Stocks 1/3 Off

VOL 21 / ISSUE 30 / 01 AUGUST 2019 / £4.49

CUT-PRICE STOCKS 1/3 OFF

5 companies to buy in the stock market summer sale

NO JOY FOR JUST EAT KNOW YOUR INVESTORS STUCK SHAREHOLDERS FUND: WHAT’S IN SUSPENDED SHOULD HOLD OUT INSIDE FUNDSMITH WOODFORD FUND FOR A BETTER OFFER EQUITY? EDITOR’S VIEW Takeovers aren’t always welcome Bidders, get your hands off our prized investments

akeovers and mergers are dominating the the longer-term impact on your wealth and headlines as companies make acquisitions also whether you will receive cash or shares T to accelerate growth, foreign companies from the bidder. take advantage of a weak pound to buy UK Some bids are made by foreign companies and businesses, and private equity firms put some of the deals are structured as cash, a mixture of cash their spare cash to use. and shares, or just shares. Therefore you could While this M&A frenzy has recently triggered potentially end up owning stock in an overseas- some hefty share price movements, such as listed company, which is something some UK Just Eat (JE.) rising by 25% on a merger deal investors don’t want. with Takeaway.com and Cobham (COB) jumping However, a takeover can occasionally provide nearly 40% on a bid from Advent, there are often some relief, particularly if a share price has been downsides to such corporate activity. struggling. For example, Merlin Entertainments Let’s say one of the stocks in your portfolio is (MERL) floated at 315p in November 2013 and taken over and delists from the market. You may exceeded 500p in summer 2017. get a 20% to 30% premium to the market price Subsequent share price weakness wiped out all before the news was announced, but you could these gains until a takeover bid emerged just over a suffer from losing an investment which could month ago at 455p. Assuming the deal completes, generate significant returns for years to come. the price means investors may narrow their losses Long-term investors could argue that the typical or some might walk away with a profit. 20% to 30% bid premium woefully undersells the Private equity firms have struck £13.6bn worth of target company’s true value generation potential. UK deals so far this year, according to Dealogic, the For example, three years ago FTSE 100 highest level since 2007. The industry is awash with technology giant ARM Holdings was bought by cash after making substantial disposals in recent Softbank. The takeover was arguably bad news years so private equity firms are looking to recycle for investors who had enjoyed average annualised the proceeds by doing new deals. shareholder returns of more than 30% over the Should one of your investments be taken over by previous decade from the stock. private equity there is a chance it could reappear Imagine one of your greatest investments on the stock market in the next few years, as disappearing from your portfolio. You might get holding periods by such acquirers can be short. a chunk of cash as compensation yet finding However, the key question is whether your prized a suitable replacement is likely to be a hard company is still in the same state as when it left job, particularly as most quality companies are your portfolio as private equity firms have a habit currently trading on high valuations. of draining cash out of a business and loading it So the next time one of your portfolio holdings with debt. receives a bid, take some time to think about Takeovers can be exciting on the initial news but they aren’t always good for your long-term wealth creation.

By Daniel Coatsworth Editor

The savvy saver

Whether you like to save a little or a lot, there’s an investor inside us all. Discover yours with our flexible, low-cost SIPP.

youinvest.co.uk

AJ Bell Youinvest does not provide advice. Capital at risk. CFA UK Publication of Contents the Year CFA UK Journalism EDITOR’S Awards 2019 02 VIEW Takeovers aren’t always welcome

BIG Woodford / Vodafone / Just Eat / 06 NEWS Centrica / Reckitt Benckiser / BP / Sports Direct

GREAT New: Softcat / Centamin 10 IDEAS Updates: Catching up on news from 11 of our Great Ideas TALKING 16 POINT US tech firms (mostly) shine in latest quarterly earnings season MAIN 18 FEATURE Cut-price stocks: 1/3 off 26 FUNDS Know your fund: what’s inside Fundsmith Equity? INVESTMENT 28 TRUSTS How to play a surge in Chinese domestic consumption 30 ETFS Where to start with investing in metals and energy products via ETFs 32 AEQUITAS What we can learn from oil’s latest sticky patch MONEY 34 MATTERS How to invest an inheritance 36 ASK TOM ‘Is it illegal to recycle pension money to get extra tax relief?’ 37 EDUCATION What are adjusted earnings and why do companies use them? 39 FEATURE Should you snap up the income on offer from retail bonds? 41 INDEX Shares, funds, ETFs and investment trusts in this issue

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 DISCLAIMER agrees that the reporter can write about the interest, it should be disclosed to Index of companies and funds in this issue readers at the end of the story. Holdings by third parties including families, trusts, IMPORTANT self-select pension funds, self select ISAs and PEPs and nominee accounts are included in such interests. 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. 2. Reporters will inform the editor on any occasion that they transact shares, Comments published in Shares must not be relied upon by readers when they derivatives or spread betting positions. This will overcome situations when the make their investment decisions. Investors who require advice should consult a interests they are considering might conflict with reports by other writers in the properly qualified independent adviser. Shares, its staff and AJ Bell Media Limited magazine. This notification should be confirmed by e-mail. do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions. 3. Reporters are required to hold a full personal interest register. The whereabouts of this register should be revealed to the editor. 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 4. A reporter should not have made a transaction of shares, derivatives or spread will be disclosed. Shares adheres to a strict code of conduct for reporters, as betting positions for seven working days before the publication of an article that set out below. mentions such interest. Reporters who have an interest in a company they have written about should not transact the shares within seven working days after the 1. In keeping with the existing practice, reporters who intend to write about any on-sale date of the magazine.

4 | SHARES | 01 August 2019 Only SHARES magazine subscribers benefit from an investment toolkit that INVESTMENTgives them the edge and helps them make the very best investing decisions. FACTS.Do you have WHO CAN YOU TRUST? the SHARES • Live share prices In uncertain times, when the • Customisable live watch list economyadvantage? is buffeted by change, • Portfolio manager it can be hard to know who to • Fund selector and prices • Intraday and historic charts trust when investing. • Latest broker forecasts with alerts • Latest director deals with alerts Shares magazine is produced by our expert editorial team, offering 24/7 coverage and insight into today’s vibrant • Fundamentals and investor tools investment markets. • Educational and company videos A subscription to Shares gives you access to the SHARES • …and of course, the weekly digital digital investment hub and a host of benefits including: Shares magazine with the latest > Your weekly digital magazine brimming full news and views from the Shares of investment ideas experts > Market news and company updates > Exclusive investor tools including live share prices

Try it now for just £1 for the 1st month and then just £12 a month*.Catch the best £ investment news and latest share prices

Explore the best investment news and latest share prices

+ Subscribe at www.sharesmagazine.co.uk/SUBSCRIBESubscribe today at www.sharesmagazine.co.uk/subscribe £ % £ £ £

*Make The more£1 for from 1 month your andinvestments then £12 with a month the shares offer investmentis only available hub. Ourto new Subscriptions subscribers. can Your be first payment will be £1 and thereafter subscriptions will automatically continued, billed at £12 per cancelled at any time in the ‘Manage Account’ area under ‘Subscription’. For all enqiries contact month unless cancelled. Subscriptions can be cancelled at any time by calling 0207 378 4424 between 8am - 4.30pm on Monday to Friday. No refunds are offered during the cancellations period us at [email protected] but all outstanding issues and services will be fulfilled. For enquires contact us at [email protected] BIG NEWS No joy for investors stuck in suspended Woodford fund

But manager Neil Woodford could be sacked from running the Patient Capital Trust

nvestors in LF Woodford Equity Income Fund (BLRZQ62) will have to wait until at least I December before they can access their money. Buying and selling in the fund has been suspended since 3 June and will stay that way until later this year while fund manager Neil Woodford restructures the portfolio to focus mainly on large and mid-cap stocks in the FTSE 100 and FTSE 250 indices. Analysis of company disclosures to Neil Woodford, Fund manager the stock market shows that in July he The fund has been selling down positions in manager sold various third party management doorstep lender Provident Financial groups, indicating that Neil Woodford (PFG) and subprime lender Non- £1m could be sacked as manager. Shares Standard Finance (NSF), as well as of his own in the investment trust have halved activist fund Crystal Amber (CRS:AIM), shares in July in value since it floated on the stock Southend Airport owner Stobart Group market in 2015. (STOB) and transport play Eddie Stobart ‘We think any new manager taking on Logistics (ESL:AIM). the contract should make some assessment Under-fire Woodford has also been selling down via the board and shareholders as to whether positions over the past month in NewRiver REIT this would be on a normal long-term continuing (NRR), IP Group (IPO), Allied Minds (ALM) and basis, or whether shareholders will look for the memory foam mattress seller Eve Sleep (EVE:AIM). investment trust to go into “run-off” with disposals Woodford says 80% of the proceeds from share of investments and returns of capital to investors,’ sales since the suspension in June have been say analysts at investment bank Stifel. reinvested in FTSE 100 companies. Woodford Patient Capital Trust has a three His asset management business is under month notice period to change manager, shorter increasing pressure from investors to reduce fees than the normal six to 12 month period. Stifel during the suspension period. believes any change in manager would result in Meanwhile, the fund manager has sold a different fee structure, scrapping the current approximately £1m of his personal holding in arrangement for no annual management fee and Woodford Patient Capital Trust (WPCT), another Woodford only being remunerated through a fund he runs. Woodford said he was a ‘reluctant performance fee. seller’ after disposing of 1.75m shares or around ‘Whilst Woodford IM is not receiving any annual 60% of his holding to meet ‘personal financial fee income for managing the investment trust obligations, including a tax liability’. under the current fee structure, we think that if the The board of Woodford Patient Capital Trust contract was removed, it could be a symbolic blow on 29 July revealed that it had been talking with to Woodford Investment Management,’ adds Stifel.

6 | SHARES | 01 August 2019 BIGBIG NEWSNEWS Vodafone shares see largest ever one-day jump Spinning off its towers business could prompt investors to reappraise the stock

nvestors in mobile network operator Vodafone (VOD) received some rare good news last I week, sending the shares up over 10% on Friday (26 Jul) and another 6% on Monday (29 Jul) VODAFONE’S TOWERCO to 154p, their best level in more than six months. OWNS EUROPE’S Chief executive Nick Read, who has been in the job less than a year, has proposed hiving off LARGEST PORTFOLIO Vodafone’s European mobile towers interests into OF 61,700 TOWERS a separate legal entity called ‘TowerCo’ and ACROSS 10 MARKETS possibly listing it on the London stock market within the next 18 months. Phone masts are hardly glamorous but they generate significant cash flows and while listing them on the stock market may sound novel, tower companies have been popular with European and US investors for many years. A flotation of TowerCo could not only be used to pay down some of Vodafone’s sizeable debt but valuations of European and US peers suggest that it could transform the company’s own market value. Spain’s Cellnex Telecom, which gets two thirds of its revenue from renting its 45,000 towers to mobile phone networks, has an enterprise value (EV), or market capitalisation plus debt, of €14.1bn. Analysts forecast Cellnex’s earnings before interest, tax, depreciation and amortisation with Telecom Italia in a deal which values the unit (EBITDA) will reach €640m this year, which at an EV-to-EBITDA multiple of 24-times. means investors are paying a multiple of 22 times Finally, Crown Castle International, which EV-to-EBITDA in order to own the shares. owns a portfolio of US mobile phone towers, is Vodafone’s TowerCo owns Europe’s largest valued at 22 times EV-to-EBITDA so a valuation portfolio of 61,700 towers across 10 markets of between 20 and 25-times for TowerCo would and according to Read is capable of generating seem reasonable. ‘potential’ proportionate EBITDA of €900m If Read can hive off the towers business with per year. a big chunk of debt – its listed peers carry debt Putting a multiple of 22-times on TowerCo’s equivalent to between 40% and 75% of their EBITDA would value the towers business alone at market value – it could go some way to reducing almost €20bn or £18bn against Vodafone’s market Vodafone’s parent company indebtedness. value of £35bn and EV of £68bn the day before the We should stress that none of the above is set in announcement. stone other than the plan to separate the towers Vodafone also announced last Friday that it had unit. More detail will doubtless emerge at the agreed to merge its Italian tower infrastructure analyst meeting on 19 August.

