WHY FIXED INCOME ASSETS ARE IN FOCUS AND HOW TO GET EXPOSURE
TRUMP TARIFFS Market reaction as Mexico and Canada get reprieve but China does not
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05
VIEW Trump tariffs, why UK stocks could be well placed and the benefits of investor participation
07 Markets brought back from the brink after planned tariffs put on hold
08 US companies on course for highest quarterly earnings growth since 2021
09 Saba rebuffed as retail shareholders turn out for trust votes 10 The factors driving Imperial Brands to 52-week highs
10 Mitchells & Butlers shares knocked by £100 million ‘cost headwinds’
Barclays set to deliver strong annual profit growth after doubling share price 12 A return to growth in international markets in focus at McDonald’s
This is a great time to invest in the Allianz Technology Trust 15 Dial down portfolio risk with dividend growth star Law Debenture
17 Futura Medical’s profit warning leaves nagging doubts so exit now
INVESTMENT TRUSTS
Why Nick Train is excited about digital winners, the domestic stock market and drinks giant Diageo
COVER STORY
Investing in bonds
Why fixed income assets are in focus and how to get exposure
33 Screening the UK small cap market for value, income and growth
How to invest in smaller UK companies through funds or trusts 37 RUSS MOULD How to invest in smaller UK companies through funds or trusts 4O ASK RACHEL
Should I combine my smaller pension pots with my larger SIPP? 42 INDEX Shares, funds, ETFs and investment trusts in this issue
Three important things in this week’s magazine
BONDS INVESTING IN
Everything you need to know about bonds and how to start investing
Learn why everyone is talking about bonds, what factors move the market and how you can use them to spread risk in your portfolio.
Discover some of the best small-cap funds and trusts
Read the second and third parts of our smaller companies analysis as we take you through our fund ideas and show you how to screen for small-cap winners.
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:
What happened when Shares attended the Finsbury Growth & Income AGM
We listen in at the annual shareholder meeting as Nick Train discusses the popular trust’s ups and downs and the decision to introduce a continuation vote.
Trump tariffs, why UK stocks could be well placed and the benefits of investor participation
Amid renewed volatility and uncertainty in the markets there is plenty to peruse in our latest issue
Investors now have a flavour of how unpredictable life could be under a Trump administration as tariffs on neighbours Mexico and Canada were announced and then subsequently delayed in the space of 24 hours. Quite what this means for global markets is still up for debate and there remains an air of real uncertainty over what comes next.
In this week’s news section, Martin Gamble picks over what we can judge from what we know so far. However, what we can say with some degree of certainty is an America with a genuinely protectionist agenda could have all sorts of implications for the dollar, interest rates, inflation and more so expect us to continue analysing and assessing this story as it develops.
One initial observation from the recent volatility which has afflicted stocks, is the UK market might not be the worst placed in the current circumstances. It has limited technology exposure – which means the DeepSeek drama is not that relevant. The FTSE 100, in particular, has decent exposure to the dollar so a stronger US currency could flatter earnings in relative terms.
Valuations are nowhere near as high in the UK as they are for American shares and there aren’t lots of listed manufacturing firms in the UK which would be vulnerable to Trump’s apparent trade war. Notably the FTSE 100 is up twice as much as the Nasdaq composite index so far in 2025, an unusual state of affairs.
Berenberg analyst Jonathan Stubbs, writing in mid-January, said: ‘In 2024, UK equities returned around 10%, with leadership from banks. Momentum strategies, including buyback momentum, performed well; value did too. Despite positive gains, UK equities continue to trade at a deep discount to both global equities and their own history at around 10.7 times. To us, this suggests
to reasonable returns from UK shares this year is low.’
Cheap small-caps are part of the UK equity story and we have parts two and three of our four-part series on small caps in this issue, crunching some data and looking at the top-performing UK small cap funds and trusts.
In the next issue we’ll look at small-cap collectives with a more global horizon.
And, after our trip to SRT Marine Systems’ (SRT:AIM) AGM covered in our last issue, this time round we pitched up to Finsbury Growth & Income’s (FGT) latest annual get together, with manager Nick Train in mea culpa mode once again.
Investors can derive a big benefit from being properly engaged with the stocks and trusts they are invested in, and it’s been really encouraging to see the high levels of retail participation in the meetings requisitioned by US activist hedge fund Saba at several investment trusts recently. We cover the latest on this story elsewhere in the digital magazine.
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Markets brought back from the brink after planned tariffs put on hold
Recent events show that Trump may sees tariffs primarily as a negotiating tool
In a fitting irony for our high-tech 21st century world, it was an old-fashioned technology which brought markets back from the brink on 3 February after Donald Trump’s telephone conversations with the presidents of Mexico and Canada resulted in planned 25% tariffs being delayed by a month.
Mexico agreed to station 10,000 members of its National Guard on the border and Canada deployed Canadian forces to its border and appointed a ‘Fentanyl tsar’.
Stock markets recovered from deep losses and the US dollar gave back gains, while gold slipped back after registering a new high of $2,832 per troy ounce.
There was, however, no reprieve for China which means 10% tariffs apply from 4 February. China has responded by slapping 15% tariffs on US coal and natural gas as well as 10% tariffs on crude oil and farm equipment.
It has also announced some export controls on key metals and opened an anti-monopoly investigation into Alphabet (GOOG:NASDAQ) owned Google.
The chaotic market action did at least provide investors a sneak-peek of what could be in store should tariffs become a reality for Canadian and Mexican goods imported into the US.
Two of the biggest impacts are expected to be seen in the autos and drinks sectors which represent a large proportion of US consumption. Europe’s biggest car company VW exported over half a million cars to the US from Mexico in 2024 according to Mexico’s statistics agency.
European car makers slide on tariff fears
and Stellantis (STLAM:BIT) seeing the brunt of the selling, dropping as much as 7%.
Analysts at investment bank Stifel estimate around €8 billion of VW’s revenues are impacted by tariffs which could wipe out 12% of operating profit. The corresponding estimates for the Fiat, Chrysler and Peugeot owned Stellantis group are $16 billion and 40%, respectively.
The European auto index dropped around 3.5% at its worst point on Monday with the two biggest manufacturers, Volkswagen (VOW:ETR)
US car makers were also caught up in the selling with Ford (F:NYSE) and General Motors (GM:NYSE) falling up to 5%, on worries that tariffs could add thousands of dollars to the price of new cars.
The drinks sector is also exposed to tariffs given that a combined 80% of beer is imported into the US from Canada and Mexico.
Looking at the broader equity market, chief US equity strategist David Costin at Goldman Sachs estimates that, if sustained, every fivepercentage point increase in US tariffs would reduce S&P 500 earnings per share by 2% to 3%, everything else being equal. [MG]
US companies on course for highest quarterly earnings growth since 2021
Although much of the market’s focus last week was on president Donald Trump on the one hand, and Chinese AI startup DeepSeek, on the other, there was also a slew of earnings reports which included a couple of Big Tech companies.
Facebook, Instagram and Whatsapp-owner Meta Platforms (META:NASDAQ) posted fourthquarter revenue of $48.4 billion, up 21% on the previous year and well above analysts’ estimates of $47 billion thanks to growth in advertising receipts.
Earnings per share also crushed expectations with a rise of 50% to $8.02 compared with the consensus of $6.76, but the share price reaction was muted due to soft forward guidance.
billion this year while estimates for overall spending on AI technology over the next three years has been pegged at around $2 trillion.
Like Meta, Microsoft (MSFT:NASDAQ), whose second-quarter results also beat the consensus with revenue of almost $70 billion and EPS of $3.23, saw its shares come under some pressure as analysts bemoaned a slower than anticipated growth outlook for its Azure cloud computing arm.
Revenue for the first quarter is now seen up 12% at $39.5 billion, against a market forecast of $41.7 billion, while spending on AI (artificial intelligence) data centres is set to top $60 billion this year, up more than 50% on 2024.
According to thestreet.com, spending on AI projects by the big tech firms could reach $300
This was despite cloud revenue posting 21% year-onyear growth and surpassing $40 billion in quarterly revenue for the first time.
Analysts were also downbeat on the prospects for OpenAI, in which Microsoft owns a 49% stake, due to the entry of a low-cost, open-source competitor seemingly from out of nowhere.
In terms of the wider earnings picture, over a third of the companies in the S&P 500 index have now reported results for the final quarter of 2024, with 77% of companies beating forecasts, which is in line with the five-year average according to Factset.
