EDITOR’S VIEW How bad is the rain for soft drinks firms? We have yet to see a sector-wide share price sell-off in the wake of bad weather

he UK soft drinks industry could be crying a lower sugar content. They all seemed to cope into its hands at the state of this summer’s with that pressure quite well and the industry went T weather. A washout June is disaster territory into 2019 with a focus on product innovation. We for the sector, particularly as last year was boosted would expect them to carry on with these plans and by an unprecedented amount of sunshine and high stay optimistic despite recent unfavourable market temperatures which lasted for most of the summer. conditions. Drinks companies should have been through Fevertree has just launched pre-mixed gin and volatile weather patterns plenty of times in the past tonic which is an interesting move and caters for and they’ve kept on going, although investors may the type of customer looking for convenience with a not like the sour taste of weak sales figures should ready-made product. they appear in the next round of results. AG Barr is also targeting the ready-to-drink Surprisingly the market doesn’t appear to be market with the recent debut of its Funkin canned pricing in much bad news for the majority of the cocktails, and it is launching an Irn-Bru energy drink sector. AG Barr’s (BAG) share price has been on this summer, capitalising on a very strong brand to a tear and has only pulled back slightly in recent tap into a fast-growing market. Earlier this month weeks, Britvic (BVIC) lost momentum a few months it also bought a 20% stake in alcohol-free adults ago but hasn’t really been that weak, and Nichols drinks firm Elegantly Spirited. (NICL:AIM) is trading close to its all-time high. Britvic is in a slightly different position to its peers The only stock to have fallen hard in recent because last year’s summer comparative period weeks is Fevertree (FEVR:AIM). That’s likely to isn’t as hard to beat. Its carbonates business was be a result of figures from market research group heavily affected by a carbon dioxide shortage in Nielsen which show UK sales of Fevertree products mid-2018, leading the company to say last July for the four weeks to 19 May falling by nearly 6% that it couldn’t fully capitalise on the exceptional compared with last year. weather in the UK. Last year the sector had to contend with the soft Putting the near-term risk of a sales slowdown to drinks industry levy and rework products to have one side, one has to look at the soft drinks sector with admiration in terms of how all four businesses DRINK COMPANIES’ SHARE are coping with challenges and staying abreast with PRICE SINCE 1 JUNE 2019 changing consumer tastes. This sector is often overlooked by investors who 2.3% are focused on big tech stocks, generous dividend payers or high quality businesses. We think it is Britvic AG Barr Fevertree a mistake to overlook the soft drinks companies -0.2% as they also have plenty of good traits. As such, Nichols it might be worth thinking about taking some -2.8% positions should we get any summer trading- induced share price weakness.

By Daniel Coatsworth Editor -8.7% Source: Shares, SharePad, data to 17 June 2019

2 | SHARES | 20 June 2018 Avoid distracting headlines

Headlines grab attention, but only details inform. For over 28 years, that’s how Orbis has invested. By digging deep into a company’s fundamentals, we find alue others miss. And by ignoring short-term market distractions, we’ve remained focused on long-term performance.

As with all investing, your capital is at risk. Past performance is not a reliable indicator of future results.

Orbis Investments (U.K.) Limited is authorised and regulated by the Financial Conduct Authority VIEWING SHARES AS Contents A PDF? CLICK ON PAGE NUMBERS TO JUMP TO THE START OF THE RELEVANT SECTION EDITOR’S 02 VIEW How bad is the rain for soft drinks firm ? BIG 06 NEWS Weather warning / Africa Airtel / Activist investors

GREAT New: 888 / Invesco Perpetual Smaller Companies 10 IDEAS Updates: Sopheon / GB Group / Filta / SThree TALKING 18 POINT The rules companies have to follow when reporting earnings UNDER THE 20 BONNET Reckitt Benckiser’s new chief executive has a difficult job ahe MAIN 22 FEATURE Ultimate guide to ESG investing. Part one: E and S

Top fi e ETFs with an ESG focus / ETFs to gain exposure to the US, 30 ETFS Europe and China

38 FUNDS Five different ways to play the bond market rally

MONEY Wine, a warm house and holidays: planning for the retirement 42 MATTERS you want

