VOL 26 / ISSUE 02 / 18 JANUARY 2024 / £4.49
BEYOND BUFFETT APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON -OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU -APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON - OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON - OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON - OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON - OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON - OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON - OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU-APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON -OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI ITOCHU -APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON - OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON - OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON - OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON - OCCIDEN- APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON -OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON -OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON -OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU - AMERICAN EXPRESS - COCA COLA -CHEVRON -OCCIDENTAL PETROLEUM - KRAFT - AMERICAN EXPRESS - COCA COLA -CHEVRON -OCCIDENTAL PETROLEUM - KRAFT
HOW IS BERKSHIRE HATHAWAY APPROACHING THE SUCCESSION AND DOES THE GREAT MAN HAVE ONE LAST BIG DEAL IN HIM?
To keep pace with life, we keep investing in great companies. Dunedin Income Growth Investment Trust Lots of people look to invest to stay ahead of the rising cost of living. But which investments can help you do that? Dunedin Income Growth seeks to deliver a rising income plus capital growth by identifying exceptional, sustainable UK companies with the potential for strong, growing dividends and a rising share price. Unconstrained in our stock selection and highly focused on selecting companies with strong environmental and social practices, we believe that aiming for inflation-beating returns starts by seeking out market-leading companies. So to keep pace with life, why not think about investing with us? Please remember, the value of shares and the income from them can go down as well as up and you may get back less than the amount invested.
You can invest via most leading platforms. Find out more at dunedinincomegrowth.co.uk Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London, EC2M 4AG. Authorised and regulated by the Financial Conduct Authority in the UK. Please quote Q101.
STA0124198990-001_IT_AD_2024_DIGIT_Q101.indd 1
08/01/2024 18:05
Contents NEWS 06 After a dearth of IPOs last year, 2024 already looks more interesting
07 Why the outcome of a pre-trial hearing could prove good news for GSK
08 FCA to investigate commission deals in the UK motor finance market
09 Warpaint shares continue to soar after strong trading update
09 Burberry shares hit a new low after second profit warning
10 Why investors might expect a positive earnings surprise from Associated British Foods
11 All eyes on AI as Microsoft kicks off Big Tech earnings season
12 UK Christmas retail sales likely to be a mixed bag and US GDP in focus
GREAT IDEAS 14 Buy this ETF for a low-cost play on unloved Chinese market leaders
15 Trustpilot’s re-rating has only just begun UPDATES 16 We remain positive on Marks Electrical despite
APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON -OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S MITSUBISHI - ITOCHU -APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON - OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON - OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON - OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON - OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU APPLE - BANK OF AMERICA AMERICAN EXPRESS - COCA COLA -CHEVRON - OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON - OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU-APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON -OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU -APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON - OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON - OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON - OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON - OCCIDEN- APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON -OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON -OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU APPLE - BANK OF AMERICA - AMERICAN EXPRESS - COCA COLA -CHEVRON -OCCIDENTAL PETROLEUM - KRAFT HEINZ - MOODY’S - MITSUBISHI - ITOCHU - AMERICAN EXPRESS - COCA COLA -CHEVRON -OCCIDENTAL PETROLEUM - KRAFT - AMERICAN EXPRESS - COCA COLA -CHEVRON -OCCIDENTAL PETROLEUM - KRAFT
22
short-term headwinds
17 Whitbread looks to offer plenty more upside for patient investors
FEATURES 22 COVER STORY
Beyond Buffett: How is Berkshire Hathaway approaching the succession and does the great man have one last big deal in him?
18
18 Should investors be concerned by Fundsmith Equity’s five year underperformance?
28 How fund managers plan to respond to the artificial intelligence theme in 2024
34 UNDER THE BONNET Diversification is key to Spotify’s success in 2024 and beyond
37 EDITOR’S VIEW Bitcoin excitement builds again but it is not a credible store of value
39 DAN COATSWORTH Falling interest rates could trigger new wave of takeovers
43 FINANCE
39
43
How to benefit from higher rates in your Stocks and Shares ISA
46 ASK RACHEL Where is the best place to put the money I’m saving on my National Insurance contributions?
48 INDEX Shares, funds, ETFs and investment trusts in this issue
18 January 2024 | SHARES | 03
Contents
Three important things in this week’s magazine BEYOND
Feature:
BUFFETT
Fundsm
ith Equit
y Fund
1 A
n investor predictive blessed with Nostrad with Berkshpowers who put mo amus-like Warren Buff ney to wo ire Hathaw in 196 rk Charlie Mu ett and his co-ma would hav 4 and held the shaay (BRK.B:NYSE) nag value grew nger, the company’s er for six decade 3,787,464 e enjoyed a gargantuares until 2022 s % 20% over at a compound ann per-share market leaving the in terms of per sha n overall gain of tha for the S&P t period comparedual rate of around 500 index stellar 24,708% reture market value, 500 index. with 10% wit rn But as the per year Under the h dividends include from the S&P we ll-w d for direction of orn disclaim performanc legendary dust. er e is goe no 22 | SHARES s, gui Following past investor de to futu | 18 Janu the ary 2024 partner Mu death of Buffett’ re returns. s lon nger in late November g-term business 2023, a me re
Berkshire Hathaway beyond Buffett We discuss what changes if any the US investment giant might make as it transitions to new leadership
atsworth : Take
A
H O W IS TH E SU BE RK SH IR E H AT CC ES H AW H AV E OSI O N AN D DO ESAY AP PR O AC H IN G N E LA ST TH E G RE BI G DE AL AT IN H IM ? M AN APPLE DENTAL BANK OF AM ERICA PETROL - BAN - AMERI EUM K CAN EXP PETROL OF AMERICA - KRAFT HE RESS INZ EUM - AMERI - COC AMERI CAN EXP- MOODY’S A COL CA - AM KRAFT HEINZ A - MIT RESS - KRA ERICAN SUBISH -CHEVRON - COC FT EXPRES MOODY’S -OC A COL I - ITO - AMERI HEINZ A MITSUB S - COC CHU -AP CIMOODY CAN ISHI - -CHEVRON A COL ’S HEINZ EXPRES PLE - OCC ITOCHU S - COC - MITSUBISH A -CHEVR IDENT APPLE CAN EXP MOODY’S ON A I COLA OCCIDE - BAN AL -CHEVR - ITOCHU K NTAL - MOODY RESS - COC MITSUBISH APPLE ON PETROL OF I - ITO A ’S COL OCC - MIT BANK PRESS SUBISH A -CHEVRON CHU APPLE IDENTAL PET OF AM EUM - COCA ERICA I - ITO - BAN - OCC ROLEU - MIT COL A K IDENT M - KRA SUBISH -CHEVR CHU AL PET OF AMERICA COLA I ON - OCC APPLE FT ROLEU -CHEVR - ITOCHU - AMERI BANK IDE M APP NT OF SUBISH ON - KRA AL PET LE - BAN OCC FT HE I ROLEU AMERICA K -CHEVR - ITOCHU-AP IDENTAL INZ AMERI PETROL OF AMERICA M - KRAFT ON -OC CAN EXHEINZ ITOCHU EU - AMERI CIDEN PLE - BANK - MOODY TAL PET OF AM M - KRAFT CAN EXP OCCIDE -APPLE - BAN ERI ’S ROLEU HE NTAL M - KRA CA - AMERI INZ - MO RESS - COC PETROL K OF AMERI - BAN ODY’S A CAN EXP FT HE K EUM CA - AM PETROL OF AMERICA KRA ERICAN INZ - MOODY RESS - COC- MITEUM - AMERI FT HEINZ EXPRES A COL ’S - MIT AMERI KRA A MO S CAN EXP FT HE - COCA ODY’S SUB CA - AM INZ RESS - MIT COLA -CH ISHI - KRA ERICAN - COC SUBISH FT HE EVRON EXPRES MOODY’S A COL INZ I - ITO AMERI A -CH MIT S - COC CHU APP CAN EXP - MOODY’S EVR A COLA SUBISHI - AMERI LE RES - MIT ITOCHU ON - OCCIDE -CH SUB CAN EXP S - COCA NT APPLE HEINZ COLA -CH ISHI - ITO EVRON - OCC RESS - BAN AL CHU IDE - COC EVRON CAN EXP MOODY’S A COL - OCCIDE APPLE - BANNTAL PETROL K OF - MIT A -CH RESS SUBISH EUM MOODY N- APP K OF AM I - ITO EVRON -OC ’S - MIT- COCA COL LE ERI CIDEN A -CH - COC CHU APP SUBISH TAL PETBANK OF AM CA EVR A LE ERI ROL MITSUB COLA -CHEVR I - ITOCHU ON -OCCID BAN CA EUM K OF AM ENTAL ISHI APPLE ON -OC KRAFT PET PETROL ERICA - BAN - AMERI EUM - ITOCHU - AM CIDENTAL K OF AM ROLEUM PET KRA KRAFT ERI ERICA - AMERI FT HEINZ - AMERI CAN EXPRESROLEUM KRAFT S - COC CAN EXP HEINZ CAN EXPRES A COLA S - MO PETROL RESS - COC -CHEVR A COL EUM ON -OC ODY’S A -CH KRAFT CIDEN EVRON TAL -OCCID ENTAL
Daniel Co
over Targe ts Falling in trigger n terest rates co u e ld w wave of London -lis takeove stocks co ted mid- and lar ge- cap uld be tar rs get
Should in by Fund vestors be con year un smith Equity ’s ficerned derperf ormanc ve The best manage rs fail to e? match the ma
T
rket aro
erry Smith und a thi rd of the news last delivered disappointi time we revealed his ek (9 January) afte ng has handily r he flagship annualised beaten the index by underperfoFundsmith Equity Funequity fund means Sm total return of 15.3% delivering an successive rmed the MSCI Wo d (B41YBW7) had ith has tur rld Index for year. almost £6, ned a £1,000per year which Moreover a third 500 investment The fund today. lags the glo , the fund’s cumula into remain tive total bal benchm return now inception among s the best perform As Smith ark over er since the 165 fun Investment outperform points out in his ann five years. ds wh Ass Not only has ociation Global sec ich sit in the positive retuing the market or ual letter, tor. eve the fund bes done so wit investors rn every year is not n making a ted h the low sho index, it has er share pric something about 63% So, what uld expect. e price volatil more than the ind variability returnin anything at should investors do ex per uni g ity. t of Smith has investment all, and how should with this news, if the fund’s built a loyal fanbas feature intr performance in a they think about ass wid odu converts are ets swell to over e which has seen Looking thr ces and analyses er context? This £24 unl As Laith Kha ikely to be too con billion, so been an unm ough a long-term some key pointers. cer laf, head of len Bell points investm ned. Since ince itigated success sto s Fundsmith has ption in No ry. prone to perout: ‘All active manag ent analysis at AJ vember 201 those like iods of underperfo ers are of course 0, the fun d Fun 18 | SHARES investment dsmith which hav rmance, especially | 18 Janu e style and ary 2024 run a concena distinct trated por tfolio.
2
Could takeovers move up a gear?
With the prospect of lower discount rates and cheap valuations, the UK market could see a raft of bigger and bolder deal-making
s in 20
24 big increas premium e in the average tak in eov of the UK 2023 highlights how er stock marke t continue parts for UK sto undervalued. The to be ave cks and 43% in in 2023 was 51% rage bid premium against 37% 2021, acc ording to Most Lon in 2022 ana don lysis by -listed small-cap firms. Buy takeovers last yea AJ Bell. equity firm ers were a r involved we could to gain sca s or industry player mixture of private see private s loo le or to get sector or a foot in the king to buy rivals targets, particularl equity firms go geo after bigger y as many door in a significant The lack graphy. are new powder’ in amounts of cash (als sitting on not a con of large-cap deals me o known the ind tributing fact ans UK’s flagship or to the per takeovers were industry players maustry). We might also as ‘dry ind ke opport sized rivals. formanc ex, the the 2023 unistic bid see large London-list FTSE 100. Indeed e of the s for similar 100 compan ed takeov , none of ers WHICH CO received a ies and only three involved FTSE MPAN bid FTSE 250 companies Reckitt (RKT) and IES MIGHT BE TAR Yet this situ . GETS? Unilever (UL ation cou watch as pot rates start ld cha VR) enti nge are one al large-cap are compan during the to fall. Private equity if interest takeover targ s to ies tha ext firm t inve way and are s flourished ets borrowing ended period of now trying stors feel have lost . Both Advertising the to get bac using their money cheaply to low interest rates, k on track. ir buy takeover targ agency WPP (W sharp rise cash flow to help pay companies and PP) in an undem et given share pric could also be a has made interest rates ove off the debt. The and r deb forward ear ing valuation, trade weakness and multi-billio t financing more the past two years nin ing on 7.8 tim expensive value to ear gs and an EV to to stomach.n pound or dollar tran es and EBI nin TDA gs before inte sactions har (enterprise and amorti With sign res der However, sation) ratio of 8.9 t, tax, depreciation and central s that interest rate con tim s ma banks cou in 2024 cou cerns over the glo es. ld begin cutti y have peaked someone ld throw icy water bal economy ng in 2024, wo on Biggest as earnings uld try and buy WP the idea that bid listed tak premiums for UK clients sca are likely to come P in the near-term under pre le back pro eovers in ssure if motional Analysts 2023 Seraphin e American have touted diversifiactivity. 206% (AAL) as a ed miner Hotel Cho for pot colat Anglo someon ential 170% STM Grou saw its ma e like Glencore (GL takeover target p EN), after rke 144% operationa t value shrink by the firm Egdon Reso 39% urces in 202 96% and downgrl setbacks, weaker commodity 3 due to aded produc prices While the tion gui NOTE: The mining sec re is merit to this dance. acquirer bid premium repr line of thin is esents the and not at tor has a history of on the day paying to buy the king, the extra amo com before the unt buy bid went pany versus its mar of money the Chart: Shar to only wa the bottom. Miners ing at the top public. ket valuation es magazine nt • Source: going well, to do deals when show a tendency AJ Bell, com pany anno uncemen key commorather than risk spe everything is ts at presen dity prices are flat nding money when t. or falling as they are
3
18 January
2024 | SHA
What to do about Fundsmith RES | 39
The ever-popular global equity fund has lagged its benchmark for five years, but should investors be worried?