However, the average ‘beat’ has only been 5% against the five-year average of 8.5% as positive results from technology and communication services companies – including Meta and Microsoft – have been partially offset by negative surprises from industrial companies, which have been more numerous and make a bigger contribution to the total.
As of the end of January, the blended earnings growth rate for the companies which have so far reported was 13.2% compared with 11.8% at the end of December.
If this rate is maintained it would mark the sixth consecutive quarter of growth for the index and the highest year-on-year growth rate since the fourth quarter of 2021. [IC]
Saba rebuffed as retail shareholders
turn out for trust votes
looming three-year continuation vote at Herald in particular to exert influence.
As we write, the first five investment trusts targeted by Saba have seen the US activist hedge fund proposals overwhelmingly voted down.
As a brief reminder Saba was proposing to replace the current independent boards with two new directors and had stated an intention to follow this up with a replacement of the investment manager and a new investment mandate.
After Herald Investment Trust (HRI) shareholders voted against the proposals on 22 January, their counterparts at Baillie Gifford US Growth (USA), Keystone Positive Change (KPC), Henderson Opportunities Trust (HOT) and CQS Natural Resources Growth & Income (CYN) have followed suit. The outcome of a vote at European Smaller Companies Trust (ESCT) was set to be announced as we went to press.
With very few independent shareholders voting with Saba, the challenge for the trusts was always going to be getting the retail investor vote out in numbers and they did.
Data from AJ Bell, shown in the table, reveals investors on the platform turned out in their droves As Laith Khalaf, head of investment analysis at AJ Bell comments: ‘Retail shareholders have come out in force to have their say on the proposals put forward by Saba. These voting figures show that shareholder democracy is alive and well, and when important matters are on the line, ordinary investors are willing to come out to vote.’
The last trust in Saba’s crosshairs where the votes are still being counted is Edinburgh Worldwide (EWI), with a meeting set for 14 February. Although Saba does notably have stakes in several other trusts so further action on its part cannot be entirely ruled out. That includes at the names where meetings have already been requisitioned.
Deutsche Numis analyst Ewan Lovett-Turner suggests all of the trusts affected so far will need to stay vigilant with Saba potentially using votes on the reappointment of directors at AGMs and on a
‘The board may need to mobilise shareholders again for this event, or it may face Saba voting down the resolutions,’ he says.
Describing recent events as a ‘wake-up call for the sector’, Lovett-Turner adds: ‘We believe that boards need to be more proactive about managing discounts, providing liquidity, stimulating demand and demonstrating a focus on shareholder returns. To “keep the wolf from the door” discounts need to be kept relatively narrow, which may require a wider range of measures than it did historically,’
DISCLAIMER: Financial services firm AJ Bell referenced in this article owns Shares. The author (Tom Sieber) and editor (Ian Conway) of this article own shares in AJ Bell. Ian Conway owns shares in Edinburgh Worldwide
Trust name % shares voted *Voting still open. Data to 3 February 2025
The factors driving Imperial Brands to 52-week highs
The multi-national tobacco company has been on a roll since reporting its full-year results last November
Shares in Imperial Brands (IMB) have gained nearly 30% over the past six months due to a combination of investors piling into defensive stocks amid bouts of global market volatility and a strong five-year strategic plan.
The multi-national tobacco company shares recently hit a
52-week high at £27.42 (on 3 February).
Analysts at Panmure Liberum are upbeat about Imperial’s share price saying: ‘The company can and will do more as the CFO’s purchasing power is undimmed: those factors driving 2024’s share price performance are no less true now.’
The FTSE 100 company which owns several tobacco brands including Davidoff, West, Golden Virginia and JPS delivered a robust set of full-year results last November buoyed by NGPs (next generation products).
The company reported a 4.6% increase in net revenue, a 4.5% rise in operating profit to £3.5 billion and a 26% rise in NGP net revenue
Mitchells & Butlers shares knocked by £100 million ‘cost headwinds’
Despite a strong first quarter the stock is down more than 20% over six months
Shares in Mitchells & Butlers (MAB) seem to be in a downward spiral despite the pubs, bars and restaurants group reporting strong trading during its first quarter which encompassed the festive season.
Mitchells said firstquarter like-for-like sales remained well ahead of the market, however the pubs group highlighted circa £100 million of year-on-year cost headwinds driven primarily by increased wage costs linked to changes in October’s
UK Budget.
Over the past year Mitchells, which owns All Bar One, Miller & Carter and O’Neill’s, has blamed a variety of issues including poor weather for a drop off in sales growth. If the pubs group can move past cost headwinds and the impact of wintry weather, Storm Darrah and snow dragged down sales in the first seven weeks of the year, the outlook may improve through the course of 2025.
Analysts at Shore Capital are
Chart: Shares magazine • Source: LSEG
to £335 million with growth from all regions and improved gross margins.
Imperial’s CEO Stefan Bomhard said at the time that it was ‘on track to deliver five-year capital returns of circa £10 billion, representing 67% of our market capitalisation in January 2021 when we launched our strategy’. [SG]
& Butlers
expecting a £5 million increase in EBIT (earnings before interest and tax) to £317 million for the year and ‘continued profit growth’ even though the macro outlook remains cloudy. The company has a track record of market outperformance and delivering cost efficiencies and its balance sheet is improving but the backcloth is clearly very difficult. [SG]
UK
UPDATES
OVER T HE NEXT 7 DAYS
FULL-YEAR RESULTS
11 Feb: BP, Wynnstay
12 Feb: Smurfit Westrock, TBC Bank
13 Feb: Barclays, British American Tobacco, Relx, Unilever
FIRST-HALF RESULTS
11 Feb: Dunelm, MJ Gleeson
12 Feb: Barratt Redrow
13 Feb: Renishaw
TRADING ANNOUNCEMENTS
11 Feb: Babcock International Group, Bellway
Barclays set to deliver strong annual profit growth after doubling share price
Next week sees the start of the UK fourth-quarter reporting season proper, with the big banks kicking off proceedings as usual.
First up is Barclays (BARC), which has been in the news for all the wrong reasons recently with its online payments system seeming to have failed miserably around the end of the tax year just as its chief executive is reckoned to be in line for a whopping salary increase.
The bank insisted the IT glitch which stopped customers accessing their bank accounts was a ‘technical issue’ rather than a cyber attack, although the fact the same thing happened to Lloyds (LLOY) and Halifax customers a day later suggests there was some
What the market expects from
What the market expects from Barclays
What the market expects from Barclays
kind of malicious activity targeted at the big banks.
Meanwhile, there were media reports boss CS Venkatakrishnan could see his total pay rise more than 45% from £9.8 million to £14.3 million, if major shareholders agree, by reducing his basic salary to a still-weighty £1.59 million and allowing him to receive up to eight times that amount in bonuses if the bank hits its new ROTE (return on tangible equity) target.
None of which should detract from the fact Barclays has been one of the best-performing stocks of the past year, having doubled its market cap. Barclays is expected to show a strong uplift in profitability for the fourth quarter thanks to high levels of equity and debt trading in its investment bank and higher net interest income from mortgage lending on the retail side.
Shore Capital’s Gary Greenwood see full-year pre-tax profit rising 23% from £6.56 billion to £8.07 billion and EPS (earnings per share) growing 31% from 27.7p to 36.4p while the dividend is set to rise from 8p to 8.6p per share. [IC]
A return to growth in international markets in focus at McDonald's
Fast food giant will be hoping the $5 meal deal continued to drive customers back to its US restaurants in Q4
Wall Street analysts are expecting McDonald’s (MCD:NYSE) to report a 4.4% year-on-year decline in EPS (earnings per share) to $2.82 for the fourth quarter as revenues nudgeup by 1% to $6.48 billion, when it reports on 10 February.
The Golden Arches delivered a positive earnings surprise in the third quarter, beating EPS estimates by around 1.6%. Earnings revisions have slipped by nearly 2% over the last few months, which lowers the bar for another earnings beat.
Investors will be keen to know if US store visits have recovered from the E-Coli outbreak in October which forced the hamburger chain to temporarily pause sales of Quarter Pounders in a fifth of its 14,000 restaurants.
There will also be interest in how the launch of the everyday value menu in January 2025 is progressing as the hamburger chain looks to regain its value credentials in a market which is seeing more people choosing to cook at home.
Outside its home turf McDonald’s
will be hoping to regain momentum in international markets after global sales fell 1.5% in the third quarter, the largest decline in four years.
Weaker consumer spending in China and the war in the Middle East have impacted international sales alongside sluggishness in the UK and France.