45 AEQUITAS FTSE 100 needs more momentum to make further gains

48 INDEX Shares, funds 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 | 20 June 2019 INVESTING IN CLEAN ENERGY

AND ENERGY STORAGE

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Issued by Valu-Trac Investment Management Limited. Authorised and regulated by the Financial Conduct Authority (UK), registration number 145168. Past performance is not a guide to future performance. The value of the investment and the income deriving from it can go down as well as up and can’t be guaranteed. You may get back less than you invested. Before investing in the fund please read the Key Information Document and Prospectus (and take particular note of the risk factors detailed therein). BIG NEWS Washout weather could hurt retailers and push up food prices We look at the potential losers (and winners) from the summer of rain

or UK retailers, 2018’s late April-to-early ARE FOOD PRICES ABOUT TO GO UP? August hot weather already provided a F demanding comparative for the same Flooding period in 2019. Trade in the period was also boosted by the Royal Wedding and the England in the US football team’s strong showing at the World Cup in has raised Russia. Unfortunately for the nation’s shopkeepers, fears of a it is now raining cats and dogs which suggests corn supply forthcoming trading updates could be ugly. shortage, Downpours keep consumers indoors and triggering a away from high streets and retail parks. The UK’s midsummer monsoon compounds the weak footfall rally in the flagged up in May’s BRC-Springboard data (10 Jun). commodity Grocery sales last summer were boosted by price record temperatures which stoked demand for everything from beer to ice cream, as well as the Royal Wedding celebrations. Comparatives for 4.60 the likes of Tesco (TSCO), Sainsbury’s (SBRY) and Corn Morrisons (MRW) are tough and should heavy 4.20 rainfall persist, consensus earnings estimates could prove overly optimistic. 3.80 In the general retail sector, Next (NXT) notched up 4.5% sales growth for its first half to 28 July 2018 as unusually warm weather boosted takings 3.40 at the high street fashion-to-homewares giant, now DEC JAN FEB MAR APR MAY up against demanding comparatives. Torrential rain won’t have helped hard-pressed B&Q owner Kingfisher (KGF) to shift DIY and Shore Capital analyst Clive Black says: ‘Every gardening ranges and the weather presents a cloud has a silver lining but most of Britain’s retail modest headwind for high street snack seller and food and beverage chiefs will be hoping for Greggs (GRG) too. more clement weather sooner rather than later, Retail wet weather beneficiaries are few and far otherwise the skies will start to feature into trading between. However, indoor leisure plays including updates and earnings forecasts. Cineworld (CINE) and Hollywood Bowl (BOWL) ‘Ongoing wet conditions could perhaps may have benefited from the rain. feature too in food prices if sodden fields hit crop And while unhelpful for the core JD fascia, production, as the US Department of Agriculture recent downpours may have driven demand for has reported for US corn, where plantings are the waterproof apparel sold by JD Sports Fashion’s behind plan, leading to downgrades to corn (JD.) outdoor businesses. production expectations.’

6 | SHARES | 20 June 2019 BIGBIG NEWSNEWS Emerging data and mobile money growth eyed by Airtel Africa IPO Continent’s second largest mobile operator pins hope on £3.6bn market valuation

obile network Airtel Africa is hoping to raise around £595m from new M investors as part of a London stock market flotation later this month in what could be an interesting emerging market opportunity for investors. Airtel Africa is the second largest mobile operator in the continent, providing services to 98.9m subscribers in 14 nations. Owned by India’s Bharti Airtel and a handful of institutions, the company plans for a free float of at least 25%. The new WHERE AIRTEL AFRICA MAKES ITS MONEY shares will be priced at between 80p and 100p each, implying an upper range market valuation of £3.6bn. Nigeria This valuation range will catapult Airtel Africa above TalkTalk (TALK) to be the UK’s third largest listed telecoms business, behind Vodafone (VOD) and BT (BT.A). East Africa Airtel Africa has spent the best part of the past decade building its mobile networks throughout Africa, having initially bought Kuwait-based Zain’s African operations in a $10.7bn deal in 2010. Since Rest of Africa then it has embarked on a series of acquisitions $ from Nigeria in the west of Africa, to Kenya in the 0 200 400 600 800 1000 1200 east, and as far south as Malawi and Zambia. Source: Company In the year to 31 March Airtel Africa reported EBITDA Revenue anouncement revenue just shy of $3.1bn and earnings before and fast-growing populations, low customer interest, tax, depreciation and amortisation of and data penetration and inadequate banking $1.33bn, on an underlying basis. About two- infrastructure,’ says Raghunath Mandava, Airtel thirds of that comes from voice revenues but Africa’s chief executive. the company hopes to ramp-up income from New funds raised are likely to go towards paying increasing data usage and mobile cash transactions down its $4bn or so net debt. through its Airtel Money service. Final pricing of the new shares is expected on 28 Africa has become a popular testing ground for June, with trading in the stock scheduled to start mobile financial transaction services, including the same day. banking apps, largely because of limited fixed-line This sounds like an interesting emerging markets infrastructure. growth opportunity, but without more detail on ‘The 14 countries where we operate offer valuation or dividend potential, one to watch strong GDP growth potential and have young only for now.