Visit our website for more articles Did you know that we publish daily news stories on our website as bonus content? These articles do not appear in the magazine so make sure you keep abreast of market activities by visiting our website on a regular basis. Over the past week we’ve written a variety of news stories online that do not appear in this magazine, including:
Experian shares gain after revenue beat and raised guidance
Money transfer firm Wise ups growth guidance, so why have the shares fallen flat?
Card Factory succumbs to profittaking despite strong Christmas sales
04 | SHARES | 18 January 2024
Ocado shares ripen following return to positive earnings
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Discover AGT at www.aviglobal.co.uk *As at 31 December 2023 **30JUN1985 - 31DEC2023 AGT NAV TR +11.8% vs MSCI ACWI +9.2% (annualised GBP returns) Source: Morningstar 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.
News
After a dearth of IPOs last year, 2024 already looks more interesting Three floats and a new issue should add some variety to the UK market
A
ccording to London Stock Exchange data there were just 23 IPOs (initial public offerings) in total on the UK market in 2023, only slightly more than half the number the preceding year and the lowest since the exchange started publishing records in 1995. For the first time since the financial crisis just one company joined the market in the fourth quarter, and that was a new listing rather than an IPO, as Chapel Down (CDGP:AIM) moved from Acquis to AIM without raising fresh capital. However, there are grounds for optimism, not least after the FCA (Financial Conduct Authority) proposed simplifying the listing regime to attract more companies to the UK. So far, Shares understands there are already three companies on the ‘launch pad’ hoping to raise money from investors. Air Astana, Central Asia’s largest airline, is based in Kazakhstan and is looking to raise $120m
IPOs dry up in London Number of IPOs 2014
138
2015
96
2016
70
2017
108
2018
89
2019
36
2020
50
2021
126
2022 2023
45 23
Chart: Shares magazine • Source: LSEG
06 | SHARES | 11 January 2024
(around £95 million) through a dual listing in its home country and London. In a strange twist of fate, UK defence firm BAE Systems (BA.) owns 49% of the carrier. The stake, which cost the UK company $8.5 million in 2002, was part of an attempt to sell radar equipment to the Kazakh government, but the deal fell through under pressure from Russia. Also aiming to impress is London Tunnels, definitely one of the quirkier firms to come to market. The company’s sole asset is ‘a unique set of tunnels, owned by a British company, built by the British Government, for the defence of Britain, that can further enhance London’s reputation as a leading tourist destination’. The idea that underground tunnels used to shelter from the Blitz might be a leading tourist destination sounds rather hopeful, but as AJ Bell investment director Russ Mould explains, the tunnels may have a special appeal. ‘James Bond fans might be giddy at the prospect of seeing the inspiration for Q-Branch as the Special Operations Executive, a secret British World War II organisation, was located in the tunnels in the mid-1940s.’ Hoping to tickle investors’ taste buds, food company Microsalt is making a third attempt to list on AIM, and finally not a new listing but a share issue in an unusual asset class may fire up a few investors. Holding company Tertre Rouge Assets (TRA), named after a corner on the famous Le Mans circuit, is offering investors the chance to own part of a portfolio of rare and exotic classic cars. Among the firm’s directors are former racing drivers David Coulthard, Mike Hakkinen and Alan McNish, who know a thing or two about life in the fast lane. [IC] DISCLAIMER: AJ Bell referenced in the article owns Shares magazine. The author of this article (Ian Conway) and the editor (Tom Sieber) have an investment in AJ Bell.
News
Why the outcome of a pre-trial hearing could prove good news for GSK Strong operational improvement at the drug maker has been masked by litigation worries
S
GlaxoSmithKline (p)
hares in global bio-pharmaceutical firm 1,500 GSK (GSK) have performed poorly in recent times, relatively speaking, lagging the FTSE 1,400 100 index by 4% and peer AstraZeneca (AZN) by a whopping 87% over the last five years. Operationally there have been clear signs of Aug Sep Oct Nov Dec Jan improvement, with the company delivering strong 2023 2024 trading updates throughout 2023 which saw the Chart: Shares magazine • Source: LSEG shares finally outperform both the blue-chip index and AstraZeneca. Yet, while the business now appears to be ‘avoid distraction related to protracted litigation in performing better, the shares are still being held this case’. back by concerns over US litigation claims linking its Conroy estimates the shares currently discount heartburn drug Zantac with cancer. a worse-case scenario equivalent to a settlement However, there is an upcoming event which value of around $30 billion, which implies roughly might have a big impact on the shares says Shore 22% downside to his base case settlement. Capital healthcare analyst Sean Conroy. Meanwhile, litigation experts at Bloomberg In a recent research note, Conroy highlighted estimate a total settlement value for the Delaware pre-trial hearings scheduled from cases, which represent the majority 22 January to 25 January relating of claimants, of between $2.5 billion Further clarity could and $4 billion, with GSK bearing to around 80,000 Delaware cases as providing a clue to whether GSK is support a material around 30% of the total as it is not likely to make settlements in 2024. re-rating of the shares the sole defendant. The outcome of the hearings Zantac became an over-the-counter and we believe there could have a big bearing on the heartburn treatment in the midremains a compelling 1990s after GSK launched the drug on performance of the shares, believes Conroy: ‘Further clarity could support risk-reward profile prescription in the early 1980s. ahead of further a material re-rating of the shares Other firms which subsequently updates on Zantac and we believe there remains a sold Zantac and its generic compelling risk-reward profile ahead equivalents and are also named as of further updates on Zantac’. defendants in the litigation cases To recap, GSK won a landmark case in December include US firm Pfizer (PFE:NYSE) and French drug 2022 after a Florida Multi-District litigation federal maker Sanofi (SAN:EPA). court dismissed around 50,000 claims due to a Zantac sales were banned in 2019 after lack of consistent scientific evidence that Zantac the discovery of a ‘probable’ carcinogen in caused cancer. the treatment. In June 2023, GSK reached a confidential Conroy estimates GSK shares trade on nine times settlement in a California case which prevented it his forecast for 2025 earnings per share, implying going to trial reflecting management’s desire to an unjustified 40% discount to its peers. [MG]
”
11 January 2024 | SHARES | 07
News
FCA to investigate commission deals in the UK motor finance market Probe into customer claims could be ‘as big as PPI’ says expert
H
Conduct Authority) has a new target in its sights – the motor finance market. Firms which generate revenue from providing motor finance include Close Brothers (CBG), Inchcape (INCH), S&U (SUS) and Secure Trust Bank (STB). In 2021, the regulator banned commission models which gave motor dealers, finance providers and finance brokers an incentive to bump up customers’ costs after its research found discretionary models had led to increased prices of complainants. for consumers. Therefore, the FCA is bringing to bear the full Its research also found firms often failed to give power of the Financial Services and Markets customers ‘timely, relevant information’ in order Act 2000 to review all historical commission for them to make what it called ‘more appropriate arrangements across several firms and is pausing all decisions’, not just in the motor finance business complaints while it investigates. but across the whole credit sector. Sheldon Mills, FCA executive director of The FCA said it would look closely ‘at any attempt Consumers and Competition, warned companies: by a motor finance firm to introduce a commission ‘If we find widespread misconduct, we will act to model that could lead to the same harm that make sure people are compensated in an orderly, we have sought to ban’, while monitoring consistent and efficient way.’ how well firms complied with the new rules So far there seems to have been little reaction including carrying out ‘mystery shopper’ pointto the news in the financial press, but well-known of-sale exercises to measure lenders’ control over consumer champion Martin Lewis has called it a dealer networks. ‘huge announcement which may mean a On 11 January this year the regulator pay-out for millions’. said a high number of customers had On his back-of-the-envelope numbers, If we find complained to motor finance firms ‘at the top end this could be PPI-type claiming compensation for commission scale’ says Lewis. FT Advisor puts the widespread deals arranged prior to the ban, but firms misconduct, we total industry costs of the PPI (payment were rejecting most complaints because will act to make protection insurance) scandal at £50 in their opinion they hadn’t acted sure people are billion, with the big high-street banks unfairly based on the applicable legal and bearing the impact for more than compensated regulatory requirements at the time. a decade. in an orderly, However, in two new cases the Lewis believes compensation could be consistent and Financial Ombudsman has upheld for the interest on the motor loan, the customers’ complaints and some commission, or even the whole loan in efficient way County Courts have also found in favour some cases. [IC]
”
08 | SHARES | 11 January 2024
News
Warpaint shares continue to soar after strong trading update Shares in the colour cosmetics supplier are up 132% over the past year
compared with a 13% fall in the FTSE AIM All-Share index, and since Value-focused cosmetics company floating in 2016 they Warpaint (W7L:AIM) can do no wrong have gained 213%. in investors’ eyes, it seems. Behind the dramatic share The shares hit a new-all time price rise is strong trading in the high on 12 January after the colour company’s W7 and Technic brands cosmetics supplier upgraded its full- and momentum across its business. year 2023 revenue guidance for the Analysts at Shore Capital fourth time. commented: ‘Trading since the Warpaint is now forecasting interim results has proved strong, full-year 2023 revenue with broad-based outperformance of £89.5 million against across its retailer and geographic Moving previous guidance of at base (including gifting sales) HIGHER further supported by excellent least £85 million. Over 12 months the online momentum through shares are up 132% November and December 2023.’
Warpaint London 400 300 Oct 2023
Jan 2024
Chart: Shares magazine • Source: LSEG
The analysts go on to say the company has ‘considerable potential in Europe, the US and online.’ Warpaint has successfully tapped into the UK and international markets, and this shows no sign of abating with analysts impressed by its performance. Further ‘colour’ on customer and channel dynamics is expected when Warpaint announces its preliminary results for the year to April 2024, when the group expects to post pretax profit of at least £18 million. [SG]
Burberry shares hit a new low after second profit warning Slowdown in the luxury market continues as consumers tighten purse strings Burberry (BRBY) has had a terrible start to 2024, although 2023 was hardly a vintage year for the British fashion house either. The company slashed its profit guidance due to a slowdown in demand for luxury purchases – its second profit warning in three the stock saying greater investment months. was required to deliver a sales Burberry now expects adjusted turnaround. operating profit for the year ending Cracks have clearly begun to 30 March 2024 to be in the range appear in the luxury goods sector, of £410 million to £460 million, with well-heeled consumers down from £553 million to around the world coming under £668 million. pressure from the rising cost The shares have lost DOWN of living, affecting even the 46% over the past year, biggest names in the business in the and fell further on 15 such as French champagnedumps January when US bank to-perfume conglomerate Goldman Sachs downgraded LVMH (MC:EPA).