Despite these headwinds McDonald’s reaffirmed full year revenue and margin guidance at the Q3 results and said it expected no material impact from the E-Coli outbreak. [MG]
Applied Materials, Datadog, Deere & Company, Duke Energy, Molson Coors Brewing, Moody’s, Pool
This is a great time to invest in the Allianz Technology Trust
Deep pool of expertise and experience can help investors navigate this exciting, if volatile, sector
Allianz Technology Trust
( ATT ) 431p
Market cap: £1.63 billion
Big technology stocks have dominated growth for more than a decade yet one of the valuable lessons to come out of recent DeepSeek developments is that financial markets are not a one-way street, and key tech stocks don’t always go up.
Less experienced investors may not realise it, but such shake-outs are not rare, and volatility is built into the technology industry. Never has life been so disrupted and change come as thick and fast as it has today, and rapid technological development sits right at the centre of this transformation, a crucial factor for all investors to mull.
Shares believes avoiding the tech space entirely is not a sensible response for most investors, as it means missing out on a sector chock-full of
Allianz Technology Trust (p)
companies with large and sustainable competitive advantages, pricing power and strong cash flows in markets where there are long runways for future growth.
Seeking out help from deep pools of expertise and experience that are available definitely is sensible though, which is why we believe now could turn out to be a fantastic opportunity to invest in Allianz Technology Trust (ATT), run by one of the sharpest tech investment teams around in our opinion.
Led by Mike Seidenberg for the past couple of years, he was predecessor Walter Price’s right-hand man for several years before that, a period during which the trust established a strong reputation as a tech investor, and the simple remit remains: get the best possible bang-for-buck shareholder returns over a medium-term time frame, usually assessed as at least five years.
The portfolio contains many familiar tech names – Nvidia (NVDA:NASDAQ), Microsoft (MSFT:NASDAQ), Meta Platforms (META:NASDAQ), Amazon (AMZN:NASDAQ), Broadcom (AVGO:NASDAQ), Palantir Technologies (PLTR:NASDAQ) – so why not just buy a simple S&P 500 tracker?
It’s a good question, one answered in two parts. First, concentration: the portfolio typically
has somewhere between 35 and 50 companies (currently 45), designed to exclude less attractive investments.
Second, the trust’s ability to go overweight or underweight versus a benchmark, as illustrated by the Vanguard S&P 500 ETF (VUSA), say (see table), allowing the trust to make bigger than benchmark bets where its conviction is highest.
Crucially, Seidenberg operates what might be called an ‘anti-geek’ policy, frequently reminding his team that their job is not to identify the best or most exciting technologies but to focus on the best opportunities to monetise technology developments for the benefit of shareholders, be it in AI, cloud, chip design, cybersecurity or whatever.
An example Seidenberg has explained to Shares in the past is that new generative AI features will let businesses craft sales pitches using Salesforce (CRM:NYSE), summarise your employees’ skills in Workday (WDAY:NASDAQ), create images from prompts in Adobe’s (ADBE:NASDAQ) Photoshop and automatically draft responses to IT requests in ServiceNow (NOW:NYSE).
We might not be there yet, but these are the types of companies, with clear routes to generating new revenues and cash flows, which investors should be thinking about, the fund manager says. ‘Ultimately, if a business doesn’t create superior cash flows and scale, it’s not a very interesting business to us,’ says Seidenberg.
Many investors think technology stocks are expensive, yet this is sector where investors are most likely to find sustainably above average growth so there is a clear play-off. The Allianz Tech Trust has a long-proven track record for navigating these factors, and it shines through in performance.
A decade seems like a reasonable horizon to judge a fund through the vagaries of a cycle
Allianz Tech Trust's biggest
(booming markets, Covid, inflation spikes, interest rate rises), and the trust has produced an average annualised total return of 22.6% over 10 years while the Vanguard S&P 500 ETF has generated a 15.2% annual return.
Put another way, if that performance was repeated over the next decade, for every £1,000 invested in the Allianz Tech Trust investors would have £7,672 by 2035, versus £4,120 for the ETF.
To us, this outperformance and wider-thanaverage discount to net asset value (8.7% versus 7.7%) justifies the trust’s 0.8% annual charges.
DISCLAIMER: The author of this article (Steven Frazer) owns shares in Allianz Technology Trust.
How Allianz Tech Trust returns compares to an S&P 500 ETF
Dial down portfolio risk with dividend growth star Law Debenture
This diversified trust’s unique structure is helping it outperform peers
Law Debenture Corporation (LWDB) 899p
Market cap: £1.19 billion
Financial markets have been rocked by the twists and turns of the tariff situation created by US president Donald Trump, which threatens to turn into a full-blown trade war. This has spooked investors since it could result in higher inflation and halt further interest rate cuts, which is likely to be negative for equities and could stir up headwinds for highly-rated growth stocks in particular.
Investors fretting over the potential for a volatile stock market ride in the years ahead might look to dial down portfolio risk by purchasing a fund with a proven long-run track record and a bias towards value that should provide some downside protection. Take a bow Law Debenture Corporation (LWDB), an investment trust whose unique structure combines a predominantly UKfocused equity portfolio with a growing, cashgenerative business, its Independent Professional Services (IPS) unit, that underpins the trust’s ability to invest in lower-yielding, yet higher-growth potential companies.
Admittedly, Law Debenture’s 1.75% premium to net asset value (NAV) means investors are giving up some performance from the getgo. Nevertheless, Shares believes it is worth paying up for a UK equity income star turn with over 45 years of increasing or maintaining dividends under its belt.
Law Debenture
sector, not to mention a five-star Morningstar rating, only bolster the bull case.
LEADER OF THE PACK
Shares regards Law Debenture, which recently celebrated 135 years of being listed on the London Stock Exchange, as a highly-differentiated and compelling investment trust option. Overseen by CEO Denis Jackson and with £1.29 billion of assets at last count, Law Debenture combines an allcap, value-oriented UK equities portfolio with the profitable, growing IPS business which broker Peel Hunt believes is conservatively valued in Law Debenture’s NAV.
Low ongoing charges of 0.49%, the fastest fiveyear dividend growth rate in the Association of Investment Companies’ (AIC) UK Equity Income
The robust IPS operation funds more than a third of the trust’s total dividends through steady, recurring and inflation-linked revenues, and its presence creates a flexible structure for joint portfolio managers James Henderson and Laura Foll to scout for opportunities beyond the UK market’s traditional large cap income-payers. They have license to invest in lowly-valued small and mid cap companies offering greater re-rating potential as a result.
This formula clearly works, since the FTSE 250-listed fund has forged a formidable long-term
Dividend growth with downside protection from value portfolio
long-term historical averages.
track record of value creation for shareholders and is the leading performer in the AIC’s UK Equity Income sector over the short, medium and longer term. As the table shows, the trust is the best 10-year share price total return performer with a 158.6% haul that handily beats the sector average of 81.4%, while Law Debenture also bestrides the leader board on a five-year view with a strong 86.6% return.
PROTECTING THE DOWNSIDE
Janus Henderson duo Foll and Henderson pursue a contrarian, value-focused investment style that has benefited from being unconstrained by the trust’s income objective. They seek out high-quality companies with strong competitive advantage trading at attractive valuations and prefer out-offavour shares trading at valuation discounts to their
They retain high conviction in the outlook for UK equities, to which the best part of 90% of the investment portfolio was allocated as of 29 November 2024. In recent periods, the equity portfolio’s impressive performance has been powered by holdings such as Rolls Royce (RR.), the aeronautical engineer which has experienced a significant earnings uplift from cost savings and the recovery in flying hours, as well as high street banks Barclays (BARC) and NatWest (NWG), which benefitted from persistently high interest rates boosting their interest margins. A high level of M&A activity, including takeovers of underlying holdings and share price boosts from bids that were rejected, has also been a tailwind, though performance detractors have included the likes of energy giant BP (BP.), Vanquis Banking (VANQ) and AFC Energy (AFC:AIM). Given recent market volatility, Henderson and Foll have trimmed some portfolio positions where valuations have risen significantly, including RollsRoyce, Marks & Spencer (MKS) and BAE Systems (BA.). A new position purchased in November was Convatec (CTEC), the Reading-based medical device producer delivering healthy organic growth and expanding its operating margins under a new management team led by CEO Karim Bitar. [JC]
Law Debenture regional
Table: Shares magazine • Source: The AIC
Futura Medical’s profit warning leaves nagging doubts so exit now
Missing sales expectations by half could be considered a flop
16.5p
Loss to date: 50%
In October 2024, we highlighted sexual health specialist Futura Medical (FUM:AIM) as a great opportunity to get on board as it launched its ED (erectile dysfunction) product Eroxon into the US market through commercial partner Haleon (HLN)
WHAT HAS HAPPENED SINCE
WE SAID
TO BUY?