20 June 2019 | SHARES | 7 BIG NEWS Who is next as activist investors circle UK stocks? Opportunistic investors are pouncing on fragile London-listed names to enforce change

omino’s Pizza (DOM) and Restaurant Group (RTN) could potentially be targets D for activist investors, based on how they screen for valuation and quality. Both companies have suffered falling share prices in recent years due to trading difficulties. Domino’s has been getting into a spat with its franchisees and its overseas operations aren’t going to plan. Restaurant Group is in the middle of a turnaround plan, but could still be a target for an activist who may have a plan to speed up the restructuring process. Canaccord Genuity has screened the UK markets for stocks which are defined as value plays, in this instance companies which have gone through difficult periods, leaving them trading on cheap valuations. It flags the aforementioned two stocks as possible targets and says three more names that candidates. The shareholder believes FirstGroup popped up on its screen already have activist doesn’t have the relevant transportation, investors on their shareholder register. These are turnaround and government experience to deal gambling technology provider Playtech (PTEC), with its multitude of challenges. transport operator FirstGroup (FGP) and van hire In May, activist investorCrystal Amber (CRS:AIM) business Northgate (NTG). criticised Northgate’s chief executive Kevin UK-listed companies are increasingly targets Bradshaw, saying that despite being paid more than for activist investors who seek an opportunity to £1m since joining in 2017 he has never purchased invest in a depressed stock and enforce change. a share in the business. Three months ago Crystal The ultimate goal is to realise value by getting a Amber succeeded in removing chairman Andrew company to do something different and for that Page from Northgate. action to drive up the share price. Plumbing supplies firm Ferguson (FERG) ‘Of the 318 non-US campaigns initiated in 2018, recently attracted US activist investor Trian Fund 128 targeted European companies, of which Management which took a 6% stake after third around half were UK companies. This compares quarter results signalled a slowdown in its primary with 300 to 500 campaigns per year in the US, market, the US. according to Activist Insight and JP Morgan,’ says And having amassed a 9.3% stake, ValueAct Canaccord analyst Nigel Parson. ‘This trend should Capital last month urged theme park operator continue as European markets and company Merlin Entertainment (MERL) to put itself up valuations are less stretched than in the US, helped for sale. by sterling weakness.’ Other London-listed stocks in the middle of FirstGroup is currently engaged in a battle with activist situations include online food ordering 9.8% shareholder Coast Capital which wants platform Just Eat (JE.). Shareholder Cat Rock Capital to replace six board of directors with its own wants Just Eat to buy or merge with a rival.

8 | SHARES | 20 June 2019 Set yourself up for a brighter tomorrow

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CM15222 FCIT 150 Adverts-210X297_v9.indd 1 13/05/2019 15:50:14 GREAT IDEAS 888 has a plan for a sporty comeback

