AJ Bell Shares magazine 7 March 2024

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Contents

NEWS

06 Budget 2024: British ISA launched, booze duty freeze lifts pub stocks

07 Will the Reddit initial public offering live up to investors’ hopes?

08 Competitive pressures are piling up for Pets at Home

09 Indivior enjoys a strong recovery as it targets primary US listing

09 Halfords skids lower on weak demand and wet weather woe

10 Persimmon expected to post a one-third drop in sales for 2023

11 Is Adobe primed for an upside surprise?

12 Focus on UK, US employment and European interest rates

GREAT IDEAS

14 Rental growth drives long-term income ` at Primary Health Properties

16 JPMorgan Global Growth & Income shows its mettle whatever the backdrop UPDATES

18 How all-weather global equity fund Brunner has rewarded our faith FEATURES

20 Why more UK companies are purchasing their own shares

24 COVER STORY

6 GREAT STOCKS FOR YOUR ISA

Scanning the UK market for growth, quality and value

31 FUNDS

Latest ‘Spot The Dog’ report sees neartrebling of laggard funds

34 UNDER THE BONNET

Bloomsbury is more than just a successful publisher of sci-fi and fantasy books

40 FINANCE

Giving to charity? Don’t miss the tax boost

45 EDITOR’S VIEW

When cutting the dividend can be the right thing to do

47 RUSS MOULD

How gold and emerging markets are warning about US debt growth

50 ASK RACHEL

I’ve paid into more than one ISA of the same type, what do I need to do now?

53 INDEX

Shares, funds, ETFs and investment trusts in this issue

34

Three important things in this week’s magazine

Why more UK companies are purchasing their own shares

Shares picks six stocks which we believe have the right mix of growth,

and value to help you make the most of investing.

The pros and cons of share buybacks explained UK companies are mimicking their US counterparts by buying back shares but is it all good news for investors?

The best and worst in class funds revealed We pick through the latest Spot The Dog report to identify toppedigree funds and those in the doghouse.

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:

Available

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Budget 2024: British ISA launched, booze duty freeze lifts pub stocks

New tax wrapper with £5,000 allowance will be limited to UK assets

The unveiling of a new British ISA helped give domestic stocks a modest lift after its announcement in the Budget.

The £5,000 limit on the new tax wrapper, which can only be invested in UK assets, will be in addition to the existing £20,000 ISA allowance.

The key test will be whether this provides a meaningful boost in terms of flows into UK equities and helps improve what has been a very difficult market for small cap companies in particular.

Tax and financial planning expert at Quilter (QLT), Rachael Griffin says: ‘So few people use their total ISA allowance in a given tax year too so the allure of £5,000 more is only appealing to much higher net worth people. The reality is we need to better incentivise the millions languishing in cash ISA accounts to be put to work in the stock market.

‘While the British ISA is presented as a strategic move to bolster the UK stock market and economy, it is fraught with potential pitfalls and may not address the root causes of the challenges facing the UK’s financial sector. The measure is likely a politically motivated stunt ahead of upcoming elections, rather than a well-considered strategy

aimed at sustainable economic growth.’

Chancellor Jeremy Hunt also announced plans for new requirements for pension schemes to disclose their level of international and domestic holdings as a potential precursor to steps to encourage them to invest more on these shores.

The widely trailed 2p cut to national insurance may provide some support to consumer-facing firms at the margin if it means households have a bit more money in their pocket.

Hunt announced plans to press ahead with the sale of shares in NatWest (NWG) to retail investors this summer, subject to market conditions. The stake which the government acquired in 2008 to rescue the then Royal Bank of Scotland was acquired at 500p. As we write NatWest shares trade at 254p.

News of an alcohol duty freeze out to February 2025 helped lift pubs operators like JD Wetherspoon (JDW), the owner of All Bar One Mitchells & Butlers (MAB), and Marston’s (MARS).

A new levy on vaping was introduced but the accompanying extra duty on tobacco to help push people from cigarettes to less harmful alternatives helped vape companies Chill Brands (CHLL) and Supreme (SUP:AIM). Elsewhere the sunset clause on the windfall tax for the UK oil & gas sector was extended until 2029. [TS]

Will the Reddit initial public offering live up to investors’ hopes?

The social media company has been eyeing a New York listing since 2021

After repeated delays due to stock market volatility, social media business Reddit will finally make its Wall Street debut some time later this month according to its Securities and Exchange Commission (SEC) filing on 22 February.

If the New York listing does go ahead it will be the first major technology IPO (initial public offer) of 2024 and the first social media float since Pinterest (PINS:NYSE) in 2019.

There has been a dearth of new tech companies coming to market with just Instacart (CART:NASDAQ) and ARM (ARM:NASDAQ) going public in the second half of 2023.

Having previously been valued at a fairly punchy $10 billion after its last private funding round in August 2021, the company is now looking at a more realistic valuation around the $6.5 billion mark.

The firm plans to offer its shares at between $31 to $34 apiece according to the Wall Street Journal, with the ticker RDDT.

In common with other US listings, there will be a number of share classes available: Class A, giving investors one vote per share; Class B, giving investors 10 votes per share; and Class C, which has

no voting rights.

In its favour, the appeal of Reddit’s online community and discussion boards such as WallStreetBets means it has built a strong brand among the millennial demographic.

It is also investing in its advertising platform, after nearly a decade of neglect, while the acquisition of short-form video creation app Dubsmash in 2020 gives it a credible rival to TikTok.

In spring last year, it hired its first ever chief financial officer, Drew Vollero, previously chief financial officer of Snapchat (SNAP:NYSE).

However, unlike bigger social media firms, Reddit hasn’t made a profit since it was founded in 2005, with cumulative losses reaching $700 million to date.

Last year, Reddit posted a net loss of $90.8 million, which was an improvement on 2022’s $158.6 million loss, but the firm cautions in its prospectus it may never actually make a profit. As well as not being profitable, Reddit’s strategy of not tracking the personal information of its users means it is missing out on valuable advertising revenue.

The decision to keep its users anonymous lays it open to claims of manipulation as bots and other ‘bad actors’ could drive their own agendas.

There have been calls for greater scrutiny of the firm’s rules and its user base after shares in US video entertainment firm GameStop (GME:NYSE) experienced wild price fluctuations due to posts on the WallStreetBets discussion board. [SG]

Competitive pressures are piling up for Pets at Home

Ownership change at Jollyes could keep UK pet care leader’s growth on

a tighter leash

Shares in Pets at Home (PETS) have plunged 30% over one year due to an overhang from the CMA (Competition and Markets Authority) review of the UK veterinary sector and signs there are limits to the sums pet owners will spend on their animal companions during a cost-of-living crisis.

While competitive threats from the supermarkets and online-only player Zooplus are already priced in, the market may be underestimating the challenge posed to the UK pet care leader by the second largest player Jollyes, where TDR Capital has snapped up a majority stake from Kester Capital.

Valuing Jollyes at around £130 million, the TDR deal will enable Pets at Home’s unquoted rival to lower prices and accelerate its UK store opening programme. One of the UK’s fastest-growing brick and mortar retailers with a sharp value focus, Jollyes expanded from 64 to 100 stores and more than doubled profits under Kester’s ownership and its expansion plans include rolling out more grooming and veterinary-led community pet clinics.

Ominously for Pets at Home, Jollyes chief executive Joe Wykes says the new investment will help the pet food superstore build ‘a much bigger stage, accelerating our growth plans and giving us the resources we need to bring more value to more places’. An expansionist Jollyes could impact Pets at Home’s ability to win market share and possibly constrain like-for-like growth by keeping a lid on prices.

On 30 January 2024, Pets at Home conceded third quarter sales ‘didn’t quite hit’ anticipated levels and downgraded its year-to-March 2024 adjusted pre-tax profit guidance to £132 million, below the £135 million consensus estimate. While like-for-likes rose 13.3% in the 12 weeks to 4 January 2024 in the veterinary services business, retail like-for-like growth of 3.7% came in below expectations.

Pets at Home’s policy of offering pet products as well as veterinary and grooming services under one roof continues to be a successful model, but the outlook for the business is also clouded by the CMA vet sector probe, albeit Pets at Home has been clear it doesn’t engage in the sort of practices the CMA plans to stamp out.

Nevertheless, any future regulatory action from the CMA might impede the ability of Pets at Home and acquisitive veterinary services business CVS (CVSG:AIM) to grow earnings in the years ahead. CVS remains a rival to be reckoned with in this market, with first half results (29 February 2024) showing it delivered robust 6% like-for-like sales growth in the six months to December 2023. [JC]

Indivior enjoys a strong recovery as it targets primary US listing

Opioid-use disorder treatment specialist is one of the top-performing UK stocks so far in 2024

Shares in Indivior (INDV) are up 36% year-to-date. The latest catalyst for the opioid-use disorder treatment specialist came in the form of 2023 sales and profit towards the top end of expectations and guidance for stronger than forecast profit growth in 2024 (22 February).

Also giving the shares a boost was the news the company plans to move its primary stock exchange listing to the US where it

may achieve a higher valuation. The company listed its shares on Nasdaq in 2023.

At £17.63, the share are below the £20 mark they traded at in February 2023 when the firm took an unexpected $290 million provision to cover legacy litigation cases.

In October 2023, Indivior agreed to pay $385 million to settle certain some cases, resolving claims brought by direct purchasers that the firm suppressed competition for its opioid addiction treatment Suboxone Management expects 2024 net revenue to grow

Halfords skids lower on weak demand and wet weather woe

Shares in the car parts-to-bikes purveyor are down 22% over one year following 25% profits downgrade

Car parts, bikes and tyres seller Halfords (HFD) has let investors down again. The retailer’s latest profit warning (28 February) pinned on weakening demand for bicycles as well as wet weather, which has deterred customers from visiting its stores and purchasing winter and car cleaning products in the fourth quarter.

Halfords now expects to deliver pre-tax profit in the £35 million to £40 million range for the year ending 29 March 2024, well below

its previous £48 million to £53 million forecast and implying a 25% cut to guidance at the mid-point of the range. Following the downgrade, shares in the Worcestershire-based retailer have reversed 22% over one year and deflated by 35% over five years.