Burberry (p) 2,000 1,500 Oct 2023
Jan 2024
Chart: Shares magazine • Source: LSEG
Charlie Huggins, manager of the Quality Shares Portfolio at Wealth Club, commented: ‘Chinese consumers are vital for the luxury sector, but spending from this cohort appears to be slowing. China’s economy is struggling, with its real estate sector in a fine mess, and this appears to be filtering through to Chinese consumer sentiment.’ (SG) 18 January 2024 | SHARES | 09
News: Week Ahead
Associated British Foods Why investors might expect a positive earnings surprise from Associated British Foods (p)
2,400 2,200 2,000
Robust updates from value retailers offer a positive read-across for budget clothing chain Primark
UK
UPDATES OVER THE NEXT 7 DAYS FULL-YEAR RESULTS 22 January: Watkin Jones 25 January: Titon Holdings INTERIMS 24 January: Hargreaves Services, Van Elle Holdings 25 January: IG Group, Newmark Security, Time Finance TRADING ANNOUNCEMENTS 19 January: 4Imprint 23 January: Associated British Foods, Premier Foods 24 January: Computacenter, Palace Capital, PensionBee, easyJet, Quilter 25 January: Intermediate Capital Group, Fuller Smith & Turner, Mitie, PPHE Hotel Group
10 | SHARES | 18 January 2024
Primark’s Christmas trading performance, as well as management commentary around trading early in the new calendar year, will be the main focus when the discount fashion chain’s parent Associated British Foods (ABF) next updates the market on 23 January. With a tailwind from the cost-ofliving crisis, value-focused retailers and discounters including German grocers Aldi and Lidl, bargain stores giant B&M European Value Retail (BME) and baker Greggs (GRG) have all issued robust Christmas updates so far, offering a positive read-across for cut-price clothing chain Primark. Analysts will pore over the statement for an update on the resilience of the consumer as well as Primark’s actions on markdowns over the peak period. The Christmas like-for-like sales performance from the jewel in the Associated British Foods’ crown, which continues to expand in Europe and the US, will
1,800
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Jan 2024
Chart: Shares magazine • Source: LSEG
be of particular interest to investors as the value-focused fashion store was lapping tough prior year comparatives. Same-store sales were up 11% in the 16 weeks to 7 January 2023 with sales in the week leading up to Christmas Day 2022 reaching a new record. Investors will also be eager to learn if cost pressures continue to ease for the Weston family-controlled foods-to-fashion conglomerate and whether grocery brands including Twinings, Ovaltine, Blue Dragon, Patak’s, Jordans managed to sustain their momentum during the festive selling period. [JC] What the market expects of Associated British Foods EPS
Revenue
Year to September 2024
173p
£20.75bn
Year to September 2025
188p
£21.66bn
Table: Shares magazine • Source: Stockopedia
News: Week Ahead
All eyes on AI as Microsoft kicks off Big Tech earnings season Copilot and Azure will be front and centre as Windows giant reports Although financial companies traditionally signal the start of the US earnings season, next week is when the tech heavyweights begin reporting starting with Microsoft (MSFT:NASDAQ) on 23 January. Expect AI (artificial intelligence) to continue to dominate the commentary with all eyes on Copilot and Azure growth. Microsoft has emerged as the top AI software story over the past year, with real-world AI applications being quickly embedded into the firm’s product suite through Copilot, delivered over its cloud computing arm Azure, which has been closing the gap on cloud leader Amazon Web Services. Microsoft shares closed the first What Whatthe themarket market expects expectsof ofMicrosoft Microsoft EPS EPS ($) ($)
Revenue Revenue ($bn) ($bn)
Q2 Q22024 2024forecast forecast
2.75 2.75
52.9 52.9
Q3 Q32024 2024forecast forecast
2.58 2.58
60.8 60.8
Table: Table:Shares Sharesmagazine magazine• •Source: Source:Zacks ZacksInvestment InvestmentResearch, Research, Investing.com Investing.com
Microsoft ($) 350 300 250 Apr 2023
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Jan 2024
Chart: Shares magazine • Source: LSEG
calendar quarter of 2023 with a gain of 20%, going on to register a 57% increase over the full year, and another rampant start to this year would go down very well with investors. In fact, last Friday, Microsoft overtook Apple (AAPL:NASDAQ) as the world's most valuable company in terms of market cap. Analysts are forecasting earnings per share of $2.75 for the final quarter of 2023 against $2.32 the previous year, and revenue of $52.9 billion, while investors can expect plenty of optimism for the year ahead that could keep the shares moving higher. The earnings consensus suggests growth is set to accelerate as the months tick by, as customer use cases and Microsoft income ramp up. [IC]
US UPDATES OVER THE NEXT 7 DAYS QUARTERLY RESULTS 19 January: Schlumberger, Travelers, State Street, Fifth Third, Huntington Bancshares, Regions Financial, Comerica 22 January: Brown & Brown, Equity Lifestyle, United Airlines, Zions, Crane NXT, Bank of Hawaii 23 January: Microsoft, J&J, Procter&Gamble, Netflix, Verizon, Texas Instruments, General Electric, Logitech, Premier Financial 24 January: Tesla, IBM, ServiceNow, AT&T 25 January: Visa, Intel, T-Mobile US, Comcast, Union Pacific, Starbucks, Marsh McLennan, Dow, Southwest Airlines, United States Steel, American Airlines
18 January 2024 | SHARES | 11
News: Week Ahead
UK Christmas retail sales likely to be a mixed bag and US GDP in focus Evidence so far points to weakness in clothing and homeware spending There isn’t a great deal of UK economic news to look forward to over the next seven days, the highlight being official December retail sales due on 19 January. If reports from supermarkets and highstreet retailers are any guide, shoppers spent more freely on groceries than last year, and bought more items than usual, while general merchandise and clothing sales performed less well. That seems to be backed up by the latest survey by consultants KPMG and the BRC (British Retail Consortium), which showed December retail sales up 1.7% against a 6.9% rise the previous year with both in-store and online non-
Macro Macro diary diary 18-25 18-25 January January 2024 2024 Date Date 18-Jan 18-Jan
19-Jan 19-Jan
24-Jan 24-Jan
25-Jan 25-Jan
Economic Event Economic Event US December Housing US December Housing Starts Starts US January Philly Fed US January Philly Fed Manufacturing Index Manufacturing Index UK December Retail Sales UK December Retail Sales Eurozone December CPI Eurozone December CPI US December Existing US December Existing Home Sales Home Sales US January Michigan US January Michigan Consumer Sentiment Consumer Sentiment Euro-zone January Euro-zone January Manufacturing PMI Manufacturing PMI US January Manufacturing US January Manufacturing PMI PMI US December Durable US December Durable Goods Orders Goods Orders US Q4 GDP US Q4 GDP
Previous Previous Month Month 1.56m 1.56m -10.5 -10.5 0.1% 0.1% 2.4% 2.4% 3.82m 3.82m 69.7 69.7 44.4 44.4
Next Next Central Central Bank Bank Meetings Meetings & & Current Interest Rates Current Interest Rates
47.9 47.9
Date Date
Event Event
25-Jan 25-Jan
European European Central Central Bank Bank
4.5% 4.5%
31-Jan 31-Jan
US US Federal Federal Reserve Reserve
5.5% 5.5%
01-Feb 01-Feb
Bank Bank of of England England
5.25% 5.25%
5.4% 5.4% 4.9% 4.9%
Table: Shares magazine • Source: Morningstar, central bank websites Table: Shares magazine • Source: Morningstar, central bank websites
12 | SHARES | 18 January 2024
food sales falling. According to the BRC head of UK retail Paul Martin, ‘The festive feel-good factor was lacking this year as many retailers faced a disappointing December with sales only up 1.7%. Christmas shoppers ditched clothing, jewellery and technology gifts, opting for beauty, health and personal care products, which, along with food and drink drove festive sales this year.’ Despite a slowdown in inflation, an upcoming cut in national insurance rates and some consumers having more money in their pockets this Christmas than last, ‘the constant drip of economic challenges over the last two years has finally come home to roost’ said Martin. In the Eurozone, where the ECB is seen as likely to be the first central bank to start cutting interest rates, the focus will be firmly on consumer prices. November’s annual inflation figure of just 2.4% was better than forecast and the best reading since July 2021, so a lower figure for December could unleash animal spirits after a lacklustre performance for Eurozone stocks on the whole last year. In the US, after December’s inflation figure came in marginally above expectations, the next major test for the market will the durable goods data and fourth-quarter GDP reports on 25 January, where bad news economically-speaking is likely to be hailed as good news if it puts the chance of an early rate cut back on the table. [IC]
Previous Previous
Table: Table: Shares Shares magazine magazine •• Source: Source: Morningstar, Morningstar, central central bank bank websites websites
Great Ideas: Investments to make today
Buy this ETF for a low-cost play on unloved Chinese market leaders This product should appeal to risk-tolerant investors eager for exposure to unloved Chinese equities
HSBC MSCI China UCITS ETF USD (HMCH) Fund size: £480 million
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hina is one of the biggest contrarian calls for 2024, with tensions between the world’s second biggest economy and the West on the rise over issues including access to the latest technology and the fate of Taiwan which is pivotal to the global semiconductor manufacturing industry. In addition, concerns over the populous Asian nation’s debt and its property sector, as well as a post-Covid economic rebound which has struggled to gain traction, are all reflected in the lowly valuations currently ascribed to Chinese stocks. For risk-tolerant investors eager for exposure to this gargantuan emerging market and its exciting technology stocks with huge potential as the AI (artificial intelligence) era begins, this is as compelling an entry point as you’re likely to get. Chinese equities could take off like a rocket and re-rate from depressed levels as earnings momentum improves in the year ahead, thereby rewarding the bold. One low-cost way to gain exposure is through the HSBC MSCI China UCITS ETF USD (HMCH), the cheapest exchange-traded fund tracking the MSCI China index with charges of just 0.28%. However, this product isn’t for the risk-averse or those who dislike volatility, having delivered negative total returns of 26.5% and 46.8% over one and three years respectively. For the adventurous investor, however, this £480 million fund offers a high-octane play on the recovery potential
14 | SHARES | 18 January 2024
HSBC MSCI China (p) 800 600 400 2019
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2023
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Chart: Shares magazine • Source: FE Analytics
of China, the domain of many market-leading companies. The ETF aims to track as closely as possible the returns of the MSCI China Index, which tracks the largest and most liquid Chinese stocks, replicating the performance of the underlying index in full. For the uninitiated, this means the fund buys every single index constituent, while the dividends in an ETF offering a 2.2% yield are distributed semi-annually. As of 30 November 2023, the fund offered diversified exposure via 767 holdings with a very forgiving price to earnings ratio of 13.1 implying significant re-rating scope. Top 10 holdings included modestly-valued Chinese internet titans Tencent (0700:HKG), among the globe’s highest grossing multimedia companies by sales, and Alibaba (9988:HKG), one of the world’s largest retailers and e-commerce companies. Prospective investors are also buying into the likes of JD.com (9618:HKG), a major competitor to Alibaba-run Tmall, not to mention Baidu (9888:HKG), which is China’s answer to Google parent Alphabet (GOOG:NASDAQ), Chinese food delivery leader Meituan (3690:HKG) and insurance-to-banking behemoth Ping An Insurance (2318:HKG). [JC]
Great Ideas: Investments to make today
Trustpilot’s re-rating has only just begun – buy the stock now More muscle on margins is one of many reasons to back the business
Trustpilot (TRST) Price: 161p
Market cap: £672 million
I
nvestors may think they have missed the Trustpilot (TRST) boat after the shares have doubled in six months. Not so, in our opinion. Shares believes this re-rating story has only just started and the share price could easily surge past 200p this year and far higher over time. To put this into context, when analysts at Berenberg and Peel Hunt began covering the stock in summer 2021, both saw the stock hitting 430p. While it has taken a little longer than originally hoped for Trustpilot to make a profit breakthrough, rapid progress is on the cards this year. Trustpilot listed in London in March 2021 with a market capitalisation of £1.08 billion and a 265p share price. Behind the stock’s recent rally are repeated earnings upgrades and excitement surrounding the arrival in September of Adrian Blair as chief executive, the former global chief operating officer of UK food delivery firm Just Eat (JET). Like many digital commerce businesses,
Trustpilot (p) 400
200
0 2022 Chart: Shares magazine • Source: LSEG
2023
2024
Trustpilot’s business grew rapidly during the pandemic. The platform now hosts more than 167 million consumer reviews of products and services across 714,000 websites. Thousands of businesses now turn to Trustpilot for customer transparency and the underlying consumer data analytics it provides to clients. Crucially, this creates valuable network benefits. The more consumers that use the platform and share their own opinions, the richer the insights the company can offer clients. Done well, this creates a virtuous circle where consumers feel drawn to Trustpilot because it is where meaningful services are listed and reviewed, and the more consumers who use Trustpilot, the more businesses will feel they cannot afford not to be on the platform. Independent survey data from Sirkin Research showed 87% of consumers in the UK and US found ads more trustworthy with the Trustpilot logo and star rating than without. Annualised recurring revenues are running at £197 million, and Berenberg sees 44% adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) growth this year (to 31 Dec) against its analysts’ long-term 30%-plus target. The investment case is similar to Rightmove (RMV), one of our Great Ideas last week, and Auto Trader (AUTO), both platform businesses which have consistently beaten the market for returns. While fierce competition from the likes of New York-listed Yelp (YELP:NYSE) and others is a certainty, Trustpilot is already cemented in the minds of consumers and on balance it still looks like an exciting long-run growth story to us. (SF) 18 January 2024 | SHARES | 15
Great Ideas Updates