Don’t be fooled by the gambler’s recent share price slump as the future looks much brighter

he tough regulatory 300 backdrop has seen shares 888  BUY 888 T in the largest London- (888) 154.1p 260 listed gambling sector names Stop loss: 120p 220 fall by an average 43% over the 180 past 12 months. We believe 140 Market value: £567m 2018 2019 investors may have overreacted and are therefore missing out on some good opportunities, 45% in casino revenue. one of which is online gambling The global market for sports specialist 888 (888) where the betting is expected to grow by market hasn’t fully recognised 7.2% over the next five years and significant changes to the way it 888 is well positioned to capture does business. market share thanks to its end- 888 has reshaped itself from to-end infrastructure, which a focus on high rollers and allows it to be more efficient in business-to-business revenue its marketing. (B2B) to a mass-market player The recent BetBright in casino and sports betting. acquisition enables a more The ambition is to become the effective pricing strategy and dominant casino player and a top personalisation. For example tier sports operator, by scaling its cost per customer acquisition proprietary technology platform. has fallen by 13% since the first Its shares trade on 11.4 times quarter of 2017 and 8% since the forecast earnings for 2020 and What this means in practice first quarter of 2018. an EV/EBITDA (enterprise value- is that the company will be able While the legacy poker and to-earnings before interest, tax, to enter new jurisdictions with B2B units are expected to depreciation and amortisation) speed and the flexibility to add remain a drag on earnings for ratio of 6.4. In comparison, the new features. For example, the current year, analysts then average of the online gambling utilising its unique in-house expect a full recovery in the UK peer group is 12.2-times and studio, the company can offer and structural growth in global 9.7-times respectively, according differentiated games to fill casino and sports betting. to investment bank JP Morgan. specific gaps in the market. Adjusted pre-tax profit is The global casino market is At a recent capital markets forecast to be $65m in 2019 still fragmented with online day, management said that its (2018: $87m) before progressing penetration of only 6%, games generate 1.46 times more to $73m in 2020 and $87m compared with 44% in the bets per play than third party in 2021. UK. 888 intends to scale-up its equivalents. mass market offering to grab According to JP Morgan analyst market share, leveraging its Ted Nyhan, and based on year- By Martin Gamble heritage brand and best-in-class to-date numbers, 888 is seeing Senior Reporter technology. implied like-for-like growth of

10 | SHARES | 20 June 2019 ADVERTORIAL FEATURE

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ll serious investors 3000 need a small cap fund INVESCO PERPETUAL UK INVESCO PERP.UK SMCOS. 2500 in their portfolio and SMALLER COMPANIES FTSE ALL SHARE A 2000 Invesco Perpetual UK Smaller INVESTMENT TRUST 1500 1000 Companies (IPU) is a cracker of  BUY 500 TOTAL RETURNS TOTAL 0 an investment trust to buy now. (IPU) 527.8p / Stop loss: 350p 10 11 12 13 14 15 16 17 18 Smaller companies have the potential to generate high returns for investors as contract subsequently grown in size; it wins, a rise in customer numbers tends to sell down once they get and market share gains can all bigger. One third of the portfolio have a bigger impact on their is in the £500m to £1bn range; share price than larger, more and most of the rest sit in the mature companies. £100m to £500m range. Invesco’s fund has significantly The managers look for outperformed the Numis companies with lots of growth Smaller Companies index potential. ‘We seek good benchmark over the past three, profit margins, good returns, five and 10 years. Shareholders some pricing power or barriers have been richly rewarded with to competition. Intellectual 17.9% annualised total returns property and good brands are over the past decade, according also desirable,’ says West. The fund’s portfolio includes a to Morningstar. The ongoing stake in yarn manufacturer Coats ‘We don’t look at blue-sky charges figure is 0.88%. companies,’ he adds, referring yields of 2.5% or lower. to businesses which might HOW IT DIFFERS The dividend is funded by have a bright idea but are not FROM THE REST a mixture of income from its yet generating a profit. ‘We Co-managers Jonathan underlying portfolio and capital. want companies where we can Brown and Robin West have The introduction of this analyse historic returns to see if plenty of experience investing enhanced yield has helped to margins have held up.’ in the smaller company space improve market sentiment Most of the analysis is done and they’ve differentiated the towards the fund and the shares by the Invesco team with third fund by having an enhanced are now trading on a narrower party research used to help build quarterly dividend. discount to net asset value, financial models. They initially targeted 4% currently 2.9%. The managers undertake yield but subsequent share hundreds of company meetings price appreciation means the PORTFOLIO CONSTRUCTION and site visits a year, and Brown yield has fallen to 3.5% based Approximately one quarter and West make sure they go on the amount of dividends of the portfolio contains together rather than splitting paid in the past financial stocks worth £1bn and above. these meetings up. year. The majority of smaller Many of these holdings were ‘You get a more thorough company investment trusts have smaller companies which have analysis when two people