The company bemoaned a ‘further material weakening’ in its cycling, retail motoring and consumer tyres markets in Q4, although the Autocentres arm continues to deliver good growth. Halfords remains ‘cautious on market recovery in the shortterm’, which means pre-tax profit for the year to March 2025 is expected to be as flat as a punctured tyre.

by 18% at the midpoint of the range ($1.29 billion) and to generate an adjusted operating profit of between $330 million and $380 million. [TS]

Liberum Capital said Halfords’ board ‘could now come under increasing pressure to sell the business, but potentially at a much lower price than recent months’ bid speculation’. Last year, Halfords was the subject of market whispers about a takeover approach from Redde Northgate (REDD) which came to nothing, but a resurrection of profit warnings could be a catalyst for shareholders to push for changes including new ownership. [JC]

Persimmon expected to post a one-third drop in sales for 2023

The outlook for 2024 is likely to be a bigger driver of the shares

UK

UPDATES OVER T HE NEXT

7 DAYS

FULL YEAR RESULTS

8 March:

BP, Informa

11 March:

HGCapital Trust

12 March:

Domino’s Pizza, Persimmon, Costain, H&T

13 March:

Balfour Beatty, Nexteq, Ferrexpo, Centaur Media. 4Imprint, PensionBee, Gym Group, Advanced Medical Solutions

14 March:

Empiric Student Property, Savills, Restore, Playtech, Hill and Smith, Vistry

FIRST HALF RESULTS

13 March:

Seraphim Space Investment Trust

TRADING

ANNOUNCEMENTS13

14 March:

Trainline, Moonpig, Halma

Leading housebuilder Persimmon (PSN) issued an upbeat full-year trading statement in January saying it had ‘performed well in challenging market conditions, delivering completions ahead of expectations alongside enhanced quality metrics of our already five-star homes’.

It described sales as being ‘relatively robust throughout the year’ while it kept a lid on costs but continued to invest in the business ready for when conditions improve.

Completions were down 33% from 14,868 to 9,922 units, a slightly bigger drop than rival Barratt Developments (BDEV) which reported a 28.5% reduction in completions from 8,626 to 6,171 units and a 33.5% drop in revenue to £1.85 billion.

What

What the market expects of

Table:

Table: Shares

Table:

The market is therefore expecting Persimmon to post a similar 33% drop in revenue to around the £2.6 billion mark when it reports its full-year earnings on 12 March.

The firm said it saw ‘a sustained pick-up in interest’ during 2023 and ‘a particularly strong delivery’ in the final quarter, so investors will be hoping for positive comments on the outlook.

We know Persimmon started the year with a decent order book, with private orders up 11% by volume and 4% by value to around £500 million thanks to its Boxing Day campaign, but it did caution conditions would stay uncertain especially with 2024 being an election year. [IC]

Is Adobe primed for an upside surprise?

Stock has drifted so far this year, but Q1

Analysts have been turning increasingly optimistic on Adobe (ADBE:NASDAQ) this year, but you wouldn’t have guessed it by looking at the price. Shares in the Photoshop to Illustrator graphic designs software firm have drifted so far in 2024, partly due to soft revenue guidance issued in December 2023.

Some of the most bullish analysts had anticipated as much as $25 billion sales this year (to the end of November), so a steer between $21.3 billion to $21.5 billion left the market deflated. Koyfin consensus data is currently pitched at $21.5 billion.

We'll likely get a feel for whether that mark is too gloomy when first quarter 2024 earnings are released. Consensus calls for $4.38 earnings

What

What the market

Table: Shares magazine•Source: Zacks

Table:Shares magazine•Source:Zacks

on $5.12 billion revenue, implying 19% and 11% year-on-year growth respectively. That would be pretty good going given signs of wider software softness as corporates cut back on costs, yet it hasn’t stopped Adobe pushing through price rises this year, always an encouraging sign that clients simply can’t run without its design tools.

This hints that consensus might be over-egging the pessimism, which in turn suggests potential to upside surprise, which could spark share price revival. If so, analyst price targets of $700-plus may not look so left-field for this year, as Shares suggested in our picks for 2024. [SF]

QUARTERLY RESULTS

8 March: Algonquin Power, Central Puerto, Eve Holding, Target Hospitality, Deep Yellow

11 March: Legend Bio, Caseys, Asana, Ballard

12 March: Uranium Energy, Guild

13 March: UiPath

14 March: Adobe, Dollar General, Smartsheet

Focus on UK, US employment and European interest rates

Soft retail sales mean March starts on a down note

By the time Shares goes to press we will already have had the February UK retail sales survey from the BRC (British Retail Consortium) and potentially the last spring Budget from chancellor Jeremy Hunt.

January retail sales got off to a good start thanks to the usual New Year promotions, but that wasn’t sustained during the month and larger purchases

Macro diary 7 March to 14 March 2024

Macro diary 7 March to 14 March 2024

such as furniture, household appliances and electricals were weak as the higher cost of living continues into a third year.

February was expected to show an improvement, but sadly that wasn’t the case with sales up 1.1% against 1.2% the previous month and estimates of a 1.6% increase with non-food sales once again the culprit.

We will also have had the European Central Bank’s decision on whether or not to cut rates, with most observers expecting Christine Lagarde to stand pat at 4.5% again.

Leaving the spring Budget to one side, the end of this week will be all about US employment data, in particular the January JOLTS (Jon Openings and Labour Turnover Survey) figure on 6 March and non-farm payrolls on 8 March, both of which have thrown the market some big surprises in recent months.

The strength of the labour market both in the UK and the US has been a thorn in the side of those calling for early central bank rate cuts, and next Monday sees the release of the UK January unemployment rate along with average wage data which will no doubt feed into the Bank of England’s thought process when it comes to deciding on the trajectory of interest rates later this month.

Meanwhile, the Federal Reserve will be watching the direction of consumer and industrial prices, and in particular the core measures, before it makes its decision on interest rates in just under a fortnight. [IC]

Rental growth drives long-term income at Primary Health Properties

As well as a growing dividend stream the shares offer upside potential

Primary Health Properties (PHP) 90p

Market cap: £1.2 billion

As the National Health Service continues to struggle under the weight of an ageing population and increased demand for treatment, resulting in growing waiting lists, there has never been a greater need for primary healthcare services outside of hospitals.

Primary Health Properties (PHP) is a UK real estate investment trust and a leading investor in modern, purpose-built primary care facilities.

The group owns the freeholds or long leaseholds of flexible modern properties built specifically for the purpose of providing local primary care, and at the end of last year its portfolio was valued at £2.78 billion while its market cap was less than half that amount.

HOW DOES PHP OPERATE?

The UK population is growing, but at the same time it is ageing and more people are suffering more instances of chronic illness, particularly since

PHP

Health Properties

the pandemic.

This means demand for health care is growing, affecting service provision, levels of patient care and patient outcomes.

Despite the roll-out of digital services like myGP, close to 70% of consultations are now face-to-face which is the same level as pre-Covid.

Yet a third of the NHS estate is obsolete and cannot cope with demand, added to which the Government strategy is to move services

Great Ideas: Investments to make today

away from hospitals towards modern primary care premises.

By letting out its purpose-built modern properties on long-term leases, backed by secure underlying covenants where the majority of rental income is funded either directly or indirectly by a government body, PHP is able to generate a secure income and pays a progressively rising dividend.

HEALTHY FINANCIAL SITUATION

2023 marked the 28th year of the trust paying an increased dividend, which was once again fully covered by earnings thanks to a total property return of 3.5% as rental growth offset a decline in valuations.

The company doesn’t make speculative investments, and only invests in new facilities if they are accretive to earnings meaning it is disciplined with respect to its development pipeline.

It currently has over £320 million of cash and undrawn loan facilities which it can use to make acquisitions or invest in its existing portfolio, and after recently placing a 10-year note with a fixed rate of just under 4.2% to repay more expensive variable-rate borrowing – in order to finance expansion in Ireland – it has an average cost of debt of just 3.3%.

Nearly two decades of positive rental growth

our total property return, which was significantly ahead of the wider property market’, said chief executive Harry Hyman.

Some 97% of net debt is fixed or hedged for a weighted average period of just under seven years.

RECORD RENTAL GROWTH

The portfolio consisted of 514 properties as at the end of last year, with the majority in England and Wales, 40 in Scotland and 21 in Ireland, which is a new market for the group with plenty of potential to grow.

Occupancy is 99.3%, and with almost 90% of income coming from government bodies and upward-only rent revisions earnings visibility is extremely high.

In 2023 the firm generated rental income of £151 million, an increase of 4%, thanks to record rental growth with reviews generating £4 million of additional income, up from £3 million in 2022 and £2 million the year before that.

‘The strong rental growth has been reflected in

ANALYST VIEWS

House broker Peel Hunt flags PHP’s ‘super-secure income’ thanks to its almost 100% occupancy rate, upward-only rental revisions and the fact its rent roll is almost wholly government funded.

The analysts also point to the fact the shares are trading at multiyear lows, leaving the company on an undemanding 21% discount to NAV with an attractive 7.7% yield.

Jefferies describes PHP as ‘Dividend Royalty’ and also flags the low risk associated with its cash flows together with its low cost ratio, helped by falling input costs. [IC]

JPMorgan Global Growth & Income shows its mettle whatever the backdrop

The managers are focused on the best total returns

JPMorgan Global Growth & Income (JGGI) 551.1p

Market cap: £2.44 billion

Investors looking for a balance of dependable income and growth should look no further than JPMorgan Income & Growth (JGGI) which is the top performer in the AIC’s (Association of Investment Companies) global equity income category over the last five and 10 years.

The objective of the fund is to provide superior total returns and outperform the MSCI All Country World index over the long term by investing in the managers’ best global ideas.

Over the last five and 10 years the fund has delivered annualised share price total returns of 16.6% and 14.9% a year respectively.

One of the key strengths and competitive advantages of the fund is the ability of co-managers James Cook, Tim Woodhouse, and Helge Skibeli to tap into JPMorgan’s global research team.

The firm’s analysts meet over 5,000 company managements a year as well as spending $150 million on fundamental research. The insights provide the fund managers with high conviction ideas.

The managers are essentially looking for the best companies wherever they are listed. The focus is on high-quality, cash-generative businesses which can ‘control their own destiny’ and not be knocked off course by the state of the economy or competitive forces.

The managers populate the portfolio with 50 to 90 of the best stocks with a good balance between growth and income which allows the fund to perform relatively well in different style regimes.

In terms of income, the team is looking for sustainability and growth potential which means

they do not ‘fish’ in traditional income sectors which may provide higher yields but are more cyclical.