Although we acknowledged the extra risks of owning smaller, single product companies, it was still disappointing to face a profit warning on 30 January, which sent the shares roiling by 50%.
On the bright side, Futura revealed that revenue and profit after tax for the year to 31 December 2024 will be ahead of market forecasts which it believes to be £13.4 million and £500,000 respectively.
Unfortunately, the company now expects to undershoot prior revenue expectations for 2025 by 50%, which means the company anticipates reporting a full year loss.
Management believes consensus forecasts were £18.5 million of revenue and £6.3 million of profit. The company said the ramp-up in sales has been slower than expected.
Launching a new product into a new category was never going to be plain sailing, especially given US consumers are not accustomed to buying an ED product without a prescription.
Chart: Shares magazine • Source: LSEG
Further launches of Eroxon across European countries has also been slower than originally expected and the company is working with commercial partner Cooper Consumer Healthcare to iron out the issues and challenges faced in generating greater consumer awareness. The company referenced its ‘robust’ balance sheet with cash of £6.6 million at the end of 2024, providing working capital through to the second half of 2026.
WHAT SHOULD INVESTORS DO NOW?
It would be unrealistic not to expect teething problems when launching an entirely new product into a big market. That said, investors now face the prospect of the shares needing to double to recoup the loss. If the short-term issues are fixable, the value creation opportunity remains potentially significant. However, the magnitude of the sales downgrade leaves a nagging doubt around credibility and, painful as it is, it’s time to cut our losses. [MG] Futura
One improvement Futura has identified is removing in-store lock boxes which then need the intervention of a shop assistant, impacting sales.
Why Nick Train is excited about digital winners, the domestic stock market and drinks giant Diageo
Star manager apologises for Finsbury Growth & Income Trust’s persistent underperformance and trys to reignite investors’ enthusiasm over the portfolio’s potential
With a sense of anticipation Shares scurried along to Finsbury Growth & Income Trust’s (FGT) latest AGM (annual general meeting) at London’s Guildhall on a wet and windy day (28 January), where shareholders turned up in droves and one or two left the assembled board members squirming in their seats.
While the total return-focused trust’s long-run record under star manager Nick Train remains impressive, results for the year ended 30 September 2024 showed an NAV (net asset value) total return of 8.2%, behind the benchmark FTSE All-Share’s 13.4% haul, and as of 31 December 2024, the trust had underperformed the index over one, three and five years on a discrete basis.
Seated in front of the gathered throng of longterm shareholders and a smattering of analysts and journalists, the board faced tough questions over its decision to offer a continuation vote after the
current financial year ends in September 2025.
This was deemed ‘completely unnecessary’ by one otherwise happy long-term holder who accused the board of ‘hyperventilating’ over a temporary period of lacklustre performance. The same shareholder also blasted the strategy of buying back shares to try and narrow the persistent NAV discount on a day which saw Simon Hayes agree to disagree on the merits of buybacks as he retired as a director and handed the chair’s baton to Pars Purewal.
But the board did receive supportive utterances from others in the hall, plenty of shareholders expressing their confidence in the stock picking abilities of Train, who manages the £1.4 billion cap trust with deputy manager Madeline Wright.
NO TIME FOR ‘FUZZY NOSTALGIA’
Once the company’s formal business concluded with all resolutions duly passed, Train paced up and
Top 10 holdings (as at 31 December 2024)
down the floor to issue another mea culpa for five years of frustrating underperformance from this concentrated, low turnover portfolio that aims to beat the FTSE All Share’s total return.
Since Lindsell Train’s December 2000 appointment as manager, the trust’s NAV has risen by the best part of 700%, handily beating the rough 250% index return. ‘I do not find myself in the mood for fuzzy nostalgia or self-congratulation,’ commented Train, who has steered the trust for 24 years with a strategy of long-term investment in high quality companies with durable and cash generative franchises.
‘Calendar 2024 was yet another year that Finsbury Growth & Income Trust underperformed its benchmark. NAV per share was up 7.7% but the FTSE All-Share was up 9.5% and that is disappointing for you, for me and for Madeline. I sort of feel I’m running out of ways to say sorry, but sincerely I apologise for this persistent underperformance,’ said Train.
But this respected ‘buy-and-hold’ investor is keeping his nerve and sticking to his investment principles. He remains convinced the best way to get the NAV and share price moving up again is to continue running a concentrated portfolio
around exceptional UK companies.
‘In the first half of 2024 we suffered painful drawdowns from our investments in Diageo (DGE), Fevertree (FEVR:AIM) and Burberry (BRBY),’ recalled Train. ‘Thank goodness we didn’t sell Burberry at the bottom, it has nearly doubled since the low. But what a torrid 12 months that company has been through.’
Train, whose investment style is hinged on being patient, then pointed out that Finsbury Growth & Income’s NAV has made some progress of late.
‘Today, the net asset value is over £10 a share for the first time in the company’s history. We hope
Portfolio
Table: Shares magazine • Source: Finsbury Growth & Income Trust
While rival manager Terry Smith has ejected Diageo from his flagship Fundsmith Equity (B41YBW7) fund, Train remains thirsty for the growth ahead of the Johnnie Walker whisky-toCasamigos tequila maker, which he hopes will retain the Guinness brand.
‘The concern is changes in consumer behaviour, particularly in the consumer’s willingness to use quite powerful drugs in order to change their body shape and behaviour, will be a drag on the whole beverage industry worldwide,’ remarked Train. ‘What we think is so important to note is that actually, for at least 30 years, per capita consumption of alcohol has been declining in the developed world. People have been drinking less alcohol per person per year than they used to 40, 50 years ago. But that hasn’t mattered, until the last 18 months arguably, to the industry, because consumers have instead have chosen to drink
better quality, premium brands and alcoholic experiences and that has more than offset the reduction in volumes. I think one would welcome the fact that consumers around the world are drinking less alcohol to excess, but are willing to treat themselves to a bottle of Johnnie Walker blue label once every six months.’
He continued: ‘The other thing to say about Diageo is that it is the biggest one of its type in the world, and yet it only speaks for 4% of global alcoholic beverage, so even if the other 96% is under pressure or isn’t particularly growing, that doesn’t mean that Diageo doesn’t still have a huge opportunity to grow its brands. People say, “young people aren’t drinking anymore”, but they are drinking a lot more tequila and Diageo has the best tequila brands in the world. They are drinking a lot more Guinness, and Diageo is the company that owns Guinness. That’s why we still own Diageo and have added to it when we can.’
that the NAV and the share price will make further gains during 2025.’
DIGITAL WINNERS
Train and Wright have responded to this period of underperformance by tilting the trust’s exposure towards London-listed data, software
and technology platform companies, which has reduced the exposure to consumer brands.
They continue to believe that Johnnie Walkerto-Smirnoff vodka maker Diageo, British luxury fashion house Burberry and premium mixer company Fevertree are full of potential. The latter’s share price spike on news (30 January) of a transformational strategic tie-up with beer maker Molson Coors (TAP:NYSE) shows they may be on to something. However, they generally prefer other types of company more.
Specifically, ‘London-listed, UK companies with world-class data, data analytics, software or technology platform assets’, according to Train. ‘I can assure you that the London stock market does provide plenty of companies of that type. Since 2019, the exposure to digital winners has increased to nearly two thirds of the portfolio,’ he added. Relevant holdings include proprietary data curators such as Experian (EXPN), LSEG (LSEG) and RELX (REL). Train has responded to the UK stock market’s
disappointing performance by buying more of it, funding purchases through sales of non-UK holdings. ‘We believe we can invest in world class UK growth companies at a marked discount to the valuations that pertain for similar companies elsewhere and that the right thing is to buy more of them. Today, 100% of the portfolio is invested in UK equities.’
A NEW MAGNIFICENT 7?
‘The UK stock market itself has been gradually changing for the better in recent years and today, is considerably more “growthy” than it has been in the past,’ observed Train. Holdings that have materially outperformed the Nasdaq over the course of the 21st century include data and publishing giant RELX, Finsbury Growth & Income’s single biggest holding whose market cap exceeded that of BP (BP.) for the first time in 2024, as well as global financial and information firm LSEG, Dove soap-to-Marmite maker Unilever (ULVR) and beverage alcohol behemoth Diageo (DGE).