01 August 2019 | SHARES | 7 BIG NEWS Just Eat shareholders should hold out for a better offer Takeaway.com’s merger price looks too low and others may also be interested

ews of a proposed merger between fast claimed to lack online food delivery experience. food delivery group Just Eat (JE.) and South African group Naspers has been N Dutch based competitor Takeaway. investing in food delivery and has a 22.5% com saw the former’s shares trade at a Just Eat stake in German company Delivery 9% premium to the 731p offer price. Hero, while Uber and Deliveroo have This implies the market is confident of shareholders entered the UK food delivery market, a counter bid from someone else. will own 52.2% putting pressure on Just Eats’ The merger proposal shouldn’t and Takeaway.com market position. come as a surprise because activist 47.8% of the Analysts at Liberum believe investor Cat Rock Capital, which has the regulator might allow an Amazon/ stakes in both businesses, cited a ‘clear combined share Just Eat tie-up in preference to current rationale’ for the merger in an open capital plans for Amazon to invest in Deliveroo. letter to management on 11 February. The third reason is related to the current A lot of investors have shorted Just Eat’s deal’s metrics. Following completion, Just Eat shares, meaning they would profit from a decline shareholders will own 52.2% and Takeaway.com in the share price. Closing the short positions will 47.8% of the combined share capital. put extra upward pressure on the shares. Roughly Just Eat has a business which is three times larger 50m shares or 7.34% of the stock are held short, than its acquirer and made £82.7m of profit last up from 4% since the start of the year, according year while Takeaway.com is still loss-making. to shorttracker.com. However the combined company will be run Secondly, the deal may flush out a higher, by Takeaway.com management, and will be competing offer for the company. Originally a incorporated, headquartered and domiciled in pure-play high margin takeaway platform, focusing Amsterdam, albeit with a listing on the London on restaurants that do their own delivery, Just Eat Stock Exchange. has struggled to execute on its plans to build its The implied enterprise value-to-sales at five-times own delivery system. is roughly half the multiple that Takeaway.com paid Cat Rock was critical of the board’s appointment for the German business of Delivery Hero last year. of previous chief executive Peter Plumb, who it This may prompt Just Eat’s shareholders to reject the offer, on the basis that it materially undervalues the company, and encourage management to negotiate a fairer price. Takeaway.com will have to make a formal offer before 24 August. If it goes ahead, Just Eat shareholders will receive 0.09744 Takeaway.com shares in return for each Just Eat share. We suggest shareholders sit tight in anticipation of a better offer from Takeaway.com or the outside chance of a counter-offer.

8 | SHARES | 01 August 2019 BIGBIG NEWSNEWS Centrica, Reckitt Benckiser, BP and the week’s other big news We look at the market’s risers and fallers from the last week

t was a week to forget for Centrica (CNA) as London Stock Exchange (LSE) swirled investor shares in the energy company hit a 21-year excitement on the FTSE 100 this week as its shares I low following a series of bad news. soared to an all-time high of £65.15 following Chief executive Iain Conn agreed to step down confirmation of its talks to buy data provider following a £446m pre-tax loss in the six months Refinitiv for $27bn. to 30 June, and the company slashed its interim Together LSE and Refinitiv would be the largest dividend by more than half. listed global financial markets infrastructure Shares in the British Gas owner fell to around provider. 79p, a marked contrast to the 150p they were BP (BP) also had a good week despite being hit trading at a year ago. by lower oil prices. Its shares moved up to 546p Whoever replaces Conn will have a tough task, after it beat expectations on its version of net as will incoming Reckitt Benckiser (RB) CEO income, underlying replacement cost profit, which Laxman Narasimhan. stood flat at $2.8bn in the second quarter, better Reckitt revised its full year expectations after a than the $2.46bn forecasted. flat first half of its year, impacted by a slowdown in Sports Direct (SPD) on the other hand had a demand for its infant formula products in China. terrible time as its shares started the week over Also weighing on the results were competitive 25% down following its delayed results debacle. pressures and its inability to successfully push The company hid at the bottom of its results up prices. Big companies like Reckitt aim to have document a shock €674m tax bill from the Belgian pricing power, but the firm has faced flagging sales authorities, something which led its auditor Grant with its Dettol, Durex and Scholl brands. Thornton to quit.

FTSE 350 MOVERS OVER THE PAST WEEK

BEST PERFORMERS STOCK SHARE PRICE RISE REASON Cobham 39.4% Takeover offer from US private equity group Advent Just Eat 24.4% Merger proposal from Takeaway.com Vodafone 16.1% Unveils plan to spin off European mobile mast business

WORST PERFORMERS STOCK SHARE PRICE FALL REASON Aston Martin -43.1% Reports a slump in sales Sanne -28.7% Warns of weaker operating margins Metro Bank -19.9% Reports 84% drop in half year pre-tax profit Source: Shares, SharePad. Data as of 30 July 2019

01 August 2019 | SHARES | 9 GREAT IDEAS Softcat primed for IT outsourcing market share run Software reseller is already UK’s number two but still has big growth ambitions

his is not one of those cuddly toys contestants XXXXSOFTCAT  BUY  BUY Tused to win on Crackerjack, (xxx)(SCT) xxxp959.5p Softcat (SCT)is what’s called a Stop loss: 768pxxp value-added reseller. Market value: xxx£1.92bn The Marlow-based FTSE 250 member sells a wide selection of third party software to small and medium-sized companies and public sector organisations, plus PCs and smartphones. It then offers deep technology expertise ambition and potential. Analysts July 2020. and advice on top. calculate that Softcat currently Softcat will face challenges, Softcat effectively removes the has a 6% market share with not least from those periodic burden of customers managing forecasts for it to move closer IT and software upgrade weak multiple IT products and service to 9% by 2021. Yet the firm’s spells. There’s also the chance relationships by using it as a chief executive Graeme Watt that public sector spending slows trusted point of contact. That’s believes £2bn of revenue is on as the UK grapples with Brexit. an immensely valuable service, the cards over the next few But Softcat has a long track especially in an increasingly years, implying 11% or 12% record of managing these sort of digitised world. market share is being targeted challenges and prospering, which The company has a string by management. explains why the shares are so of industry accreditations Importantly, this will not be at highly rated. with many blue-chip the expense of profit because The stock is trading on a household software suppliers, the company leaves loss-leading rough 2020 price-to-earnings such as Microsoft, VMWare, Cisco contracts for others to fight over. multiple of 26.8. The growth Systems, IBM and HP, plus it’s This is best measured by tracking potential is there for the longer- the biggest reseller of products Softcat’s customer growth, its term, plus a rough 3.8% free cash from cyber security firm gross profit per customer and by flow yield and it pays dividends, Sophos (SOPH) in the UK. calculating operating profit as a including specials when surplus The model works; in 15 years percentage of gross profit, which cash builds up. revenue has jumped from was running at about 36% at the £50m to close to £1bn, while half year in January. 1000 SOFTCAT the company has become the The company said on 25 July 900 UK’s number two value-added that operating profit for the 800

reseller. Seven years ago it year to 31 July 2019 will beat 700 ranked ninth. expectations, pitched at about 600 We believe investors are £83.5m. That’s expected to 2018 2019 underestimating the growth rise to £87.5m for the year to

140 10 | SHARES | 01 August 2019 CENTAMIN 120

100

2018 2019 LISTEN TO OUR WEEKLY PODCAST Recent episodes include:

What Boris means for your money, warning signs with property bonds, and why paper receipts could be history

How to invest money for your children, why you should pay attention to directors dealing in their shares, and the latest fund manager departure

Best buy lists, finding financial happiness, credit deserts and postal savings rates

MONEY MARKETS Listen on Shares’ website here

You can download and subscribe to ‘AJ Bell Money& & Markets’ by visiting the Apple iTunes PodcastStore, Google Podcast or Spotify and searching for ‘AJ Bell’. The podcast is also available on Podbean. GREAT IDEAS FTSE 250 gold miner Centamin is starting to shine again Snap up its shares as operational setbacks become history

or those who are nervous about where the world CENTAMIN  BUY F is heading, one way to (CEY) 129.6p potentially take comfort (and Stop loss: 85p profit) could be through a mining Market value: £1.5bn company digging for gold by the Red Sea. After cutting its production guidance three times last year due to operational issues and suffering from associated share price weakness, FTSE 250 miner Centamin (CEY) is starting to win miners – so that gives it some improvements and is pricing in back the market’s favour, helped protection should it come into significantly lower than spot by a stronger gold price. any unforeseen problems, which and long-term forecast The miner is targeting 490,000 can never be ruled out with gold prices,’ say analysts at to 520,000 ounces of gold mining companies. investment bank Jefferies. production this year, ahead of the Centamin last month reported ‘With improving free cash 484,322 ounces it sold last year. an improvement in its business flow in 2020 (7% yield), driven Gold tends to do well following numerous operational by metal price forecasts and when there is an economic problems in the past year at modest assumed operational downturn, and its price per its Sukari mine. It previously improvements, we forecast the ounce has hit six year highs so suffered lower grades of gold dividend yield returning to 5%, a far in 2019 due to a multitude than expected from the open pit notable standout versus global of global problems, including section of its mine and disruption gold peers.’ the US/China trade war, Brexit to the process it uses to get the The analysts believe uncertainty and bubbling gold out of the ground. improvements in Sukari’s open tensions in the Middle East. But the firm has moved to pit near term, along with stronger Centamin says its all-in reassure investors that it has free cash flow generation and sustaining costs will be around a ‘new team in place’ ready to shareholder returns will drive the $890 to $950 per ounce. With return Sukari ‘back to its full equity re-rating. gold having hovered above potential’, having ‘identified, $1,400 an ounce this year, the evaluated and implemented’ 140 CENTAMIN company stands to make a solutions to the aforementioned 120 decent profit. problems. In addition, the company ‘Centamin’s share price, while 100 has around $300m in cash on off its lows as gold prices have 80 its balance sheet as well as rallied, in our opinion does 2018 2019 no debt – unlike a lot of other not reflect any operational