The trust pays quarterly distributions that are set at the beginning of each financial year, and on aggregate the intention is to pay dividends totaling at least 4% of the fund’s NAV (net asset value) at the time of announcement. This can be topped up using the trust’s capital reserves in the event of a shortfall.

The unusual feature of paying out a dividend from net assets and share buybacks has helped keep the shares trade close to NAV rather than a wide discount like many sector peers. Over the last five years the shares have traded at an average 1.8% premium. The premium is a little below that level now at 1.33%.

Top holdings include Microsoft (MSFT:NASDAQ), which represents 6.8% of the portfolio, Amazon (AMZN:NASDAQ), which makes up 6%, and Nvidia (NVDA:NASDAQ) – whose market value recently pushed through $2 trillion and represents 4.5% of the fund.

The trust has an ongoing charge of 0.5% a year.

Against so much uncertainty, from the direction of interest rates to the state of the global economy, JGGI provides investors a reassuringly diversified portfolio. [MG]

Country Spotlight: Turkey

The prospect of greater financial and political stability, combined with a young, consumption-focused population and an enterprising economy, is strengthening Turkey’s appeal to international investors. Please read on for your guide to this key market in Emerging EMEA.…

Why we like it:

Return of sound monetary policy plus a ‘new economic policy’ indicate a new era of fiscal prudence and transparency and a focus on attracting foreign direct investment.

Improving current account balance thanks to strong exports, declining energy costs, and strong tourism.

• Deep, attractively-valued equity market with record low foreign participation suggests a pick-up in international interest in 2024.

• Municipality elections in March 2024 pave the way for four-plus years without electioneering: a positive backdrop for monetary and fiscal policy.

Turkey boasts a large population of over 80mn, of which about 40% are under age 25. This increase in the working-age population offers an opportunity for accelerated economic growth.

In turn, this ‘demographic dividend’ should support job creation, local companies, and increase consumption as citizens become wealthier.

Key themes:

FALLING RISK PREMIUM: Turkey’s increasingly investorfriendly and balanced policies will, over time, continue to drive down the country’s risk premium, attracting investment and supporting stock market performance.

GROWTH POTENTIAL: A young and entrepreneuriallyminded population provides the backdrop for an economy brimming with potential in almost all sectors, making Turkey a strong target for foreign direct investment.

Companies to watch:

AKBANK

Akbank is one of Turkey’s largest banks and has been using its ecosystem of innovative product and services across mobile and digital banking to rapidly acquire

and monetise its customers. This has been supported by the bank’s strong management team, which has successfully navigated Turkey’s recent volatile and uncertain economic backdrop.

BIM

A leading retailer of discounted food and consumer goods with over 12,000 stores, BIM has a reputable management team with a strong track record of execution. Its focus on providing highly competitivelypriced goods should make it a strong defensive growth stock for investors as Turkey’s new economic policy is implemented.

Emerging EMEA: A diverse collection of countries with unifying characteristics

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

www.bemoplc.com

To subscribe to monthly updates, news and views on the Trust, sign up at bemoplc.com

Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Changes in currency exchange rates may affect the value of investments. Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. Coupled with less developed regulation, this means your money is at greater risk. Any investment results, portfolio compositions and or examples set forth in this document are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The document is for informational purposes only and is not an offer or solicitation for the purchase or sale of shares in the Company. It is recommended that prospective investors seek independent advice as appropriate. The Key Information Document (KID) must be received and read before investing. This and other documents, such as the prospectus, latest fact sheet, annual and semi-annual reports, are available from www.bemoplc.com Although every effort is taken to ensure that the information contained in this document is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information. Baring Asset Management Limited, 20 Old Bailey, London, EC4M 7BF, United Kingdom. Authorised and regulated by the Financial Conduct Authority. Date of issue: March 2024.

How all-weather global equity fund

Brunner has rewarded our faith

The diversified dividend hero has beaten its benchmark once again and the shares are testing new highs

Brunner Investment Trust (BUT) £12.75

Gain to date: 19%

We highlighted investment trust Brunner (BUT) at £10.71 in April 2023 on the basis a 7.1% discount to (NAV) net asset value provided an opportunity to purchase a balanced global portfolio for less than the value of the underlying assets.

Our bullishness reflected the fact that the quarterly dividend-paying trust has delivered consistent returns across the market cycle and had particular appeal during the prevailing uncertainties at the time.

WHAT’S HAPPENED SINCE WE SAID TO BUY?

Shares in Brunner have trekked almost 20% higher, helping the discount relative to peers begin to narrow, boosted by the global equities rally witnessed towards the back end of 2023 as well as portfolio outperformance and well-received full year results (14 February).

Brunner beat its benchmark once again in the year ended 30 November 2023, delivering an NAV total return of 8.7%, ahead of the 5.5% increase in the composite benchmark. This reflected strong stock selection from the managers and standout performances from the likes of tech titan Microsoft (MSFT:NASDAQ), Greek-listed retailer Jumbo SA (5JB:FRA), Danish pharma star turn Novo Nordisk (NOVO-B:CPH) and insurer Munich Re (MUV2:ETR), which chair Carolan Dobson

said demonstrates ‘the variety of companies and sectors the manager selects to meet the company’s performance and risk objectives’.

WHAT SHOULD INVESTORS DO NOW?

Stick with Brunner, a reassuringly diversified trust providing exposure to high quality companies with high market shares and pricing power, as well as strong balance sheets and a sustainable competitive advantage, that are expected to perform well over the long term. This all-weather fund should hold up well in 2024, a year of countless elections around the world and with the geopolitical landscape remaining dangerous.

Brunner also proposed a 5.6% hike in the total dividend to 22.7p, meaning it has now reached 52 years of consecutive dividend increases. [JC]

Fidelity China Special Situations PLC

An AJ Bell Select List Investment Trust

If you want to take full advantage of the incredible growth of China’s middle classes and a seismic shift towards domestic consumption, you need real on-the-ground expertise.

Fidelity China Special Situations PLC, the UK’s largest China investment trust, looks to capitalise on an extensive, locally based analyst team to make site visits and attend company meetings. This helps us find the opportunities that make the most of the immense shifts in local consumer demand.

China’s growth story

Since its launch in 2010, the trust has offered direct exposure to China’s growth story; from tech giants right the way through to entrepreneurial medium and small-sized companies, and even new businesses which are yet to launch on the stock market. Portfolio manager Dale Nicholls looks to identify and invest in companies that are best placed to capitalise on China’s incredible transformation.

Past performance

Investing in China’s most compelling growth drivers Dale believes a vast and still expanding middle class is increasingly driving stock market returns in China.

“China is well established now as a major driver of growth and investment performance, not just in Asia, but in the wider world. The sheer size of China’s economy, its continued growth and ever-increasing global importance, should see investors increase their exposure to China as part of a balanced investment portfolio.”

Past performance is not a reliable indicator of future returns

Past performance is not a reliable indicator of future returns.

Source: Morningstar as at 31.01.2024, bid-bid, net income reinvested. ©2024 Morningstar Inc. All rights reserved. The FTSE All Share Index is a comparative index of the investment trust

Source: Morningstar as at 31.01.2024, bid-bid, net income reinvested. ©2024 Morningstar Inc. All rights reserved. The MSCI China Index is a comparative index of the investment trust.

Important information

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. Investments in emerging markets can be more volatile than other more developed markets. The trust invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The Trust can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

The latest annual reports, key information documents (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) Ltd, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited.

Why more UK companies are purchasing their own shares

More buybacks are done around market tops and fewer near market bottoms

More and more UK companies are buying back their own shares. Data collected by Russ Mould, investment director at AJ Bell, shows share buybacks at FTSE 100 companies are running at an aggregate value of £18.3 billion so far in 2024.

Despite being only two months into the year, the value of buybacks already equates to 35% of the whole value of buybacks in 2023.

This isn’t just a UK phenomenon either ─ according to fund group Janus Henderson, global buybacks have almost tripled since 2012, outpacing dividends.

Consequently, the importance of share buybacks has increased. In 2012 global buybacks were 52% of dividends. By 2022 the ratio had increased to 94%, ranging from 18% in emerging markets to 158% in the US.

The figures are inevitably skewed by large companies, with Apple’s (APPL:NASDAQ) $89 billion of purchases equating to 7% of the global total in 2022.

WHY DO COMPANIES BUY BACK SHARES?

Buying back (and subsequently cancelling) shares has the effect of reducing the number of shares outstanding.

This means annual profit is divided between fewer shares which produces an uplift in EPS (earnings per share) for remaining shareholders. The same effect is seen on dividends per share.

The effect is purely mechanical and has no impact on the underlying value of a business. Cash flow and profit remain unchanged.

Selling shareholders receive cash, while remaining shareholders benefit because they now own a biggest share of the distributable profit.

A working example using retailer Next (NXT) is provided later in the article.

Share buybacks have been popular in the US for many years but until recently were little used in the UK. According to wealth manager Schroders (SDR), 13% of large UK companies bought back at least 5% of their shares in 2023 compared with 9% in the US.

A study by McKinsey & Co in 2015 looked at 250 companies in the S&P 500 index between 2004 and 2014 and found no relationship between buybacks and total return (capital gain plus dividends) for shareholders.

This probably reflects misuse of share buybacks which is discussed later in the article.

Scrutinising management’s use of buybacks is important for shareholders trying to figure out if shareholder value is being created or not.

Remember, buying back shares is but one choice management teams have for allocating surplus cash, alongside paying out dividends, reinvesting in the business, making acquisitions or paying down debt.

WHY UK FIRMS ARE EATING THEMSELVES

One reason for the increasingly popularity of share backs is the low valuation of UK shares.

Managers Ian Lance and Nick Purves at valuefocused trust Temple Bar (TMPL) sum up the situation as follows:

’Some of the largest market participants in the UK have been allocating away from UK equities, which are close to all time low valuations, and therefore should have the potential to offer attractive returns.

‘Instead, investors are allocating to US equities, at close to all time high valuations, a level which has historically been associated with poor returns.’

More UK managements are seeing the value of using surplus cash to make share repurchases in addition to paying out dividends.

Fund managers at Artemis say companies are buying back shares ‘at a rate we have never seen before ’.

In the past year 57% of companies by value in the Artemis Income Fund (B2PLJH1) have bought back shares, says the manager.