We remain positive on Marks Electrical despite short-term headwinds The business remains in good shape despite a temporary set-back
Marks Electrical (MRK:AIM) 69.35p
Loss to date: 29.3% In late August 2023 we said online domestic appliances and consumer electronics retailer Marks Electrical (MRK:AIM) had good growth potential driven by market share gains and geographical expansion. Over the last three years, its share of the online major domestic appliances market has more than doubled to 4.7% while its share of the online consumer electricals market has increased by a factor of six to 0.6%. WHAT HAS HAPPENED SINCE WE SAID TO BUY? In a trading update on 10 January, the company said it experienced strong revenue growth in its third quarter to the end of December of 17.8% to £35.1 million taking year-to-date revenue up 22% to £88.9 million. The firm also said it had continued to increase
Marks Electrical (p) 100 80 Apr 2023
Jul
Chart: Shares magazine • Source: LSEG
16 | SHARES | 18 January 2024
Oct
Jan 2024
market share in online domestic appliances and consumer electronics. A strategic decision to keep delivery and installation services in-house resulted in record volumes during the peak trading period. Unfortunately, that is where the good news ended. Economic uncertainty has led to consumers becoming ‘highly price-conscious’, resulting in pricing pressure and lower gross margins. Despite action to control other costs, the firm said there would be a temporary but ‘material’ impact on full year profits. In addition, management cautioned on the speed of recovery in consumer buying patterns and therefore gross margins. Analysts at Canaccord Genuity have reduced their 2024/25 EBITDA (earnings before interest, tax, depreciation, and amortisation) estimates by 38% and 28% respectively. However, the broker remains constructive on the shares: ‘We believe the long-term story remains intact, yet short-term the shares are likely to see pressure given the sizeable downgrades.’ WHAT SHOULD INVESTORS DO NOW? It is disappointing to see a profit warning, but macroeconomic headwinds are beyond management’s control and the business continues to take market share and maintain excellent customer service levels as reflected in an industry leading Trustpilot score of 4.8. Despite current headwinds, the business remains profitable and has net cash on the balance sheet. The long-term story is intact and we remain positive on the shares. [MG]
Great Ideas Updates
Whitbread looks to offer plenty more upside for patient investors Revenue and earnings are rising nicely while the assets look undervalued
Whitbread (WTB): £36.75
Whitbread
Gain to date: 9%
3,500
(p)
3,000
We recommended buying into hotel and leisure group Whitbread (WTB) in June 2023 as revenue, earnings and dividends were already well above their pre-pandemic levels but the shares had yet to recover. In addition, bookings were on an improving trend not just among holidaymakers but also business travellers and we were watching corporate developments. Press talk suggested Whitbread was looking to sell part of its UK pub and restaurant division, which typically earns a lower margin than the hotels, while a private deal for Travelodge suggested the core Premier Inn business was significantly undervalued. WHAT HAS HAPPENED SINCE WE SAID TO BUY? The group posted strong results for the six months to September, with revenue up 17% on what was already a robust performance in the prior year and up 55% on the same six-month period before the pandemic. Chief executive Dominic Paul called the results ‘outstanding’, rewarding investors with a 40% hike
Apr 2023
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Jan 2024
Chart: Shares magazine • Source: LSEG
in the interim dividend and an extension of the share buyback programme. Paul also said the group saw the undersupply of quality UK hotel accommodation extending to at least 2028 due to the closure of so many operators due to the pandemic. The positive momentum in first-half bookings and revenue continued into the third quarter, with the firm reporting ‘robust demand’ in the UK driving high occupancy levels and strong pricing. While there was no change to current-year guidance, for the coming year the company said the supply situation in the UK still looked favourable and it had a strong forward booked position as well as a plan to offset cost inflation – which has slowed sharply to just 3% to 4% - with operational cost savings. Finally, although there has been no word on disposals, the recent sale of 66 Travelodge hotels for £210 million – 50% above the value suggested last summer when US hedge fund GoldenTree was looking to offload the chain – suggests even more valuation upside for Whitbread’s estate. WHAT SHOULD INVESTORS DO NOW? We would sit tight as we expect Premier Inn UK to continue posting solid quarterly numbers, while 2024 should see Whitbread’s German operations start to contribute to group earnings after a lengthy period of building momentum, and the valuation still looks attractive. [IC] 18 January 2024 | SHARES | 17
Feature: Fundsmith Equity Fund
Should investors be concerned by Fundsmith Equity’s five year underperformance? The best managers fail to match the market around a third of the time
T
erry Smith delivered disappointing news last week (9 January) after he revealed his flagship equity fund Fundsmith Equity Fund (B41YBW7) had underperformed the MSCI World Index for a third successive year. Moreover, the fund’s cumulative total return now lags the global benchmark over five years. As Smith points out in his annual letter, outperforming the market or even making a positive return every year is not something investors should expect. So, what should investors do with this news, if anything at all, and how should they think about investment performance in a wider context? This feature introduces and analyses some key pointers. Looking through a long-term lens Fundsmith has been an unmitigated success story. Since inception in November 2010, the fund
18 | SHARES | 18 January 2024
has handily beaten the index by delivering an annualised total return of 15.3% per year which means Smith has turned a £1,000 investment into almost £6,500 today. The fund remains the best performer since inception among the 165 funds which sit in the Investment Association Global sector. Not only has the fund bested the index, it has done so with lower share price variability returning about 63% more than the index per unit of price volatility. Smith has built a loyal fanbase which has seen the fund’s assets swell to over £24 billion, so converts are unlikely to be too concerned. As Laith Khalaf, head of investment analysis at AJ Bell points out: ‘All active managers are of course prone to periods of underperformance, especially those like Fundsmith which have a distinct investment style and run a concentrated portfolio.
Feature: Fundsmith Equity Fund This is especially true when market leadership is as narrow as it was in 2023.’ For new investors considering an investment in the fund the calculus may be slightly different. Some may view the underperformance as an opportunity to get ahead of a potential bounce back to form. Others may view the soft patch as a red flag which may be enough to prevent them taking the plunge. The reality is nobody knows how the next five or 10-years will play out. Statistically, past investment performance has no relation to future performance. WHAT IS SPECIAL ABOUT THREE YEARS? This begs the question, what is so special about fund managers that they need to prove their worth over one or three years? As the managers of the Overstone Global Equity Income Fund (FUND:B75K5L9) commented in their recent 2023 review: ‘A year is the time it takes the Earth to complete one orbit around the Sun. Important if you are planting a crop; less so if you are appraising the performance of a long-term investment strategy.’ In 2022, the fund – which like Fundsmith Equity takes a long-term approach and holds a
concentrated list of stocks - lagged the benchmark by 20%, whereas last year it beat the index by 17%. ‘Same approach, same process, very different outcomes – simply based on where one anchors a starting point’, add the managers. Another illustration of the peculiar effects of using fixed dates relates to US investment manager Bill Miller at Legg Mason Capital Management. Between the early 1990’s and 2000’s, Miller’s fund outperformed the S&P 500 for 10 consecutive years. A book was written on the era called ‘The Man Who Beats the S&P’ by Janet Lowe. While much was made of this phenomenal run, Miller himself downplayed the result as a quirk of the calendar and pointed out that if the start and end dates been moved by just a few days, his phenomenal winning streak would not have happened. Interestingly, Fundsmith Equity outperformed the MSCI World Index for 11 consecutive years following launch in November 2010 (ignoring the two months to 31 December 2010). SUPERINVESTORS In 1984, Warren Buffett wrote an article for the Columbia Business School magazine Hermes entitled ‘The Superinvestors of Graham-
Approximate excess return versus the S&P 500 Index (with dividends reinvested) of top investors No of Years
Annualised Excess return (%) 0
10
20
30
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Joel Greenblatt Jim Rogers Stanley Druckenmiller Charles Munger George Soros Peter Lynch Warren Buffett Benjamin Graham Anthony Bolton John Templeton Terry Smith Terry Smith's excess performance is against the MSCI World Index rather than the S&P 500 Chart: Shares magazine • Source: Frederik Vanhaverbeke.
18 January 2024 | SHARES | 19
Feature: Fundsmith Equity Fund
Fundsmith Equity Fund vs MSCI World Index Rebased to 100 Fundsmith Equity
MSCI World
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and-Doddsville’. In it he presented and discussed the investment performance of some of his peers who had been taught by the legendary Benjamín Graham and who all invested using value principles learned from Graham and Dodds’ seminal book ‘Security Analysis’. Over periods ranging from 13 years to 28 years, the group outperformed the market by between 8% and 17% per year. To recall, Fundsmith has outperformed the market over the past 13 years by around 4% per year, so these investors performed two times to four times better albeit under very different market conditions and time frames. What is striking about these superinvestors is that they all suffered significant underperformance at some point along the way to building spectacular long-term track records. On average, they underperformed around a third of the time they managed money (the range is 7.1% to 42%). The worst three-year underperformance (peak to tough percentage loss) saw one manager fall almost 50% behind the benchmark. In this regard, Fundsmith Equity compares very well. It has underperformed in only three out of 13 years which is equivalent to 23% of the time. The fund is around 12% behind the benchmark over three years and around 7% behind over five years according to FE data as of 8 January 2024. Eugene Shahan, who graduated from the Columbia Business School, wrote an article on Buffett’s findings and his ‘superinvestors’ in 1986. Shahan observed: ‘In today’s environment, they would have lost many of their clients during their periods of underperformance. Longer term, it would have been the wrong decision to fire any of 20 | SHARES | 18 January 2024
those money managers.’ Shahan summed up the dilemma well: ‘It may be another of life’s ironies that investors principally concerned with short-term performance may very well achieve it, but at the expense of longterm results.’ EVEN THE EXPERTS GET IT WRONG Academic studies looking at the investment decisions of pension plan sponsors show that managers tend to get fired after a three-year period of underperformance and hired after strong periods of outperformance. One study in 2006 by Amit Goyal and Sunil Wahal of the University of Lausanne and Arizona State University concludes: ‘Using a matched sample of firing and hiring decisions, we find that if plan sponsors had stayed with fired investment managers, their excess returns would be larger than those actually delivered by newly hired managers.’ In conclusion, trying to assess the skill of an investment manager by past performance is fraught with jeopardy and generally not the best idea. It is far more important to focus on the investment philosophy adopted and the processes implemented. DISCLAIMER: AJ Bell referenced in the article owns Shares magazine. The author of this article (Martin Gamble) and the editor (Ian Conway) have an investment in AJ Bell. Ian Conway also has an investment in Fundsmith Equity. By Martin Gamble Education Editor
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BEYOND BUFFETT HOW IS BERKSHIRE HATHAWAY APPROACHING THE SUCCESSION AND DOES THE GREAT MAN HAVE ONE LAST BIG DEAL IN HIM?
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A
n investor blessed with Nostradamus-like predictive powers who put money to work with Berkshire Hathaway (BRK.B:NYSE) in 1964 and held the shares until 2022 would have enjoyed a gargantuan overall gain of 3,787,464% in terms of per share market value, leaving the stellar 24,708% return from the S&P 500 index with dividends included for dust. Under the direction of legendary investor 22 | SHARES | 18 January 2024
Warren Buffett and his co-manager for six decades Charlie Munger, the company’s per-share market value grew at a compound annual rate of around 20% over that period compared with 10% per year for the S&P 500 index. But as the well-worn disclaimer goes, past performance is no guide to future returns. Following the death of Buffett’s long-term business partner Munger in late November 2023, a mere
33 days short of his 100th birthday, it is the future of Berkshire Hathaway, a beacon of investment management revered for its long-term strategy and high rate of return, that concerns investors now. Keith Ashworth-Lord, manager of the CFP SDL UK Buffettology Fund (BF0LDZ3) which uses Buffett’s name and pursues the quality-focused ‘Business Perspective Investing’ approach championed by the ‘Sage of Omaha’ and Munger, describes the latter’s death as ‘truly an epoch-making event’. Munger had been Buffett’s right-hand man for six decades, during which they forged their reputation as the world’s supreme investors. It was Munger who steered Buffett away from what he had learned from Ben Graham, buying dirt-cheap ‘cigar butt’ shares with a view to selling at a fair value, and towards buying quality businesses at fair prices and then holding them for the very long term. Munger also earned the nickname ‘the Abominable No-Man’ for his capacity to correct and occasionally contradict Buffett, so his influence on the ‘Oracle of Omaha’ shouldn’t be understated. But the big question on everyone’s lips is how Munger’s passing might change Berkshire Hathaway and the way it is managed. After all, Buffett is now 93, a ripe old age for a chief executive, and as the world’s greatest living investor recently conceded: ‘I feel good, but fully realise I am playing in extra innings.’