12 | SHARES | 01 August 2019 1400 SOPHEON 1200

1000

800

2018 2019

260 FIDELITY EUROPEAN VALUES 240

GREAT220 IDEAS UPDATES

200 2018 2019

Catching up on news3500 DIAGEO 3300 3100 from 11 of our Great2900 Ideas 2700 We look at the latest events from Diageo, AstraZeneca, GB Group2500 and more 2018 2019 he Great Ideas section 1400 SOPHEON 7400 of the digital magazine 1200 7000 ASTRAZENECA represents our best T 1000 6600 ideas each week. We try to 6200 p u b l i s h u p d ate s a s s o o n a s 800 5800 there has been relevant news, 2018 2019 5400 but sometimes all the news 2018 2019 comes at once and we don’t have space to feature everything. 3800The company now expects 260Shares in Diageo have risen more that JUDGES SCIENTIFIC In an effort to catch up on the 23% since we said to buy last summer full3400 year sales to increase in low FIDELITY EUROPEAN VALUES latest events, we’re running the 240 double3000 digits, up from previous Great Ideas Update section in Investment bank UBS says guidance2600 of high single digits. 220 a slightly different format this investors may be disappointed Total2200 product sales topped week as we have 11 stocks to by guidance for £4.5bn cash analysts’ expectations by 5% to 200 2018 2019 squeeze in. returns over2018 the 2020 to2019 2022 reach $5.72bn. Identity checker and fraud financial years. Chief executive Pascal Soriot prevention technology specialist believes five of the company’s 3500 GB Group (GBG:AIM) is the best DIAGEO new medicines will become performing Great Idea among 3300 blockbuster drugs this year. the ones which have issued 3100 n e w s i n t h e p a s t f e w w e e k s . 2900 A RECENT SUCCESS The shares have risen by 2700 Pushing through operational 2500 41.9% since we said to buy 2018 2019 efficiencies and keeping its last December. own sales teams on the ball A recent trading update 7400Despite these issues, anyone has helped Judges Scientific suggests organic revenue and who7000 boughtASTRAZENECA the shares following (JDG:AIM) to perform well, adjusted operating profit are our6600 article last summer which feeding through to a rising in line with expectation, while outlined6200 the investment case share price. 5800 management are also continuing would5400 have subsequently made It’s been tough for UK to extract value benefits from 23.2% gain, excluding dividends. manufacturers but Judges 2018 2019 recent acquisitions. Also in the large cap provides niche product lines space, pharmaceutical giant where margins can be protected 3800 LARGE CAP GAINS AstraZenecaJUDGES SCIENTIFIC (AZN) has when volumes fade. Its Shares in Diageo (DGE) last performed3400 well since we said to underlying first half order book is week cheapened after the buy3000 last November, up 13.9% worth 13.2 weeks of annualised world’s biggest spirits company compared2600 with a gain of 9.4% for sales and the company says it is reported full year organic sales the2200 FTSE 100 index. confident that full year market growth of 6.1%, slightly below Second quarter2018 results2019 expectations will be achieved. expectations of 6.2%. However, reported on 22 July showed 9% organic operating profit strong progress from oncology, A PAIR OF growth beat consensus forecasts which saw a 57% rise in sales INVESTMENT TRUSTS of 8.7%. to $2.17bn. We outlined the investment case

01 August 2019 | SHARES | 13 GREAT IDEAS UPDATES

for100 Fidelity European Values SOPHEON (FEV)1200 at the start of 2019 and in the six months to 30 June the investment1000 trust has increased its00 net asset value (NAV) by 19.9% and201 its share price2019 has risen by 24.5%, both well ahead Marston’s of the benchmark. dividend by 10% to 6.6p. A debt reduction plans, proposing 20 £10,000 investment in Law to defer £70m of new build FIDELITY EUROPEAN VALUES 20 Debenture a decade years ago investment in order to reallocate would be worth £36,050 as at 30 £20m to £30m into organic 220 June 2019. capital expenditure, which is expected to get a higher return. 200 201 2019 SLOW START FOR This will allow the company to TWO PUB COS generate an additional £40m to Manager Sam Morse remains Shares in pubs, lodging and £50m of cash flow over the next 300 cautiousDIAGEO on the outlook for brewing group Marston’s three years. European3300 equities and the (MARS) are roughly where we Fuller, Smith & Turner (FSTA) portfolio3100 remains focused on said to buy in June. has also been quiet in terms of ‘defensive2900 growth’ stocks which The shares were weak share price movement. can200 be bought at reasonable following the 24 July trading There has been a lot of 200 prices. The201 fund is overweight2019 update, which showed like-for- operational change for investors healthcare and technology stocks like sales growth slowing to 0.5% to digest, including the sale of and00 underweight consumer and from 2% at the half year stage, the brewery business. utility000 ASTRAZENECAstocks. impacted by tough comparatives. Once the new finance director 00The discount to NAV has However, the company Adam Councell takes up his shrunk200 from 11.4% in January announced an acceleration of its new role in August, investors to00 just 6%, and the board is 00 committed to keeping it in single PERFORMANCE DATA FOR A SELECTION OF OUR GREAT IDEAS digits, with201 the option to2019 buy back shares if necessary. GAIN/ 300 ENTRY ENTRY PRICE Our JUDGES21 March SCIENTIFIC 2019 ‘buy’ call STOCK LOSS TO 300 PRICE DATE NOW on Law Debenture (LWDB) is DATE 3000 modestly in the money. Half year GB Group 422.5p 20/12/18 599.64p 41.9% results200 (24 Jul) revealed a good start2200 to 2019 for the investment Diageo £28.02 2/8/18 £34.52 23.2% trust which201 looks for quality2019 Judges Scientific £28.50 11/4/19 £34.80 22.1% companies with the potential for long-term growth and which Fidelity European Values 214.5p 17/1/19 256.87p 19.8% have been mispriced by the AstraZeneca £63 15/11/18 £71.78 13.9% market. Law Debenture 578p 21/3/19 604p 4.5% FTSE 250-listed Law Debenture, which in addition to Marston’s 107.2p 6/6/19 107.9p 0.7% a portfolio of stocks managed Fuller's £10.70 14/2/19 £10.75 0.5% by Janus Henderson provides services to corporate trust and SThree 290p 23/5/19 284.5p -1.9% pension trustees, generated a FDM 924p 4/4/19 827p -10.5% creditable NAV total return of 10.3% and upped the interim Sopheon 930p 13/9/18 762p -18.1% Source: Shares, latest data taken 30 July 2019

14 | SHARES | 01 August 2019 GREAT IDEAS UPDATES are expecting the company to seems to get caught up in Brexit articulate the new strategic talk yet investors don’t seem to 100 SOPHEON direction of the company as well give it credit as a broad-based 1200 as announce the return of £50m business operating all over to £69m of cash to shareholders. the world. 1000 Half year results showed 00

THE LAGGARDS revenue up 14%. ‘The group 201 2019 Specialist recruiter SThree (STHR) is seeing good growth in most reported a 10% increase in net areas, but is being held back earnings expectations. fee income and a 21% jump in by UK Government sector ‘The momentum in the operating profit in the first half and North American financial strong20 pipeline remains to 31 May. services weakness,’ note analysts unchecked;FIDELITY EUROPEANhowever, VALUES client The firm ontinuesc to benefit at Shore Capital. behaviour20 has moved more from strong growth in its core Elsewhere, innovation rapidly than expected towards science, technology, engineering platform supplier Sopheon cloud220 consumption rather and mathematics (STEM) markets, (SPE:AIM) has taken a battering than200 perpetual licences,’ particularly the US and Europe, after warning of licence delays says FinnCap201 analyst Andrew2019 as well as a rising proportion that will wipe out growth Darley. ‘Revenue recognition of contract revenue which have this year. That’s a blow after is therefore protracted – even 300 higher profit margins. three years of rapid growth as clientDIAGEO commitment and IT skills supplier and and something that’s caused multi-year3300 contracted revenue consultant FDM (FDM) always analysts to downgrade their visibility3100 are improved.’ 2900 200 200 201 2019

00 000 ASTRAZENECA 00 200 00 00

201 2019

300 JUDGES SCIENTIFIC 300

3000

200

2200 201 2019

01 August 2019 | SHARES | 15 TALKING POINT Our views on topical issues US tech firms (mostly) shine in latest quarterly earnings season

Alphabet, Microsoft, Facebook and Amazon continue to capture the market’s attention

he FANGs and other big US tech stocks are being T viewed through the lens of record high share prices by investors worried about a US stock market on the point of overheating. Yet many of the biggest and fastest-growing tech companies are still knocking the ball out of the park when it comes to earnings, based on the latest at 8,330.21, and even the To cap things off Alphabet quarterly updates. more broadly-based S&P 500 said its cloud computing FANG stocks are Facebook, continued its run of record- business is now on an $8bn Amazon, Netflix and Google breaking closes above 30,000, a year revenue run-rate and (officially called Alphabet), a ending the session at 30,025.86. it unveiled plans for a $25bn well-used grouping of some This week’s expected share buyback. The cloud of the fastest growing big tech interest rate cut by the Federal business news is particularly stocks in the world. Reserve is likely to fuel further encouraging for investors Quarterly earnings were mixed performance optimism in the because it has historically across the broader spectrum yet weeks and months ahead. lagged behind rivals Amazon the undercurrent is still hugely Alphabet led the way with the and Microsoft. positive in both growth and stock jumping close on 10% to This represents a stunning stock performance terms, led by $1,245 after posting a 34% jump return to favour for the internet better-than-expected earnings in quarterly earnings, its biggest advertising and search giant from Alphabet and Facebook year-on-year gain in three years. considering that its stock had with knock-out revenue and Revenue rose 19% as it staged plumbed depths of $1,038 as user growth posted by Twitter, a remarkable recovery from the recently as 3 June. although there was negative previous quarter’s weak internet market reactions to both advertising growth rates that FACEBOOK’S $5BN FINE Amazon and Netflix. had many investors worried. In the social media space Facebook reported better- ROBUST EARNINGS ALPHABET QUARTERLY EPS than-expected second quarter POWER US MARKETS earnings although that was TO NEW RECORDS VS offset by confirmation of its The updates helped US stock CONSENSUS record-breaking $5bn privacy markets to close at new record fine settlement with the Federal highs. The tech heavy Nasdaq $14.21 VS $11.33 Trade Commission for past Composite closed last week infringements.

16 | SHARES | 01 August 2019 Our views on topical issues TALKING POINT

FACEBOOK QUARTERLY MICROSOFT QUARTERLY EPS VS CONSENSUS EPS VS CONSENSUS

$1.99 VS $1.88 $1.37 VS $1.21

Revenue growth of 26% showed acceleration on the previous quarter and it is worth noting that while the shares eased back modestly to $199.75 following its earnings update, the stock remains an astonishing 47% up year-to-date. Twitter also jumped 10% to $41.96 after beating revenue Another negative data point fourth quarter 2019 results and user growth estimates, while lurking in the update came from from Microsoft, showing Snapchat-owner Snap reported its Amazon Web Services cloud another strong headline lower than anticipated quarterly computing arm, or AWS as it is performance. Total revenue losses and strong revenue and typically known. growth of 12% to $33.7bn was user growth. Snap’s shares The unit saw revenue growth ahead of market estimates rocketed to $17.87, its highest in dip below 40% for the first time of $32.8bn while adjusted well over a year. at 37%. operating profit was up 20% to Investors were also concerned $12.4bn. AMAZON’S LONG-TERM FOCUS with falling subscriber numbers As we flagged in our recent More frustrating for long-term in the US for Netflix while in-depth look at Microsoft, its investors will be the negative overseas expansion slowed too. Azure cloud computing business reaction to a modest earnings Overall subscribers grew by goes from strength to strength, miss by Amazon. The online 2.7m to 151.56m but this was growing 64%, albeit to an shopping and cloud computing well short of the company’s unspecified number. giant’s $5.22 per share of forecast of 4.7m and the 5m net Microsoft barely moved earnings fell short of analysts’ additions that were expected by on the day (adding $0.15 to $5.57 estimate. Its shares dipped the market. $136.42) yet it is worth noting 1.6% to $1,943 in response. The on-demand streaming the stock was already close to This was largely caused by TV market is getting tougher by record highs, a mark the shares lavish investment (about $800m) the day with Disney and AT&T have subsequently surpassed to expand its one-day Prime joining Amazon Prime and a again. deliveries designed to seed host of others. Which makes it We recently launched a future growth, a move that possibly illustrative that new series of articles analysing many longer-term stock owners Netflix’s subscriber slowdown the major overseas-listed stocks would support. was more acute in markets and will look at some of the where Netflix has been forced FANGs in more detail in future AMAZON QUARTERLY to increase prices in order to editions of Shares. keep up with its heavy content EPS VS CONSENSUS spending. By Steven Frazer $5.22 VS $5.57 MICROSOFT DRIVES AHEAD News Editor There were more impressive