Some UK examples are stark: oil major BP (BP) has reduced its share count by 16% in just over 18 months, while NatWest (NWG) has reduced its share count by 22% in under two years and housebuilder Berkeley (BKG) has reduced its share count by 30% since 2016.

DOUBLE-EDGED SWORD

Buybacks can be a double-edged sword, however, because shareholder value can be destroyed as well as enhanced depending on the price paid for the shares in relation to the intrinsic value of the business.

As Warren Buffett explains in his annual letter (24 February): ‘All stock repurchases should be price dependent. What is sensible at a discount to businessvalue becomes stupid if done at a premium.’

The problem is intrinsic value is a slippery beast and hard to nail down with any precision. Another Buffett quote is useful here: ‘It is better to

be roughly right than precisely wrong.’

John Barr Williams first came up with the idea of calculating business or intrinsic value using discounted cash flows in his book The Theory of Investment Value published in 1938.

His work has influenced many value investors, including Buffett, who wrote in his 1992 shareholder letter: ‘In The Theory of Investment

SHARE BUYBACK EXAMPLE

Retailer Next (NXT) has been buying back shares on a regular basis over the last decade as well as paying dividends.

Next’s management has shrunk the number of shares outstanding by around 17% over the last decade, equivalent to around 2% a year.

Underlying post-tax profit has grown at a CAGR (compound annual growth rate) of 2.8% a year. Reducing the number of shares has had the effect of increasing the CAGR in EPS to 5.1% a year.

In addition, the company has seen a 5% CAGR in dividends per share.

Next explicitly states it will only purchase shares if it can achieve what it calls an 8% equivalent rate of return. This is calculated by dividing anticipated pre-tax profit by the current market valuation.

share buybacks

Feature: Buybacks

Value, written over 50 years ago, John Burr Williams set forth the equation for value, which we condense here: ‘The value of any stock, bond, or business today is determined by the cash inflows and outflows-discounted at an appropriate interest ratethat can be expected to occur during the remaining life of the asset.’

NOT ALL BUYBACKS MAKE SENSE

Some investors are sceptical of share buybacks and favour dividends instead. Nick Clay, head of equity income at fund manager Redwheel, reveals some of the banana skins which await unsuspecting adherents of buybacks.

He argues most buybacks happen near market tops

and end up destroying shareholder value. At market bottoms when buybacks make more economic sense they disappear, and worse still are replaced by share issues which further dilute shareholders.

A second drawback for Clay is many buybacks are made to offset dilution of share-based compensation. A related issue is when companies conduct share buybacks to trigger bonuses or stock options.

One final important criticism Clay makes is when buybacks are made with borrowed money which is a no-no in his mind, or when cash is used which could otherwise have been invested in the business to create greater value.

Clay concludes: ‘Dividends represent an equal distribution to all investors, be they longer-term investors or employees or pension funds.

‘Everyone receives the same per share distribution. Dividends as a means of returning value to shareholders is statistically advantageous for investors, truly aligned to their long-term objectives in a manner of equality.’

Dividends and share buybacks are taxed

differently with the former treated as income and the latter capital gains. Some investors may have a preference based on the tax treatment.

One final consideration to be aware of is that companies do not always carry through with announced buyback programmes and sometimes do not cancel the shares purchased. Instead holding them in treasury.

This is another reason why some investors prefer dividends because cutting them or reducing them sends a stronger message to shareholders than stopping a buyback.

Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Martin Gamble) and the editor (Ian Conway) own shares in AJ Bell.

If you’re looking to invest your money wisely, you’ll need the right kind of investment wisdom. Our experienced fund managers from around the world search the globe for companies that offer the potential for long-term growth. At Witan, we invest collectively and responsibly for your savings or retirement.

Witan shares can be held in an ISA and bought via an online platform such as AJ Bell, or through a Financial Adviser. To find out more, visit witan.com

T6 GREAT STOCKS FOR YOUR ISA

6 GREAT STOCKS FOR YOUR ISA

Scanning the UK market for growth, quality and value

he end of the tax year is coming down the track fast and that means there are only weeks remaining to make full use of your £20,000 annual ISA allowance.

Even if you are some way off this maximum limit or haven’t invested through an ISA at all in 2023/24, the rapidly approaching deadline is a good spur to look at the possibility of making money from the financial markets.

Two weeks ago we ran an article looking at funds and investment trusts to suit different types

of investors. This time we’ve conducted a similar exercise but focused instead on individual stocks.

To help generate ideas we ran three different screens of UK shares on Stockopedia, targeting a trio of investment styles: growth, value and quality. This provided a starting point and the Shares team then applied its knowledge to come up with a list of six names which would make great picks for your ISA portfolio whether you’re looking for bargains, exciting expansion potential or just really great, wellestablished businesses. Read on to discover more.

Auto Trader

(AUTO) 746p

Market cap: £6.75 billion

Auto Trader is the UK’s leading online automotive marketplace, with a 75% share of all minutes logged on car classified sites in the six months to September 2023 according to consultants Comscore.

The company operates a platform model, and as such it benefits from network effects which support high margins and its market-leading position.

Network effects mean as more people use a platform, more advertisers are attracted to it, which in turn drives more users to it and so on, constantly adding to its market share and value.

Traditionally a site for people looking to buy and sell used cars, the business had evolved massively since the early days and is increasingly used by dealers selling new cars.

As of September 2023 there were around 440,000 vehicles listed on the site, with average revenue per retailer rising 12% over six months as the company pushed through price increases and saw strong uptake of its new products and services.

Its ‘Deal Builder’ product, which allows buyers to value their part-exchange vehicle, apply for finance and reserve their purchase online, has been expanded from 50 to 500 dealers and is receiving positive customer feedback.

Changes in the way the new car market works are also creating opportunities for the firm to take market share, with manufacturers able to operate an agency model and advertise their products direct to consumers on the Auto Trader website.

This means that instead of going into your local dealership and haggling with the salesperson, you can compare cars and read reviews on the site and get a fixed price on a car anywhere in the UK.

The shares trade on a PE (price to earnings) multiple of around 24 times for the year to March 2025, which sounds expensive but the company has grown its earnings by 30% per year on average over the last decade according to Stockopedia which is no mean feat. [IC]

Keywords Studios

Keywords Studios

(KWS:AIM) £14.59

Market cap: £1.1 billion

Leading service provider to the video game industry

Keywords Studios (KWS:AIM) is a quality growth business trading at an unwarranted PE (price to earnings) discount to its historical average.

Rising interest rates have impacted many growth shares over the last two years and Keywords has not been spared with the PE halving from over 20 times to the current 13.8 times based on 2024 consensus earnings forecasts.

Keywords has delivered consistent sales and profit growth since listing on AIM in 2013 with sales growing 50-fold and profit 27-fold which has catapulted the shares 10-fold, making them one of the most successful shares on AIM.

The video gaming industry has seen a big increase in outsourcing to specialists like Keywords which provides localisation of content to help game

20202021202220232024

makers launch into multiple markets and languages simultaneously.

The outsourcing market is relatively immature and despite rapid growth Keywords has only just scratched the surface of the global opportunity.

The company has built a market share of around 6%, which does not sound impressive until you realise it is more than three times the size of its next largest competitor.

The company’s strategy is focused on consolidating a very fragmented market through acquisitions and growing organically.

Since floating Keywords has spent around €600 million on acquisitions to gain access to a wide range of niche skills as well as broaden its geographical spread. This has brought the company significant cross-selling opportunities and insight into client needs.

Over the medium term management believes it can grow annual sales by 10% organically augmented by acquisitions while achieving an adjusted pre-tax margin of around 15%.

Based on the company’s strong track record, leading market position and long-term growth prospects Shares believes Keywords Studios should be a core holding. [MG]

Kier

(KIE) 138.6p

Market cap: £607.1 million

Areas like infrastructure and construction have been heavily out of favour with investors and that’s done nothing for the share price of Kier (KIE).

However, we the stock has gained some recent momentum and still looks excellent value. With a significant turnaround of the business near to completion, we believe signs of improved operational and financial performance and an expected return to the dividend list can act as a catalyst to unlock that value.

Based on consensus forecasts for the 12 months to 30 June 2025, Kier trades on a price to earnings ratio of 6.3 times and offers a 4.8% yield.

In June 2019 a new management team, headed up by current chief executive Andrew Davies, concluded a strategic review of a business which was frankly in a bit of a mess. Like much of its peer group it had become too unwieldy, too focused on winning contracts regardless of their profitability and with a stretched balance sheet.

Davies and co set out to fix these problems and while the Covid pandemic delayed progress, this repair job now looks largely complete. Cash generation has already begun to improve materially and further evidence of this should be rewarded by

the market.

Non-core assets have been sold off, the company is now managing contract risk better and the focus is on areas where the company has the scale and expertise to enjoy a clear competitive advantage. This includes infrastructure, construction, highways, property and utilities projects across the UK. As is often the case when shares look cheap, there are risks for investors to consider.

After all, while Kier’s exposure to state-funded investment in critical infrastructure should provide some insulation from the macro-economic backdrop, the parlous state of UK public finances means there is some risk of a slowdown in work. [TS]

Moneysupermarket.com

(MONY) 249p

Market cap: £1.33 billion

At a time when the cost of living seems to be going up every month, especially for things we have to pay for but might never actually have to use like car, home and travel insurance, price comparison websites are an essential way of helping people save money.

The firm estimates it saved consumers a record £2.7 billion in 2023, while at the same time it generated record turnover of £432 million, an 11% increase on 2022. This was thanks to ‘exceptional’ trading in its insurance specialism as customers sought out cheaper policies.

Revenue from the insurance business alone jumped 28% to £220 million, accounting for more than half of the group total, as ‘exceptionally high premium inflation continued, driving high search traffic in the quarter and fueling high levels of switching in car and in home,’ said the company.

What is doubly impressive about last year’s performance is it was achieved with virtually no energy switching due to an almost complete lack of competition among the power providers.

In 2019, its previous record year, the company saw ‘exceptional’ levels of energy switching, driving a 40% jump in home services revenue.

Analyst Roddy Davidson at Shore Capital expects

Moneysupermarket to deliver double-digit earnings growth this year and next year along with strong cash generation and an increasing dividend.

Ciaran Donnelly and the team at Berenberg recently expressed confidence in the group’s ability to grow even without a contribution from energy switching again this year, based on the firm’s plan to expand its offering with membershipbased propositions such as SuperSaveClub, the MoneySavingExpert app and the Quidco cash-back service.

