the final month of our financial year, saw an exceptional sales performance for Bloomsbury as the surge in reading continued. We do not yet know how consumer behaviour will change as academic institutions, shops and leisure activities re-open and whether this popularity will continue as restrictions are lifted,’ the company added. Numis analyst Steve Liechti commented: ‘Fundamentally we see Bloomsbury as an interesting asset with better growth vs recent history given more aggressive management of its Consumer assets, and good momentum in digital platform driven A&P (academic & professional). ‘An interesting “problem” is a relatively inefficient looking balance sheet, after much better cash flow performance through Covid-19 vs initial fears, and the pre-emptive placing in April 2020.’

MICRON TECHNOLOGY

Original entry point: Buy at $80.72, 21 January 2021

100

Original entry point: Buy at 283.84p, 4 February 2021

MICRON TECHNOLOGY

320

280 240

BLOOMSBURY

200 2020

2021

SHARES SAYS:  A great play on the current semiconductors shortage, with longer-term attractions too. [SF]

160

2020

2021

SHARES SAYS:  Keep buying. [TS] 08 April 2021 | SHARES |

VOLUTION (FAN) 400P

Gain to date: 121.6% Original entry point: Buy at 180.5p, 9 July 2020

VENTILATION PRODUCTS firm Volution (FAN) has been a superb performer since we added it to the Great Ideas portfolio last summer. We were right to conclude that demand for its portfolio of solutions would be supported by Covid-19 with the latest evidence coming in the form of very strong first half results (11 Mar). The company upgraded forecasts alongside the numbers which showed that for the six months ended 31 January 2021, pre-tax profit increased by 18.8% to £14.2 million year-on-year. Volution provided an interim dividend of 1.9p per share, citing strong profitability, free cash generation and confidence in its prospects.

In a recent initiation note on the company Irish stockbroker Davy observed: ‘Ventilation and air quality are of increasing importance to modern society and the expanding Volution is a leader in this category. ‘There is a deepening international dimension to its operations plus the group’s ambition is supported by consistently high free cash flow. ‘It successfully navigated the challenges related to the pandemic, and we believe Volution can increase earnings by an average of circa 20% per annum between 2020 and 2023.’ 400

VOLUTION

350 300 250 200 150 100

2020

2021

SHARES SAYS:  Still a buy. [TS]

DESIGNED TO PERFORM ACTIVELY MANAGED TRUSTED FOR OVER 35 YEARS

DISCOVER AGT AT WWW.AVIGLOBAL.CO.UK Past performance should not be seen as an indication of future performance. The value of your investment may go down as well as up and you may not get back the full amount invested. Issued by Asset Value Investors Ltd who are authorised and regulated by the Financial Conduct Authority.

RENEWI (RWI) 49P

Gain to date: 105%

Original entry point: Buy at 23.95p, 19 November 2020 OUR CALL TO back the selfhelp programme at Anglo-Dutch waste management firm Renewi (RWI) has paid off faster than we expected, more than doubling our money in less than six months. With no shortage of good ideas out there we think it is time to book profit and move on. Volumes in the Minerals and Waste division have grown as hoped, while cost savings from the Renewi 2.0 programme are flowing through and earnings for the year to the end of March are set to hit the firm’s upgraded guidance. Going forward, the firm expects another year

of overall waste volumes below pre-pandemic levels in the Benelux region but says it’s too early to assess the financial impact. Meanwhile, the increase in margins from the shift from incineration to more sales of highgrade secondary building materials will take time, as will the recovery of lost sales at the hazardous waste unit. 55

RENEWI

45 35 25 15

2020

2021

SHARES SAYS:  After such a dramatic re-rating of the shares, and with a tough year still in prospect, it’s time for us to bank our winnings and move on. Though long-term investors may want to book some profit and keep at least portion of their position running. [IC]

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AS FOCUSED ON DIVIDENDS AS YOU ARE The Merchants Trust PLC The Merchants Trust aims to provide a rising income by investing in large UK companies with the potential to pay attractive dividends. Although past performance is no guide to the future, we’ve paid a rising dividend to our shareholders for 38 consecutive years, earning us the Association of Investment Companies’ coveted Dividend Hero status. Beyond a focus on dividends, Merchants offers longevity too. Founded in 1889, we are one of the oldest investment trusts in the UK equity income sector. To see the current Merchants dividend yield or to find out more about us, please have a look at our website. A ranking, a rating or an award provides no indicator of future performance and is not constant over time. You should contact your financial adviser before making any investment decision.

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INVESTING INVOLVES RISK. THE VALUE OF AN INVESTMENT AND THE INCOME FROM IT MAY FALL AS WELL AS RISE AND INVESTORS MAY NOT GET BACK THE FULL AMOUNT INVESTED.