‘When you look below the surface of the UK stock market you find businesses that have grown and as a result of their growth, have outperformed Nasdaq over long periods of time and have the prospect of continuing to do so. And that’s going to help the UK stock market, which is closer to mustering a “Magnificent 7” of world-class growth businesses than its current dowdy reputation would suggest,’ continued Train.
To date this century, the two new additions to the portfolio have also outperformed Nasdaq, namely global shipbroking leader Clarkson (CKN), and Intertek (ITRK), the globe’s biggest assurance and testing company. Train and Wright believe
Clarkson is more of a data business than its valuation implies, and are hopeful the fund will benefit from exposure to the growth of global trade but also a rerating, as data/platform revenues grow as a proportion of the whole, while Wright described Intertek at the AGM as ‘another true tollbooth company’, one well placed to benefit from the ever-increasing burden of global regulation and end user demand for demonstrable quality and compliance. ‘Both have good returns on equity, which implies there is something unique about their business models,’ she explained.
POTENTIAL TO OUTPERFORM
In his closing remarks, Train tackled the thorny issue of concentration. At the turn of the year, the top 10 holdings accounted for over 90% of Finsbury Growth & Income’s portfolio by value. ‘Concentration cuts both ways,’ commented Train. ‘The reason why the performance has not been as I’ve aspired it to be is because some of the big holdings haven’t worked over the last 18 months. But when I look back over the sweep of Finsbury Growth & Income’s long-term track record, I know that the returns have been generated by building concentrated portfolios concentrated on exceptional businesses. The structure of this portfolio today gives it the potential to perform very differently, and lets hope that here on in, it is going to be very much better.’
By James Crux Funds and Investment Trusts Editor
B ONDS INVESTING IN
WHY FIXED INCOME ASSETS ARE IN FOCUS AND HOW TO GET EXPOSURE
European, UK and US central banks started cutting interest rates in June, August and September 2024, respectively, yet beady-eyed investors will have noticed that 10-year bond yields are higher today than they were then.
The move higher in yields reflects increasing investor nervousness over high government budget deficits, sticky inflation and uncertainty caused by US trade tariffs.
Those concerns have pushed up bond yields on longer dated maturities. So much so that an investor can buy UK 30-year gilts and receive a four-and-a-half-fold return, including the repayment of the original capital, assuming the investment is held for three decades.
In the middle of January 2025, 30-year gilts touched their highest yield since the financial crisis sparked by the Russian debt default in 1998. Does this represent a great buying opportunity or do higher rates portend something more sinister?
This article explains why this is happening and explores what higher bond yields could mean for
your investments. Later, we also provide some ideas of how to get exposure to bonds directly, and through active and passive funds.
Before getting into the meat of the discussion it may be worth providing some recent historical context.
Martin Gamble Education Editor
WHEN NEGATIVE INTEREST RATE BONDS RULED THE ROOST
Five years ago, on the eve of the pandemic, interest rates on government bonds across the western world were yielding close to zero. Investors willing to lend their hard-earned cash to the UK treasury for a decade were offered a miserly 0.2% a year.
At the peak of this apparent madness in 2019, there were around $15 trillion dollars invested in bonds, which, if held to maturity were guaranteed to lose money, according to economists at Deutsche Bank.
That represented approximately a quarter of global bond markets at the time. Sounds crazy, right?
Not at all, claimed bond fund managers, who explained their rationale for holding bonds with implied negative interest rates was that they anticipated them to become even more negative.
We have so far assumed bonds are held to maturity, but they can also be sold and purchased between the time they are issued and maturity. If an investor sells before maturity to another investor who is willing to pay a higher price (accepting a lower yield), a capital gain can be made.
The days of negatively yielding bonds appear to be in the past and according to common wisdom, unlikely to return anytime soon.
BACK TO REALITY
Global supply chain disruptions and shortages coming out of lockdowns and the war in Ukraine ignited inflationary pressures. Central banks were arguably too slow to react, with the US
Federal Reserve mistakenly labelling inflation as ‘temporary’.
Subsequently, central banks were forced to increase interest rates aggressively to bring down inflation. For the most part inflation today is getting close to the 2% targeted by the central banks.
Central banks in the US, UK and Europe are all in ‘recalibration mode’ which means they are looking to reduce interest rates, and therefore monetary tightening, as inflationary pressures abate.
December 2024 consumer prices in the UK and the US came in lower than expected, with US core prices, excluding volatile food and energy, rising 3.2% year-on-year compared with expectations of 3.3%.
In the UK core consumer prices rose by 3.2%, down from 3.3% in November 2024. Generally, there appear to be few worries over inflation becoming entrenched.
By most measures, US inflation expectations remain well anchored, hovering around 2.5% for the last two years, having troughed in March 2020 around 1.1%.
As previously mentioned, the recent spike in bond yields has been happening at the longer end of the yield curve. (bonds with longer-dated maturities) Economists refer to this as a term premium.
It means investors are demanding to get paid more for the uncertainty of holding bonds further out on the yield curve.
The worry is that governments continue to finance their budget deficits with more debt. As every student of economics knows, when the supply of something increases, there is a tendency for prices to fall and therefore yields to rise.
WHAT DO HIGHER YIELDS MEAN?
As we started the article off by saying, the good news is that investors can earn a decent level of risk-free return, for the first time in many years.
UK and US government bonds are considered close to a risk-free because governments are unlikely to default on their debts, given their power to raise taxes.
While it is true that higher risk-free rates are good for investors looking for income, riskfree rates play an important role across capital markets, and the effects are not positive for all assets.
For example, higher risk-free rates reduce the theoretical value of riskier assets like stocks and
other so-called long duration assets like property and infrastructure.
This effect was evident during the equity market drop of 2022, against the backdrop of increasing interest rates, when technology and other high growth stocks suffered more than value stocks in the market downturn.
Theoretically, stocks are worth the sum of future expected cash flows, discounted at an appropriate interest rate. It is market practice to use the 10-year yield as a proxy for the risk-free rate, sometimes referred to as a hurdle rate.
Think of the hurdle rate as an ‘opportunity cost’ of investing.
To get a flavour of how this works, consider a stream of £100 cash flows each year over the next decade.
An investor can put the cash to good use without any risk, by investing in a 10-year government bond paying 4.5% interest or £4.50. Taking the opportunity cost of £4.50 into account reduces the £100 received in a year’s time to £95.50. It is also referred to as net present value.
represents half of the long-term average return.
Whether yields on 30-year gilts are attractive depends to a large degree on the average rate of inflation over the next 30 years.
Inflation is a very important factor to consider when investing in bonds. Unlike stocks, bonds do not grow, which means inflation can quickly erode the purchasing power of the capital and interest received over the life of a bond.
For example, if UK core inflation were to average the current 3.3% rate over 30-years, the real or inflation adjusted return from a 30-year gilt would be 1.8%, rather than 5.1%.
This is repeated for every year of cash flow. The important bit to remember is that compounding means the cash flows further into the future are worth a lot less than near-term cash flows.
For example, the discounted value of £100 in year 10 is £64.40 in net present value terms, two thirds lower than year one.
The same effect works in reverse, with stocks getting a theoretical valuation uplift when interest rates fall.
ASSET ALLOCATION SHIFTS
There is another reason why stocks and other long duration assets might fall when interest rates rise. We have already established that the theoretical valuation of equities goes down when interest rates go up.
At the same time, income from government bonds has increased from close to zero a few years ago to 4.5% for 10-year gilts.
Considering long-term total returns from owning stocks in the UK have averaged 8.8% a year since 1899, according to the 2024 Barclays Equity Gilt study, a 4.5% risk-free return
If inflation returns to the central bank’s 2% target, the real return will average 3.1%.
If, on the other hand, average inflation is higher, investors will probably demand even higher rates, forcing a temporary capital loss on bond holders.
It is important to remember an investor gets their capital back on maturity, assuming the government does not default on its debts.
The Barclays Equity Gilt study shows real returns from gilts since 1899 have averaged 0.9% a year and 2.8% over the last 50 years.
High long-term interest rates have wider economic impacts such as increasing the cost of mortgages and credit which squeezes demand in the economy and potentially reduces consumer spending.
Smaller companies find it harder to gain access to loans and those which carry high or unsustainable debts are more likely to struggle as more cash is soaked up by rising interest costs.
Governments are not immune to the same impact on their cash flows. In conclusion, rising interest rates have many effects on the way financial markets are priced and the real economy.
BOND MARKETS ARE MULTIFACETED
There are many different types of bonds to choose from including UK government bonds, corporate bonds, overseas government bonds and inflation protected bonds.