Leveraging its brands, in particular the highly trusted MoneySavingExpert, should reduce the company’s dependence on paid marketing and allow it to consistently drive both revenue and margin growth.

The shares trade on a multiple of 14 times this year’s earnings, which we don’t think is expensive given the quality of the business and the growth potential. [IC]

SSP (SSPG) 219.6p

Market cap: £1.75 billion

Food travel expert SSP’s (SSPG) shares have yet to get even closer to recovering from the Covid pandemic and we think that’s unjustified. SSP has an excellent long-term track record and the cash generation to service its sizeable but manageable net debt. As such, Shares believes the present valuation discount to pre-pandemic levels presents a compelling entry point for ISA investors. Particularly those seeking a quality compounder with pricing power arising from a captive customer base, and an exciting global growth opportunity with leisure travel demand continuing to recover.

Led by CEO Patrick Coveney, SSP operates restaurants, bars, cafes and other food and drink outlets at airports and railway stations across 36 countries under owned brands such as Upper Crust, Ritazza and Le Grand Comptoir and franchises it runs. These include Burger King, Starbucks (SBUX:NASDAQ) and M&S Food-To-Go.

Despite headwinds including geopolitical uncertainty and industrial action across Europe, the £1.75 billion cap’s first quarter update (30 January 2024) confirmed SSP has positive momentum driven by like-for-like sales growth, new business wins and contract renewals and acquisitions. The FTSE 250 firm continued to see strong performances across its key growth markets of North America and Asia Pacific, while

SSP

14.3% like-for-like sales growth of 14.3% reflected the further recovery of passenger numbers and the strength of SSP’s customer proposition.

The acquisition of concessions operator Airport Retail Enterprises will significantly strengthen SSP’s position in the attractive Australian market and increase the proportion of revenues focused on the fast-growing Asia Pacific region.

For the year to September 2024, Shore Capital forecasts a jump in adjusted pre-tax profits to £185.2 million ahead of £222.1 million by 2025, with earnings expected to rise from 11p this year to 13.5p next. Based on those 2025 estimates, SSP trades on a price to earnings ratio of 16.3 and a price to earnings growth (PEG) ratio of 0.7, which seems undemanding given the opportunities ahead in a structurally growing global travel market. [JC]

are recovering as it benefits from rebound for travel

YouGov

(YOU:AIM) £11.40

Market cap: £6.75 billion

Market research and data analytics group YouGov is probably best known in the UK for its political polling but this is just a small part of what is a much larger and growing business.

It may be headquartered in the UK but this is a truly global operation with operations in Europe, North America, the Middle East and Asia Pacific.

Based on analysis by industry body ESOMAR (European Society for Opinion and Marketing Research) the ‘established research’ market YouGov operates in is worth some $48 billion globally, around 50% of which is centred around the UK and US. ESOMAR estimates this is growing at some 5% a year.

It remains a highly fragmented market, giving YouGov scope to take share both organically and through acquisitions. The recent €315 million takeover of GfK’s consumer panel business, for example, brought in 1,100 clients. Of which 70% were not YouGov customers prior to the deal.

In a world where data is becoming both more voluminous and important, the company provides key insights to companies, governments and other institutions so they can make informed decisions.

The business is underpinned by a strong central platform which has more than two decades worth of data within it. Crucially YouGov has some 26 million registered panel members which allow it to deliver robust consumer insights.

The company is targeting growth in three main ways. The biggest opportunity is in enterprise sales which deliver strategic insights on an ongoing basis

to large national and multinational organisations.

For clients with more straightforward requirements YouGov offers a digital path to purchase data through its new self-service research platform. Finally, the company is looking to innovate and develop new projects by building on its existing research engine.

Chief executive Steve Hatch, who took over last summer having previously worked at Meta Platforms (META:NASDAQ), is beginning to put his stamp on the business. Recently bringing in a new chief commercial officer in the form of Tom Fisher to sharpen the company’s money-making instincts. A price to earnings ratio of 22 times is not cheap but reflects the company’s robust growth with consensus forecasting EPS growth of 31.7% and 27.8% in financial years running to 31 July 2024 and 31 July 2025 respectively. [SG]

Latest ‘Spot The Dog’ report sees near-trebling of laggard funds

Performance of US stocks means global funds have struggled to keep up

Evelyn Partners has just released its biannual Spot The Dog survey of UKlisted actively managed investment funds available to retail investors which identifies not just the winners but the losers, with the aim of pushing fund groups into taking action.

The report focuses on funds which warrant ‘special attention’ because they have performed particularly badly compared with their benchmark over the last three years, but it excludes investment trusts as their share prices may not reflect the NAV

(net asset value) or underlying performance of the managers due to discounts and premiums.

We should also stress this research isn’t a list of funds to sell, it is simply a statistical snapshot of fund performance over a given period, and investors are encouraged to do their own due diligence before reaching any conclusions.

TOUGH TIME FOR GLOBAL MANAGERS

As the report puts it, markets have been particularly ‘capricious’ over the last three years with leadership

UK All Companies 'Dogs' and 'Pedigree Picks'

Funds: Spot the dog

–and index performance – dominated by a handful of well-known tech companies which has made it hard for active managers to outperform.

As a result, only 4% of global equity funds have managed to outperform the MSCI World index over the three years to the end of 2023.

In total, the number of funds ‘in the doghouse’ has almost tripled from 56 in July to 151 in December with a combined asset value of £95.3 billion against £46.2 billion six months earlier.

The highest number of ‘dogs’ is in the global sector, with 49 names against 24 funds in mid-2023, of which half are focused on sustainable investing and therefore had no exposure to energy stocks which rocketed in 2021 and 2022, first due to the post-pandemic rebound which sent fuel prices soaring and then due to the invasion of Ukraine.

A key area of underperformance was in funds with a ‘quality’ bias, as they tend to invest in companies with strong balance sheets, resilient cash flows and robust business models.

In theory, these are exactly the sort of stocks which should have performed well in a period when global interest rates rose at their fastest-ever pace and quality companies with pricing power were able to benefit at the expense of weaker competitors.

However, as the report highlights, coupled with the strength of energy stocks, ‘over the period of this report markets have swung

violently between favouring highly economically sensitive-companies and those benefiting from AIexcitement’ instead.

The report also points out 2021 to 2023 was an especially tough time for investors in renewable energy with the MSCI Global Alternative Energy index down three years in a row.

EQUALLY TOUGH FOR UK EXPERTS

There was a rise in the number UK-only funds which underperformed, and a significant rise in the assets under management to £12 billion or threeand-a-half times the previous count.

Part of the reason for this is the number of ‘ethical’ and ‘sustainable’ funds, which like their global counterparts have to steer clear of energy stocks, except in the case of the UK the energy sector has a much bigger weighting than it does in the global index, so the underperformance is even more marked.

The authors of ‘Spot the Dog’ acknowledge that funds can go through weaker periods for a variety of reasons: poor decision-making, a run of bad luck, instability in the team or ‘because the fund has a style or process that may be temporarily out of fashion with recent market trends’, which could explain the surge in numbers over the last six months.

‘Identifying whether these are short-term factors that will eventually pass, or more problematic, is

UK Equity Income 'Dogs' and 'Pedigree Picks'

Funds: Spot the dog

key and investors should ask several questions before they take any action’, stress the authors.

Valuations in the UK are widely accepted to be cheap versus other regions but that didn’t help overall performance last year despite a pick-up in the final two months.

Of the 191 UK-focused funds in the report’s universe, 34 or 18% qualified as dogs, ranging across the spectrum in terms of style, from growth to recovery to income.

Big companies with international exposure and overseas earnings generally fared better than smaller, domestically-oriented mid- and small-caps where sentiment remained – and remains – poor.

Looking on the bright side, the report suggests the UK’s cheap valuations, high dividends and the fact many companies are now buying back their shares ‘could encourage investors back into the market’.

Money & Markets podcast

featuring AJ Bell Editor-in-Chief and Shares’ contributor Daniel Coatsworth

LATEST EPISODE

Big incentives to switch bank accounts, why a sell-off in government bonds has troubled markets, and should you pay for social media networks?

Bloomsbury is more than just a successful publisher of sci-fi and fantasy books

Diversification into academic publishing and e-books has made a big difference

Shares in publishing outfit Bloomsbury Publishing (BMY) hit a record level on 14 February after the firm raised its guidance for the year ending 29 February 2024.

Over the past year, Bloomsbury shares have gained 22% and over five years 137% to sit at 536p. The publisher has clearly benefited from the revival of reading which started during the pandemic and the ability to tap into popular genres like sci-fi and fantasy. Interest in these genres has grown by 54% over the past five years in the UK, according to data from UK Nielsen BookScan.

Bloomsbury chief financial officer Penny Scott-Bayfield tells Shares: ‘The fantasy genre has been important to us throughout. Our key [overall] focus is to publish books of excellence and originality across many genres and categories from academic, consumer, children, adult [books]. We began with Harry Potter nearly 30 years ago, we now have Samantha Shannon and Cixin Liu in the sci-fi space and now the global phenomenon that is Sarah J. Maas.’

HOW DOES BLOOMSBURY MAKE MONEY IN ITS CONSUMER DIVISION?

Founded in 1986 by current chief executive Nigel Newton, Bloomsbury really made its name off the back of the explosive success of the Harry Potter titles – enduring a fallow period in the 2010s as Pottermania faded. However, the pandemic

Under the Bonnet: Bloomsbury Publishing

As well as making money from new authors, Bloomsbury makes money from selling its backlist of previously published titles”

reawakened peoples’ love of reading which, combined with some successful strategic initiatives and the canny capture of some winning authors, has helped propel the stock to its fresh all-time highs.

As a traditional publisher, Bloomsbury makes money from contracts and royalty payments and pays out advances to authors. For the first half of the financial year just ended Bloomsbury booked royalty payments of £15.9 million.

An advance amount is negotiated between the publisher and the author. If the author is new than the advance is lower, whereas if they are more established and successful then the advance is more.

Royalties are paid from book sales – commercial arrangements will vary but typically a publisher might take 10% to 15% of the cover price of a book. Bloomsbury has a sales and marketing division which helps promote and distribute the books on its roster.