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OUR SIMPLE, NO STRESS ISA PORTFOLIO Four funds to set you up for life

By Yoosof Farah Reporter

he new tax year is now underway, which means you’re able to fill up your ISA again with another £20,000. For those just starting out who want to put their money to work in the markets but aren’t yet confident enough to pick their own stocks, we have come up with a portfolio of exchange-traded funds (ETFs) which offer a simple, no-stress option which could set you up for the long term. ETFs are an excellent option for a beginner investor. An ETF is a type of investment that simply tracks an index, like the FTSE 100 for example, and so mimics its returns. That means they are low cost compared to an actively managed fund, where a fund manager picks out the stocks or bonds they think will outperform the rest of the market. FUND MANAGERS DON’T ALWAYS OUTPERFORM However fund managers don’t always outperform, and their higher fees can eat into your returns, something which is less of an issue with ETFs.

Once you are further along in the world of investing and have a better understanding of how the markets work, and are able to compare the track records of different fund managers, then actively-managed funds could well become a good option for your portfolio. ETFs also give you that all important diversification, so if one or a few investments in the ETF perform badly, there will typically be many others which perform better to offset the losses. More often than not ETFs give you better diversification that actively managed funds, which tend to have fewer holdings in their portfolios. That’s also why it’s best to avoid investing in individual stocks until you understand the ins and outs of the stock market, because putting all your money in one or a few stocks leaves you a lot more exposed to the whims of the stock market and investor sentiment and gives your money none of the protection provided by having a diversified portfolio via ETFs or funds. So as you embark on your investment journey, here is the simplest starter portfolio ever for your ISA. Four ETFs is all you need. 08 April 2021 | SHARES |

PORTFOLIO FOR YOUNGER INVESTORS For someone who’s in their 20s, 30s or 40s and has time on their side to invest for the longterm, it is worth opting for ETFs that give you access to all the important stock markets in the world that offer the best growth potential. We’ve chosen to ignore bond ETFs and dividend-paying ETFs as someone who has more time on their side can afford to take more risks and keep their money invested for longer in order to smooth out the ups and downs stock markets always go through. Stocks also typically provide better returns over the long term compared to bonds, albeit with more volatility. ISHARES CORE MSCI WORLD (SWDA) What better way to get started with investing than to buy an ETF that puts your money to work in stocks all over the world? The MSCI World index is the most commonly used index to track companies in all the developed markets across the world and with well over 1,000 stocks in there it’s certainly diversified. More than anything it’s a play on the US, which makes up 66% of the index and has all the big US tech stocks in its top 10 holdings – together they alone make up 10% of the index – so you’ll feel the benefit if the likes of Apple, Amazon, Facebook, Microsoft, Tesla and Google owner Alphabet continue to perform strongly in future. Its present bias towards growth companies means it may not shine in the short-term when value stocks are in favour. This is reflected in a return of just 1.6% so far year-to-date as the value rally continues. However, over the longer term it should deliver strong performance and indeed has a five-year annualised return of 14.73%. There is also the benefit of not having all your eggs in one basket as the index also includes stocks from the UK, Japan and other countries like France, Germany and Canada. The best ETF to pick to follow the index would be iShares Core MSCI WORLD (SWDA), which is one of the cheapest options with an annual fee of just 0.2% of your invested cash, 18

| SHARES 08 April 2021

and also has the lowest cost between buying and selling due to its highly liquid nature – the ETF holds $34.3 billion of investors’ money. 6000

iShares Core MSCI WORLD (SWDA)

5000 4000 3000 2016

2017

2018

2019

2020

The specific ‘SWDA’ version has been picked because this is the GBP share class. It’s important to always pick the GBP version to avoid any unnecessary foreign exchange charges for converting US dollars into pounds for example. For all ETFs mentioned in this article we’ve picked out the GBP share class. ISHARES MSCI WORLD SMALL CAP (WLDS) Global small cap stocks have outperformed their mid- and large-cap counterparts on average over the last decade, and could be a good option to potentially add some decent growth to your portfolio. There is always the risk they will do worse than their larger peers when stock markets go through turbulent periods where performance is volatile but over a market cycle of at least five years their better growth potential than large and mid-caps could be realised. 550

iShares MSCI World Small Cap (WLDS)

450

350

250

2018

2019

2020

2021

The best option here would be iShares MSCI World Small Cap (WLDS), which follows the MSCI World Small Cap index and is one of

the cheapest options to track global smaller companies with a 0.35% annual fee. Again the index has heavy exposure to the US which makes up 60% of the index, and the stocks in it aren’t exactly small by UK standards with the average market value of each constituent in the index standing at just over $1 billion. But they are certainly small compared to giants like Amazon and Tesla, and many have been in favour so far in 2021 as global investors look outside the big names to find growth.

Both indices have a lot of their exposure to China, but the FTSE one has a greater allocation to Chinese stocks at 44.5% of the index compared to 36.6% for the MSCI one, and also has a higher weighting towards technology stocks. This in part reflects the fact that, unlike MSCI, FTSE considers South Korea to be a developed rather than an emerging market.