01 August 2019 | SHARES | 17 CUT-PRICE STOCKS 1/3 OFF

5 companies to buy in the stock market summer sale

here’s a reason people queue not for that long. After doing some up outside shops at dawn on 26 number crunching and then putting December, and it’s not just to get its collective brainpower to work, the away from annoying relatives. We Shares team has identified five stocks Tall love a bargain, picking up quality worth buying now while they are merchandise when it is on sale and marked down, some by more than often we only have a short window to a third. play with. Our quintet of cut-price stocks are A similar logic can apply to the stock soft drinks outfit A.G. Barr (BAG), market. Sometimes quality stocks can oil company Cairn Energy (CNE), IT trade at knockdown prices but typically firm Craneware (CRW:AIM), posh

18 | SHARES | 01 August 2019 mixers maker Fevertree Drinks (FEVR:AIM) and prospective potash producer Sirius Minerals (SXX). All were trading at a 10% or more discount to their 200-day moving average when we screened the market for opportunities. A moving average is something which helps you see the wider trend in a share price and smooth out the impact of short- term volatility. Share prices

WHY HAVE THE SHARES FALLEN? can fall for Share prices can fall for all sorts of reasons. At times of market panic, selling can be both all sorts of disproportionate and indiscriminate. We took advantage of this situation when we reasons added electronic equipment manufacturer Halma (HLMA) to our Great Ideas portfolio following widespread selling in October 2018. We recognised nothing had ultimately changed about what was an extremely good business and recommending buying at £12.62. As we write the Founded in 1975, NMC is the largest healthcare shares trade at £20.11, representing a significant provider in the United Arab Emirates and owns gain on our entry price. We would not necessarily and operates over 200 hospitals across more than expect all of our ideas to generate returns on this 15 countries, treating more than 8.5m patients scale but double-digit gains in a year are a realistic every year. possibility if sentiment towards our list of names in Its shares are down 44% from their peak in this article shifts. August 2018 and there has been an increase in the Buying stocks at an apparent discount doesn’t ‘short interest’ since late 2018, meaning that hedge always work and we don’t always get it right. The funds and other investors are placing bets that the same week we flagged Halma, we also highlighted shares will fall further in value. the potential in ticketing technology firm Accesso Data from shorttracker.co.uk show that the (ACSO:AIM) and its shares continued to fall. percentage of the company’s shares being used for Investors need to remain alive to changes to short selling has risen from 0.5% in November 2018 the investment case, whether these are driven by to 4.73% on 20 July this year. internal developments or external developments. The negative stance seems to be driven by the acquisitive nature of the company’s strategy QUALITY CONTROL IS NEEDED and suspicions it has grown too fast and that Simply screening for cut-price stocks doesn’t acquisitions are masking poor organic growth. necessarily mean each one on the list is worth Investment bank Jefferies has also raised concerns buying. For example, one name appearing on our around corporate governance, opaque accounting latest screening exercise is healthcare provider and supply chain finance. NMC Health (NMC) and there are valid reasons for Up until last year investors seemed happy to

the decline in its shares. chase the share price up to £41, which moved

further than the fundamentals, thus increasing the valuation of the business. This created a virtuous “ cycle whereby the company could buy companies trading on lower multiples than itself and We all love announce that the purchase was instantly ‘earnings enhancing’ for shareholders. “ As the stocks has fallen more than the a bargain fundamentals and the shares have become cheaper, the dynamics of ‘accretive growth’ may be more difficult to achieve.

01 August 2019 | SHARES | 19 A.G. BARR (BAG) 620p sales for the 26 weeks to 27 July in the region of £123m, roughly a 10% year-on-year decline. Due to operational gearing, investors can expect full BUY year profits to drop by up to 20%.

WHAT COULD SPARK A RE-RATING? We believe this profit setback is temporary, mindful of A.G. Barr’s otherwise strong track 1000 record on execution and delivery. Current balmy weather offers a positive 800 catalyst for A.G. Barr, already seeing positive indications of consumer acceptance of higher 600 IRN-BRU prices. A.G. BARR Reassuringly, management has addressed 400 2016 2017 2018 2019 the Rockstar and Rubicon issues with a mixture of new product development and recipe improvements which could boost the second WHY HAS THE SHARE PRICE BEEN WEAK? half performance. And remember, AG. Barr has A near-40% share price plunge from June’s scope for soft drink distribution wins, boasts 975p peak at soft drinks group A.G. Barr (BAG) a strong balance sheet and, given a largely UK presents a buying opportunity for long-term sales profile, Brexit looks less of an issue for the investors looking for a typically dependable, FTSE 250 firm than for internationally-focused defensive and growing portfolio compounder. beverage rivals. We remain bullish on the long-term earnings For the year to January 2020, Shore Capital potential of Glasgow-headquartered A.G. Barr, now forecasts adjusted pre-tax profit of £36.1m whose competitive advantage lies in a portfolio (2019: £45.2m), with profit rebuilding to £37.2m of differentiated soft drinks brands spearheaded and £38.4m in 2021 and 2022 respectively. by iconic Scottish tipple IRN-BRU, as well Following this year’s material downgrade and as Strathmore, Rubicon and cocktail mixers based on estimated earnings per share of 25.6p name Funkin. and a 17.1p dividend, A.G. Barr remains optically A.G. Barr, which recently took a minority expensive on a prospective price-to-earnings stake in non-alcoholic spirits brand STRYYK, ratio of 24.2-times with a modest 2.8% yield. Yet also benefits from well-invested manufacturing we believe the shares merit a premium rating assets and is highly cash generative, progressive and this pullback presents a compelling new dividend paying and able to fund supportive entry point for patient investors. share buybacks. Its shares slumped on a punishing profit warning (16 Jul) blamed on a strategy shift from a heavy focus on driving volume last year to prioritising value now. Also at play were disappointing spring and early summer weather, most notably in Scotland and the north of England, as well as challenges around its Rockstar energy and Rubicon juice drinks. Against a prior year comparative boosted by 2018’s summer heatwave, A.G. Barr expects

20 | SHARES | 01 August 2019 CAIRN ENERGY bad news, yet this rating reflects the company’s (CNE) 162.6p continuing investment in development and exploration assets. Encouragingly the balance sheet is in rude BUY health, with $66m of cash at the last count and just $85m drawn from a $575m reserves-based lending facility. In terms of specific catalysts for the share 280 price, a multi-well drilling campaign in Mexico CAIRN ENERGY 240 targeting upwards of 500m barrels of oil equivalent could have a significant positive 200 impact on the share price in the event of success. In order to get the market back on side, Cairn 160 needs to deliver strong operational performance

2016 2017 2018 2019 and ultimately production from its North Sea oil fields Catcher and Kraken, and this is likely to be in focus when the company announces its first- WHY HAS THE SHARE PRICE BEEN WEAK? half year results on 10 September. Beyond the oil price volatility which has hit Deliberations on the Indian tax case are not most of the wider sector there have been likely to conclude until the end of the year but several company-specific issues weighing on a successful outcome could be worth as much Cairn’s share price. Key has been a hold-up in as 190p per share. However, expecting India arbitration proceedings over a long-running to abide by any ruling in the company’s favour Indian tax dispute, where Cairn is seeking $1.4bn might be wishful thinking. At least Cairn is in compensation. protected from any unfavourable decision which A reserves downgrade for its Kraken field in would be ring-fenced to the Indian interests. the North Sea earlier this year did little to help sentiment, particularly as write-offs associated with both these setbacks saw the company post a $1.27bn net loss in March. More recently the company announced a disappointing result from its Lynghaug well in Norway. There has also been a slight delay in the final investment decision on its highly prized SNE development in Senegal. Funding this project might require bringing in an additional partner and selling down some of its current 40% stake.

WHAT COULD SPARK A RE-RATING? If the first part of 2019 has seen a run of a bad news then there are reasons to feel more positive about the remainder of the year and with the shares trading close to multi-year lows Cairn could enjoy a significant second-half bump. A price-to-earnings ratio of 16.8-times is higher than you might imagine given the recent

01 August 2019 | SHARES | 21 CRANEWARE (CRW:AIM) £18.75 WHAT COULD SPARK A RE-RATING? Demonstrating this situation is temporary will obviously be vital in getting the share price BUY going again, and Craneware certainly has a hard-earned reputation for operational excellence to lean on. That the company dominates its niche, earns 3500 only recurring revenues on average five-year contracts, and enjoys an entrenched competitive 2500 position at the top of its industry, makes a quick return to more exciting growth very likely. 1500 Craneware already supplies its software CRANEWARE analytics tools to almost a third of the hospitals 500 2016 2017 2018 2019 in the US. It uses automation to highlight operational and financial risks, plus identify new income opportunities to healthcare WHY HAS THE SHARE PRICE BEEN WEAK? management. The company estimates that it can Made-in-Britain Craneware (CRW:AIM) shows help an average 350-bed hospital tap an extra that even the best of companies sometimes $22m a year of revenue. get caught up in temporary logjams. In June the The financial health of all US hospitals is billing and healthcare analytics software supplier already faced with challenges as the healthcare revealed a sharp slowdown in sales, meaning it system across the pond transitions to a value- would miss full year expectations. based approach. That the Trump administration Where the market had been anticipating continues to implement regulations on pricing revenue and adjusted EBITDA (earnings before transparency will only intensify the pressure, interest, tax, depreciation and amortisation) and support Craneware’s long-term value-cycle of $79.5m and $25.6m respectively, the strategy and place it as a key trusted hospitals company actually reported $71.1m and $23.8m. technology partner. Importantly, growth metrics will miss the near- The long-run opportunity justifies the 2020 20% expected, posting 6% and 10% instead. price-to-earnings multiple of 34-times, and we At the core of the issue is Trisus Health believe Craneware is a core growth holding for Intelligence, Craneware’s recently launched the long-run. cloud-based analytics platform. Developed over many months, it combines the best of the firm’s core price, cost and compliance features with new financial, operational and clinical data tools. This new, even more feature-rich platform is more complex and getting its US hospital customers to understand its power to slash costs, drive new revenue streams and speed up administration takes that bit longer. Management is clear that there is nothing in worries about market share losses or intensifying competition, flagging unchanged renewal levels alongside ‘a significant and growing pipeline’.

22 | SHARES | 01 August 2019 FEVERTREE DRINKS ever so it is quite possible that the third quarter (FEVR:AIM) £20.79 will see a strong rebound in consumption but we won’t know for some time. The UK still represents roughly half of group BUY sales so a slowdown to 5% growth in the first-half has acted as a major drag on the numbers.