The more copies a book sells, the more money the publisher makes. For example, Bloomsbury sells to retailers like Amazon (AMZN:NASDAQ) and Waterstones who in turn sell to the public. If a

retailer then discounts certain titles then it does not typically impact how much Bloomsbury receives.

As well as making money from new authors, Bloomsbury makes money from selling its backlist of previously published titles such as Sarah J. Maas’ previous 15 books and J.K. Rowling’s Harry Potter titles.

Making titles available to buy online in a digital format is an effective way for the publisher to generate revenue from its backlist at limited additional cost.

Audio books represent another growth area. For the first half, Bloomsbury said sales for Sarah J. Maas and Samantha Shannon titles grew by 79% and

DIVERSIFIED STRATEGY SOURCE: BLOOMSBURY PUBLISHING

CHANNELS

• Digital products, print, ebooks and audio

• Easy and complementary customer access

MARKETS

• Combination of Academic and Consumer publishing

• Publishing portfolio diversified across consumer and academic markets

CHANNELS

TERRITORY MARKETS

TERRITORY

• Global expansion, with 76% of revenue international

• Global reach of key authors

• US, UK, Australia and India

Source:

169% respectively.

Other bestsellers in Bloomsbury’s consumer division include Poppy Cooks: The Actually Delicious Air Fryer Cookbook by Poppy O’Toole, Pub Kitchen by Tom Kerridge and The House of Doors by Tan Twan Eng in the US.

HOW DOES BLOOMSBURY MAKE MONEY IN ITS NON-CONSUMER DIVISION?

WHAT IS BLOOMSBURY’S VALUATION?

Based on consensus forecasts for the 12 months to 28 February 2025, Bloomsbury shares trade on a price to earnings ratio of 16.5 times and offer a dividend yield of 2.5%.

The publisher also makes money from its non-consumer division by selling academic products like its Bloomsbury Digital Resources (BDR) subscription-based offering.

In the first half of the financial year to 29 February, Bloomsbury generated non-consumer revenue of £47.3 million and an underlying pre-tax profit of £5.9 million.

‘Academic publishing is attractive to us for several key reasons - the revenue stream is much more predictable, the margins are higher and there is also the digital channel upside potential - while in the consumer division print remains attractive,’ says Scott-Bayfield.

WHAT IS THE STRATEGY?

The strategy of combining consumer and nonconsumer sales has proved a solid one in recent years. It has also meant Bloomsbury is not as reliant on the Christmas trading period when traditionally the bulk of book sales are been made.

The publisher’s new BDR target is to achieve a further 49% organic increase in revenue over the five years to 2027/2028 and reach approximately £37 million of turnover.

Bloomsbury’s latest trading update (14 February) saw it guide for revenue and pre-tax profit (and

highlighted items) to be ‘significantly ahead’ of upgraded market expectations for the year ending 29 February 2024. These expectations were for revenue of £291.4 million and underlying pre-tax profit of £37.2 million. The company is due to report its full-year results on 23 May.

Backed by its strong balance sheet the publisher has been on the acquisition trail since 2008 and has completed 19 deals since then.

In December 2021 the company bought ABC CLIO, a US academic publisher of reference books with ‘a major presence in the US high-school library market.’

A new platform for streaming academic content –Bloomsbury Video Library (BVL) – was also launched at the same time.

USING SOCIAL MEDIA

Some of the publisher’s success within the consumer division has been driven by its social media strategy around the books it is promoting.

Chief executive Nigel Newton has singled out TikTok and Instagram as social media platforms

Bloomsbury revenue breakdownsix months to 31 August 2023

which have helped to propel sales. The BookTok phenomenon on the former is seeing young people share their passion for certain titles with millions of people around the world.

The publisher has also been capitalising on appetite for content from global streaming channels like Netflix (NFLX:NASDAQ). For example, Bloomsbury author Cixin Liu’s bestseller Three Body Problem will be adapted for film by Game of Thrones producer David Benioff and D.B.Weiss and aired through Netflix on 21 March.

WHAT DO ANALYSTS AND FUND MANAGERS THINK?

This view is shared by Eric Burns, lead manager at the CFP SDL Free Spirit Fund (BYYQC27). Despite the recent share price gains, Burns believes the stock is not expensive.

His fund has held Bloomsbury since 2019, and it is the fund’s biggest position at just over 9% of the portfolio.

WHAT IS FREE CASH FLOW?

Free cash flow is cash a company generates through its operations minus any capital and operating expenditure.

Analysts Alastair Reid and Darren Milne at Investec believe the publisher’s business model has ‘structural attractions’ and continues to be ‘under-appreciated.’

‘Management note they see significant opportunities for acquisitions, with the ‘virtuous flywheel’ we have previously highlighted of cash generation and investment continuing to take effect, and the ongoing diversification strategy is increasingly smoothing profitability during the year, leading to a rebalancing of the dividend (in the first half now 3.7p).’

‘There is no doubt that author Sarah J. Maas has turbo-charged Bloomsbury’s returns in the shortterm. [However] over the long term it is a steady publisher which executes well and delivers strong returns. If you look at this year’s forecast there is a big step up, and if you look at next year’s it is set very conservatively and is not an example of the stock getting ahead of itself.’

Burns says: ‘It is our largest holding, and we are comfortable with that. If we look at [the company’s] free cash flow yield up to February 2025, it is just over 7%. We have a great business here and it is hardly expensive with such an attractive FCF yield.’

INVEST IN THE COMPANIES SHAPING OUR FUTURE

A market-leading range of funds, built around the structural trends that are re-defining our world

Our funds offer investors unbeatable access to the cutting-edge megatrends shaping our future

INVESTMENT PROCESS

Designed in partnership with leading impact research and data providers, impact is at the heart of the methodology underpinning our funds.

Robust impact analysis ensures that only the highestrated companies are selected for our funds.

CIRCA5000 is a thematic investment specialist.

We believe the world’s biggest challenges are also the biggest return opportunities. From renewable energy to vertical farming and access to housing and healthcare, these trends are rapidly transforming the global economy. Through our in-depth research we offer investors unrivaled access to these future trends in their purest form.

We have built CIRCA5000 for investors that demand full transparency, clear data to support every claim and active engagement with the companies within our funds.

STEP 1

Initial Screening

We screen the global equity universe for companies that are aligned to each theme. Additional filters are applied to weed out any businesses involved in controversial activities.

STEP 2

Impact Analysis

The remaining companies in each theme are then meticulously analysed to identify those companies with the most direct exposure to the given area. Any company not deemed to have a materially positive impact is removed.

STEP 3

Final Fund

Only companies with measurable direct links to the theme remain in the universe. The final fund is weighted using a combination of market capitalisation and scoring from our research.

Ourinvestment process produces5 market-leading funds built around the structural trends that are redefining our world.

C5KW

Clean Water & Waste

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Green Energy & Technology

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CIRCA5000 has been a certified B Corp since 2019. In both 2021 and 2022 CIRCA5000 was recognised by B Lab as ‘Best For The World: Customers’, scoring in the top 5% of B Corps globally for services to our customers. In 2023, we were awarded ‘Best For Sustainable Investors’ by Boring Money and ‘New ETF Issuer Of The Year’ by ETF Stream.

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Disclaimer : Issued by CIRCA5000 UK Ltd. Registered in England and Wales, company no. 13214839. Registered office: 86-90 Paul Street, London, United Kingdom, EC2A 4NE. CIRCA5000 UK Ltd is an appointed representative (FCA reg no. 950019) of CIRCA5000 Ltd, who is authorised and regulated by the Financial Conduct Authority (FCA reg no. 846067). Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by CIRCA5000. The CIRCA5000 ICAV is an open ended Irish collective asset management vehicle which is constituted as an umbrella fund with variable capital and segregated liability between its sub funds and registered in Ireland with registration number C -491100 and authorised by the Central Bank of Ireland as a UCITS. The manager of the ICAV is Carne Global Fund Managers (Ireland) Limited, who is authorised and regulated by the Central Bank of Ireland, reference number C 46640. The ICAV is a recognised schemeunder section 272 of the Financial Services Market Act 2000 and so the prospectus may be distributed to investors in the UK . Thematic Risk: The Fund may be subject tothe risks associated with, but not limited to, investing in companies with a material exposure to the climate transition. These risks include the obsolescence of intellectualproperty as technology evolves and changes in regulation or government subsidies that may affect the revenue or profitability of a company Derivative Risk: The Fund may invest inFinancial Derivative Instruments (FDIs) to hedge against risk , to increase return and/or for efficient portfolio management. There is no guarantee that the Fund’s use of derivatives for any purpose will be successful. Derivatives are subject to counterparty risk (including potential loss of instruments) and are highly sensitive to underlying pricemovements, interest rates and market volatility and therefore come with a greater risk . Sustainability Risk: The Manager, acting in respect of the Fund, through the Investment Manager as its delegate, integrates sustainability risks into the investment decisions made in respect of the Fund. Given the investment strategy of the Fund and its risk profile, the likely impact of sustainability risks on the Fund’s returns is expected to be low. Currency Risk: Some of the Fund’s investments may be denominated in currencies other than the Fund’s base currency (USD) therefore investors may be affected by adverse movements of the denominated currency and the base currency. Market Risk: The risk that the market will go down in value, with the possibility that such changes will be sharp and unpredictable. Operational Risk: The Fund and its assets may experience material losses as a result of technology/system failures, human error, policy breaches, and/or incorrect valuation of units. Capital at risk . The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. All features described in this fact sheet are those current at the time of publication and may be changed in the future. Nothing in this fact sheet should be construed as advice and it is therefore not a recommendation to buy or sell investments. If in doubt about the suitability of thisproduct, you should seek professional advice. No investment decisions should be made without first reviewing the key investor information document of the Fund (“KIID”) which can be obtained from www.circa5000.com This marketing material is only directed at investors resident in jurisdictions where this fund is registered for sale. It is not an offer or invitation to persons outside of those jurisdictions. We reserve the right to reject any applications from outside of such jurisdictions.

Giving to charity? Don’t miss the tax boost

Additional and higher rate payers could be in line for a rebate

Lots of people gift money to charity every year, but many aren’t aware there are big tax breaks for doing so.

Research commissioned by HMRC showed that although 94% of higher earners donating to charity had heard about gift aid, only 52% were aware they could claim a tax rebate on their donations. Staggeringly, just one in five higher and additional rate taxpayers had claimed a rebate which goes some way to account for the estimated value of unclaimed gift aid exceeding £500 million.