VANGUARD FTSE EMERGING MARKETS (VFEM) Given they’re based on some of the fastest growing economies on earth, having exposure to companies in your portfolio from emerging market countries is a good idea. There are risks with these markets, considering they are still emerging and can frequently encounter teething problems as they develop, but someone willing to ride out volatility over the long term could potentially see some very decent growth from their investment. ETFs are among the best ways for a beginner investor to access emerging markets, as they give you the diversification of emerging markets across the world and not just a specific region like many actively-managed emerging market funds. One of the best ETFs to pick for emerging markets exposure is Vanguard FTSE Emerging Markets (VFEM), a popular ETF which is one of the cheapest ways to access these high growth markets with a low ongoing cost of 0.22% a year. Vanguard FTSE Emerging Markets (VFEM)

6000

5000

AMUNDI MSCI WORLD SRI In the investment world, investing ethically is becoming less and less of a niche thing propagated by unheralded trailblazing fund managers, and more and more a de facto part of the general investment process. However, picking an ethical ETF that puts money to work in the way you want it to and conforms to the spirit of the environmental, social and governance (ESG) criteria created by the investment industry can be something of a minefield. No option we pick here is perfect, but one good option could be Amundi MSCI World SRI (WSRI), which focuses on something called SRI, meaning socially responsible investing, and has an annual charge of just 0.18%. The ETF follows the MSCI World SRI index, which screens out stocks involved in thermal coal, nuclear power, tobacco, alcohol, gambling, military weapons, civilian firearms, genetically modified organisms and adult entertainment. Ethical criteria are then applied to the remaining stocks and the top 25% left over are then picked to go into the index. 75

Amundi MSCI World SRI (WSRI)

4000

65 3000

2016

2017

2018

2019

2020

Most ETFs track the MSCI Emerging Markets Investable Markets index, but the Vanguard one tracks the FTSE Emerging Markets index.

55 45 2018

2019

2020

2021

08 April 2021 | SHARES |

PORTFOLIO FOR SOMEONE CLOSER TO RETIREMENT For someone in their mid-50s onwards who’s looking to get started in investing and put their ISA money to work, but perhaps doesn’t quite have the same amount of time to ride out all of the volatility in stock markets over a few market cycles, we suggest still buying both the iShares Core MSCI World ETF and the iShares MSCI World Small Cap ETF, but adding a bond ETF to offer portfolio protection against volatility and a dividend-paying ETF to offer some income. VANGUARD CORPORATE BOND (VUCP) A lot of investors when thinking about investing in bonds might immediately turn to gilts, i.e. UK government bonds. While they have often been seen as something of a safe haven investment, gilts don’t exactly offer a great return on your investment. One way to get some of the safety that bonds provide, but still actually see some decent returns on your investment could be through investing in corporate bonds, which are bonds issued by companies. One of the most popular options for investors looking to access corporate bonds has been Vanguard USD Corporate Bond (VUCP), which has a charge of just 0.09% a year and offers access to over 5,500 investment grade company bonds. These include bonds from the likes of AT&T, Vanguard USD Corporate Bond (VUCP)

4800 4400 4000 3600 2016

2017

2018

2019

2020

Verizon, Comcast, Citigroup and Budweiser maker Anheuser-Busch InBev – all companies which the top credit rating agencies think are unlikely to default on their borrowings. ISHARES UK DIVIDEND (IUKD) The UK stock market has the highest dividend yield by country according to data from Siblis Research with an average dividend yield of 4.66% from the FTSE All-Share, and with dividends back on the menu again from FTSE 100 and FTSE 250 companies adding some home market exposure marks sense. iShares UK Dividend (IUKD)

1000

800

600

2016

2017

2018

2019

2020

The most popular ETF in this regard has been iShares UK Dividend (IUKD), which currently offers a 4% yield with dividends paid quarterly. It does have a relatively pricey ongoing charge for an ETF with an annual fee of 0.4% a year, but contains a lot of strong, reliable dividend-payers including utilities National Grid (NG.) and SSE (SSE), and miners such as BHP (BHP) and Rio Tinto (RIO), which are currently paying out hefty dividends with yields of more than 6% on the back of booming commodity prices. UK stocks have also been considered cheap by global standards and with value stocks set for a good 2021, the ETF also has the potential to offer capital growth as well, particularly given the combined price-to-earnings ratio of its holdings stands at a lowly 10.6 times.

HOW MUCH £2,000 INVESTED WOULD NOW BE WORTH ETF

Shares bought 5 years ago

Shares bought 10 years ago

iShares Core MSCI World

£3,911.60

£5,979.16

Vanguard FTSE Emerging Markets

£3,165.72

N/A

Vanguard USD Corporate Bond

£2,231.35

N/A

iShares UK Dividend

£1,630.37

£1,877.40

Source: Shares, Refinitiv. N/A = not available as this version of the ETF was not launched at that time

| SHARES 08 April 2021

20 2021 APR

Presentations: 18:00 GMT

WEBINAR

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TIME TO INVEST IN VALUE beginning of a longer-term comeback for good quality, cheaply valued stocks.