THINKING THE UNTHINKABLE BERKSHIRE BEYOND BUFFETT Ashworth-Lord’s take is that ‘nothing much will change, at least in the medium term. The culture of long-termism and shareholders-asowners is so embedded. ‘It is in the company’s DNA,’ he says. His main worry is ‘the toll it might take personally on Warren, who must feel bereft’. In terms of the future beyond the Buffett era, Ashworth-Lord stresses that plans are in place for Howard Buffett, one of the great man’s sons, to become the nonexecutive chairman with Greg Abel, currently the head of Berkshire’s energy business, to run the operating business, and Ajit Jain to oversee the insurance operations. Tod Combs and Ted Weschler will continue as investment managers of Berkshire’s portfolio of marketable securities. Abel is seen as the next Berkshire Hathaway chief executive, concurs Nick Brind, co-manager of investment trust Polar Capital Global Financials (PCFT), adding: ‘It is almost impossible to imagine Berkshire Hathaway after Buffett has gone but
Berkshire Hathaway - top 10 holdings Value ($000)
Percentage of portfolio
AAPL:NASDAQ
156,753,093
50.0%
Bank of America
BAC:NYSE
28,279,487
9.0%
American Express
AXP:NYSE
22,618,800
7.2%
Coca-Cola
KO:NYSE
22,392,000
7.1%
Chevron
CVX:NYSE
18,590,066
5.9%
Occidental Petroleum
OXY:NYSE
14,541,501
4.6%
Kraft Heinz
KHC:NASDAQ
10,954,355
3.5%
Moody's
MCO:NYSE
7,799,843
2.5%
Davita
DVA:NYSE
3,412,114
1.1%
HP
HPQ:NYSE
2,634,739
0.8%
Company
Ticker
Apple
Holdings as of 30 September 2023. Date filed 16 November 2023. Table: Shares magazine • Source: Berkshire Hathaway Q3 2023 13F
18 January 2024 | SHARES | 23
WHY BERKSHIRE HATHAWAY MATTERS
An American multinational headquartered in Omaha, Nebraska, Berkshire Hathaway was founded in 1839 as a New England textile manufacturer but underwent a drastic restructuring into a conglomerate starting in the mid-1960s under the leadership of Buffett and Munger. Today, this $800 billion cap’s main business and source of capital is insurance, from which it invests the float in a broad portfolio of subsidiaries and equity positions. Present-day Berkshire Hathaway is one of the largest companies in the US employing several hundred thousand people through its railroad, manufacturing, retailing, energy, confectionery and insurance businesses. Berkshire’s insurance brands include auto insurer GEICO and reinsurance firm Gen Re; its railroad interests include Burlington Northern Santa Fe (BNSF); utilities and energy interests include Berkshire Hathaway Energy (BHE), and its other businesses span everything from manufacturer Precision Castparts to housing company Clayton Homes, flooring distributor Shaw Industries, clothing brand Fruit of the Loom and iconic candy shops chain See’s, to give just a flavour. Buffett’s corporate creation is ‘basically a microcosm of the US economy and that was one of the reasons why I decided to put Berkshire Hathaway, which was run by people that I liked and respected immensely, into Buffettology’, says Ashworth-Lord. ‘If you look at the operating businesses you’ve got the railroad in there, the power generation and distribution businesses, a whole host of manufacturing businesses in various nooks
24 | SHARES | 18 January 2024
and crannies of the economy and the retail and consumer-facing businesses. And that’s aside from the fact that Berkshire is probably best known for its insurance activities, which provide all the nice moolah to invest.’ Oakglen’s Lamond explains that Berkshire Hathaway has amassed ‘a diversified portfolio of investments’ bringing exposure to technology, banking, insurance, communications, energy and consumer staples. ‘Over the last few decades, Berkshire has accumulated substantial positions in these companies which has ensured it has oversight of the management of these investments. This has ensured Berkshire has been able to influence how the companies have been run.’ And then of course there is Berkshire’s investment portfolio including its largest single holding, Apple (AAPL:NASDAQ) – Buffett has said Apple is ‘probably the best business I know in the world’ – as well as Bank of America (BAC:NYSE), American Express (AXP:NYSE), Coca-Cola (KO:NYSE) and Chevron (CVX:NYSE), market leaders with the economic ‘moats’ beloved by Buffett. Other positions include Kraft Heinz (KHZ:NASDAQ), Amazon (AMZN:NASDAQ), Diageo (DGE) and Chinese electric vehicle maker BYD (002594:SHE). Through its National Indemnity subsidiary, Berkshire Hathaway also has interests in five Japanese trading firms, namely Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo, the biggest of Japan’s so-called ‘sogo-shosha’ or general trading companies. Buffett has likened this quintet to Berkshire Hathaway itself, since they have diversified portfolios with long-term investments and a focus on value and cash flow.
we would not expect any major changes to the way the business is run. The management of the investment portfolio is less clear albeit it is assumed that Ted Weschler and Tod Combs who currently manage a not insignificant percentage of the portfolio will be heavily involved.’ Also weighing in is Will Lamond, investment director at Oakglen Wealth. ‘Greg Abel is expected to take over the reins at Berkshire when Buffett finally stands down,’ Lamond informs Shares. ‘The Sage of Omaha was recently quoted in an interview with CNBC that Abel, “Does all the work and I take the bows – it’s exactly what I wanted.” The more pressing question is how and who will Abel be supported by in his role, and will there be another Charlie Munger-type figure?’ Like Ashworth-Lord, Lamond would be surprised to see many changes in how Berkshire Hathaway is run or how it invests. ‘The management team have all been handpicked by Buffett and the late Munger and have been in place for several years. I suppose the best way of looking at it, is if it isn’t broke, why try to fix it?’
Could Unilever be a potential target?
Could potential targets include Marmite-toMagnum ice cream maker Unilever (ULVR) for instance? After all, back in 2017 Buffett was involved in the ultimately aborted bid for the FTSE 100 group from Kraft Heinz (KHC:NASDAQ). Or COULD BUFFETT DO ANOTHER BIG DEAL? might Berkshire be interested in buying Diageo At the last count, Berkshire Hathaway (DGE), the Johnnie Walker maker was sitting on a record $157 billion whose shares are currently nursing a cash pile thanks to the mountains profit warning-induced hangover? of cash generated by its operating Lamond says the enormous cash The culture of businesses and following investment pile ‘has been well reported and in long-termism and portfolio share sales. Given the certain investment circles has been a shareholdersconglomerate’s formidable firepower detractor to the investment case for as-owners is so for acquisitions, might Buffett, who Berkshire. One would be foolhardy embedded. remains highly active for a man of his to totally discount a mega deal being years, have one big deal left in him? struck but it is more likely Berkshire will
”
Berkshire Hathaway in numbers Berkshire Hathaway Class B Share price
$367.7
Market cap
$803.2bn
Berkshire Hathaway Class A Share price
$558,855
Market cap
$803.2bn
Table: Shares magazine • Source: Google Finance
18 January 2024 | SHARES | 25
HOW TO BUY BERKSHIRE HATHAWAY Berkshire Hathaway is a stock with defensive attractions given its ownership of large insurance businesses able to offset its more economically-sensitive businesses. And as Brind points out, the company is rated AA by S&P and Aa2 by Moody’s, reflecting the strength of its balance sheet. Analysts at Morningstar believe that owing to its diversification and lower overall risk profile, Berkshire offers ‘one of the better risk-adjusted return profiles in the financialservices sector (and remains a generally solid candidate for downside protection during market sell-offs). We remain impressed by Berkshire’s ability in most years to generate high-single-to-double-digit growth in book value per share, comfortably above our estimate of its cost of capital.’ Ashworth-Lord assures Shares that Berkshire has been ‘a tremendously successful investment for the fund, because not only have we had quite a rise in local currency terms but we’ve had the benefit of cable.’ He’d be a happy holder beyond Buffett since the succession is ‘well in place and the culture is so ingrained in these guy that we don’t need to worry about them going off at a tangent’. Combs and Weschler have been ‘long bedded in as investment managers and been given more and more responsibility. I think you can see their impact in investments like Apple, which were probably their origination.’ Investors interested in buying the shares can, in theory, choose between Class A stock (BRK.A) and Class B stock (BRK.B). The main difference between the two classes is their price: as of 10 January 2024, the Class A shares were trading at $558,855 per share with the more affordable Class B shares changing hands for $367.70. Class A is the original stock, known for its astronomical price per share, whereas the lower-priced Class B shares, issued in 1996 to enable smaller investors to nibble at the Berkshire pie, carries lower voting rights. The Class A shares can be converted into an equivalent amount of Class B shares any
26 | SHARES | 18 January 2024
time a Class A shareholder wishes to do so. The conversion privilege does not exist in reverse. Class B shareholders can only convert their holdings to Class A by selling their Class B shares and then buying the equivalent in Class A. Another option is to purchase exposure through funds and investment trusts. At 5.18% of the portfolio, the conglomerate is the fourth biggest position in the CFP SDL UK Buffettology Fund (BF0LDZ3) and a top 10 holding in the BlackRock US Dynamic (B87XJQ6), Schroder US Equity Income Maximiser (B87XJQ6) and WS Canlife North American (B73N327) funds. In the investment trusts space, JPMorgan American (JAM) holds the stock in its top 10, as does the Brind and George Barrow-managed Polar Capital Global Financials. ‘In terms of the valuation, we were guided by price to book value which is exactly what Warren does,’ adds Ashworth-Lord. ‘I always think it is worth looking at Berkshire Hathaway if it gets below a discount to book value of 10% to 15%. We’re not there at the moment, but if I was looking to buy more, I might just wait for a bad day on Wall Street because Berkshire is going to go down with it. You’ll get your opportunity.’
Compounded annual gain – 1965 to 2022 Berkshire
S&P 500
19.8% 9.9% Chart: Shares magazine • Source: Berkshire Hathaway
Overall gain – 1964 to 2022 Berkshire
S&P 500
3787464% 24708% Chart: Shares magazine • Source: Berkshire Hathaway
continue to accumulate positions in companies such as Occidental Petroleum (OXY:NYSE), which remain underappreciated by the market. Also, Berkshire has a progressive share buyback program in place that allows management to buy back shares if the company trades below its internally set intrinsic value.’ Polar Capital’s Brind says: ‘A sustained downturn that is of sufficient duration to allow Buffett to deploy the cash in supporting or acquiring a decent sized business would make it much more likely but even during the financial crisis there was no one single huge deal as it was spread across a number of businesses. Having said that it was shortly followed by the acquisition of BNSF in 2009/10 so you never know.’ Ashworth-Lord insists Buffett won’t be rushed into anything and it is a case of ‘finding a deal that is big enough to move the dial and comes at a price that makes business sense for Buffett.
‘I can tell you from experience that he does not overpay. But if a deal does present itself, I’ve no doubt whatsoever he will do it.’ The general consensus on Berkshire Hathaway is that the shares could plunge when Buffett finally shakes off his mortal coil. Yet AshworthLord doesn’t think the price will crater: ‘You’ll have the venture capitalists swarming round it like flies round a honeypot. But if Berkshire Hathaway were to tank, look at all that lovely cash on the balance sheet to start buying back shares. The company could mount a massive share buyback at a knockdown price and if that were to come to pass, it could well be Buffett’s best-ever deal from beyond the grave.’ By James Crux Funds and Investment Trusts Editor
18 January 2024 | SHARES | 27
Feature: Fund managers’ best opportunities
How fund managers plan to respond to the artificial intelligence theme in 2024 AI stocks made impressive gains last year but were they just a flash in the pan? There is no question the dominant theme in stock markets last year was AI (artificial intelligence), in particular generative AI. In an interview with Time magazine last June, Sam Altman – the former chief executive of OpenAI, whose ChatGPT product has been at the forefront of the AI trend – said he believes the technology will ‘transform the way people work and the way people learn. It’s going to transform the way people interact with the world. In a deep sense, AI is the technology that the world, that people have always wanted’. So, for the final part of our survey, we thought we would ask fund managers what impact AI might have on their portfolios and their stock picks for the year ahead.
HOW WILL AI IMPACT YOUR INVESTMENTS IN 2024? George Ensor
Julian Bishop
R&M UK Listed Smaller Companies Fund (B1DSZS0)
Brunner Investment Trust (BUT)
‘While we don’t underestimate the impact AI is going to have, the market has been very quick to decide on which companies are winners and which are losers. We expect the answers are going to be more nuanced and take time to be realised. There are obvious productivity opportunities for many companies as well as risks from new AI-enabled competitors.’ 28 | SHARES | 18 January 2024
‘AI is already everywhere and will only grow in importance with time as the broad shift towards information technology continues. On a personal level, I’m hoping Microsoft’s (MSFT:NASDAQ) forthcoming AI ‘Copilot’ for Office 365 will help me better summarise company meeting notes and reduce the time needed to construct financial models – two examples of its many purported uses. AI will also generate business for IT implementation firms, and further boost demand for semiconductors, where we have several holdings we think will benefit.’
Feature: Fund managers’ best opportunities
Jean Roche
Stephen Yiu
Schroder UK MidCap Fund (SCP)
Stephen Yiu, Blue Whale Growth (BD6PG78)
‘AI has been around financial markets for 10 years now and is in use to a greater or lesser degree in many products and services. It’s just been re-badged and democratised. Last Christmas I was learning to write witty poems about my kids with the help of Chat GPT, now we have our own “AI sandbox” at Schroders, called Genie, which helps me to be more efficient in how I read annual reports, for example. Some would liken AI models to very well-qualified and resilient graduates with boundless energy – dangerous if left to pick stocks on their own, but if guided well, can help experienced investors make more informed decisions. ‘Looking across our top 15 holdings, I see multiple beneficiaries of AI – either users of or suppliers to this growth industry, for example Computacenter (CCC), Man Group (EMG), Oxford Instruments (OXIG) and Spectris (SXS).’