There are also niche areas of fixed income such as ABS (asset-backed securities), collateralised
Hypothetical one-year return scenarios for bond yielding
Rates fall (bps) vs Rates rise (bps) 1
BPS=basis points (100 basis points is 1%)
Table: Shares magazine • Source: Factset
THE UPSIDE IS GREATER THAN THE DOWNSIDE
The starting valuation is a critical input to consider when thinking about likely returns, including bonds. With UK gilt yields where they are today, they provide a sizable cushion against a rise in interest rates.
If rates were to fall, income would be enhanced as prices go up and yields move lower. In other words, the
loan obligations and AT1s (Additional Tier 1 capital) issued by banks as part of their regulatory capital.
ABS are securities backed by a pool or portfolio of income producing assets such as credit card receivables, auto loans and student loans.
Investing in individual bonds requires a different mindset to investing in stocks and a different skillset and minimum investments in most corporate bond issues are prohibitively high, which is why for most retail investors, investing in bonds via actively managed funds or passive trackers and ETFs is more practical.
For those investors with the confidence to construct their own bond portfolios, most platforms allow retail investors to invest in existing new UK government bond issues which have become popular due to the fact bonds now pay a competitive level of income.
The London Stock Exchange runs the ORB (Order Book for Retail Bonds), giving investors access to government bonds, and corporate bonds issued by household names such as National Grid (NG.) and even mid-cap companies. However, this market hasn’t really taken off and there is pretty limited activity on this platform.
The thing to remember is that different types of bonds have different risks.
upside is greater than the downside. This is referred to as convexity. It means there is an asymmetry in potential bond returns.
In plain English, from today’s starting point, investors stand not to lose much from further rate increases, but potentially gain a lot if rates fall.
Here are some general rules to remember.
Longer dated bonds are more sensitive to changes in interest rates than shorter dated bonds. The same rule applies to low coupons (the annual interest rate paid) which are more interest rate sensitive than high coupon bonds.
Corporate bonds are riskier than government bonds because they have credit risk attached to them. Investment grade bonds are low risk and high-yield bonds are high risk.
Overseas bonds have currency risk which makes them riskier than investing in UK bonds.
Inflation is the enemy of all bonds given their fixed income characteristics.
BOND FUNDS
Investors going down the funds route might consider strategic bond funds as a good way to get started. The main advantage of these products is that they can go anywhere and invest in the most attractive parts of the bond markets.
The Artemis Strategic Bond Fund Inc (BJT0KT28:FUND) is managed by a team of three co-portfolio managers and aims to provide income and capital growth over a five-year period. The
managers look to preserve capital during tough times and profit when conditions are favourable.
The team position the portfolio around their views on the economic cycle, risk of defaults, yields and interest rates. In the November fund update, the managers said central banks lowering interest rates should be supportive for bonds.
Growing government deficits keeps the team cautious towards longer-dated government bonds while they find the argument for investing in short-dated investment grade bonds ‘compelling’.
The £823 million fund distributes income quarterly and has a trailing yield of 4.7% and ongoing charge of 0.6% a year.
Investors looking to achieve higher yields might consider the Invesco Bond Income Plus (BIPS) trust which aims to provide high income and capital growth from investing in high-yielding fixed income securities.
The vehicle has a market capitalisation of
Examples of popular bond ETFs
£389.5 million and trades at a slight 1.65% premium to net asset value. The trust has a dividend yield of 6.6%, based on an annual dividend target of 11.5p, paid out quarterly.
The trust has an ongoing charge of 0.94%.
The fund is managed by Rhys Davies who has been part of the Invesco team since 2003 and aided by Edward Craven who became a fund manager in 2020, managing high yield fund and multi-asset funds.
The fund is diversified across multiple countries and industries and invested in high yield bond issued by household names such as Vodafone (VOD) and Aviva (AV.).
The managers conduct expert credit analysis on companies and carefully select investments which they believe off the best risk to reward opportunities. As well as providing a high and predictable income, the dividend has grown by around 3% a year over time.
iShares
iShares
Table: Shares magazine • Source: JustEtf, data to 30 January 2025
HOW YOU CAN USE ETFS TO ACCESS THE BOND MARKET
Investors can use exchange-traded funds to gain exposure to the bond market.
Bond ETFs invest in a portfolio of different bonds giving investors diversification across sectors, maturities and credit ratings.
There are ETFs which track government bonds, corporate bonds issued by public and private companies with different credit ratings, as well as high yield bonds.
One of the main advantages of investing in the bond market through ETFs is that they are low cost compared to actively managed bond funds.
One of the best-performing bond ETFs over the past three years iShares USD Corporate Bond Interest Rate Hedged UCITS ETF (Acc) (HLQD) has ongoing charges of 0.25%.
Bond ETFs are grouped together by issuer, geography, credit rating, maturity duration and currency.
When buying bond ETFs, it is important to look out for what index the product tracks and exactly what underlying bonds you are exposed to and what the charges are. [SG]
WATCH RECENT PRESENTATIONS
Time Finance (TIME)
Ed Rimmer, CEO & James Roberts, FD
Time Finance (LON:TIME) The company’s purpose is to help businesses in the UK thrive and survive through the provision of flexible funding facilities. It offers a multi-product range for SMEs, concentrating on asset finance, commercial loans, and invoice finance. The company is focussed on being an ‘own-book’ lender, but it does retain the ability to broke-on deals where appropriate, enabling it to optimise business levels through market and economic cycles.
Henderson International Income Trust (HINT)
Ben Lofthouse, Portfolio Manager
Henderson International Income Trust (LON:HINT) scours global markets to look for reliable and growing income. By investing in established and enduring companies outside of the UK, we aim to offer a truly diversified source of income and potential for capital growth that is not bound by borders.
Patria Private Equity (PPET)
Alan Gauld, Senior Investment Director
The Patria Private Equity Trust provides investors with exposure to leading private equity funds and private companies, mainly in Europe. It invests in private equity funds by making primary commitments and secondary purchases, and it makes “direct” investments into private companies via co-investments and single-asset secondaries.
CAP FOCUS - PART 2 UK small cap funds
How to invest in smaller UK companies through funds or trusts
In part two of our small-cap overview we look at ‘collectives’
The UK market has a long tradition of collective investing in smaller companies, which means there is a wide range of funds and trusts available to investors looking for broad exposure rather than to pick individual stocks themselves.
There are two dozen trusts listed on the
Association of Investment Companies website, with a combined market cap of around £6 billion, while the Investment Association lists 26 funds with a combined market cap of £5.5 billion.
There are several advantages to buying smallercap companies through a fund or trust, primarily you get the benefits of diversification without
Top 10 UK small cap investment trusts by market cap
having to keep tabs on dozens of individual stocks yourself, which can be time-consuming.
Also, the ‘spread’ when buying and selling as an individual can be quite wide (as much as 10% in less liquid names), whereas a fund or trust can often buy shares at a better price in ‘blocks’, and if one of your stocks is taken over and you are offered foreign shares as part of the deal (as in the case of Dowlais (DWL)), the managers handle the paperwork and hold the stock.
Top 10 holdings for Aberforth Smaller Companies Trust
EXAMINING SMALL CAP INVESTMENT TRUST PERFORMANCE
Interestingly, performance across the small-cap universe has been far from uniform with many funds and trusts posting negative returns over one year or five years, and in some cases over both periods, which we suspect reflects the impact of the pandemic on one hand and the continual drain of money out of UK equities into bonds and international equities on the other.
The biggest trust by market cap, and one of the best-performing, is Aberforth Smaller Companies (ASL) run by Edinburgh-based Aberforth Partners.
With total assets of £1.45 billion, Aberforth has a consistently positive track record, returning around 9% over one year, 13% over five years and 84% over 10 years.
The managers take a bottom-up value approach, looking for shares in companies which they believe are selling for less than their intrinsic worth. As a result, the trust is overweight consumer cyclicals, financial and industrial stocks, relative to the small-cap index, and underweight basic materials, energy, health care, real estate, technology and utilities.
Table: Shares magazine • Source: Company factsheet, 31 December 2024
The active share – that is, the percentage of the portfolio which differs from the stock weightings in the Deutsche Numis Smaller Companies Index – is high at 78%, and the list of top 10 holdings demonstrates this quite nicely.
Another trust which has been a steady performer – and has beaten Aberforth by quite a margin over 10 years, although it has more or less matched it over one year and five years – is JPMorgan UK Small-Cap Growth & Income (JUGI).