Hugh Sergeant, Head of Value and Recovery at River and Mercantile, discusses the opportunities in value investing.

First, value stocks typically do well during an economic recovery. During a downturn, it is more difficult for the average company to grow and so there is a premium paid for companies with structural growth. But in a recovery environment, growth comes from a more diverse group of sectors and styles of stocks, so the premium paid erodes, and value stocks tend to do well.

WHILST, AS DISCUSSED in our previous article, UK equities look good value at the moment, there are a lot of expensive stocks out there, often those which are ‘growth’ focused. The positive news is there are still lots of fantastic, cheaply valued opportunities for investors to take advantage of and we, at R&M, believe now is a good time to get excited about them.

Secondly, valuations are key. Not only are value stocks trading cheaply relative to their growth-based counterparts, but they are cheap in absolute terms. Investors have started to pick up on this, but there is still plenty of runway as scepticism around these cheaper companies’ prospects erodes or animal spirits in corporate M&A emerge.

In recent years, ‘value’ investing - investing in stocks which are trading at cheap valuations, often unreflective of the underlying company’s value - has been unfashionable. Investors across the world have eschewed these slower burning companies for faster growing ones known as ‘growth’ stocks. A good example of this is the well-known FAANG (Facebook, Amazon, Apple, Netflix, Google (Alphabet)) companies and other fast-growing technology/social media stocks that have dominated the US stock market for some years.

There is a third factor, reflation, which relates to economic growth. Value stocks are often the main beneficiaries of a return to modest inflation during a recovery. We will delve more deeply into this in our next article, published in 2 weeks’ time.

Value investing has recently seen something of a resurgence, but we believe that this is just the

The ES R&M UK Recovery Fund enables investors to have targeted exposure to those companies that R&M believe to have particularly strong potential to create value, following a period of depressed profits that could enable significant recovery. To find out more, visit here.

This is a financial promotion within the meaning of the FCA rules. For further details of the specific risks and the overall risk profile of this fund; as well as the share classes within it, please refer to the Key Investor Information Documents and ES River and Mercantile Funds ICVC Prospectus which are available on our website www.riverandmercantile.com. The value of investments and any income generated may go down as well as up and is not guaranteed. An investor may not get back the amount originally invested. Past performance is not a reliable guide to future results. Changes in exchange rates may have an adverse effect on the value, price or income of investments. The information and opinions shared are subject to updating and verification and may be subject to amendment. The information and opinions do not purport to be full or complete. No representation, warranty, or undertaking, express or limited, is given as to the accuracy or completeness of the information or opinions shared by R&M, its partners, or employees. No liability is accepted by such persons for the accuracy or completeness of any such information or opinions. As such, no reliance may be placed for any purpose on the information and opinions contained in this article. Prepared and issued by River and Mercantile Asset Management LLP (“R&M”), registered in England and Wales under Company No. OC317647, with its registered office at 30 Coleman Street, London EC2R 5AL. R&M is authorised and regulated by the UK Financial Conduct Authority (FRN 45308) and is a subsidiary of River and Mercantile Group PLC which is registered in England and Wales under Company No. 04035248, with its registered office at 30 Coleman Street, London EC2R 5AL. Equity Trustees Fund Services Ltd is the Authorised Corporate Director (the “ACD”) of the ES River and Mercantile Funds ICVC and of its sub-funds. The ACD is authorised in the United Kingdom and regulated by the Financial Conduct Authority (FRN 227807) and has its registered office at Pountney Hill House, 4th floor, 6 Laurence Pountney Hill, London EC4R 0BL.

The case for cannabis: how to access an emerging investment opportunity This sector has significant potential but investors need to be aware of risks and volatility

here are good reasons to be excited by the prospects for the global cannabis industry as more countries legalise recreational usage and a plethora of new medical applications are developed. In addition, an increasing number of cannabis-based consumer products are slated to enter the market over the next few years which should help to bring cannabis into the mainstream. According to consultancy Research and Markets the worldwide legal cannabis market was valued at $20.5 billion last year and is projected to reach $90.4 billion in 2026, representing a compound annual growth rate of 28%. In this article we highlight a relatively low-cost way to get diversified exposure to the sector and discuss some of the key names in the UK and overseas. LONG-TERM POTENTIAL EVEN BIGGER The long-term potential for cannabis is potentially even bigger than has been forecast if you consider that the illicit

| SHARES | 08 April 2021

market is, according to some reports, worth around 10 times the legal market. Despite the changing regulatory landscape, the negative image associated with cannabis, also referred to as weed or marijuana, still lingers. It’s still illegal to grow or distribute cannabis for recreational use in the UK and the authorities consider financing of such activities as the proceeds of crime. Medicinal cannabis was made legal in 2018. LIMITED OPPORTUNITIES TO INVEST For UK investors looking to get in on the strong growth prospects the listed choices are relatively scarce, although that will no doubt change. We discuss the merits of the existing plays later

in this article. The countries which legalised cannabis first have the most developed cannabis industries. The largest and most advanced are Canada and the US, so that is where you can find the largest quoted companies. It’s often useful to look at countries which have already legalised to get an idea of the potential growth after legalisation. After Canada legalised recreational cannabis in October 2018 (medicinal cannabis was legalised in 2002) it racked up C$1.2 billion (£675 million) in sales, which more than doubled to C$2.6 billion (£1.5 billion) in 2020. Canada has around 275 cannabis growing businesses and 85 cannabis manufacturing enterprises.