‘This year portfolio companies such as Nvidia (NVDA:NASDAQ) have benefited enormously from the proliferation of AI and its democratisation through the development of services such as Chat GPT, Adobe Firefly, and DALL.E, amongst others. ‘We see “the AI revolution” as a long-term theme, the importance of which should not be underestimated. Where digital transformation was the story of the past decade, the AI revolution is where we see the majority of growth coming in 2024. As global titans, such as Microsoft (MSFT:NASDAQ) and Meta (META:NASDAQ), embrace AI, the quality growth opportunities are incredibly exciting. The portfolio is invested accordingly.’
Kartik Kumar, Artemis Alpha Trust (ATS)
‘AI will shape business dynamics for the next decade, but the impact over the next year is hard to predict. Unlike the internet, I think it is more likely to be an enabling technology than a disruptive one. The long-term potential benefit to financial services seems underappreciated. These companies have significant customerfacing and support functions where cost could be reduced through automation.’ 18 January 2024 | SHARES | 29
Feature: Fund managers’ best opportunities
James Henderson
Guy Anderson
Henderson Opportunities Trust (HOT)
Mercantile Investment Trust (MRC)
‘AI has been totally overhyped this year in the same way that hydrogen was a couple of years ago. AI will become hugely important, just as hydrogen will, but it will take time. The market wants these things to happen much quicker than is possible in reality.’
‘‘This theme has captured imaginations this year, and the long-term potential of AI is not to be underestimated. Although we would urge a degree of caution, there are some pockets of the market where we are already seeing genuine transformation. Our investments in Bytes (BYIT) and Softcat (SCT) could benefit as their corporate and public sector customers start to adopt generative AI solutions.’
Charles Montanaro Montanaro UK Smaller Companies (MTU) William Tamworth Artemis UK Smaller Companies Fund (B2PLJL5) ‘With any exciting new technology there is the risk its impact can be over-estimated in the short term. We believe the potential negative impacts of AI have in some instances been overstated – for example, in the case of digital publisher Future (FUTR) or enterprise translation provider RWS (RWS), which also has its own leading machine translation offer. Some companies are already using AI to make their businesses more efficient – we expect more of this but it will be a relatively gradual process.’ 30 | SHARES | 18 January 2024
‘There are several companies in the portfolio which may benefit from advances in AI. Kainos (KNOS), an IT services company, is harnessing the power of generative AI to make its own software engineers more efficient, while also winning AI-related projects with customers. Bytes Technology (BYIT), a leading software reseller in the UK, stands to benefit via its partnership with Microsoft (MSFT:NASDAQ), as the tech giant rolls out CoPilot features across its Office suite. XP Power (XPP), a provider of power supplies, sells to manufacturers of equipment used to produce semiconductors, and thus may indirectly benefit from an increase in manufacturing capacity required to make more AI chips.’
Feature: Fund managers’ best opportunities
Simon Barnard
Richard Penny
Smithson (SSON)
Crux UK Smaller Companies (BQV37J7)
‘While there will be a limited impact on our portfolio companies in the coming year, in the long term we expect AI to help reduce costs and produce new products. Many of our companies already use some form of AI combined with machine learning to process data, while others such as Verisk Analytics (VRSK:NASDAQ), the US insurance data company, are starting to research the potential uses of generative AI to offer new products.’
Stuart Gray Alliance Trust (ATST) ‘Although it has huge potential to boost productivity, we are wary of much of the hype surrounding AI. As with the internet bubble 20 years ago, it could take several years before the clear AI winners emerge. ‘While we do have exposure to AI today, through Microsoft (MSFT:NASDAQ) for example, our stock pickers are playing it company by company rather than as a portfolio theme. The key will be which companies are able to use AI to improve their efficiency or customer offerings and outperform their competition.’
‘We own shares in FD Technologies (FDP:AIM) whose KX Systems subsidiary has just launched a product KDB.AI. KX Systems sells database products which are very good at handling highvolume and very fast streams of data, and on various metrics, are significantly superior to other solutions. These capabilities are very important for training AI systems such as Chat GPT and using vector databases such as KDB. AI can avoid the need for GPU-type products, which have propelled Nvidia (NVDA:NASDAQ) to significant highs. ‘The UK market has a very different attitude to growth and FD Tech shares have been punished for the investment and shortfall in profits and now trade close to £10 having been £22 earlier this year. The revenues for this business are c£65 million and we believe it can grow by 30% to 40% over the next three to five years. The company has sales partnerships with AWS, Microsoft Snowflake and Databricks. We believe this business is currently valued c1x this year’s sales, and that the shares should benefit from a multi-year growth in revenues and a more generous US style valuation metric which can be between five and 15 times revenues.’
18 January 2024 | SHARES | 31
Feature: Fund managers’ best opportunities
James Harries
Thomas Moore
STS Global Income & Growth Trust (STS)
Aberdeen Equity Income (AEI)
‘It is hard to predict exactly how AI will impact our portfolio and markets more broadly in 2024. There is much excitement (hype) embedded in valuations and expectations currently which may actually recede somewhat in the coming months. ‘This may lead to a resurgence in the performance of more defensive but currently overlooked areas of the market. This is descriptive of our quality focused, conservatively managed portfolio and should benefit our relative performance.’
Helen Steers
‘It’s probably too early to say with any great confidence which company will be the key winner in the advent of artificial intelligence (AI). All the companies we invest in are doing the due diligence of how AI will impact them and their efficiency. ‘Take Speedy Hire (SDY) for example a UKbased tools and equipment hire business. The company is looking at how they can improve their operational efficiency, so they have teamed up with an AI specialist to improve their efficiency to make sure they have the right products in place to meet customer demand. In addition to this companies have been telling us that they can use AI to control costs.’
Pantheon International (PIN) ‘We have already seen the application of AI in some portfolio companies, for example in customer interactions through chatbots, or content generation in graphics for entertainment. Venture Capital comprises just 3% of the portfolio, so direct exposure to AI is limited, but we expect a wider spectrum of applications to come out of this area as significant tools for better productivity and efficiency are developed in the coming years. Our portfolio is focused on assetlight, high margin and less labour-intensive businesses, which we believe are well placed to benefit from AI in the future.’ 32 | SHARES | 18 January 2024
By Ian Conway Deputy Editor
Cut through with conviction
Available in an ISA
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The value of investments can go down as well as up and you may not get back the amount you invested. Overseas investments are subject to currency fluctuations. The shares in the investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trusts can gain additional exposure to the market, known as gearing, potentially increasing volatility. Investments in emerging markets can more volatile that other more developed markets. Tax treatment depends on individual circumstances and all tax rules may change in the future. To find out more, scan the QR code, go to fidelity.co.uk/its or speak to your adviser.
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The latest annual reports, key information document (KID) and factsheets can be obtained from our website at www.fidelity.co.uk/its or by calling 0800 41 41 10. The full prospectus may also be obtained from Fidelity. The Alternative Investment Fund Manager (AIFM) of Fidelity Investment Trusts is FIL Investment Services (UK) Limited. Issued by FIL Investment Services (UK) Limited, a firm authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Investment professionals include both analysts and associates. Source: Fidelity International, 30 September 2023. Data is unaudited. UKM1223/384820/SSO/1224
Under the Bonnet: How Does Spotify Make Money
Diversification is key to the streaming service’s success in 2024 and beyond The firm has made its share of blunders with content in the past
M
edia company Spotify Technology (NYSE:SPOT) primarily generates cash from streaming music to listeners digitally, and judging by its third-quarter results, where total revenue grew 11% on the previous year to $3.4 billion, business is good for the Swedish-based firm. Subscribers and non-subscribers are able to listen to millions of songs from a variety of genres from indie, rock and pop to classical music on Spotify’s vast library, which also includes podcasts. Spotify offers a free service, which is ad-supported but with lower audio quality, and a premium subscription service with better audio quality, no adverts and the ability to download songs. In the third quarter, Spotify grew its premium subscriber numbers by 16% yearon-year to 226 million, two million above the
34 | SHARES | 18 January 2024
company’s expectations. This rise was despite Spotify increasing its prices in the US, UK and 50 other markets last July by 10%. Its standard monthly subscription for UK customers now stands at £10.99 per month rather than £9.99. The company told subscribers at the time the rise was to ‘invest in and innovate our product offerings and features’, which it has done by unveiling new personalised experiences for users and tools for ‘creators’ like artificial intelligence (AI) voice translation for select podcasts, an expanded AI DJ to 50 markets and a tool to help artists promote music releases. BALANCING ACT Although Spotify is generating healthy revenue through its increased subscriber numbers and advertising, the company has mounting costs to the music industry. According to a company presentation, as of
Under the Bonnet: How Does Spotify Make Money 2022, Spotify’s total pay-outs to the music industry were approximately $40 billion in both recording and publishing royalties. Yet the company has come under increasing criticism for how little it pays musicians, which is on average between $0.003 and $0.005 per stream. This year, Spotify is introducing a significant change to the way it calculates recorded royalties meaning tracks must have reached at least 1,000 streams in the previous 12 months to generate royalties on the platform. This change in strategy, the company said in a blog post, will ensure that each of the tracks streamed will earn more. BAD RAP The firm has also come in for a fair amount of criticism over its podcasting strategy, where errors of judgement have resulted in job cuts. During the pandemic, the company invested heavily in podcasting to build its audience but ended up overpaying for content. For example, the company spent more than $2 million per episode for a dozen podcasts featuring Prince Harry and Meghan Markle. Last December, Spotify announced the departure of chief financial officer Paul Vogel. Just days after the firm announced a further 1,500 job cuts, Vogel cashed in $9.3 million worth of shares. Laying off 17% of the workforce may not be an unusual move for a tech company, and in fairness the big beasts of the sector were all doing it – Meta
Spotify Forecast Forecast
2023
2024
Revenue (Euros)
13,306
16,036
Revenue Growth %
13.5
20.5
Operating Income
−332
288
Operating Margin %
−2.5
1.8
Adjusted EBITDA (millions)
87
710
Adjusted EBITDA Margin %
0.7
4.4
Earnings Per Share (Diluted)
−2.19
0.71
Adjusted EPS Growth %
−0.1
−132.4
Price/Earnings
−73.3
226.1
Price/Book
15.9
14.9
EV/EBITDA
338.1
41.6
Free Cash Flow Yield
−0.2
1.6
Data as of 24 October 2023 Table: Shares magazine • Source: Morningstar Valuation Model.
WHAT DO INVESTORS LIKE ABOUT SPOTIFY? Spotify has many high-profile investors, including Scottish Mortgage Investment Trust (SMIT) which has owned a 1.9% stake since 2015 because it believes the company is ‘reshaping the music industry’. The trust’s managers argue Spotify has created a platform ‘where artists can own copyright and be heard by new listeners, while fans get more choice and closer relationships
with artists’. The firm has become an industry leader by ‘making music a constant companion and creating machinegenerated personalised playlists. Exponential growth in podcast production is also increasing user engagement‘, add the managers. Just as Steve Jobs was considered pivotal to the early success of Apple
(AAPL:NASDAQ), so Spotify’s co-founder and chief executive, 40 year-old billionaire Daniel Ek, is seen as integral to the Swedish firm’s success. ‘Ek is thinking on a universal scale for Spotify; he wants to put it in front of every single person on the face of this universe who’s interested in music. He is also committed to making it possible for creators to live off their art’, say the managers.
18 January 2024 | SHARES | 35
Under the Bonnet: How Does Spotify Make Money Platforms (META:NASDAQ) cut an additional 10,000 jobs in March, Amazon (AMZN:NASDAQ) laid off 9,000 workers and Alphabet (GOOG:NASDAQ) shed 12,000 jobs globally in 2023 with more redundancies announced this month. When asked about the timing of Vogel’s departure, Daniel Ek simply said ‘over time we’ve concluded that Spotify is entering a new phase and needs a new CFO with a different mix of experiences.’