12 | SHARES | 20 June 2019 GREAT IDEAS attend a meeting,’ says West. bigger in textile rental and linen Other types of investments ‘We can be more fleet of foot, services.’ Shares in Johnson in the fund include self-help as we can make a decision on Service have nearly tripled in or recovery situations and whether to invest straight after value in the past five years. companies benefiting from a meeting, rather than one of us Polypipe (PLP) features among structural growth. The latter having to brief the other about Invesco’s GARP selections. includes promotional products what was said.’ Manufacturing pipes may be group 4imprint (FOUR) which as dull as it can get, yet that’s recently qualified for inclusion in PORTFOLIO THEMES exactly what attracted Brown the FTSE 250 index, so perhaps The two biggest themes in the and West to the stock. no longer considered to be a portfolio are roll-ups/roll-outs Many investors looking for smaller company. where companies are either exciting, market disruptive West says it is the market buying rivals or expanding stories wouldn’t give Polypipe leader in the US but only has organically to gain scale, and the time of day which mean a 3% market share, implying stocks offering growth at a other investors had a chance to further opportunity for growth. reasonable price (GARP). buy into an underappreciated He adds that 4imprint has Among the former, positions story when it floated on the benefited from expanding include tenpin bowling operator London market in April 2014 at marketing spend across Hollywood Bowl (BOWL), 245p. Today the shares trade more channels. document management at 430.6p. A year ago Google told the group Restore (RST:AIM) and ‘Polypipe may appear to be a company it couldn’t see a go-to- IT infrastructure provider basic business but it has scale, is name in promotional products Softcat (SCT). investing in factory automation from an advertising perspective. Johnson Service was snapped and has an advantage with It suggested 4imprint try radio up when the managers realised builders’ merchants. The latter and TV advertising, as well the market misunderstood the want to offer a full range of as online. The returns from company. ‘People thought it products to trade customers but 4imprint following Google’s was just a dry cleaning business, they don’t have room to take advice beat expectations. so it was priced at a discount. a lot of stock,’ explains Brown. The shares benefited from the ‘They are able to give a good discovery effect as more people service and replenish stock By Daniel Coatsworth began to appreciate it had quickly, which smaller rivals Editor morphed into something much can’t do.’ INVESCO PERPETUAL UK SMALLER COMPANIES KEY PORTFOLIO THEMES Self help/recovery Roll-out/roll-up Structural growth Core GARP Alfa Financial CVS 4imprint Coats Bovis Homes FDM Boohoo Hill & Smith Essentra Future Kainos M&C Saatchi Euromoney Hilton Food Keywords Studios Polypipe Northgate Hollywood Bowl Microgen Robert Walters SDL Johnson Service NCC RWS Topps Tiles Restore VP Vectura Softcat Young & Co Source: Invesco Perpetual

20 June 2019 | SHARES | 13 Shower your ISA with wisdom

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SOPHEON GB GROUP FANTASTIC (SPE:AIM) £11.15 (GBG:AIM) 540p STOCKS FOR 2019 Gain to date: 19.9% Gain to date: 27.8% Original entry point: Original entry point: Buy at 930p, 13 September 2018 Buy at 422.5p, 20 December 2018

A PAUSE FOR breath was to be expected after A DETAILED TRADING update from such a strong start to the year for identity data Sopheon (SPE:AIM) on 13 June confirms current intelligence expert GB Group (GBG:AIM). That the performance momentum plus investment in stock, one of our top picks for 2019, remains up future growth opportunities. by more than a quarter year-to-date even after The innovation mapping software company is two months of relative drift illustrates the point. beginning to talk up digital transformation as a GB believes it holds a technology edge over possible third pillar in the enterprise IT offering, competitors and we agree. Knock-out full year alongside280 well established enterprise resource results on 5 June suggests that customers both planning (ERP) and customers relationship FILTA new and old increasingly share that view. Revenue management240 (CRM) themes. up 20% to £144m encompasses very decent 12%