MUSHROOMING INVESTOR INTEREST The cannabis sector got a shot in the arm after the Reddit and WallStreetBets crowd chased cannabis stocks and indices following the merger of Tilray and Aphria, two of the largest cannabis companies. Also influencing the run-up in stocks was speculation US president Joe Biden will soon legalise cannabis at the Federal level which would allow cannabis to move across state lines. (15 states have legalised recreational use, whereas 36 have legalised medicinal use). Canadian based Tilray which is listed on Nasdaq with a market capitalisation of $3.8 billion is merging with Canadian listed Aphria to create the largest cannabis operator with combined revenues of over $600 million. Tilray jumped 50% on the day

THE CANNABIS SECTOR - A SNAPSHOT Market cap (£m)

Sales 2021E (£m)

Canopy Growth

8,922

328

Jazz Pharmaceuticals

6,900

1,915

Aphria

4,000

393

Amyris

3,727

245

Tilray

2,750

211

Cronos

2,430

Organigram

747

53.4

Kanabo

MGC Pharma

7.3

Celluar Goods

Source: Refinitiv, Stockopedia Note: market caps and sales calculated at exchange rates of GBP/USD 1.378 GBP/CAD 1.73.

of the news to $66 before falling back by two-thirds at the most recent price. Other stocks which moved strongly include Canopy Growth, up 128% over the last 12 months and Aurora Cannabis, up more than 1,145% on the same time-frame. Exchange traded funds have also been in demand with the

WHAT IS MEDICINAL CANNABIS? PEOPLE HAVE KNOWN about cannabis for thousands of years and it is known to contain dozens of active substances that influence the brain and body. The best known are Tetrahydrocannabinol or THC, Cannabidoil or CBD and Cannabinol. CBD is used for medical purposes and doesn’t contain the psychoactive ingredient present in THC. The effectiveness of cannabis is due to the natural way it interacts with the human body’s own endocannabinoid system

which influences metabolism, energy balance, pain, emotional memory and appetite. Researchers are studying cannabis for treating Alzheimer’s disease, cancer, diseases of the immune system, epilepsy, glaucoma, multiple sclerosis, nausea and Crohn’s which is a digestive disorder.

Rize Medical Cannabis & Life Sciences ETF (FLWG) doubling over the last six months and the Medical Cannabis and Wellness ETF (CBDP) surging by 82%. In October 2020 the UK securities watchdog, the financial conduct authority said it would allow medicinal cannabis companies to list on the stock exchange, paving the way for companies to come to the market. STRING OF RECENT IPOS In early February 2021 MGC Pharmaceuticals (MXC) became the first medicinal cannabis company to list on the London stock exchange, with the shares advancing rapidly on debut. The shares have since given up a good chunk of those gains. MGC is a biopharmaceutical company which is developing cannabis-based epilepsy and dementia drugs. It also has a Covid-19 drug called CimetrA which has been approved to go into phase three trials to evaluate efficacy and safety. Shortly thereafter Israel-based medicinal cannabis company 08 April 2021 | SHARES |

Kanabo (KNB:AIM) joined the market via a reverse takeover and also saw big gains on its first day of dealings. The group has developed the world’s only medicinal cannabis vaporiser, designed to provide specific doses of cannabis extract without additives. The increasing number of private clinics can now prescribe products like Kanabo’s VapePod on an individual basis to alleviate chronic pain as well as neurological conditions. 22 20 18 16 14 12 10 8 6 4 2

MGC PHARMS. (LON) KANABO GROUP

FEB

MAR

David Beckham backed synthetic cannabidoil consumer products company Cellular Goods (CBX:AIM) became the latest cannabis company to list on the London stock exchange (26 February) valuing the company at £25 million. Instead of cultivating cannabis sativa plants and extracting the oil as is done traditionally, Cellular has found a way to manufacture the cannabis in the laboratory. This is a ‘green’ approach because it saves on water usage while also reducing cultivation from 200 days to seven. The company plans to use the money 20 18