Spotify Technology ($) 300
200
100
MONEY MAKER To make a sustainable profit in the long term, 0 Spotify has to keep a lid on costs and innovate 2019 2020 2021 2022 2023 2024 to fend off competition from Apple, Alphabet Chart: Shares magazine • Source: LSEG and Amazon, all of which offer their own music streaming services. Ali Mogharabi, senior equity now anticipate a higher user analyst at Morningstar, notes: count and wider margins given the Spotify is leveraging ‘Unlike Spotify, these firms don’t strengthening of Spotify’s flywheel, AI across its platform. rely solely on streaming music resulting in a $183 fair value Coupled with audiobooks estimate, up from $170, a level at or podcasts to drive profitability and can potentially run at which the stock is trading currently rolling out to premium breakeven or even as loss leaders after nearly a 10% jump in reaction subscribers, we believe while monetising users via other to the firm’s quarterly results.’ the company has products and services. Over the past year, it’s fair to several opportunities ‘It might also be harder for say Spotify shares have performed to drive engagement Spotify to steal share from these well having gained 129%. and eventually stronger competitors over time, as Apple Justin Patterson, equity research Music and Apple Podcast listeners monetisation analyst at KeyBanc Capital are probably entrenched with Markets, is also upbeat about other Apple products, Amazon the firm’s prospects. Music with Echo and so on.’ ‘Spotify is leveraging AI across its platform. However, Moghrabi is upbeat about the company Coupled with audiobooks rolling out to premium saying Morningstar has raised its projections: ‘We subscribers, we believe the company has several opportunities to drive engagement and eventually stronger monetisation.’ In the long term, if Spotify can invest in more services and tools for artists then the company may be able to attract artists away from record labels and toward independent distribution, which may allow it to pay lower royalties over time. Diversification into different content is also key for Spotify over the next 10 years, for example video which will attract more users and advertisers.
”
By Sabuhi Gard Investment Writer
36 | SHARES | 18 January 2024
Editor’s View: Tom Sieber
Bitcoin excitement builds again but it is not a credible store of value Cryptocurrency gets boost as SEC approves ETFs in the US tracking spot prices
B
itcoin is having another moment in the sun on the back of the decision by the US SEC (Securities and Exchange Commission) to greenlight exchangetraded funds which track the cryptocurrency. There is no doubting the significance of this move. It will make it easier and potentially cheaper for investors, though crucially only those across the Atlantic for now (of which more later), to invest. Mainstream asset managers like BlackRock and Fidelity are getting involved. The SEC was at pains to dismiss any sense it was endorsing Bitcoin with this move but this is likely to be ignored. There is no doubt this a further step towards the mainstream for crypto. Bradley Duke, chief strategy officer at exchangetraded product provider ETC Group commented: ‘The approval of the US spot Bitcoin ETFs by the SEC and also the Hong Kong Securities Commission announcement that it too will approve spot Bitcoin ETFs, goes far to legitimise Bitcoin as an investable global asset. ‘Here in Europe, we have had secure and efficient spot Bitcoin ETPs for over three-and-a-half years and we are spoiled for choice with the range of physically backed Crypto ETPs available including many different single-asset Crypto ETPs as well as broad market index products.’ Duke draws an important distinction here: current Bitcoin instruments in Europe are exchangetraded products as opposed to exchange-traded funds. This, without getting too much into the weeds, is an important distinction. ETFs in Europe have to meet diversification criteria and if that’s not possible then ETPs are the obvious solution. ETC Group launched BTCetc - Bitcoin ETP back in June 2020, which is now Europe’s largest physically backed Bitcoin ETP and trades on several European exchanges. In 2021, the Financial Conduct Authority banned the sale of exchange-traded products containing ‘unregulated transferable cryptoassets’, arguing they had no inherent value, were widely volatile, rife with financial crime and
Gold vs Bitcoin Bitcoin
Gold bullion
100 80 60 40 2022
2023
2024
Rebased to 100 Chart: Shares magazine • Source: LSEG
did not fulfil any kind of planning need for investors. Interestingly, Vanguard has banned US investors using its platform from buying Bitcoin ETFs. Bitcoin is a divisive topic. Detractors, and there are plenty of them, will line up to denounce it as a Ponzi scheme while fans argue it will revolutionise the world of money. This author has more sympathy, though not much, for the latter argument than the suggestion of Bitcoin as a store of value to rival gold. Gold is a physical asset with a long history as a safe haven and while the price can experience some volatility, ranging between current levels above $2,000 per ounce and lows below $1,700 over the last two years, Bitcoin has ranged from $16,000 to its current $42,660 over the same period. Anything with this level of volatility cannot be sold as a credible ‘store of value’. Blockchain, the infrastructure underpinning Bitcoin, could prove more interesting in the long term. It is a verifiable electronic ledger for recording transactions and tracking assets in a business network, which could be anything from a tract of land to a key piece of intellectual property. There are several exchange-traded funds which look to provide exposure to blockchain as a theme – the largest of which is Invesco CoinShares Global Blockchain (BCHS) with an ongoing charge of 0.65%. 18 January 2024 | SHARES | 37
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Daniel Coatsworth: Takeover Targets
Falling interest rates could trigger new wave of takeovers London-listed mid- and large- cap stocks could be targets in 2024
A
big increase in the average takeover premium in 2023 highlights how parts of the UK stock market continue to be undervalued. The average bid premium for UK stocks in 2023 was 51% against 37% in 2022 and 43% in 2021, according to analysis by AJ Bell. Most London-listed takeovers last year involved small-cap firms. Buyers were a mixture of private equity firms or industry players looking to buy rivals to gain scale or to get a foot in the door in a new sector or geography. The lack of large-cap deals means takeovers were not a contributing factor to the performance of the UK’s flagship index, the FTSE 100. Indeed, none of the 2023 London-listed takeovers involved FTSE 100 companies and only three FTSE 250 companies received a bid. Yet this situation could change if interest rates start to fall. Private equity firms flourished during the extended period of low interest rates, borrowing money cheaply to buy companies and using their cash flow to help pay off the debt. The sharp rise in interest rates over the past two years has made debt financing more expensive and multi-billion pound or dollar transactions harder to stomach. With signs that interest rates may have peaked and central banks could begin cutting in 2024,
Biggest bid premiums for UKlisted takeovers in 2023 Seraphine
206%
Hotel Chocolat
170%
STM Group
144%
Egdon Resources
96%
NOTE: The bid premium represents the extra amount of money the acquirer is paying to buy the company versus its market valuation on the day before the bid went public. Chart: Shares magazine • Source: AJ Bell, company announcements
we could see private equity firms go after bigger targets, particularly as many are sitting on significant amounts of cash (also known as ‘dry powder’ in the industry). We might also see large industry players make opportunistic bids for similarsized rivals. WHICH COMPANIES MIGHT BE TARGETS? Reckitt (RKT) and Unilever (ULVR) are ones to watch as potential large-cap takeover targets. Both are companies that investors feel have lost their way and are now trying to get back on track. Advertising agency WPP (WPP) could also be a takeover target given share price weakness and an undemanding valuation, trading on 7.8 times forward earnings and an EV to EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation) ratio of 8.9 times. However, concerns over the global economy in 2024 could throw icy water on the idea that someone would try and buy WPP in the near-term as earnings are likely to come under pressure if clients scale back promotional activity. Analysts have touted diversified miner Anglo American (AAL) as a potential takeover target for someone like Glencore (GLEN), after the firm saw its market value shrink by 39% in 2023 due to operational setbacks, weaker commodity prices and downgraded production guidance. While there is merit to this line of thinking, the mining sector has a history of buying at the top and not at the bottom. Miners show a tendency to only want to do deals when everything is going well, rather than risk spending money when key commodity prices are flat or falling as they are at present. 18 January 2024 | SHARES | 39
Daniel Coatsworth: Takeover Targets
FOUR COMMON THEMES There were four common themes among UK takeovers last year and we could expect similar trends in 2024. 1. The acquisition enables the buyer to expand into a new country That is the rationale behind CoStar’s £100 million bid last year for property portal OnTheMarket. The purchase price is tiny compared to CoStar’s own $36 billion valuation but strategically interesting as it gives the buyer a foot in the door in the UK market and the opportunity to try and take market share from Rightmove (RMV). CoStar is a big player in the US and this acquisition could give Rightmove and UK peer Zoopla sleepless nights.
Group was a listed entity, but Apollo is taking a long-term view and believes it can get the business back on track under private ownership. WHO MIGHT BE BOUGHT IN 2024? The following three stocks have the right qualities to be takeover targets:
Entain (p)
1,400 1,200
2. Opportunistic bid following share price weakness in a rival Mars pounced on Hotel Chocolat (HOTC:AIM) while its shares were depressed, offering a large premium to the market price to buy the business.
1,000
3. Private equity firms think about the bigger picture when buying undervalued companies Buy-out firms often use the acquired business as a roll-up vehicle to make acquisitions in a certain sector or tap into a network of contacts to help improve the acquired company. For example, Brookfield is in the process of buying London-listed Network International (NETW) and has indicated a desire to merge it with another payments group it majority-owns called Magnati.
Chart: Shares magazine • Source: LSEG
4. The buyer takes the view the target would be better under private ownership One of the downsides of being a listed company is constantly being in the spotlight. Investors are judging every move, and that can be a distraction if a business is going through a challenging period and wants to focus on the recovery. For example, Apollo just bought Wagamamaowner Restaurant Group and believes it is better away from public markets. Restaurant Group has suffered mixed fortunes in recent years – its posh pubs arm and Wagamama have been successful while there have been troubles elsewhere. The share price was incredibly volatile when Restaurant 40 | SHARES | 18 January 2024
800 Apr 2023
Jul
Oct
Jan 2024
FTSE 100 member Entain (ENT) has significant scale in the gambling industry, but setbacks have hurt the share price and it now has a caretaker chief executive. If ever there was a time for vultures to circle the business and pounce with an offer, it’s now. The company is one of the world’s largest sports betting and gaming groups and scale matters in this industry. It owns big brands including Ladbrokes, Coral, Eurobet and STS. Entain trades at 974p, having suffered a disastrous few years. An aggressive acquisition spree attracted widespread criticism and more recently it agreed a deal with the Crown Prosecution Service to pay £585 million in relation to a bribery investigation linked to its former Turkish business. Chief executive Jette NygaardAndersen quit in December 2023 and nonexecutive director Stella David has replaced her on an interim basis. The logical buyer is MGM Resorts (MGM:NYSE), its partner in the US, which previously offered to buy Entain for the equivalent of £13.83 per share in January 2021. That same year DraftKings
Daniel Coatsworth: Takeover Targets
(DKNG:NASDAQ) also tried to buy the business, proposing to pay as much as £28 a share. The company’s shareholder register includes three activists who could push for a sale or break-
up of the business. They would no doubt seek the highest possible price, so if we do see a new takeover approach don’t expect the first bid to be the winning one.
A selection of UK stocks receiving takeover bids in 2023 Price before announcement (p)
Offer (p)
Bidder
Premium
99.00
145.00
Young's
46%
2776.00
3875.00
EQT & ADIA
40%
DWF
65.50
100.00
Inflexion
53%
Finsbury Food
89.00
110.00
DBAY Advisors
24%
FireAngel Safety
2.10
7.40
Intelligent Safety Electronics
252%
Fulham Shore
10.50
14.15
Toridoll
35%
Hotel Chocolat
139.00
375.00
Mars
170%
Hurricane Energy
6.53
12.50
Prax
91%
Medica
160.00
212.00
IK Investments
33%
Network International
243.60
400.00
Brookfield
64%
Numis Securities
204.00
350.00
Deutsche Bank
72%
OnTheMarket
70.50
110.00
CoStar
56%
Restaurant Group
48.35
65.00
Apollo Global
34%
Rotala
42.00
63.50
Directors
51%
Round Hill Music
0.69
1.15
Concord
67%
169.00
280.00
Poltronesofa
66%
Seraphine
9.80
30.00
Mayfair Equity Partners
206%
Shanta Gold
12.65
13.50
ETC
7%
Smart Metering Systems
680.00
955.00
KKR
40%
Smoove
44.00
54.00
Digcom
23%
Sureserve
90.00
125.00
Cap10 Partners
39%
Ten Entertainment
310.00
412.50
Trive Capital
33%
Tribal
52.30
74.00
Ellucian
41%
Company City Pub Dechra Pharmaceuticals
ScS
Table: Shares magazine • Source: AJ Bell, Company announcements
18 January 2024 | SHARES | 41
Daniel Coatsworth: Takeover Targets
Premier Foods
Revolution Beauty
(p)
(p)
135
35
130 30
125 120
25
115 20 Apr 2023
Jul
Oct
Jan 2024
Aug 2023
Sep
Oct
Nov
Dec
Jan 2024
Chart: Shares magazine • Source: LSEG
Chart: Shares magazine • Source: LSEG
Mr Kipling maker Premier Foods (PFD) was the subject of two takeover bids (at 52p and 60p) from US spice maker McCormick (MKC:NYSE) in 2016, both of which it rejected on valuation grounds. Since then, the business has transformed itself and it now looks ripe for takeover interest once again. Japanese food group Nissin (2897:TYO) already owns 24.27% of the business, having formed a strategic partnership at the same time as it rejected the McCormick bids. Premier Foods distributes Nissin’s Soba and Cup Noodles products in the UK, and its Batchelors Super Noodles use Nissin’s noodle manufacturing expertise. In recent years, Premier Foods has gone from being a zombie company drowning in debt to one that is reinvesting its surplus cash into product innovation and marketing. This has significantly derisked the investment case. While the current share price of 132p is more than double McCormick’s offer in 2016, it is important to consider some companies are happy to pay a higher price for acquisitions if they are not having to deal with baggage. Moreover, Premier Foods’s shares are not expensive at 9.9 times forecast earnings and 7.2 times EV to EBITDA. Noodle-focused Nissin might seem the logical buyer given its existing stake, yet Premier Foods is a broader business involved in cooking sauces, cakes and meal kits. That suggests a more diverse food company might be a more realistic acquirer. Revolution Beauty (REVB:AIM) struggled to win over investors after joining the stock market in 2021 and share price weakness created an
opportunity for Boohoo (BOO:AIM). The latter bought a strategic stake in Revolution Beauty in 2022, building on an existing sales relationship. Now holding 27.13% of the shares, Boohoo could feasibly acquire the remainder of the business. A disagreement over leadership is now in the past after Boohoo won a battle to replace certain senior directors at Revolution Beauty. The latter recently agreed a settlement with former chair Tom Allsworth regarding various issues, and the final piece of the jigsaw would be former chief executive Adam Minto agreeing to pay the group a sum a money to settle allegations he breached his fiduciary duties to the retailer. Talks are ongoing and assuming they conclude amicably, don’t be surprised if Boohoo pulls the trigger on a full takeover. Boohoo wants to be bigger player in the beauty market so there is logic to owning Revolution Beauty. It could save money over the long term by getting rid of Revolution Beauty’s stock market listing and running the two companies on one platform. Allsworth and Minto each own 15.35% of the target company and might welcome a cash exit to start something new.