WHAT COULD SPARK A RE-RATING? 4000 The major growth driver for Fevertree going forward is the US market, where it had shown 3000 reasonable growth for 10 years via its agent but

2000 decided 18 months ago to take a much more FEVERTREE DRINKS hands-on approach and manage it directly. 1000 The step-change occurred last summer when the group signed an exclusive on-trade 2016 2017 2018 2019 distribution deal with SGWS, the largest North American wine and spirits distributor. WHY HAS THE SHARE PRICE BEEN WEAK? Given the size of the US market (estimated to Shares in upmarket mixer brand Fevertree be 16 times the size of the UK mixer market) and Drinks (FEVR:AIM) have been on something of a the increasing trend towards premium drinks rollercoaster. Having started the year at roughly and mixers, even a small increase in its current £22, they raced up to £32 by the end of May 11% market share would mean a significant only to give back all their gains in the past two increase in sales and earnings over time. months. According to S&P Global Intelligence, pre-tax Investors have gone through a whole range profit is forecast to rise from roughly £75m of emotions, from optimism and euphoria to last year to £106m in three years, bringing the disappointment and despondency. price-to-earnings (PE) ratio down from 41-times When the long-awaited first-half results were to 28-times. released last week, revealing that sales growth Yes, the shares command a premium rating had slowed to 13% and earnings growth had but we believe the company continues to have slowed to just 7%, many holders capitulated and a very strong outlook with scope to deliver large sold out. earnings growth for years to come. The shares lost almost 10% on the day of the Current share price weakness may even announcement, the second time this year that spur takeover interest from trade players they have been heavily punished for not meeting such as Diageo (DGE) and Unilever (ULVR), or expectations. private equity. In common with other drinks companies Fevertree had a blow-out start to the summer last year thanks to a combination of hot weather and big sporting events which boosted UK sales. This year the summer has got off to a soggy start, and with no major events to celebrate. Sales have been steady but growth is well below last year’s levels. Ironically the first-half results came out as much of the UK was experiencing its hottest July

01 August 2019 | SHARES | 23 Sirius Minerals eliminate the financing risk with regards to (SXX) 16p the project. And analysts covering the stock believe it’s highly likely Sirius will get this cash, meaning BUY the shares could be in for a major re-rating, with Shore Capital analyst Yuen Low saying it is the ‘key to effectively unlocking Sirius’s vast potential’. 45 Despite the mine being years from production, SIRIUS MINERALS Sirius has already secured several offtake deals 35 – which is what led JP Morgan agreeing to lend

25 it a huge chunk of the cash – with more in the pipeline, evidence both of the demand for a 15 product whose market does not yet exist,

2016 2017 2018 2019 and customers’ belief that Sirius will get this off the ground. It started a roadshow for the bond last week, WHY HAS THE SHARE PRICE BEEN WEAK? with the bond pricing on 6 August and the deal Potash miner Sirius Minerals (SXX) needs a lot of closing on 9 August. cash if it is to turn its potentially money-spinning Once the finance is in place, investors will start polyhalite mine in North Yorkshire into a reality. to focus more on the opportunity for Sirius as a The FTSE 250 firm has moved a step closer supplier of multi-nutrient fertiliser and how it can to that reality after it felt confident enough to help to improve crop yields around the world. launch a $500m bond, part of its efforts to raise Despite the potential to be a major employer $3.8bn so it can carry on with building the mine. in the UK and for the shares to re-rate Investment bank JP Morgan has agreed dramatically, investors should not lose sight of to stump up a $2.5bn overdraft if Sirius gets the fact that this is a higher-risk investment. investors to take on the $500m bond. Combined There are geological, project execution and with $400m in convertible bond sales and market risks to consider, as well as the pressure $425m raised via issuing new shares, Sirius will on Sirius to operate the mine profitably and be have the cash it needs if it can get the latest able to pay down its sizeable debt. bond money. But what has got investors so annoyed with the company is the $425m it raised from new shares, which it bagged by offering them at 15p a share – a significant discount to the 21.9p the shares closed at the day before the placing. In addition, the cost to build the mine has consistently gone up in the last few years, with Sirius asking for more cash every time. Having sat at 45p three years ago, its shares are now trading at much lower levels despite the project being more advanced. By Tom Sieber, Ian Conway, James Crux, WHAT COULD SPARK A RE-RATING? If it gets the bond money that would effectively Yoosof Farah and Martin Gamble

24 | SHARES | 01 August 2019 WATCH OUR LATEST VIDEOS

Jose Luis Vazques, CEO Mirada (MIRA) Learn more about how the company provides software products and services to digital TV operators and broadcasters

Andrew Cowley, Managing Partner Impact Healthcare REIT (IHR) Discover how the healthcare property investor makes money

Steven Cooklin, CEO Manolete Partners (MANO) Find out more about the litigation finance company’s business model

CLICK TO PLAY EACH VIDEO SPOTLIGHT

Visit the Shares website for the latest company presentations, market commentary, fund manager interviews and explore our extensive video archive.

www.sharesmagazine.co.uk/videos FUNDS Know your fund: what’s inside Fundsmith Equity?

Terry Smith’s creation is one of the best and most popular funds for very good reasons

ollowing our cover story By sticking to these criteria on the risks associated Fundsmith builds a portfolio F with ‘star managers’, in of ‘resilient businesses with the aftermath of the suspension excellent performance’. of the flagship Woodford Equity Importantly, it is structured ‘to Income Fund (BLRZQ73), we are survive Terry Smith’s demise launching a new feature looking and continue with the same at the UK’s most popular funds to investment philosophy’. analyse their investment process The fund is also clear on what and their top holdings. it won’t do: trade short-term As we explained previously, or attempt to time the market, when choosing a fund or trust adopt hedging strategies or use it’s important to understand the derivatives, ‘hug’ the index, short manager’s process and why they stocks, or charge upfront fees or own what’s in their portfolio. If performance fees. you don’t understand or don’t feel comfortable, then don’t invest. HOW DOES IT Guinness owner Diageo is in the portfolio WORK IN PRACTICE? STAR QUALITY WITH With such a rigorous selection A CLEAR PROCESS across the globe on a long-term process it’s not surprising that One of the biggest and most basis using ‘stringent investment few stocks make the grade. successful funds since its launch criteria’ to select only businesses: As the fact sheet explains, in 2010, Fundsmith Equity ‘the application of these (B41YBW7) is now valued • which are high-quality and investment criteria significantly at £18.3bn. Founded by star can sustain a high return limits the number of potential analyst-turned-fund manager on operating capital investments’. Terry Smith, it has a very simple employed (ROCE) The current number of three-step investment process: • whose advantages are holdings is 27, towards the top of buy good companies, don’t difficult to replicate the estimated range of 20 to 30 overpay and do nothing. • which do not require holdings at any given time. In the Rather than having a glossy significant leverage to last year the portfolio turnover brochure, the fund has a 20-page generate returns (therefore ratio – the percentage of the ‘Owner’s Manual’ for investors typically not banks or utilities) fund which has changed – is because ‘your understanding of • with a high degree of just 13.4% meaning only three what we are trying to achieve certainty of growth from or four stocks have been bought and how we will approach it is a re-investing their cash flows or sold. critical element in enabling us to at high rates of return Even more impressive, 11 of attain our goal’. • which are resilient to the stocks in the portfolio at the change, particularly end of last year had been there WHAT DOES IT technological innovation since the fund was launched in SAY ON THE TIN? • businesses at attractive 2010. This is the ‘do nothing’ Fundsmith invests in equities valuations approach. Good companies

26 | SHARES | 01 August 2019 FUNDS

500 FUNDSMITH TOTAL RETURN COMPARED WITH OTHER ASSETS FUNDSMITH 400 PERIOD FUNDSMITH EQUITIES UK BONDS From inception 300 to June 2019 358.0% 167.3% 40.0% 200 Jan-June 2019 23.9% 17.1% 3.1% 14 15 16 17 18 19 2018 2.2% -3.0% 1.2% 2017 22.0% 11.8% 1.4% look after themselves and 2016 28.2% 28.2% 6.5% shareholders. 2015 15.7% 4.9% 1.0% T h e t o p 1 0 h o l d i n g s a s o f 2014 23.3% 11.5% 10.0% the end of June were, in 2013 25.3% 24.3% -4.8% descending order: 2012 12.5% 10.7% 2.7% Paypal, Microsoft, Facebook, Amadeus, Idexx, Estee Lauder, 2011 8.4% -4.8% 15.6% Equities = MSCI World Index in GBP, UK Bonds = Bloomberg/Barclays/EFFAS Bond Indices UK Govt 5-10yr Intuit, Philip Morris, Stryker and Fund launched 1 November 2010 Novo Nordisk. If we assume most investors will know half of these stocks, the most from returns. In June, has a bad month the losses are then for those who are the fund gained 3.8% thanks smaller than in good months unfamiliar with the other half: to positive contributions from (best month +9.4%, worst month Amadeus owns and operates Stryker, Estee Lauder, Idexx, -6.9%). Therefore its average the world’s number one travel Microsoft and Novo Nordisk. The monthly return is +1.5%. distribution and reservation worst performers were Reckitt Finally, for those worried about computer system and is listed Benckiser (RB.), Philip Morris, liquidity, Fundsmith only invests in Spain. McCormick, Unilever (ULVR) and in large, liquid stocks and has no Idexx designs and markets Diageo (DGE). unlisted holdings whatsoever. diagnostic testing equipment for Up to the end of June the fund Despite its size, the managers say monitoring animal health and had gained just under 24% so far that 60% of the fund could be analysing dairy products and is this year against 17% for its main liquidated in seven days if it were listed in the US. benchmark, the MSCI World ever necessary. Intuit produces accounting Index priced in sterling. management and payroll Last year, when 92% of SHARES SAYS:  software, not dissimilar to UK funds in the Investment Fundsmith excels at London-listed Sage (SGE), and its Association universe posted communicating its strategy. shares are also traded in the US. negative returns along with the The fund’s process is crystal Stryker designs and markets stock market, Fundsmith posted clear and only picks long-term orthopaedic and surgical a 2.2% gain putting it in the top winners. It is also designed to equipment, and is a rough 4% of performers. survive Terry Smith’s demise as lookalike for Smith & Nephew Since launch on 1 November the manual says cheerfully. It is (SN.), and is listed in the US. 2010, the fund had racked up easy to see why this is the UK’s Finally, Novo Nordisk is one of gains of 358% to the end of June most popular fund. Buy and hold the world’s leading producers of 2019 compared a return of 167% for the long term. insulin and is listed in Denmark. for the MSCI World Index and a return of 40% on UK five-year and PERFORMANCE DATA 10-year Gilts (government bonds). Every month the fund records Importantly, it has a lot more By Ian Conway its performance and explains up months than down months Senior Reporter which stocks added or detracted (roughly 70/30) and when it

01 August 2019 | SHARES | 27 INVESTMENT TRUSTS How to play a surge in Chinese domestic consumption Fidelity’s China guru aims to invest in undervalued stocks with a bias towards small and mid caps number of global, emerging market and A thematic investment trusts put money to work in China, but there are just two dedicated China trusts within the investment companies sector, namely JPMorgan Chinese (JMC) and Fidelity China Special Situations (FCSS). This pair have had a tough time of late. The US/China trade dispute continues to weigh heavily on sentiment, credit growth is longer term showing remains Nicholls would look to buy at slowing and China’s GDP growth strong in absolute and relative an attractive valuation. is trending downwards, forecast terms, while Hong Kong-based to reduce from 2017’s and 2018’s portfolio manager Dale Nicholls’ NEW CHINA ECONOMY respective 6.9% and 6.6% to focus on cash-generative Nicholls favours sectors with 6.2% this year and 6% in 2020. companies has resulted in a strong structural growth However, earnings growth steadily-rising dividend. prospects, mainly related to in China remains strong and Manager of the fund since rising domestic consumption, although it has proved a volatile April 2014, Nicholls insists China’s growing middle class market, valuations remain there are notable investment and ongoing structural reforms. attractive versus history and opportunities in China, where The consumer, information global peers. the middle class is developing technology and healthcare rapidly and his focus is on higher sectors, so-called ‘New China’ MISPRICED POTENTIAL growth, consumer-led sectors areas where innovation remains Seeking to achieve long-term accordingly. high, continue to excite. capital growth from companies Nicholls looks for undervalued ‘I have a mid to small cap bias,’ listed in China or Hong Kong, companies that can deliver over he explains. ‘When companies and Chinese companies listed the long term, believing the best are smaller they are less well elsewhere, Fidelity China investments are companies with covered by the market and I am Special Situations has had a good long term growth prospects investing in mis-priced stocks challenging past 12 months – he asks himself ‘how big can a that can move to fair value with performance impacted company be in 10 years’ time?’ over time.’ Company meetings by a significant sell-off in – and also cash-generative and site visits are a key part Chinese equities. businesses controlled by strong of Nicholls’ process as risk The positive news is that the management teams. Ideally, management takes on increased