CELLULAR GOODS

16 14 12 10 8

MAR

| SHARES | 08 April 2021

raised at floatation to develop a range of skin care and sports recovery products. Jersey based cannabis company Northern Leaf is planning to float on the London stock exchange later this year. It will grow cannabis from a 75,000 square foot greenhouse facility and expects its first harvest in the third quarter. UK-based GW Pharmaceuticals was the first company to get a medical license in the US to sell Epidiolox, used for treating rare forms of epilepsy. The company also sells cannabis extract for treating multiple sclerosis which is licensed for sale across many countries outside the US. On 3 February GW was purchased by Nasdaq listed Jazz Pharmaceuticals for $7.2 billion, in a cash and share transaction representing a 50% premium to the previous closing price. Research by Prohibition Partners estimates that around 340,000 patients will be taking cannabis-based treatments by 2024 creating a market worth £2.3 billion. LOWER RISK EXPOSURE As we have discussed the biggest cannabis companies are in foreign territories and quoted in foreign currencies. This adds corporate governance and foreign exchange risk to the already considerable regulatory and business risks. The UK quoted companies involved in the sector are relatively small and new to the market, so would be considered only suitable for investors with a strong risk appetite. A lower risk approach is to

invest via an exchange traded fund which provides a diversified portfolio and reduces individual stock risk. RIZE MEDICAL CANNABIS AND LIFE SCIENCES ETF (FLWG) $9.46 This fund has delivered a 125% return over the last year. The largest holdings out of a total of 22 include GrowGeneration Corp which operates specialty garden centres in the US(23.2%), GW Pharmaceuticals (18.8%), Amyris which is an industrial biotechnology company (18%), and The Scotts Miracle Gro Company which is the largest provider of gardening and lawncare products in the US, including cannabis growing equipment, (11%).

The fund is manged by Davy Global Fund Management and has an ongoing charge of 0.65% a year. This is relatively high for an ETF but reflects the greater complexity of the product relative to more traditional trackers offering exposure to mainstream indices like the FTSE 100. By Martin Gamble Senior Reporter

THIS IS AN ADVERTORIAL

Is biotechnology M&A the big opportunity post-vaccine?

After a vintage year in which healthcare stocks were at the forefront of addressing the coronavirus pandemic, a wave of M&A in the sector promises opportunities for investors… It is impossible to miss the impact the last year has had on biopharma companies. Healthcare technology, already supported by strong long-term tailwinds, has been at the forefront of the battle against Covid-19, from developing new vaccines to designing new treatments for the virus as well as diagnostics. While M&A has long been a central pillar of the biopharma world, in the early stages of the pandemic the market all but ground to a halt as uncertainty clogged the wheels of deals already in motion and acquirers rethought their strategies for the years ahead. However, the industry’s success in the last year means that M&A activity has once again picked up. BIOPHARMA’S BUILDING BLOCKS M&A’s outsize role in the biopharma space is a function of the industry’s unusual dynamics. Smaller, often venture capital-funded, companies tend to take on the riskiest stages of product development, including the early-stage trials when drugs and treatments are most likely to fail. Bigger pharmaceutical companies acquire these smaller operators once a drug or therapy begins to appear successful, with their significant capital reserves and industry influence leaving them perfectly poised to execute a complex and large-scale phase three trial and to market any new products that result most effectively. The majority of early-stage development takes place in smaller companies, while the majority of drug commercialisation takes place in larger ones. When such deals are successful, they allow the acquirer a route to new products, as the patents on its older ones expire, and the acquired company a route to market to enable monetisation of its innovative activity. A WAVE OF M&A Funds, such as International Biotechnology Trust (IBT), have benefitted greatly from sitting on either side of these deals. In 2020 alone, IBT’s portfolio companies were involved in five separate M&A deals. Portfolio holding Principia Biopharma was acquired by Sanofi at a premium of c. 70%. Meanwhile, another portfolio holding, Momenta Pharmaceuticals, was acquired by Johnson & Johnson, also at a premium of c. 70% to the share price. In October, portfolio holding MyoKardia was acquired by Bristol Myers Squibb at a c. 61% premium to the share price. In December, AstraZeneca acquired Alexion for a

premium of 45%. And finally, the company benefitted doubly from Gilead Sciences’ acquisition of Immunomedics at an over 100% premium as it held shares in both. The latter three deals were substantial in magnitude with a combined value of around US$84bn, showing the appetite in the industry for merger activity among companies of all sizes. And with the pause in activity in early 2020 still leaving significant pent-up demand for such deals, biotechnology funds are poised to continue benefitting into the middle of 2021. IBT’s portfolio is particularly tilted to such opportunities. The experienced management team’s focus on investing in companies that solve an unmet medical need, have strong pricing power for products, and have experienced management and financial strength, means that the portfolio contains companies which are natural targets for acquisition. It was recently announced that Ailsa Craig and Marek Poszepczynski have taken over as joint Lead Investment Managers following the decision of Carl Harald Janson to step back and take a role as Senior Adviser to SV Health Investors. Ailsa and Marek have been working on the investment management of IBT since 2006 and 2014 respectively so this is not expected to result in a change of direction. Indeed, in respect of IBT’s M&A deal flow, Marek has a background in creating and valuing M&A transactions in the sector so offers a particularly strong skillset in this space. AN ACQUISITION ON THE HORIZON? One company which has attracted M&A speculation is Biogen. The biotech company has had a tumultuous two years after key trials of its Alzheimer’s treatment, aducanumab, seemingly showed no therapeutic benefit. However, further scrutiny of the data led the company to believe that the drug was beneficial, and it began the process of applying to have the drug approved by the FDA. That decision is now at a crucial stage, due to be made in the next couple of months. With the company’s stock currently attractively valued in comparison to the sector on a P/E basis, the potential upside of an approval for those with the nerve to hold the stock over such a pivotal period is significant. Conversely, the potential downside from bad news is terrifying, as was seen when the stock plummeted around 30% on the 2019 announcement of the original trial failure. While it has in-licenced some new drugs, the dominance of aducanumab in its portfolio as older products fall out of their patent periods means many in the market believe it is also likely to look to an acquisition in a bid to diversify its product base further, or potentially become an M&A target itself.