Managed by Georgina Brittan and Katen Patel, the trust has been on our Great Ideas list since March 2024 but has yet to really hit its stride. With a market cap of a little more than £500 million of assets, it trades at roughly a 10% discount to NAV, and as well as looking for capital growth from its investments, consistent with its income mandate it pays quarterly dividends totalling at least 4% of the NAV as at the end of the preceding year.
As of December last year, the trust was significantly overweight consumer stocks relative to the small-cap benchmark and marginally overweight financials and energy, with underweights in basic materials, health care, industrials, telecoms and utilities.
Funds: Small-cap funds and trusts
First and second-quartile performers among UK small cap OEICs and unit trusts
Although it doesn’t publish its ‘active share’, it must be close to Aberforth as its top 10 holdings differ quite markedly from the benchmark in terms of weightings.
TWO MORE TOP PERFORMING FUNDS
In terms of funds, again there are two which stand out as having avoided losses and performed consistently well over one, five and 10 years
– Fidelity UK Smaller Companies (B7VNMB1) and RGI UK Listed Smaller Companies (B1DSZS0)
The Fidelity fund, which has a market cap of around £700 million, has returned 5% over one year, 43% over five
years and 138% over 10 years.
Run by Jonathan Winton for the past decade, the fund is five star-rated by Morningstar and has strong bias towards ‘value’ and ‘core’ holdings in economically-sensitive sectors, with overweights in basic materials, consumer cyclicals, financials and industrials, and significant underweights in energy and health care.
Also, judging by its top 10 holdings, it has a fairly high active share against the benchmark, not least as it includes one or two stocks which could more accurately described as mid-caps, such as Serco (SRP) and WPP (WPP).
Top 10 holdings for Fidelity UK Smaller Companies Fund
RGI UK Listed Smaller Companies is around half the size of the Fidelity fund at £355 million but is neck and neck in performance terms over the last year with a 5% gain, although its five-year and 10year returns aren’t quite as stellar.
Managed for the last seven years by George Ensor, the fund has an active share of 84% as like other small-cap managers Ensor is overweight consumer cyclicals, financials and industrials, together with technology, and underweight health care and staples by some margin.
This is borne out by the top 10 holdings, which include holiday company On The Beach (OTB), greetings-card seller Moonpig (MOON), facilities management group Babcock (BAB) and Shares 2025 Tip of the Year, legal services business FRP Advisory (FRP:AIM).
By Ian Conway Deputy Editor
Fidelity Special Values PLC
An AJ Bell Select List Investment Trust
The recent strong relative performance of the UK equity market has gone largely unnoticed by investors, reinforcing its unloved status. Alex Wright, portfolio manager of Fidelity Special Values PLC, believes the value-oriented areas of the UK market represent a strong investment opportunity.
Turning insight into opportunity
Despite the UK being a value market, many of those who invest in the market don’t invest with a value bias. However, Alex looks to construct portfolios focused on unloved UK companies entering a period of positive change. The market is often slow to recognise change in out-of-favour stocks which creates opportunities to add value by identifying companies whose improving growth prospects are not yet recognised by other investors.
Our broad analyst coverage means that we are able to find ideas across the market cap spectrum, giving us many shots on goal. Our network of over 390 investment professionals around the world place significant emphasis on questioning management teams to fully understand their corporate strategy. They also take time to speak to clients and suppliers of companies in order to build
Past performance
Past performance
conviction in a stock. Our approach translates into a clear bias towards small and mid-cap value stocks, compared to most of our competitors who are often less differentiated.
It’s a consistent and disciplined approach that has worked well; the trust has significantly outperformed the FTSE All Share Index over the long term both since Alex took over in September 2012 and from launch over 30 years ago.
Past performance is not a reliable indicator of future returns
Past performance is not a reliable indicator of future returns
Past performance is not a reliable indicator of future returns
The value of investments can go down as well as up and you may not get back the amount you invested. Overseas investments are subject to currency fluctuations. The shares in the investment 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. 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 and the securities are often less liquid. 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.
Investment professionals include both analysts and associates. Source: Fidelity International, 30 September 2024. Data is unaudited. 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. UKM0125/399908/SSO/0325
SMALL CAP FOCUS - PART 3 UK small cap data crunching
Screening the UK small cap market for value, income and growth
Using these metrics can be a useful starting point for further research
In the third of our four-part series on small caps (you can read part two on UK small cap funds and trusts elsewhere in this issue), we get our data-crunching caps on and take a look at key metrics around value, income and growth in the smaller companies universe. To narrow things down we limited our search to London-listed companies with market valuations between £50 million and £500 million. We present
the results here – but remember, numbers can only tell you so much and these lists are intended as starting points for further analysis and research.
VALUE
One thing UK small caps certainly are not is expensive (as we pointed out in the first of these articles), so we kick things off by looking at some of the companies with the lowest PE (price to earnings) ratios.
We have avoided anything with a PE ratio below four on the basis it implied questionable data and/ or that the forecasts are just not believed by the market.
Over-50s lifestyle outfit Saga (SAGA) and pubs group Marston’s (MARS) are both businesses with significant levels of borrowings but, in fairness, both have plans to deleverage.
There is a smattering of resource names in the list, reflecting the poor sentiment towards smallcap oil and mining names. This makes sense when you consider they mine and drill for commodities
Low PE small caps
over whose pricing they have zero control. It doesn’t help that there have been few recent success stories in the small-cap energy or mining space to generate investor excitement.
It is important to note that a low PE is always just a starting point, it doesn’t tell you for example how much debt a company has on its balance sheet nor does it show you if earnings are growing.
One way of incorporating earnings growth is to look at the price to earnings growth or PEG
Low PEG small caps
ratio, which divides the PE by the expected EPS growth rate.
Interestingly, there are a few fallen giants on this list including former FTSE 250 constituent, oil services firm Wood Group (WG.), and Martin Sorrell’s digital advertising vehicle S4 Capital (SFOR).
Some of these names have made the list because earnings are rebounding from a big sell-off, which
explains the combination of high earnings growth and a low PE.
INCOME
Most people probably don’t think of dividends first when they look at small caps, but many smaller firms do provide a steady stream of income. To arrive at our list we looked for the highest-yielding stocks in our selected subset of the market with dividend cover of at least 1.5 times - in other words, those where the dividend per share is covered at least one-and-a-half times by earnings.
Top of the list is Peruvian oil and gas producer PetroTal (PTAL:AIM). While a double-digit yield is typically a sign the market thinks the dividend is at risk of being cut, chief executive Manolo Zúñiga recently told Shares: ‘We have promised investors we will continue giving back money to them through dividends.’
Zúñiga points out his family also enjoy dividends from the company, so their interests are aligned with other shareholders in that regard.
Other names to catch our eye include newspaper and magazine distributor Smiths News (SNWS), newspaper publisher Reach (RCH) and structural steel specialist Severfield (SFR)
Leaving the PetroTal example aside, high yields can be a sign that a payout is vulnerable so it does require some careful research to determine if dividends are sustainable.
Dividend cover is a useful initial check, but dividends are paid out of cash, not earnings, so you High-yielding,
Small cap earnings growth
Based on data for current financial year if December year end or year ahead if otherwise
Source: Sharescope, data at 3 February 2025
will often have to dig a bit deeper to gain greater comfort.
In any case, this list is meant as a reminder that small caps shouldn’t be ignored in the quest for income.
GROWTH
Finally, we arrive at one of the key reasons investors look to buy small caps – growth. To avoid names where growth is simply a flash in the pan we’ve looked at the companies with the highest forecast annual earnings growth which have delivered positive annualised earnings growth over the last decade.
Recruiters Robert Walters (RWA) and SThree (STHR) make this list (with earnings seen as recovering from a difficult period), as do engineering and electronics plays like Avingtrans (AVG:AIM), Judges Scientific (JDG:AIM) and TT Electronics (TTG). The extreme nature of the uplift in Robert Walters’ earnings reflects a previous drop to negligible levels.
Also making the list is chemicals firm Zotefoams (ZTF), which manufactures specialist foams used in Nike’s (NKE:NYSE) high-performance footwear.
By Tom Sieber Editor
Will money supply be a snake or a ladder for economies in 2025?
How the world’s central banks handle a slowing economy will be crucial for markets
China’s New Year Holiday festival is over, and the Year of the Snake is now under way. People with a much keener interest in, and better understanding of, the Chinese zodiac tell this column the snake signifies intelligence, mystery and renewal.
Make of that what you will, but president Xi Jinping and the Communist Party authorities are going to need plenty of the first trait if they are to resolve the second and prompt the third when it comes to China’s economy and how to turn it around.