200This chimes with plenty of positives noises Shares organic growth while expanding margins at 22.3% has been hearing across the technology space. fired a 21.7% jump in operating profit to £32m. 160Guidance is for growth to ease back Some working capital wobbles saw operating 2018 2019 somewhat in 2019 from the previous blistering cash flow decline 12% to £27.8m and cash pace. This is sensible management of conversion dip to 81%, but we believe this to 650 expectations given the company’s reliance on be a short-term effect that will iron itself out 600 landing550 larger licence deals. down the line. 500However, recent new business wins in Thailand Otherwise it is business as usual with GB GRP and450 Pakistan illustrate success in penetrating new international expansion and cross/up-selling territories400 and through new channel partners, and very much the focus, supported by integration 2018 2019 that could easily equate to a busier than currently of280 Vix Verify and IDology, opening new and expected second half. ‘significant’ opportunities in Australasia andFILTA the US240 respectively. 1400 SPHE 200Updated market expectations call for £195m 1200 of revenue and £46m of earnings before interest, 160 1000 tax depreciation2018 and amortisation, 2019implying rough 35% growth on both measures. 800 650 2018 2019 600 SHARES SAYS:  550 400 500 We have followed the story closely for more thanSTHREE two GB GRP years,360 first pitching Sopheon as aGreat Idea at 330p 450 400 in320 June 2017, and hopefully many of our readers will 2018 2019 have280 enjoyed the subsequent gains. Yet if current target share prices hovering around SHARES SAYS:  240 1400 the £15 mark prove2018 accurate, there remains2019 Typically impressive, GB remains a stand-out UK SPHE significant upside on offer even for new investors. technology1200 growth story.

1000

800 20 June 2019 | SHARES | 15 2018 2019

400 STHREE 360

320

280

240 2018 2019 GREAT IDEAS UPDATES

FILTA STHREE (FLTA:AIM) 187.7p (STHR) 292p

Loss to date: 15.4% Gain to date: 0.7% Original entry point: Original entry point: Buy at 222p, 18 April 2019 Buy at 290p, 23 May 2019

OUR TRADE ON filtration expert Filta (FLTA:AIM) was going so well until a trading update on 12 June triggered an aggressive sell-off in the share price. The company talked about the benefits

from the acquisition of grease and drainage 280 management group Watbio starting to feed SPECIALIST RECRUITMENT firm SThree (STHR)FILTA through via operational synergies and improved posted240 a reassuring half-year update (14 Jun), customer servicing. putting it on track to meet its full year targets. It also said US operations were doing well, 200Group net fee income, also known as gross

including existing franchisees broadening their profit,160 grew by 9% to £163m in the first half driven territories and increasing the size of the fleets. by strong demand2018 for contract staff in2019 the US (up In Europe the strategy is on track with further 22%), Continental Europe (up 16%) and Asia and franchisees and vans added to the estate and the650 Middle East (up 15%). guidance for the European arm to be trading 600The only region with negative growth was profitability on a monthly basis by the end of the550 UK and Ireland, as SThree restructured its 500 the year. UK businessGB GRP meaning a lower headcount and Unfortunately investors didn’t like news that lower450 fees. 400 group revenue and profit would be skewed In its core disciplines2018 of technology and2019 life towards the second half of the year. This can be a sciences, net fees rose in the first half with precursor to an eventual profit warning. an accelerating trend in the second quarter. We think the market has completely Encouragingly1400 the energy sector sprung into life SPHE overreacted to the trading update and that the with1200 27% growth in net fees in the half, more than focus should remain on the potential to grow making up for a decline in banking and finance. across Europe and improve the quality of North 1000Demand for staff in the science, technology, American franchisees. engineering800 and mathematics fields is huge and

280 growing and SThree2018 is uniquely positioned2019 to FILTA benefit among the London-listed staffing firms. 240 400 STHREE 200 360

320 160 2018 2019 280

240 SHARES650 SAYS:  2018 2019 We600 see no reason in the latest update to change our550 positive stance. Investing in a stock like Filta SHARES SAYS:  requires500 taking a long-term view of the growth and SThree’s current rating of less than 10 times GB GRP cash450 flow potential. Small setbacks should be seen earnings undervalues the company’s growth as400 an opportunity to buy more shares. prospects. Keep buying. 2018 2019

16 1400 | SHARES | 20 June 2019 SPHE 1200

1000

800

2018 2019

400 STHREE 360

320

280

240 2018 2019 THIS IS AN ADVERTORIAL Introducing AVI Global Trust

Name change We are pleased to announce that the British Empire Trust has been renamed to the AVI Global Trust (ticker: AGT), with effect from 28th May 2019.