To learn more about the team at IBT and their highly skilled approach to stockpicking, click here. Disclaimer International Biotechnology Trust is a client of Kepler Trust Intelligence. Material produced by Kepler Trust Intelligence should be considered as factual information only and not an indication as to the desirability or appropriateness of investing in the security discussed. Kepler Partners LLP is a limited liability partnership registered in England and Wales at 9/10 Savile Row, London W1S 3PF with registered number OC334771. Full terms and conditions can be found on www.trustintelligence.co.uk/investor

FEATURE

Our stock picks for 2021 are outpacing the market Several names are sitting on double-digit gains as we get off to a solid start

t the end of a tumultuous first quarter for global markets our top picks for 2021 have handily outperformed the market, chalking up a 9.5% gain versus 6.3% from UK shares in general, as measured by the FTSE All-Share.

OUR 2021 PICKS +9.5% Four of the 12 stocks have underperformed, having been victims of shifting market sentiment as much as any individual failings at a company-level. BUMPER PERFORMANCE FROM WETHERSPOONS The standout performer is pubs group JD Wetherspoon (JDW), up 36.1%. The stock is benefiting as the market reacts to the looming reopening of the UK economy. The shares have also benefited from a shift in investor preference in favour of valueorientated stocks offering the prospect of earnings recovery 32

| SHARES | 08 April 2021

today rather than the promise of growth at some point in the future at an elevated valuation. Numis analyst Tim Barnett recently made the comment that Wetherspoon seems ‘moderately upbeat on reopening’. While the 12 April reopening date is a bit later than the company had expected, there are slightly fewer restrictions than feared. He says Wetherspoon previously hoped customers would be able to order from the bar from the end of June, but this is not a given. Barnett adds: ‘It sounds like they plan to reach average weekly turnover close to 2019 levels by the end of the year.’ EYES ON THE PRIZE The second best performer from our portfolio is eyewear frames specialist Inspecs (SPEC:AIM). The company delivered an in-line update for 2020 with sales of $46.2 million, less than 2019 because of the pandemic but modestly better than the $45 million forecast by broker Peel Hunt. Perhaps more importantly the company revealed strong progress with the integration of

the recently acquired German business Eschenbach, leading Peel Hunt to observe that the company was ‘well placed to make strong progress when restrictions ease and the synergies start to come through, and now has a platform to build a materially larger business’. Other big winners in our portfolio include Eurofins Scientific. As we’d hoped the French biopharmaceutical and cosmetics testing specialist has benefited from pandemiclinked work, with the company recently launching an at-home, prescription-free Covid test. In March the company confirmed guidance for 2021 but said results could be materially better if Covid-19 testing continued at the current levels. NOT ALL TECH FIRMS ARE OUT OF FAVOUR Another value play which has done well year-to-date is language services and technology firm RWS (RWS:AIM), which already this year has pointed to good progress with integrating the SDL acquisition and, armed with a debt-free balance sheet, has signalled it is looking at

FEATURE further deals. The only negative has been relative strength in sterling which is acting as a bit of a headwind to earnings. PZ CUSSONS MAKEOVER CONTINUES PZ Cussons (PZC) has outperformed other names in its consumer goods sector like Unilever (ULVR) and Reckitt (RB.). The market seems to be warming to the stock as it outlines plans for a turnaround of the business. Numis says: ‘The application of a more rigorous approach to brand management and reduced complexity should allow the business deliver low to midsingle digit sustainable, profitable revenue growth. ‘We believe (a recent investor day) provided a clear, credible road map towards unlocking the potential of PZ Cussons’ brands and markets.’ TRACKING THE MARKET There is a collection of names whose gains are roughly in line with the wider market. These include tech-focused defence firm QinetiQ (QQ.) which at its own investor event on 4 March detailed plans to deliver enhanced returns over the next five years. Perhaps more notable is mining firm BHP (BHP) which enjoyed an extremely strong start to the year amid talk of a commodities super-cycle and was briefly minted as the largest company in the FTSE 100. However, a recent reversal in iron ore prices after a crackdown by Chinese authorities on excess capacity in the country’s

SHARES’ 2021 PORTFOLIO Company

Entry price (p)

Price now (p)

% gain / loss

Wetherspoon (JD)