A real estate bust, coupled with the need to move away from debt-funded infrastructure spending and reduce reliance upon exports (in the face of further rounds of tariffs from the US and the West), means China’s growth is slowing, especially as domestic consumption seems slow to develop and take up the slack.
Fixed-income markets sense a deep-seated malaise, given how the 30-year government bond yield in China now stands below that of Japan – a sufferer until recently of a 30-year-plus debt deflation, itself the result of an epic, debt-fuelled speculative episode in equities and property in the mid-to-late 1980s. The yields on 10-year paper are close to converging as well.
Beijing is alert to the danger, as the authorities have already sanctioned interest rate cuts, lower capital requirements for banks to try and boost lending and incentives to stimulate residential property demand.
Money supply growth is picking up a little as a result, but December’s 7% year-on-year increase is barely sufficient to sustain China 5% annual GDP growth target.
Chinese money supply growth remains sluggish
More may be required, therefore, although China’s currency could come under further pressure if monetary policy eases quickly and bond yields continue to sink.
Beijing has a delicate economic balancing act, as it seeks to dodge a downward snake and climb an upward ladder. It is not on its own in this respect
and, while it may seem old-fashioned, money supply could yet prove a telling indicator for macroeconomic trends elsewhere – including here in the UK.
MONETARY MAYHEM
In the 1980s, the economist professor Alan Walters was a huge influence on prime minister Margaret Thatcher. A monetarist, he advocated the theories of Milton Friedman, who argued that inflation is ‘always and everywhere a monetary phenomenon.’ In other words, changes in the supply of money would affect its value, just as it would any other product.
Fast-forward 40 years and this no longer seems to be a fashionable view, but one look at the money supply growth chart for China may explain why its annual rate of inflation is all but zero.
A surge in money supply in the US and UK in the early part of this decade, thanks to the deployment of furlough schemes, welfare cheques, interest rate cuts and quantitative easing as a means of fighting the economic effects of Covid-19, was a likely contributor to the subsequent surge in inflation on both sides of the Atlantic.
cool inflation, at least if Friedman’s and Walters’ theories were correct.
…to the potential benefit of inflation…
The US Federal Reserve and Bank of England then switched policy. They raised interest rates and stopped buying treasuries and gilts and started to sell them, with the result that yields have gone higher and the money supply taps have been tightened, if not quite cut off. Higher rates and quantitative tightening may have helped to
•
LAGGING BEHIND
This all matters as China debates how to drag itself out of the mire, president Trump demands the US Federal Reserve cuts interest rates and the Bank of England debates how far and how fast it should reduce the headline cost of borrowing in the UK.
The Monetary Policy Committee was slow to act as inflation rose, and is equally likely to be slow to react as it cools, in a perfectly human attempt to counterbalance the prior error, even in the knowledge that monetary policy works with an 18-to-24-month lag.
Financial markets currently expect two, onequarter-rate points from the Bank of England this year. Go too slow and inflation could stay above target, too fast and the economy could tip into recession.
Chart: Shares magazine • Source: LSEG, Office for National Statistics, US Bureau of Labor Statistics
Chart: Shares magazine
Source: Bank of England, FRED – St. Louis Federal Reserve database
18 FEBRUARY 2025
NOVOTEL TOWER BRIDGE
LONDON EC3N 2NR
Registration and coffee: 17.15
Presentations: 18.00
During the event and afterwards over drinks, investors will have the chance to:
• Discover new investment opportunities
• Get to know the companies better
• Talk with the company directors and other investors
COMPANIES PRESENTING
COHORT
The parent company of six innovative, agile and responsive defence technology businesses providing a wide range of services and products for UK and international customers.
ENSILICA
A leading fabless chipmaker focused on custom ASIC for OEMs and system houses, as well as IC design services for companies with their own design teams.
PRISTINE CAPITAL
The company create value for shareholders through active management. They are looking to make a significant and opportunistic acquisition in the Real Estate Sector.
SHIRES INCOME
The Company’s investment objective is to provide shareholders with a high level of income, together with the potential for growth of both income and capital.
TEMPLE BAR INVESTMENT TRUST
Temple Bar Investment Trust (TMPL) The strategy employed by Temple Bar is known as value investing.
Ask Rachel: Your retirement questions answered
Should I combine my smaller pension pots with my larger SIPP?
Answering a question on the pros and cons of consolidating retirement funds
I have built up five different pension schemes under different employments over the past 20 years. Three are worth less than £8,000 each. However, my main SIPP is worth considerably more, around £300,000.
My question is would I be better keeping these pensions separate and only taking them when I want to? Perhaps I should take them when my overall income is lower and I’m paying less tax? Or would it be better for me to consolidate them into my main pension scheme?
Charlie
Rachel Vahey, AJ Bell Head of Public Policy, says:
Pension participation in the UK has increased massively over the last decade; in 2023, 22.3 million of us were paying into a pension plan. This is mainly thanks to automatic enrolment which means when you join a new employer you will probably be enrolled automatically into the pension scheme.
However, automatic enrolment also brings its challenges. Previously the Department for Work and Pensions has estimated employees work for 11 employers on average during their working life. So, the result is many, like you, have built up numerous different pension plans in different places.
This can become a problem. It can create additional administration keeping track of different plans, but it can also prevent you seeing the whole picture of your total pension wealth and, maybe,
deciding what to do with it.
So, there are good reasons why combining your pensions – moving everything into one place – might work for you. If you do combine your pensions, you don’t have to take it all at once, you can take just a slice at a time whenever you want, and that can help you manage the amount of income tax you pay.
KEY THINGS TO CONSIDER
Before you rush out to combine pensions it would be good to run through a check list:
• Some pension plans apply exit penalties so if that’s the case think hard before transferring.
• Other plans can offer valuable benefits such as a guaranteed price if you buy an annuity. And a defined benefit pension scheme can be extremely valuable. Most people will need to get regulated financial advice before moving it.
• If your employer is paying into your pension, then just make sure that moving it won’t stop these contributions.
You may also want to compare your current pensions with the one you want to transfer to. For example, charges can vary so check what the difference is. And look at your investments – both how they have been performing and the cost of them, but also the range on offer.
Even if the receiving pension is more expensive you may still want to move to it if it offers you more
Ask Rachel: Your retirement questions answered
value, say through a better service, but you need to think this through.
You may also want to think about how you can take your pension. For example, if you want to take drawdown – where you take your tax-free cash and then keep the rest invested to draw an income from when you want – it may make sense to combine your pensions together.
If you don’t combine your pensions, you could pick and choose which plan to access and when. But if the plan doesn’t offer flexible access, you may be forced into taking the whole value of the plan and it could be a smaller or larger amount than would work better for you in a particular tax year.
A TECHNICAL POINT WORTH UNDERSTANDING
Finally, there’s one other technical point to mention, but, for some, it’s one worth understanding. When you take your pension, you can usually take up to 25% of it as a tax-free lump sum. Over the course of your life most people can take up to £268,275 as tax-free lump sums –this is called the lump sum allowance or LSA for short.
However, if you cash in a small (defined contribution) pension pot worth less than £10,000, then the tax-free lump sum you receive from that wouldn’t count towards your LSA. So those people who have large amounts of pension wealth, who think they may bust their LSA, may want to keep very small pots separate as the tax-free cash from them won’t count towards that limit. If so, there are a few rules to be aware of. You can only cash in three pension plans on this basis, and you have to take the whole of the pension pot from one scheme.
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:
Dan Coatsworth
Danni Hewson
Laith Khalaf
Laura Suter
Rachel Vahey
Russ Mould
Shares magazine is published weekly every Thursday (50 times per year) by AJ Bell Media Limited, 49 Southwark Bridge Road, London, SE1 9HH. Company Registration No: 3733852.
All Shares material is copyright. Reproduction in whole or part is not permitted without written permission from the editor.
Shares publishes information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters. Comments published in Shares must not be relied upon by readers when they make their investment decisions. Investors who require advice should consult a properly qualified independent adviser. Shares, its staff and AJ Bell Media Limited do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions.
Members of staff of Shares may hold shares in companies mentioned in the magazine. This could create a conflict of interests. Where such a conflict exists it will be disclosed. Shares adheres to a strict code of conduct for reporters, as set out below.
1. In keeping with the existing practice, reporters who intend to write about any securities, derivatives or positions with spread betting organisations that they have an interest in should first clear their writing with the editor. If the editor agrees that the
reporter can write about the interest, it should be disclosed to readers at the end of the story. Holdings by third parties including families, trusts, selfselect pension funds, self select ISAs and PEPs and nominee accounts are included in such interests.
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