We’ll cover how gift aid works and the other tax perks of donating to charity.

HOW GIFT AID WORKS

Gift aid is a tax incentive that gives a top up on donations from UK taxpayers to a UK registered charity or community amateur sports clubs (CASC). The government tops up the charity donation by 25% – equivalent to the 20% basic rate income tax paid on the money donated. This turns a £100 donation before the £25 top up into £125 for the charity or CASC.

But there’s a tax break on offer for higher and additional rate taxpayers too – they can claim up to 20% or 25% on their donations, depending on their tax bracket. That means an additional rate taxpayer

making a £100 donation could reclaim £31.20 from the taxman – meaning the effective cost of the donation is just £68.80. On top of that, the charity would receive £125 after claiming its Gift Aid on the donation. For a higher-rate taxpayer the cost is £75 of the £125 that the charity receives.

Claims are usually made via a self-assessment tax return, but you can ask HMRC for a P810 form to fill in if you don’t normally file a return. You can backdate claims for up to four years, so it’s worth looking into this before the end of the tax year in April. Getting the claim in now means you might be able to make a bigger claim.

Another handy tip is that you can claim a rebate ‘in-year’. Self-assessment tax returns normally look back over payments and expenses for the previous tax year. But gift aid rules mean that you can use it to claim a rebate for donations made in the current year too, up until the date you file your return, meaning you could get your gift aid rebate sooner.

YOU CAN AVOID TAX TRAPS TOO

Not only does giving money to charity give you a good feeling and some tax relief, but there are also other ways you can use charitable gifting to boost your tax position. If you’re caught by one of the many traps in our tax system, gift aid could help you lower your tax bill.

You might be a parent who has gone over the £50,000 child benefit high income charge, meaning you’d start to lose child benefit. Or if your earnings have breached £100,000 you start to lose your taxfree Personal Allowance at a rate of £1 for every £2, a whopping effective rate of tax of 60% on earnings between £100,000 and £125,240. At this level of earnings, you also lose entitlement to tax-free childcare and some funded childcare hours, which

MISSED OUT ON A REBATE?

With charity donations at record levels and frozen tax bands dragging more people into higher rates of tax, it’s likely the unclaimed gift aid figure is even greater than the £500 million figure suggested in 2016. If you’ve got records of your donations, you could make claims going back up to four years. Contact HMRC to sort this, via webchat, phone or post.

can cost you a lot of money.

Making a charitable donation and claiming gift aid means the full value of the donation (what you pay plus the government top up) is deducted from the income that would otherwise count towards the £100,000 limit (or £50,000 for child benefit).

For example, if you earn £101,250 you could make a £1,000 donation to charity. This would then be increased through gift aid to £1,250 for the charity. But that full £1,250 donation can be offset against your income to bring it down to £100,000 –meaning you aren’t subject to the taper and nor do you lose certain childcare benefits.

You can achieve a similar tax planning outcome by making a pension contribution towards your retirement too.

Schroder AsiaPacific Fund plc: Why active investing works in Asia

How a consistent, disciplined investment approach can add value

The debate about the merits of active and passive investing attracts a lot of attention in the investment world and many commentators have a clear, almost evangelical, preference for one or the other.

The reality is that some regional equity markets can be notoriously hard to beat. Take the US S&P 500 index over the last ten years, for example. The dominance of a handful of technology companies for much of this period has made it hard (but not impossible) for any active manager to match that market’s return without exposure to those stocks. Nevertheless, it is important to remember that past performance is not a guide to the future, and the next ten years for that market, and indeed any market, could be dramatically different to what we have witnessed recently.

In other parts of the world, however, conditions tend to consistently favour an active strategy. Asia is one of these regions and, over the years, Schroders has

developed an enviable track record of adding longterm value for its investors through an active approach towards Asian equities. Below we explore some of the reasons why that is the case.

ASIA IS A DIVERSE COLLECTION OF DIFFERENT ECONOMIES AND MARKETS

Investing in Asia means embracing the opportunities and risks from a highly diverse set of very different individual economies and markets. The experience of 2023 demonstrates this really well, as we can see in the chart below. The overall market (as measured by the MSCI AC Asia ex Japan Index) was flat last year in sterling terms, but that masks a huge range of different performances from individual markets within Asia. Leading the way were Taiwan (+23%), Korea (+16%) and India (+14%), while Hong Kong, China and Thailand all posted double-digit percentage declines.

The same is true at the sector level, with Information Technology (+25%) and Energy (+9%) leading the way in 2023, while Real Estate (-19%), Consumer Staples (-11%) and Utilities (-10%) all disappointed.

So for someone with a longer term perspective this spread of returns should give stock pickers the conditions in which they can take advantage of these dislocations. It only takes a modest tilt towards the better performing countries and sectors, and away from the disappointing ones, for an active manager to

CAPTURING INEFFICIENCIES

Of course, it is vital that active portfolio managers employ a consistent and disciplined investment approach, in order to ensure that the sectoral and geographical tilts within a portfolio are capable of adding that value, rather than detracting from it. This is where Schroders’ capabilities and significant resources in the region come in to their own. Richard Sennitt, portfolio co-manager of the Schroder AsiaPacific Fund plc and a member of Schroders’ Asian Equities investment team since 1993, explains.

“Over the years we have observed that Asia is an inefficient set of markets and, as a result, it is a region in which you can add a lot of value through the consistent application of a bottom-up, fundamental approach, with stock selection at its heart. One of the most important things for us as a team, is the analytical resources that we have on the ground in the region. Although Abbas Barkhordar and I, as portfolio managers, are based in London, we have 40 analysts based in six offices across the region, who are actively visiting companies, compiling research reports and making investment recommendations. Abbas and I draw on the best ideas from this analytical output to build a differentiated portfolio in which we can hold high conviction.”

One of the main reasons Asian markets are inefficient is, in our view, because of the lack of longterm analytical coverage. There are plenty of brokers in the region that are providing stock-specific research, but the majority of it has a relatively shorter-term focus, with insights and recommendations based on expectations for the next 6-12 months. Richard and

Abbas take a much longer-term focus, which enables them to take a differentiated view. Frequently, they will invest in businesses based on the long-term potential that they observe, at times when the market simply isn’t interested, because the short-term focus is elsewhere.

CORPORATE GOVERNANCE

Historically, corporate governance has been an issue when investing in Asian equities. Here, there are other aspects of the Schroder AsiaPacific Fund investment approach that can help to add value, as Abbas explains.

“As active investors, we are focused on identifying Asian companies with quality characteristics. We look for businesses with strong management teams that generate good returns on capital, and that have a track record of making sensible capital allocation decisions. Many Asian businesses have been guilty of poor capital allocation decisions, or decisions which disadvantage the interests of minority shareholders, which have weighed on long-term shareholder returns. Corporate governance is therefore a key consideration for us and the consistent nature of our approach, with its focus on quality, should add value over the long-term, in our view.”

A POSITIVE OUTLOOK

As a result of the above factors, the Schroder AsiaPacific Fund has consistently added long-term value for its shareholders through a disciplined, fundamental, active investment approach, as

Overall, the backdrop hasn’t been easy for Asian investors in recent years, with the region underperforming other major regional markets such as the US, but clearly there have been opportunities for active managers to add value.

Going forward, the outlook for the region is relatively upbeat. Asian equity valuations generally look reasonable when compared to long-term averages although, as you would expect, some markets look better value than others. Meanwhile, growth prospects in the region are broadly encouraging, supported by both domestic consumption growth and the potential

FUND RISK CONSIDERATIONS –

SCHRODER ASIAPACIFIC FUND PLC

Emerging markets risk: Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty and operational risk.

Currency risk: The company can be exposed to different currencies. Changes in foreign exchange rates could create losses.

Concentration risk: The company may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the company, both up or down, which may adversely impact the performance of the company.

Gearing risk: The company may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so. Counterparty risk: Investments such as warrants, participation certificates, guaranteed bonds, etc. will expose the company to the risk of the issuer of these instruments defaulting on paying the capital back to the company.

MARKETING MATERIAL

This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its

for a recovery in export volumes as inventories normalise.

Historically, Asian equities have done well following a peak in US interest rates and when the US dollar has been soft. We may see these conditions in 2024, which bodes well for the performance of Asian markets generally. Richard and Abbas are confident that their consistent, disciplined and active investment approach can continue to add value for shareholders of Schroder AsiaPacific Fund over the longer term.

Find out more about Schroder AsiaPacificFund plc

completeness or accuracy.

The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.

Past Performance is not a guide to future performance

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.

Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

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

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

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

Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.

When cutting the dividend can be the right thing to do

There was interesting market reaction to the recent decision (5 March) by builders merchant Travis Perkins (TPK) to slash its dividend by a whopping 58%.

At first the stock was down a little but it quickly rebounded and actually began trading higher as the day progressed. Now it’s important to add some context, the shares had dropped by a quarter over the last 12 months and a cut was widely expected by analysts and investors.

However, the scale of the cut was beyond what had been forecast. This suggests companies can sometimes get credit from the market for reducing how much they return to shareholders if it’s the right thing to do, even if the loss of income is painful.

Rather than dodging a difficult decision, management have grasped the nettle and decided to rebase the dividend and start again, with scope to improve the payout as and when market conditions improve. This was accompanied by moves to reduce costs and increase efficiency in the business through a restructuring of operations and the implementation of technology.

Going back nearly 15 years we can find a very different example of a company, operating in a similar universe to Travis Perkins, continuing to pay dividends and even increase them when it really should have been conserving cash.

Building services firm Connaught was one of the worst corporate failures in the UK market in the 21st century, taking on too much debt and

employing aggressive accounting to mask lossmaking contracts.

A telltale sign of the problems beneath the surface was the fact cash generation did not keep pace with earnings. The firm posted a sicklylooking cash conversion ratio of 28.3% in 2009, the last set of annual accounts before its collapse in September 2010.

Yet less than six months before the company went bankrupt, it increased its dividend by a fifth in a bid to stabilise the sinking share price.

In this week’s magazine we have a detailed discussion on the increasing popularity of share buybacks in the UK, and one of the potential advantages from a corporate perspective is management may feel they have more freedom to pause, scale back or cancel a buyback if circumstances dictate it’s the prudent move.