28 | SHARES | 01 August 2019 INVESTMENT TRUSTS importance when investing in small caps. Albeit diversified across 120-to-150 holdings, the portfolio’s small and mid cap tilt has been a performance drag with Chinese small caps underperforming over the past two and a half years. Over the 12 months to 30 June 2019, Fidelity China Special Situations’ net asset value (NAV) declined by 12.8%, significantly underperforming a 3.2% drop for the MSCI China index. Yet Nicholls appears as excited trade war, Nicholls says the risk Other leading contributors as ever about the domestic to earnings depends on the included luxury car dealer China Chinese opportunity given ‘the particular company in question, Meidong Auto; Li-Ning, the natural development of the although he also stresses that domestic sportswear brand middle class. As people get ‘the thrust of this portfolio is founded by a former Chinese richer, you will increasingly see a about the consumption trend in Olympic gymnast; as well as trend towards premiumisation’. China. Most of the companies Macau telecom operator CITIC I’m investing in are focusing on Telecom International. UNLISTED the domestic market.’ About 6% of the portfolio is in OPPORTUNITIES ABOUND In fact, Fidelity China Special unlisted holdings. These include A potential advantage for Fidelity Situations has low exposure to global ride-hailing network China Special Situations is its exporters with around 90% of Didi Chuxing and ByteDance, closed-ended structure, which portfolio company revenues which operates various content means Nicholls has less liquidity derived from Greater China. platforms globally including constraints and can also use ‘I have some hotel exposure China’s leading news aggregator futures, options and CFDs to and I also own online travel Toutiao, as well as artificial provide gearing and take short booking company Ctip.com.’ intelligence technology company positions. However these types Nicholls continues to find SenseTime. of assets and exposures arguably attractive new ideas, such as At 222.5p, Fidelity China have a different risk profile to recent addition Secoo, a luxury Special Situations trades at ordinary shares. e-commerce platform. a 9.3% discount to NAV of The trust is also able to invest Since he took over the running 245.24p. The discount, which has in unlisted companies, especially of the trust (1 April 2014), the ranged from 5% to 23.4% over advantageous in the current net asset value (NAV) and share the past five years, has recently climate when growth companies price are up by 121.7% and narrowed below 10% and the globally are coming to the public 128.6% respectively versus 97.3% board intends to keep it that way, markets later and later. for the MSCI China index. The top having introduced a formal plan ‘I’m continuing to find a lot two holdings are Tencent, the to that effect. We think this is of opportunities at the pre-IPO internet services and advertising a good trust to own to play the stage,’ enthuses Nicholls, whose titan; and Alibaba, China’s largest Chinese growth theme. biggest concern in China has e-commerce and cloud provider. been the build-up in debt, which The top contributors to By James Crux is also the main reason he owns performance in the 12 months Funds and Investment none of the banks. to 30 June 2019 included search Trusts Editor Turning to the US/China engine Baidu.

01 August 2019 | SHARES | 29 EXCHANGE-TRADED FUNDS Where to start with investing in metals and energy products via ETFs

We explain how the different products work and ways to play three commodities forecast to rise in value

ommodities, which cover are only appropriate for WHAT IMPACT DOES THE everything from oil to more sophisticated investors, FUTURES MARKET HAVE? C copper to corn, play a particularly as the individual A further consideration, which central role in our lives. They fuel markets can see considerable applies particularly to long-term the cars we drive, line the cables volatility. investors, is the impact of the which keep us online and some Instead it could be more futures market phenomena are in the meals we eat. sensible to start off with an ‘contango’ and ‘backwardation’. Investing in this space ETF which tracks a large basket Over time these can have a used to be the preserve of of different commodities. material impact on returns. the professionals but several An example includes Invesco Most commodities are traded developments, most notably the Bloomberg Commodity in futures contracts. This is the emergence of exchange-traded (CMOD). However, not all purchase or sale of a commodity funds (ETFs), have enabled broad commodities indices are agreed at a fixed price for ordinary investors to get in on created equal and some will delivery on a specified date – the act. be dominated by the larger typically either one month, three ETFs track a certain index commodity markets such as oil. months or six months ahead. to mirror its performance. For The methodology behind the This facilitates the buying example, if you buy a silver ETF, Bloomberg Commodity Index, for and selling of the respective it should move up and down in example, seeks to address this commodity without anyone line with the movement of the situation by adjusting the index having to take physical delivery precious metal. weighting to ensure no single of a barrel of oil or bushel of commodity dominates the index. corn, for example. Only a tiny DEMOGRAPHICS UNDERPIN In comparison, the S&P GSCI fraction of these contracts are COMMODITIES index has an energy products settled through deliveries, the An increasing global population weighting of more than 60%. bulk are instead ‘rolled over ’ and the finite nature of many commodities underpins these HOW COMMODITIES INDICES’ markets over the long term. WEIGHTINGS CAN DIFFER However, while some Bloomberg commodities exposure could be S&P GSCI Commodity Index a good fit for a balanced portfolio Energy 62% 32.5% there are several factors you Agriculture 16.5% 27.8% need to consider if you want to Industrial Metals 10% 18.5% buy a commodity-based tracking 4.7% 15.6% product, such as diversification. Precious Metals Products focused on a Livestock 6.9% 5.7% single commodity, with the Soruce: Bloomberg, S&P possible exception of gold,

30 | SHARES | 01 August 2019 EXCHANGE-TRADED FUNDS

WHICH COMMODITIES COULD GO UP IN PRICE?

A RECENT PIECE of upside in palladium research by investment prices until mid-2020. bank Morgan Stanley Demand currently COMMODITY FORECASTS identified several bright outweighs supply, spots, namely copper, which is pushing up the Commodity Q319 Q419 Q120 Q220 palladium and tin. price. Invesco Physical Copper ($/t) 6063 6504 6680 6724 Morgan Stanley Palladium (SPAP) believes supply issues is among the ETFs Palladium ($/oz) 1400 1450 1500 1490 could support copper tracking the value of Tin ($/t) 19842 20944 22046 23149 prices and an example the metal. Source: Morgan Stanley of an ETF tracking the In the long term with the metal widely ‘glues the technology base metal price is ETFS tin is expected to be used in solders. To quote revolution’. Exposure is Copper (COPA). a beneficiary of new consultancy Roskil possible through such It sees continued technology development it is the metal which ETFs as ETFS Tin (TINM). to the next month and the enhanced due to the ‘positive some products and indices pattern repeated. roll yield’. seek to provide a solution to Contango refers to the The impact of contango this problem. These so-called market condition whereby the is more acute for investors ‘optimised solutions’ will price of a futures contract in a because the providers of these typically look to buy a selection commodity is trading above the products do not pay a premium of different futures contracts to spot price (the current market every month to cover the cost mitigate the negative impact of price). The resulting futures of the ‘roll’ and maintain the contango and, in some cases, ‘curve’ would be upward-sloping same position. maximise the positive impact of with prices for dates further In effect the instrument is backwardation. in the future trading at ever giving up a proportion of its There are several UK-listed higher levels. position to cover the cost of ETFs which fall into this category. Backwardation describes the the roll-over. Among them are UBS ETF CMCI reverse – where futures are WisdomTree research director Composite (UC15), WisdomTree trading below the spot price Nitesh Shah says: ‘Most industrial Enhanced Commodity (WCOG) – often because of short-term metals have a flat futures curve and iShares Bloomberg Roll tightness in the underlying while precious metals have Select Commodity Swap (ROLL). market. Arguably contango is a negligible or no contango or WisdomTree’s Shah believes more natural state as it reflects backwardation. Energy markets you need to think carefully about costs of ownership such as tend to see more pronounced what you are buying and not storage and insurance. contango or backwardation. look to invest in the commodities Currently oil is in backwardation product with the lowest fee. COST OF THE ROLL but it had been in contango for ‘You can’t just look at the name; What does this mean for an some time before that. you really need to study the investor? When contracts ‘Other markets are very prospectus carefully in order to are rolled over to avoid seasonal such as natural gas and make an informed decision.’ taking delivery of the physical lean hogs and you will see that asset, contango sees returns reflected in the futures curve.’ diminished, also known as By Tom Sieber ‘negative roll yield’. Meanwhile, AN OPTIMISED APPROACH Deputy Editor backwardation sees returns By adopting different strategies,

01 August 2019 | SHARES | 31 AEQUITAS Insightful commentary on market issues What we can learn from oil’s latest sticky patch We try to make sense of the oil market and how it is currently viewed by investors

tock markets are generally rising high, especially in the US, but commodity prices S are doing nothing of the sort with the occasional, supply-driven exception such as nickel or iron ore. Despite a robust spring rally, the Bloomberg Commodity index is down by around 5% from where it stood a year ago and Brent crude oil is 14% lower. This could suggest that all may not be entirely well with the global economy, as you would expect to see raw material prices rise if activity and demand levels were high. That said, oil demand is expected to hit a new all-time high in 2019, at a fraction under 100m barrels a day by the end of the year. Oil’s latest sticky patch may be more related to Further good news can be found in the form of supply than demand. If so, investors need not be falling American oil inventories. US stockpiles of too alarmed by weakness in the price of crude. crude are now 9% lower than they were a year ago. This is despite a sustained increase in American RIGS ROLLING OVER oil and gas output from its onshore shale fields. Oil Supply can be quickly gauged. On the face of it, oil’s production is up by some 950,000 barrels a day, or latest wobble is curtailing fresh exploration work, 13%, over the past year. as you would hope and expect. Data from Baker This could be a key factor in capping the oil Hughes shows that the active US rig count is 9% price, since this surge in output goes a long way to lower than it was a year ago and the international compensating for the 1.2m barrel a day production count is 3% higher, as oil firms keep a close eye on cut sanctioned by OPEC in Vienna last December their expenses and cash flow. and then again in June.