Since incorporation in 1889 as the Transvaal Mortgage Loan & Finance Company, AGT’s name has always made reference to the scope of its investment mandate. In 1906, the name was We believe our new name will more changed to the British Empire Land Mortgage & accurately reflect where and how we Loan Company to reflect an increasingly global invest. focus, and in 1964 the more familiar name of British Empire Securities & General Trust was adopted. Today, 130 years after being founded, the company has developed a truly global reach and we believe its new name will more accurately reflect where and how it invests.

Investment Approach

Asset Value Investors (AVI) has managed the c. £1 bn AVI A concentrated portfolio of Global Trust since 1985. The strategy over that period c. 25* investments allows for has been to invest in asset-backed companies around detailed, in-depth research the world, where we believe that attractive risk-adjusted which forms the cornerstone returns can be earned through detailed research with a of our active approach. long-term mind-set. Once an investment has been Asset-backed companies is a broad category, and made, we seek to establish includes family-controlled holding companies, property a good relationship with the Joe Bauernfreund, Portfolio Manager companies, closed-end funds and, most recently, cash- managers, directors and, rich Japanese companies. The approach is benchmark- often, families behind the company. Our aim is to be a agnostic, with no preference for a particular geography constructive, stable partner and to bring our expertise – or sector. garnered over three decades of investing in asset-backed AVI has a well-defined, robust investment philosophy companies–for the benefit of all. in place to guide investment decisions. An emphasis is AGT’s long-term track record bears witness to the success placed on three key factors: (1) companies with attractive of this approach, with a NAV total return well in excess of assets, where there is potential for growth in value over its benchmark. We believe that this strategy remains as time; (2) a sum-of-the-parts discount to a fair net asset appealing as ever, and continue to find plenty of exciting value; and (3) an identifiable catalyst for value realisation. opportunities in which to deploy the trust’s capital.

DISCOVER AGT AT WWW.AVIGLOBAL.CO.UK

*One investment is the Japan Special Situations basket of 18 Japanese stocks. Past performance should not be seen as an indication of future performance. The value of your investment may go down as well as up and you may not get back the full amount invested. Issued by Asset Value Investors Ltd who are authorised and regulated by the Financial Conduct Authority. TALKING POINT Our views on topical issues The rules companies have to follow when reporting earnings

How to keep up to date with company announcements

n order to successfully navigate the stock market it I is useful to understand the rules on reporting earnings and what companies have to do if they know that their earnings are going to be either way above or way below market forecasts. London Stock Exchange (LSE) has a 100-page document which sets out the rules and responsibilities for companies looking to join the market and the ongoing rules on disclosure for quoted companies. Above all, the LSE has a responsibility to all participants, that is companies, professional Fevertree made its investors wait for an update last year investors and retail investors, to make sure that it runs a ‘proper website along with its recent known to try to sneak out bad and orderly market’. In order results and past accounts. Some news in an innocuous-looking to achieve this, the exchange firms only report half and full year AGM notice or a change of requires listed companies results, while some report every director, say, so it pays to keep to ‘publish price-sensitive quarter, but every firm issues an eye on the stock exchange’s information on a timely basis and a trading update for its annual regulatory news service in accordance with the market general meeting (AGM). (RNS) or sign up for company abuse regulation’. These dates are sent to the announcements. The quid pro quo for getting stock exchange and are a matter a listing on the exchange and of record, so investors can make LONG HOT SUMMER getting access to outside investors a note in their diary of when a Sometimes the wait for news can is that, if a company’s board company they own is next due to seem interminable. Shareholders knows that the company is about update the market. in premium mixer-maker to beat or miss earnings forecasts If a company suddenly issues an Fevertree Drinks (FEVR:AIM) will spectacularly, they have to tell the unscheduled trading update, it’s remember last summer’s long exchange as soon as possible. a sure-fire sign it has something wait for some kind of update. significant to say and more often Having posted its interim PUT IT IN YOUR DIARY than not it will be bad news not results on 24 July, including the Almost every quoted company good news. tantalising news of a tie-up with has a financial calendar on its Some companies have been SGWS in the potentially game-