42 | SHARES | 18 January 2024
DISCLAIMER: AJ Bell referenced in the article owns Shares magazine. The author (Daniel Coatsworth) and editor (Ian Conway) of this article have an investment in AJ Bell. By Daniel Coatsworth AJ Bell Editor in Chief and Investment Analyst
Personal Finance: Stocks and Shares ISA
How to benefit from higher rates in your Stocks and Shares ISA Discover why these tax-efficient wrappers can be a good way to protect your interest
A
s interest rates have risen over the last two years, cash products have grown in popularity, especially Cash ISAs which allow you to receive your interest taxfree. But it’s actually perfectly possible to benefit from higher interest rates within a Stocks and Shares ISA too, as it’s not just cash accounts at the bank which pay interest. As with a Cash ISA, your interest in a Stocks and Shares ISA is protected from income tax, so you don’t have to hand over any of the return your money is generating to the taxman. Here are some of the investments available within a Stocks and Shares ISA which are now enjoying better returns because of higher interest rates. MONEY MARKET FUNDS Money market funds saw rising demand from Stocks and Shares ISA investors in 2023. These are funds which invest in cash-like instruments, predominantly short term deposits with banks, and short-term loans to governments, banks and large companies. Some of these loans take place for as short a period as overnight. Money market funds typically have very low levels of volatility, which makes them an appropriate choice for more cautious investors.
Investors probably picked these funds in 2023 because they are low risk yet were offering very respectable yields as interest rates rose, in sharp contrast to the prior decade. The chart below shows the return from the average money market fund last year was 4.66%, though past performance is no guarantee of future returns. The yields offered by these funds are variable, and depend on short term interest rates, but clearly these are now much higher than they were in the 2010s.
Total return of average money market fund % 4.7 4.0
2.0
1.3 0.7 0.2 2019
2020
0.0 2021
2022
2023
Chart: Shares magazine • Source: Morningstar
18 January 2024 | SHARES | 43
BOND FUNDS Bonds are basically an IOU, whereby investors lend money to governments and companies in exchange for a set rate of interest with capital to be repaid at a set date in the future. For many years the rate of interest paid by bonds was uninspiring, causing some to describe government bonds as ‘returnfree risk’. But that’s all changed. Since interest rates have risen, it’s now possible to pick up pretty appealing yields from bond funds. Bond funds can and do fluctuate in value, and if interest rate expectations rise, you can expect to see bond prices fall. Clearly fluctuations in valuation does mean there is some risk, but bonds can actually lower the volatility of your portfolio as a whole if you are also holding shares. That’s because bonds, especially government bonds, tend to move in the opposite direction to share prices, so if you hold both in your portfolio, you should get a smoother ride. INDIVIDUAL GILTS AND CORPORATE BONDS Investors can also buy individual government bonds and corporate bonds instead of a bond fund if they wish. Last year at AJ Bell we saw an uptick in the number of investors using individual gilts to park large sums of money and lock into higher interest rates, presumably as an alternative to moving into cash. Gilts are loans to the UK government, and it’s pretty certain you will get your loan repaid, along 44 | SHARES | 18 January 2024
with the interest promised, as there’s a very, very low chance of the UK Exchequer defaulting on its debt obligations. This is probably why investors with large sums of money have been using them, as bank deposits are only covered by the Financial Services Compensation Scheme up to a maximum of £85,000 if their bank goes bust. Corporate bonds are considered less safe because they are loans to companies, which are deemed more likely to default on their obligations than, for instance, the UK government. The price of bonds fluctuates on the market, but there will be a maturity date for each bond, at which point you will get the maturity value of the bond back, unless there is a default. The maturity value, also called the par value, may be more or less than you paid for it, depending on the price you bought in at. Many bonds are currently trading at below their par value, in which case the return you can expect back between now and maturity is a combination of interest payments and capital gains. Individual bonds can be a bit tricky to get your head around, so this approach is probably best left to more experienced investors or those who are willing to roll up their sleeves and delve into the nitty gritty. MULTI-ASSET FUNDS Multi-asset funds are another potential beneficiary of higher interest rates. These funds invest across a range of assets including shares, property, commodities, bonds and cash. These last two asset classes are now offering much higher interest rates, which will be a boost to the fund managers running these funds. Multi-asset funds come in a range of risk profiles to suit investors with different appetites for volatility, so the amount of exposure you can get to bonds and cash ranges from very low to very high. These funds are useful for investors who want a mix of assets in their portfolio but want a professional fund manager to pick and choose what to invest in. By Laith Khalaf AJ Bell Head of Investment Analysis
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Ask Rachel: Your retirement questions answered
Where is the best place to put the money I’m saving on my National Insurance contributions? We look at the changes to the rules and the options for savers I work as a technical consultant in an air freshener company and earn £30,000 a year. I am single, aged 24 and live at home with my parents. I’m delighted the government has cut my national insurance contributions as it means I may have a bit more money in my pay packet this month. But before I go spend it, should I be saving it and if so what should I save it in? I have joined my employer’s pension scheme, and I set up a lifetime ISA last year. Jacob Rachel Vahey, AJ Bell Head of Public Policy, says:
Successive Chancellors have tried to win political favour by including big announcements in their Budget or Autumn Statement speeches – often referred to as ‘pulling a rabbit out of the hat’. Last November, Jeremy Hunt used his speech to cut national insurance contribution rates for both employees and the self-employed, giving a welcome boost to workers’ pay packets. From 6 January, the national insurance rate for employed people was cut from 12% to 10%, in a move that is estimated to cut taxes for 27 million working people. 46 | SHARES | 18 January 2024
For someone like you, an employed person on a £30,000 salary, this will save around £350 a year, while anyone earning more than the £50,270 threshold will save the maximum of £754 a year. The Government will also cut rates for selfemployed workers, but that won’t come into effect until 6th April this year. At that point the Class 2 band of National Insurance will be abolished, saving self-employed workers £179.40 a year at current rates. And the rate for Class 4 contributions will be cut from the current 9% to 8%. While £350 more a year isn’t to be sniffed at, it isn’t a fortune and could easily disappear meeting the rising cost of living such as on increasing food prices or energy costs. But, if you’re able to do so, you could use the extra money in your pay packet to double down on those New Year’s resolutions to get your finances sorted. If you haven’t made any resolutions yet, now is a good time. The first call is to pay down any debt. The next is to build up a buffer fund to help with any financial emergencies – financial advisers usually recommend holding between three- and six-months’ worth of salary. But if these two aims are ticked off then the extra money could be saved. If left alone, compound interest can work its magic to turn that small amount into a reasonably-sized sum. For example, by keeping the same take home pay,
Ask Rachel: Your retirement questions answered
an employed person with a £30,000 income could build up another £3,100 over the next six years by saving £350 in a Lifetime ISA (assuming that annual amount increases by 2% each year, investment returns are 4% after charges, and they are within the Lifetime ISA subscription maximum of £4,000 a year so can receive their government 25% bonus). That could help with a future first house purchase. But if not, the money can stay in the Lifetime ISA and be taken out in full from age 60. Take it out earlier and there will be penalty of 25%. If you save into a different type of ISA, you will be able to get your money out when you want, with no penalty, but you won’t get the benefit of a government bonus on the amount you invest. Alternatively, the money could be saved into a pension where it will get a boost from basic rate tax relief generating an extra £16,000 pension pot over 20 years (again assuming it increases each year by 2% and the investment return is 4% after charges). It’s always worth checking with employers and
your pension scheme that you can pay this extra amount into your pension. Depending on the pension scheme, it’s even possible that if you pay a bit more your employer might do so as well. You can’t get hold of your pension money until age 55 (increasing to age 57 by 2028). You will be able to take 25% of it as a tax-free lump sum, and the rest will be taxed as income.
DO YOU HAVE A QUESTION ON RETIREMENT ISSUES? Send an email to askrachel@ajbell.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares. Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.
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Index AIM
Main Market
IPOs coming soon
WHO WE ARE
Anglo American
39
Boohoo
42
Air Astana
6
Associated British Foods
10
Chapel Down
6
London Tunnels
6
AstraZeneca
7
FD Technologies
31
Microsalt
6
BAE Systems
6
Hotel Chocolat
40
Investment Trusts
Marks Electrical
16
Aberdeen Equity Income
32
Revolution Beauty
42
Alliance Trust
31
Steven Frazer @SharesMagSteve
Warpaint
9
Artemis Alpha Trust
29
Brunner Investment Trust
FUNDS AND INVESTMENT TRUSTS EDITOR:
28 30
Martin Gamble @Chilligg
INVESTMENT WRITER:
Overseas shares Burberry
9
Bytes
30
Close Brothers Group
8
Computacenter
29
Diageo
24
Entain
40
Future
30
Glencore
39
GSK
7
Inchcape
8
Amazon
24 23, 24
Apple
11, 23, 24
Mercantile Investment Trust
30
Bank of America
23, 24
30
Berkshire Hathaway
22
Montanaro UK Smaller Companies
BYD
24
Pantheon International
32
Schroder UK Mid-Cap
29
Smithson
31
STS Global Income & Growth
32
Kainos
30
Man Group
29
Network International
40
Oxford Instruments
29
Coca-Cola
Premier Foods
42
Davita
Reckitt Benckiser
39
RWS
Funds Artemis UK Smaller Companies
30
23
BlackRock US Dynamic
26
DraftKings
40
Blue Whale Growth
29
30
HP
23
S&U
8
Kraft Heinz
CFP SDL UK Buffettology
23, 26
Secure Trust Bank
8
LVMH
9
Crux UK Smaller Companies
31
Softcat
30
McCormick
42
Fundsmith Equity
18
Spectris
29
Meta Platforms
29
JPMorgan American
26
MGM Resorts
40
Overstone Global Equity Income
19
Polar Capital Global Financials
23
R&M UK Listed Smaller Companies
28
Schroder US Equity Income Maximiser
26
WS Canlife North American
26
23, 24
23, 24
Microsoft
11,28, 29,30
Moody's
23
Nissin
42 29, 31
Speedy Hire
32
Tertre Rouge Assets
6
Nvidia
Trustpilot
14
Occidental Petroleum
Unilever
39
Pfizer
7
Whitbread
17
Sanofi
7
WPP
39
Spotify
34
XP Power
30
Verisk Analytics
31
48 | SHARES | 18 January 2024
23, 27
ETFs Invesco CoinShares Global Blockchain
NEWS EDITOR:
James Crux @SharesMagJames EDUCATION EDITOR:
American Express
23, 24
DEPUTY EDITOR:
Ian Conway @SharesMagIan
Henderson Opportunities
Chevron
EDITOR:
Tom Sieber @SharesMagTom
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Sabuhi Gard @sharesmagsabuhi Shares magazine is published weekly every Thursday (50 times per year) by AJ Bell Media Limited, 49 Southwark Bridge Road, London, SE1 9HH. Company Registration No: 3733852. All Shares material is copyright. Reproduction in whole or part is not permitted without written permission from the editor.
DISCLAIMER Shares publishes information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters. Comments published in Shares must not be relied upon by readers when they make their investment decisions. Investors who require advice should consult a properly qualified independent adviser. Shares, its staff and AJ Bell Media Limited do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions. Members of staff of Shares may hold shares in companies mentioned in the magazine. This could create a conflict of interests. Where such a conflict exists it will be disclosed. Shares adheres to a strict code of conduct for reporters, as set out below. 1. In keeping with the existing practice, reporters who intend to write about any securities, derivatives or positions with spread betting organisations that they have an interest in should first clear their writing with the editor. If the editor agrees that the reporter can write about the interest, it should be disclosed to readers at the end of the story. Holdings by third parties including families, trusts, 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.