US SHALE OUTPUT GROWTH IS SLOWING GROWTH IS GLOBAL RIG ACTIVITY IS SLOWING DOWN

Source: Baker Hughes Source: US Energy Information Administration

32 | SHARES | 01 August 2019 Insightful commentary on market issues AEQUITAS

ANNUAL OIL CONSUMPTION HAS ONLY FALLEN TWICE SINCE 2000 AND THAT WAS IN 2008 AND 2009 WHEN THE GLOBAL ECONOMY WAS ON ITS KNEES

Yet growth in shale supply is relatively modest words, as in all markets, running with the herd just as the annual rate of increase was running at 1.9m gets oil traders badly trampled. They need to go barrels year-on-year in August 2018. Any further against the crowd. slowdown in shale growth could actually help oil – Buyers have begun to gather again, perhaps at least if OPEC and Russia maintain their current emboldened by the diplomatic stand-off between output discipline. Yet even with this deceleration in Washington and Tehran, a delicate affair in which growth crude remains weak. the UK is now embroiled after the mutual seizure One further factor which may be at work is how of oil tankers in Gibraltar and then the Straits of financial speculators are positioned via the futures Hormuz. Net long positions have crept back to market. Each contract is worth 1,000 barrels of oil around 450,000 contracts. and the fund flows are huge, easily outstripping actual physical demand. PUMP UP THE DIVIDENDS According to data from the CME, the amount That sits in the middle of the range for the last by which the number of speculative ‘long’ (buy) five years, as if to say even the professionals don’t contracts exceeded the number of ‘short’ (sell) have a strong feel for where oil is going next, so it contracts peaked at 784,290 in January 2018. would take a brave investor to take a strong view at Once the crude price began to roll over, buyers the moment. ran for cover and sellers took over. Net long The possible bad news is that oil’s weakness positions shrank to 332,714 contracts in January reflects soft demand. Annual oil consumption has 2019 and oil hit bottom at the same time. In other only fallen twice since 2000 and that was in 2008 and 2009 when the global economy was on its NET LONG OIL FUTURES POSITIONS LIE IN knees. THE MIDDLE OF THEIR FIVE-YEAR RANGE The better news is that spikes in oil have tended to act as a brake on global economic activity, as per 1975, 1980, 1990, 2000 and 2007, while relatively stable prices have tended to be a good lubricant. A quiet oil market is generally more helpful to financial markets overall than a noisy one and the best scenario for investors is more of what we have now, although history also suggests that periods of calm never last for too long.

By Russ Mould AJ Bell Investment Director Source: CME, Refinitiv

01 August 2019 | SHARES | 33 MONEY MATTERS Helping you with personal finance issues How to invest an inheritance We consider the different ways to get the most from a lump sum of money

etting an unexpected of the cash. You could allow look to pay those off before you inheritance can provide yourself to spend a proportion tackle the mortgage. G a valuable boost to your of it on something frivolous or The next step is to check finances – but how do you work buy something you’ve wanted that your emergency cash is out what to do with the windfall? for ages. Taking out 10% to treat sufficiently topped up. Usually The average inheritance yourself or the family could work it’s good to have between received is around £11,000, well, and by ring-fencing this as three and six months of your according to figures from the ‘fun money’ you’re less likely to outgoings set aside in easily- Office for National Statistics, gradually spend a big portion of accessible cash. but some people get larger, the inheritance. potentially life-changing sums. INVEST FOR THE FUTURE Often this is money that people DEAL WITH THE If you are already debt-free and haven’t planned on receiving, BORING STUFF have enough cash in reserve, so it can be tempting to splurge Before you think about investing and you think you can earn it, but what’s the best course or saving any of the money it’s more by investing the money of action? worth paying off any high-cost than by paying off the mortgage, debt. Lots of people dream of then you could look to save the TO SPLURGE OR SAVE? paying off their mortgage with money for the future. The first thing people think of a windfall, and that could be a Make sure you have a saving when they picture a lottery win is good use for the money, but you goal before you decide where usually splurging on a holiday, a need to make sure you pay off to invest it, as this will help new house or something fun for pricier debt first. determine what you invest in the family. While an inheritance Check what interest rate you’re and how much risk you’re willing is unlikely to be as large as a paying on your mortgage and to take. lottery win, it can be tempting then look at any other debt you If you’ve received the windfall to see it as bonus money and have and whether it’s costing you when you’re younger getting spend it. more. Think about credit cards, on the property ladder might There’s nothing wrong with overdrafts, personal loans or be your target. The average treating yourself with some store cards you might have and first-time buyer deposit is now

34 | SHARES | 01 August 2019 Helping you with personal finance issues MONEY MATTERS

£50,000, meaning it’s a high hurdle to reach – but even a £10,000 inheritance would be a valuable contribution. YOU COULD Using a Lifetime ISA is the SPLIT best idea if you’re certain you want to buy a home, as anyone THE MONEY eligible for this wrapper will INTO get a 25% Government bonus DIFFERENTS on top of contributions, up to £1,000 a year. POTS You can only pay in £4,000 a year, meaning that you’d need to put any remaining money into a normal stocks and shares ISA money up for a shorter period. if they haven’t received money and then move it across over the They can still benefit from directly from the deceased. following tax years. putting the money in a pension If large sums are involved a If you had a £10,000 and getting Government tax tax-efficient way is to do a deed inheritance – and assuming relief on top. Even if you’re of variation on the will, meaning you don’t make any further not earning an income you can that you effectively change contributions and it grows at still put £2,880 a year into a the will so a portion of your 5% a year after fees – with the pension, which will be topped inheritance is redirected to them. Government bonus you’d end up to £3,600 after tax relief, All the beneficiaries will need up with almost £20,000 after so you could drip feed your to agree. This means that you 10 years. inheritance in. aren’t gifting the money and so If you’re not interested in it doesn’t have to be counted for BOOST YOUR buying your first home and your inheritance tax purposes should RETIREMENT SAVINGS retirement seems too far away, you die within seven years of Another option is to put some or you might want to access the handing the money over. all of the money into your money in the shorter-term or pension. For younger people this save it for something like a new MIX IT UP might seem like a crazy car, a wedding or to gift to family Another option is to use a mixture idea, as you won’t be able to members in the future. of all of these approaches. You access it for so long, but the In this case you’re probably could allocate 10% to your fun effect of compounding means better using an ISA, as the money money pot, put another 20% in that money put away very early isn’t tied up and you can get easy your pension, allocate 50% to an on will have a long time to access to it. What you invest in ISA for shorter-term spending and grow until retirement.Y ou’ll also will depend on how long you are perhaps gift the rest of it between be able to invest in more high putting the money away for, but charity and family. risk assets. you can add in more risk if you’re The best thing is to have a plan Using the same £10,000 investing for longer. for the money, make sure you example and 5% growth, with don’t just leave it in the bank tax relief it would be worth more GIVE IT AWAY earning a measly interest rate, than £110,000 after 45 years Some people might want to pass and invest it as tax-efficiently as invested. However, you need to on their good fortune to charity. possible. be certain that you won’t need You also claim tax relief if you do to access the money, so it’s not a give the money away. By Laura Suter decision to take lightly. Many people with children AJ Bell Personal Older people who are nearer will consider passing some of Finance Analyst retirement will be locking the the inheritance straight to them,

01 August 2019 | SHARES | 35 ASK TOM Your retirement questions answered ‘Is it illegal to recycle pension money to get extra tax relief?’

AJ Bell pension expert Tom Selby explains the rules

I’ve heard that it’s possible to fall foul of HMRC’s pension recycling rules; can you explain the pitfalls and how to avoid them please? Dean

Tom Selby AJ Bell Senior Analyst says: you could be hit with a 55% similar period before tax-free HMRC has rules in place to stop unauthorised payment charge. cash was taken. pension savers getting ‘double HMRC will consider recycling You can’t get round this by bubble’ on their pension tax of tax-free cash to potentially paying into different pension relief. As you say, this concept breach its rules where the tax- schemes as HMRC will look at is referred to by the taxman as free sum (or sums) received over all of your contributions when pensions recycling. a 12-month period are worth making its assessment. The concept is straightforward more than £7,500. Equally, HMRC will penalise and probably easiest to explain The rules kick in where you for recycling if you borrow with an example. Take someone the payment has resulted in money to pay contributions or who is 65 years old and has a a 30% or more increase in pay into your pension out of SIPP pot worth £100,000. He contributions to your pension savings and then use the tax-free takes out his maximum tax- compared to what might lump sum to pay off the loan or free cash (£25,000) but then normally have been expected. top up savings. invests it straight back into While this might sound a bit Incidentally, concerns over another pension with a different vague, it’s actually a specific recycling were cited by the provider. condition – HMRC looks at Government as the primary As a result, he gets tax relief contributions paid in the rest reason for introducing the on the money he pays into that of the tax year after you took Money Purchase Annual pension (immediately boosting your tax-free cash plus up to Allowance (currently set at it to £31,250) and can get 25% two more years afterwards. £4,000) for savers who access of that money (i.e. £7,812.50) This is then compared with the taxable income from their tax-free as well. He might even contributions made during a pensions. invest that tax relief in another SIPP, and so on. DO YOU HAVE A QUESTION ON RETIREMENT ISSUES? I’ve heard this wheeze described variously as a ‘no Send an email to [email protected] with the words brainer’ and ‘too good to be ‘Retirement question’ in the subject line. We’ll do our best to Shares true’ by investors. Sadly, the respond in a future edition of . Please note, we only provide guidance and we do not provide latter point is correct and HMRC financial advice. If you’re unsure please consult a suitably has rules in place to prevent qualified financial adviser. We cannot comment on individual excessive recycling of tax-free investment portfolios. cash. If you breach these rules

36 | SHARES | 01 Augest 2019 EDUCATION What are adjusted earnings and why do companies use them? Apparently designed to give a truer picture of a company’s health, investors should take them with a pinch of salt

hen companies report loss of £142.8m in the 26 weeks out the ‘worse’ bit. their financial figures, to 2 June. Looking at red flags for Woften the final figure But the figure Ocado wants earnings in the retail sector, they want you to see is not the you to look at is its adjusted analysts at Liberum call the one that simply represents all earnings before interest, above ‘profit smoothing’ and say of their incomings minus their taxation, depreciation and that when a company adjusts its outgoings. amortisation (EBITDA), which profit higher year in, year out, A growing number of firms stood at £18.7m. and sometimes for the same think if you just take the In this case, it is perfectly reason each year, it is a ‘clear statutory figures they provide, reasonable to go on the signal of low earnings quality.’ which usually stick rigidly to adjusted EBITDA figure because They add that restructuring industry-recognised accounting the overall pre-tax loss figure costs are a staple adjustment standards, it doesn’t always includes the impact of the fire for many companies, ‘but give a true reflection of how the at its flagship robotic Andover there are some observers that business is actually performing. warehouse in February, which question whether restructuring So often companies will adjust cost it £99m. costs should be considered their figures, and push investors’ Therefore, to think that the exceptional at all, given the attention in the direction business was ordinarily making fact that businesses are almost of things like their ‘adjusted a £142.7m loss in half a year always in a state of flux.’ operating profit’, which excludes would be wrong. This is a one-off items and potentially genuine one-off item. REPEAT OFFENDERS gives investors a truer picture of In the retail sector, Liberum a company’s performance based IGNORING THE BAD STUFF analysts highlight Mothercare on its day-to-day activities. While adjusted earnings are (MTC) as ‘by far the worst Take Ocado (OCDO) as meant to give a truer picture of offender’ for adjusted earnings. an example. The grocery a company’s health for better or In its full-year results for 2019, distribution technology firm worse, an increasing percentage it made an adjusted loss of technically reported a pre-tax of firms are conveniently leaving £11.6m, compared to a statutory