1007

1371

36.1

Inspecs

271

355

31.0

€69.99

€82.19

17.4

RWS

534

616

15.4

PZ Cussons

233

268

15.0

Qinetiq

299

323.8

8.3

BHP

1983

2107

6.3

Eurofins Scientific

Tracsis

630

669

6.2

Diageo

2945

3035

3.1

ConvaTec

204.6

198.5

-3.0

Alibaba

$256.22

$229.25

-10.4

Ocado

2301

2043

-11.2

TOTAL FTSE All-Share

9.5 3624.3

3852.62

6.3

Entry prices taken 21 Dec 2020. Latest prices taken 31 March 2021.

steelmaking industry as well as measures to tackle pollution in the sector have seen a large chunk of those early gains erased. PLAYING CATCH-UP The three biggest disappointments where we are sitting on losses of varying degrees of severity have largely been victims of the same rotation out of ‘jam tomorrow’ into ‘jam today’ value stocks which benefited Wetherspoon. Medical products firm Convatec (CTEC) also hasn’t been helped by continuing delays to elective procedures thanks to Covid. Though the company did offer some encouragement after revealing a better-thanexpected outlook in a 5 March trading update. China’s Alibaba has been at the centre of potential regulatory issues in the US and China and increased scepticism over Chinese internet stocks

in general. Bottom of the leader board is online groceries firm Ocado (OCDO) which has been shunned by investors who have developed an aversion to highly rated growth stocks. In addition, the pandemic is proving an obstacle to signing up more international supermarkets for its robotics and automationbased solutions. Berenberg commented: ‘There has been increased interest in Ocado’s solutions, but the main barrier to signing deals is international travel restrictions and partner executive teams not being able to physically see the facilities in operation… travel restrictions will likely continue to impact the ability to sign new partnerships over the coming months.’ By Tom Sieber Deputy Editor

08 April 2021 | SHARES |

MON£Y & MARKET$ LISTEN TO OUR WEEKLY PODCAST Recent episodes include: Deliveroo flop, doubling money on Royal Mail shares and helping younger people get into investing Everything you need to know about ISAs, big change at Scottish Mortgage and a warning for young investors Missing out on IPO gains, AstraZenena’s falling share price, growing demand to be a Cake Box franchisee and green investing with TRIG

Listen on Shares’ website here You can download and subscribe to ‘AJ Bell Money & Markets’ by visiting the Apple iTunes Podcast Store, Amazon Music, Google Podcast or Spotify and searching for ‘AJ Bell’. The podcast is also available on Podbean.

FEATURE

Dual-class share structure may be an imperfect but necessary option Controversial model could clip wings of short-termism that has cost investors in the past

ood delivery platform Deliveroo (ROO) has put the backs up of a lot of investors, and not just because of its debut share price hammering that wiped £2 billion off its £7.6 billion starting valuation. The company’s decision to adopt a dual-class share structure was a controversial one, giving co-founder and chief executive Will Shu greater control over the company. The system has a three-year shelf life but it was enough to for many major fund firms to pass on the IPO (initial public offering). Twin-stock structures are nothing new but they are a rarity in the UK – THG (THG) is the only other example in the UK we can think of. But they remain popular with founder-owned businesses in the US, particularly with many of the big tech IPOs in recent years. Facebook investors, for example, own Class A shares which carry one vote per share, while founder Mark Zuckerberg, and a handful of senior management are Class B owners, with 10-times the voting rights. MODEL JUST ISN’T CRICKET That artificial tilting of voting

power is a difficult pill for most UK investors to swallow. One share, one vote has been sacrosanct in the UK and it strikes to the core of Brits’ sense of fair play. If management make a pig’s ear of value creation, investors can club together and throw them out, and get new people in to hopefully do a better job. But what of the long term? There are good arguments that this can lead to ‘casino capital,’ where investor impatience means there is no room for short-term sacrifices made for longer-run gains, or perfectly good businesses are sold too early and too cheaply, denying some investors years of growth and compounded cashflows. Think back to the summer of 2016 when the UK’s microchip designs champion ARM was sold to Softbank. Yes, the £32.3 billion deal meant investors cashed-in a 40%-plus premium to the then share price, but it is impossible to calculate the value that might have been created for shareholders had they taken a longer-term view. One fund manager admitted to Shares 18-months later that he ‘regretted’ selling, and there are probably many others.

NEW RULES FOR A NEW WORLD This is particularly important today where new technology-led businesses are creating entirely new markets that need time to mature before their real profit potential can be realised. The UK is good at producing bleeding edge leaders; like Skyscanner, DeepMind and Babylon Health. Payments firm Stripe, started by two Irish brothers, was recently valued at $95 billion, the biggest ever private company valuation. Dual-class share structures can give founders the time needed for their enterprise to flower without restricting their access to growth capital. The twinshare model is not perfect but if London is to attract such growth businesses when they eventually float, it may provide the owners with the flexibility they need to grow their enterprises into global giants like Amazon or Alphabet. By Steven Frazer News Editor

08 April 2021 | SHARES |