The ranks of the UK market look set to be further depleted as telecoms and connectivity testing equipment manufacturer Spirent (SPT) succumbs to a bid from private equity. The 60%-plus premium is eye-catching although still below the 211p the company was trading at a year ago. Undoubtedly the company is going through a sticky patch, as its latest financial results highlight, but it remains a good business and its departure represents a depressing continuation of the hollowing out of UK plc.

How gold and emerging markets are warning about US debt growth

Precious metals and developing economies can

do well

when borrowings surge across the Atlantic

Warren Buffett’s antipathy toward gold as an investment is well known, thanks in part to a speech the Sage of Omaha gave at Harvard in 1998. Buffett acidly asserted that: ‘Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.’

It may therefore seem perverse to return to the precious metal in the immediate aftermath of the publication of Berkshire Hathaway’s (BRKB:NYSE) annual report, sadly adorned in black this year to mark the passing of Buffett’s long-term business partner Charlie Munger. But the timing makes sense in some ways. Even as the S&P 500 equity index barrels towards new highs, gold is also setting fresh all-time highs and, intriguingly, the maths suggests that the answer to the question, ‘which is the better investment, gold or US equities,’ is either ‘neither’ or ‘both’, as they have matched each other over the past 42 or so years. However, there have been periods where one of stocks or the precious metal has done much better than the other, so perhaps the real question is what lay behind those periods and what would be needed for them to be repeated.

Gold and the S&P 500 have performed equally well in capital terms since 1971

INFLATIONARY IMPETUS

If we start on 1 January 1971 – the year when US president Richard M. Nixon smashed up the Bretton Woods monetary system, withdrew the dollar from the gold standard and effectively launched the modern era of ‘fiat’ currency – then gold has performed just as well as the S&P 500 in capital terms.

In all truth, Buffett then edges the argument, thanks to the dividends and buybacks on offer from equities, whereas gold offers no yield. But there are three clear eras when even those cash returns would not permit US equities to catch up with returns from the physical metal – the mid-1970s, the early 2000s and then 2019 onwards.

Russ Mould:

Gold

has enjoyed three marked eras of outperformance relative to US equities

In each case, inflation was higher than the Fed Funds rate, meaning US interest rates were negative in real terms. As such, there was no opportunity cost in holding gold.

DEADLY DEFICIT

But these periods have another defining characteristic, namely galloping growth in the US deficit. Increased debt and inflation may well be linked anyway, but each of these periods – mid1970s, the early 2000s and then 2019 onwards –saw US government borrowing rocket.

Periods of rapid US Government borrowing have been good for gold

Perhaps here, investors were looking for a store of value where supply grew relatively slowly, if at all, in contrast to paper government promises which, for much of this century, have then been met with the help of suppressed interest rates and money printing, courtesy of zero interest rate policies (ZIRP) and quantitative easing (QE).

on market issues

DEBT BURDEN

This argument is often given as a reason for the rise of Bitcoin, and the cryptocurrency recently attained new record levels. Not surprisingly, US Treasuries are paying close attention to America’s fiscal incontinence. The bond price falls (and yield increases) seen from the highs (and lows) of early 2020 may reflect an easing of pandemic-induced panic, inflation, an end to QE and higher interest rates from the Fed. But the ever-growing Federal debt pile is increasing the supply of Treasuries at a time when the interest burden, at one fifth of the US tax take, means the pressure is on the Fed to cut rates when it can, sticky inflation or not.

It may therefore be no coincidence that emerging market government bonds, as benchmarked by the Invesco Emerging Market Sovereign Bond ETF (PCY:NYSE) and the DBIQ Emerging Market USD Liquid Balanced Index that it tracks, have outperformed US Treasuries since autumn 2022. Emerging markets faced their own debt crisis in 1997-98 and have stuck to the lessons learned, as evidenced by the faster response on the part of their central banks to inflation’s return in 2021-22 and how sovereign debt/GDP ratios are often much lower than they are in the West.

Emerging market sovereign bonds are starting to outperform US Treasuries

This is still a nascent trend, but it may be one worth watching, especially given sentiment towards US assets is still favourable, while emerging markets still feel largely ignored by comparison.

Finding Compelling Opportunities in Japan

Asset Value Investors (AVI) drives positive change through active engagement

Asset Value Investors (AVI) has managed the c.£200m* AVI Japan Opportunity Trust (AJOT) since 2018. The strategy over the five years has been to buy quality companies and engage with management on increasing shareholder value. AJOT’s focus is on small-cap companies with excess cash. The concentrated portfolio of 20-25 stocks are all companies that have been thoroughly examined by the investment team to find value, quality, and an event to realise the upside.

Corporate governance reform has strengthened over the past five years and is a major driver of value realisation in the Japanese stock market. As Japanese companies have become more focussed on improving profitability and efficiency, AJOT’s strategy is now more relevant than ever.

Japan is no longer a value trap and there are many reasons to consider Japan now:

Interesting macroeconomic backdrop with a cheap currency, sustained inflation, and moderate wage pressure.

Improving corporate governance since the introduction of the Corporate Governance and Stewardship Codes.

The Tokyo Stock Exchange is putting pressure on companies trading on low price to book ratios to improve.

Opportunity set in undervalued,small-cap and cash rich companies.

AJOT targets high-quality companies with strong business fundamentals to avoid value traps. Our event-driven engagement strategy to unlock value is supported by an experienced investment team undertaking bottom-up research.

AJOT has a well-defined, robust investment philosophy in place to guide investment decisions. Our

aim is to be a constructive, stable partner and to bring our expertise – garnered over decades of investing in Japan to realise value. AJOT’s track record since launch bears witness to the success of this approach, with a NAV** total return well in excess of its benchmark.** We believe that this strategy remains as appealing as ever and we continue to find plenty of exciting opportunities.

I’ve paid into more than one ISA of the same type, what do I need to do now?

Our expert helps a reader who has fallen foul of a rule governing the popular tax wrapper

Over the last few years, I have been paying into two different Stocks & Shares ISAs with different providers. However, I have just found out that this was against the rules, and have stopped my payments in.

Could you confirm this and let me know what happens now, and what action I need to take to fix this.

Thanks Evan

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

ISAs are meant to be one of the simplest and easiest ways for people to save for their future, including for retirement. And in many ways they are.

But the rules around which types of ISAs investors can pay into and how much they can pay are surprisingly complicated.

Let us start with the basics. There are four distinct types of adult ISA:

1. Cash ISA

2. Stocks & Shares ISA

3. Lifetime ISA; and

4. Innovative finance ISA.

Everyone over the age of 18 can take out an ISA as long as they are resident in the UK. Those aged 16 or 17 can also apply for a cash ISA (but not a Stocks & Shares ISA). However, that lower age will be removed over the next few years, as the minimum age for an adult cash ISA is about to go up to 18.

Those who are younger than 18 can have a Junior

ISA – either a cash type or a stocks and shares type or one of each. But they can only ever have one of these. If the youngster already had a cash ISA and the registered contact for the Junior ISA (usually the parent or guardian) wanted to take out a new cash ISA with a different provider so the child would have two cash ISAs, this would not be allowed. They would have to transfer the first ISA to the new provider instead.

People over the age of 18 can also take out a Lifetime ISA before their 40th birthday.

THERE’S A GOLDEN RULE (BUT IT’S CHANGING)

Everyone can have two or more cash ISAs or two or more Stocks & Shares ISAs, but the golden rule is investors can only pay into one ISA type each tax year. So, someone could pay into a Stocks & Shares ISA in the tax year 2022-23, and then set up a brandnew Stocks & Shares ISA with another provider and pay into that one in 2023-24. They just cannot pay into two Stocks & Shares ISAs in the same tax year. (And the same goes for cash ISAs as well.)

To confuse it further, an investor could pay into a cash ISA and a Stocks & Shares ISA in the same tax year. That is allowed. No wonder, people get confused! It is easy to see why some people may have slipped up and paid into two ISAs of the same type in the same tax year.

The good news is the government is simplifying the situation. From 6 April 2024 investors will be allowed to pay into two or more cash ISAs in the same tax year, and the same for two or more Stocks & Shares ISAs. This is very welcome.

But that does not change the fact that up to this

Ask Rachel: Your retirement questions answered

point this has not been allowed. If someone has already paid into two different Stocks & Shares ISAs in the same tax year, then they need to contact the provider of the most recent ISA and let them know the situation.

The most likely outcome is the second ISA provider will refund the payments into the ISA and close or void the ISA.

WHAT ARE THE LIMITS?

Finally, a quick word on how much people can pay in. They can pay in up to £20,000 a year into an adult

ISA. This could be split across a cash ISA and a Stocks & Shares ISA.

A younger investor can also pay up to £4,000 into their Lifetime ISA. But this must be counted as part of the overall £20,000 limit. For example, they could pay £4,000 into their Stocks & Shares Lifetime ISA, £5,000 into their adult cash ISA, and £11,000 into their Stocks & Shares ISA.

Lastly, up to £9,000 a tax year can be paid into a Junior ISA. Again, that could be split over a cash Junior ISA and a Stocks & Shares Junior ISA.

MOMENTUM STOCKS

Out on

March

CC Japan Income & Growth Trust plc

An AJ Bell Select List Investment Trust

Uncovering income & growth opportunities in Japan

Portfolio manager Richard Aston’s valuation-disciplined; total return approach is designed for investing in the Japanese stock market of today. With the strategy’s core focus on consistent and improving shareholder returns, Richard looks to provide a stable income via dividends and share buybacks from Japanese companies of all sizes. Richard’s high conviction and index agnostic portfolio aims to capture the key beneficiaries of Japan’s improving corporate governance and ongoing structural economic reforms.

THE INCREASING IMPORTANCE OF DIVIDENDS IN JAPAN

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

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

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

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

To find out more visit:

www.ccjapanincomeandgrowthtrust.com

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

WHO WE ARE

EDITOR: Tom Sieber @SharesMagTom

DEPUTY EDITOR: Ian Conway @SharesMagIan

NEWS EDITOR: Steven Frazer @SharesMagSteve

FUNDS AND INVESTMENT

TRUSTS EDITOR: James Crux @SharesMagJames

EDUCATION EDITOR: Martin Gamble @Chilligg

INVESTMENT WRITER: Sabuhi Gard @sharesmagsabuhi

CONTRIBUTORS:

Daniel Coatsworth Danni Hewson Laith Khalaf

Laura Suter

Rachel Vahey Russ Mould

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