01 August 2019 | SHARES | 37 EDUCATION

loss of £87.3m. The year before it reported an adjusted profit of £2.3m, compared to a reported loss of £72.8m. The company has stripped out significant restructuring costs in its adjusted figures, but Liberum De La Rue results to 30 March 2019 points out that Mothercare has been restructuring for the past three years, and while it would appear that restructuring is nearing a conclusion, no end date has been confirmed. Adjusted operating profit £60.1m An American study by EXCEPTIONAL ITEMS: Professors Paul Griffin and David Lont suggest the adjusted Site relocation and restructuring (£4.8m) earnings of some companies in Loss on disposal of business (£2.6m) the US can be manipulated, and Acquisition costs (£0.2m) are also often symmetric with Pension costs (£2.2m) one-time gains regularly included but not one-time losses. Venezuela bill provision (£18.1m) One firm in the UK which has Amortisation (£0.7m) been publicly called out on such Operating profit £31.5m an issue is De La Rue (DLAR), the Source: De La Rue banknote and passport printer which has had a dismal time £18m provision charge related companies across the pond are after it lost a contract to to the supply of banknotes to using all the accounting tricks produce the UK’s post‑Brexit Venezuela.’ to get their earnings as high passports, issued a string of It added: ‘When we as possible, so they can’t be profit warnings and is still challenged chief executive accused of manipulation. awaiting £18m owed by the Martin Sutherland as to why the According to the study, on Venezuelan government. share price fell so dramatically if an earnings per share basis, market expectations had been between 2000 and 2016 a PUSH BACK broadly met, he replied that: quarter of S&P 500 companies The company enraged one of its “the analysts had got it wrong”.’ beat analysts’ expectations shareholders, activist investor Going on the International when using adjusted earnings. Crystal Amber, when it claimed Financial Reporting Standards But that percentage fell to just in its full-year results on 30 May (IFRS) figure as opposed to the 10% when using their GAAP that performance had ‘broadly figure adjusted by De La Rue, (Generally Accepted Accounting met market expectations’, with the company made an operating Principles) results. adjusted operating profit rising profit of £31.5m in the year to So while adjusted earnings can 6% to £60.1m. 30 March. be legitimate, it’s always worth In an update on holdings in its In Griffin and Lont’s study, they delving deeper into a company’s fund, Crystal Amber said: ‘[De found that firms in the US were accounts and not just taking their La Rue’s] claims did not reflect consistently reporting adjusted adjusted word for it. the reality that the £60m of earnings only a little above what management-adjusted operating analysts predicted, but changed profits included an unexpected tack after people became £7m benefit from an accounting suspicious. standard change, and ignored an Now, they claim, some

38 | SHARES 01 August 2019 FEATURE Should you snap up the income on offer from retail bonds? We explain how to get exposure to these fixed income instruments

ncome-seeking investors have had a notoriously Idifficult time in recent years. As interest rates have remained at rock-bottom and quantitative easing sparked a flood of money into fixed income assets, the yields paid by bonds collapsed. As a result, investors have been forced to move up the risk scale in order to find an income that beats inflation. Retail bonds may be one way OR MORE for investors to boost the yield of their portfolio and to diversify their income stream – as long as you do your research. expect to be paid, for example. Firms with retail bonds These are not to be confused Elena Chimonides, fixed currently listed on ORB range with the high-yielding mini- income specialist at London from private firms such as bonds offered by the likes of Stock Exchange, says: ‘Retail property management group Chilango, with its 8% Burrito bonds are more robust than Places for People and housing Bond, and Wellesley’s Property mini-bonds, which are more akin group A2D to huge household Mini-Bond. Listed retail bonds to crowdfunding.’ names including Royal Bank of are those available through the Retail bonds typically offer a Scotland and HSBC. London Stock Exchange on its higher income than standard Order Book for Retail Bonds corporate bonds, historically 5% A STEPPING STONE INTO (ORB) platform. or more. Companies often use CAPITAL MARKETS ORB to issue smaller tranches Chimonides says: ‘For some STRINGENT CHECKS APPLIED of debt than they might be able companies it’s a first stepping Unlike mini-bonds, listed to with an institutional bond – stone into capital markets, retail bonds are vetted and issues listed on ORB are as small for others it’s a useful way to checked and must meet the as £11m, for example. diversify their investor base by stringent rules of the stock This may appeal to smaller engaging with a new set of retail exchange in order to be able companies, which don’t have investors. Because of that, some to list. They must publish a full the need to issue hundreds of firms have come back to issue prospectus, written in clear millions in debt, as well as to second or third bonds.’ language so that investors larger and more established For an investor, the main can understand what they are firms looking to diversify their appeal of a retail bond is usually investing in and how they can investor base. the coupon it pays. A retail bond

01 August 2019 | SHARES | 39 FEATURE

from Beazley has a coupon of 5.3%, Burford Capital 6%, and EXAMPLES OF RETAIL BONDS Provident Financial 5.2%. ISSUE MATURITY CURRENT BOND NAME CODE These beat both base rate and DATE DATE YIELD inflation, which can be hard to BURFORD CAPITAL achieve elsewhere. However, as PLC BURFORD 22 BUR1 30-Jul-14 19-Aug-22 6.0% demand for high yields remains TESCO PERSONAL strong and bond issues remain in FINANCE PLC TESCO TSC5 15-May-12 21-Nov-20 4.9% short supply, coupons are not as PF 5% generous as they used to be. SEGRO PLC 52VE 21-Jun-05 20-Jun-35 4.0% But there is also the potential SEGRO.5.75 for capital gains to be made when investing in retail bonds. WESSEX WATER The prices of these assets SERVICES FINANCE 68OP 16-Oct-03 14-Oct-33 3.9% move in line with supply and PLC WESSEX W.S.5.75 demand, and investors are free GLAXOSMITHKLINE to trade listed retail bonds on the CAPITAL PLC AG99 19-Dec-01 19-Dec-33 3.7% secondary market at any time – GLAXOSMSC 5.25% as long as they can find a buyer Source: London Stock Exchange. Data as of 29 July 2019 or seller. Popular bonds can see their of 90.4p – a capital loss of nearly the bond, consider why it is price rise above par value. 10% for those who bought at par. making the issue and what it The Burford Capital issue, for The coupon represents what a plans to do with the money as example, currently has an offer bond would pay at its par value well as its financial strength and price of 107.6p. Those who and movements in price will the likelihood that it will be able bought at issue and sold at this affect the yield, with a fall in the to pay its coupon and repay the price would have made a capital bond price leading to a higher capital you have invested when gain of around 8%. yield and vice versa. the bond matures. But, just as with any other Chimonides says: ‘You should asset, negative sentiment can DO YOUR HOMEWORK look at the financial projections drag down the price of retail As with any investment, doing of the company, how they have bonds. An issue by Wasps your homework first is crucial performed and what they are Finance, which has a coupon of when choosing retail bonds. planning to do in the future 6.5%, currently has an offer price Research the company issuing in order to gauge the credit story of the issuer. Check what else is out there and how the interest rate on offer compares. You shouldn’t go into any AS WITH ANY INVESTMENT, investment blind, you need to DOING YOUR HOMEWORK do the research.’ FIRST IS CRUCIAL WHEN Investors can buy and sell retail bonds through an investment CHOOSING RETAIL BONDS. platform, as they would any YOU SHOULDN’T GO other listed entity such as a INTO ANY INVESTMENT company share. BLIND, YOU NEED TO DO THE RESEARCH By Holly Black

40 | SHARES | 01 August 2019 INDEX

KEY JPMorgan Chinese 28 • Main Market (JMC) KEY • AIM Judges Scientific 13 • Investment Trust (JDG:AIM) ANNOUNCEMENTS • Fund Just Eat (JE.) 2, 8 • Exchange-Traded Fund Law Debenture (LWDB) 14 OVER THE • Overseas share LF Woodford Equity 6, 26 NEXT WEEK Income Fund Accesso (ACSO:AIM) 19 (BLRZQ62) AG Barr (BAG) 18, 20 London Stock 9 Full-year results Allied Minds (ALM) 6 Exchange (LSE) Marston’s (MARS) 14 Alphabet 16 5 August: Dialight. 8 August: Hargreaves Lansdown. Amazon 16 Merlin Entertainments 2 (MERL) AstraZeneca (AZN) 13 Half-year results Microsoft 17 BP (BP.) 9 Mothercare (MTC) 37 Cairn Energy (CNE) 18, 21 2 August: Airea, BT, Essentra, International Netflix 16 Centamin (CEY) 12 Consolidated Airlines, Millennium & Copthorne, RBS. NewRiver REIT (NRR) 6 Centrica (CNA) 9 5 August: BBA Aviation, HSBC, Senior. 6 August: NMC Health (NMC) 19 Cobham (COB) 2 T Clarke, Domino’s Pizza, Genel Energy, Non-Standard 6 InterContinental, IWG, Meggitt, Rotork, SDL, Craneware (CRW:AIM) 18, 22 Finance (NSF) Synthomer, TP ICAP, Zotefoams. 7 August: Acacia Crystal Amber 6 Ocado (OCDO) 37 (CRS:AIM) Mining, Hill & Smith, Legal & General, Morgan Sindall, PageGroup, Phoenix, Standard Life Aberdeen, Spirax- De La Rue (DLAR) 38 Sarco, Ultra Electronics. 8 August: Arrow Global, Aviva, Diageo (DGE) 13, 27 Tritax Big Box REIT, Coca-Cola HBC, Derwent, Funding Eddie Stobart 6 Circle, Hastings Logistics (ESL:AIM) ETFS Copper (COPA) 31 Trading statements ETFS Tin (TINM) 31 Provident Financial 6 Eve Sleep (EVE:AIM) 6 (PFG) 2 August: Pets at Home. 7 August: UDG Healthcare. Facebook 16 Reckitt Benckiser (RB.) 9, 27 8 August: AA. FDM (FDM) 15 Sage (SGE) 27 Fevertree Drinks 19, 23 Sirius Minerals (SXX) 19, 24 (FEVR:AIM) Smith & Nephew (SN.) 27 WHO WE ARE Fidelity China Special 28 Situations (FCSS) Snap 17 EDITOR: DEPUTY NEWS Daniel EDITOR: EDITOR: Fidelity European 14 Softcat (SCT) 10 Coatsworth Tom Sieber Steven Frazer Values (FEV) Sopheon (SPE:AIM) 15 @Dan_Coatsworth @SharesMagTom @SharesMagSteve Fuller, Smith & Turner 14 Sophos (SOPH) 10 FUNDS AND SENIOR REPORTERS: CONTRIBUTORS (FSTA) INVESTMENT Martin Gamble Russ Mould TRUSTS Tom Selby Sports Direct (SPD) 9 Ian Conway EDITOR: Laura Suter Fundsmith Equity 26 @SharesMagIan SThree (STHR) 14 James Crux Holly Black (B41YBW7) @SharesMagJames REPORTER: Stobart Group (STOB) 6 GB Group (GBG:AIM) 13 Yoosof Farah @YoosofShares

Halma (HLMA) 19 Twitter 17 ADVERTISING PRODUCTION Invesco Bloomberg 30 UBS ETF CMCI 31 Composite (UC15) Senior Sales Executive Head of Design Designer Commodity (CMOD) Nick Frankland Darren Rapley Matt Ely Unilever (ULVR) 27 020 7378 4592 Invesco Physical 31 [email protected] Shares magazine is published weekly every Palladium (SPAP) Vodafone (VOD) 7 Thursday (50 times per year) by CONTACT US: AJ Bell Media Limited, 49 Southwark Bridge Road, IP Group (IPO) 6 WisdomTree Enhanced 31 [email protected] London, SE1 9HH. Commodity (WCOG) Company Registration No: 3733852. iShares Bloomberg 31 All Shares material is copyright. Roll Select Commodity Woodford Patient 6 All chart data sourced by Refinitiv Reproduction in whole or part is not permitted Swap (ROLL) Capital Trust (WPCT) unless otherwise stated without written permission from the editor.

01 August 2019 | SHARES | 41