18 | SHARES | 20 June 2019 Our views on topical issues TALKING POINT

going to miss forecasts or that they have been over-stated in the past as a result of criminal activity, the issue usually gets escalated to the regulator, the Financial Conduct Authority (FCA), and in some cases the Serious Fraud Office (SFO) will need to be involved. In October last year cafe operator Patisserie announced that it had uncovered ‘significant and possibly fraudulent’ irregularities in its accounts. The stock exchange suspended the shares as a precaution, but the fraud was so extensive that even months of investigation by Tesco had to pay £85m to investors for misleading them forensic accountants couldn’t get to the bottom of it and eventually changing US market, the company day passes without a positive pre- the stock was delisted. promptly went quiet for a full six announcement. Investors who When Tesco (TSCO) admitted months. believe in the growth story might in 2014 that it had over-stated The end of the year approached want to take note. its profits by £326m due to the and there was still no news. Some way it booked payments from investors – fearful of a negative CRIMINAL TENDENCIES suppliers, it was ordered by the pre-announcement maybe, or When a company does breach FCA to pay £85m in compensation more likely fearful of the lack of the stock exchange’s reporting to investors who were misled by a a positive pre-announcement – standards, the exchange itself trading statement in August 2014 tipped out their shares, sending has fairly limited powers. It can just before the revelations were the price tumbling from £30 to suspend trading in the shares or, made public. £22. in extreme circumstances, it can The update effectively created The company remained tight- cancel their right to be traded. a ‘false market’ in Tesco shares lipped, but when it eventually In practice it is more likely to and bonds which meant that reported investors who had held censure a company, privately or some investors paid more than fast or added to their holdings at publicly, or issue a fine. they should have. £22 were rewarded with a 45% The act of issuing a profit Tesco was also fined £129m gain in the following five months. warning, even if the warning by the SFO for false accounting, As we approach the interim is monumental, isn’t in itself a although under the terms of the results next month, Fevertree criminal offence. However, if a deal between the company and shares are again sliding as each company warns that profits are the agency it didn’t have to admit any wrongdoing.

Disclaimer: The writer owns INVESTORS WHO HAD HELD FAST OR ADDED TO shares in Fevertree THEIR HOLDINGS AT £22 WERE REWARDED WITH A 45% GAIN IN THE FOLLOWING FIVE MONTHS

20 June 2019 | SHARES | 19 UNDER THE BONNET We explain what this company does Reckitt Benckiser’s new chief executive has a difficult job ahead

Change at the top could see the new consumer goods boss follow the kitchen sink playbook

he retirement of Mead Johnson infant nutrition company veteran Rakesh business in 2017 may have TKapoor as chief executive boosted sales but it stretched potentially spared the board of Reckitt’s balance sheet and consumer goods firm Reckitt raised further questions about Benckiser (RB.) from a tough Kapoor’s handling of the decision after a promising start business, while missing out in to his tenure tailed off badly. an auction of Pfizer’s consumer Given that Reckitt has just health assets in 2018 was also confirmed Kapoor’s replacement seen as a disappointment. – an external candidate in the In addition, the company form of Pepsi man Laxman was hit by a high-profile cyber- Narasimhan – now is a good attack, the ongoing fall-out opportunity to examine the over the health impact of a business he will inherit and the humidifier disinfectant sold changes he might make once he in South Korea and, more takes over in September. recently, legal troubles at its WHAT’S GONE WRONG AT pharmaceutical spin-off Indivior WHAT IS THE COMPANY’S RECKITT? (INDV). Reckitt’s shares are now STRUCTURE AND Having joined the company in nearly 20% below their 2017 BUSINESS MODEL? 1987, Kapoor took over as chief record highs. Reckitt ankr s just outside the executive in September 2011. FTSE 100’s top 10 by market At first everything seemed to go WILL NARASIMHAN INCREASE value at the time of writing. well as sales continued to build INVESTMENT? In 2017 the company divided and the company was rewarded Several analysts have suggested itself into two businesses units: with a strong advance in its share Kapoor’s successor might look to Health, which encompasses price. Then like-for-like sales rebase or reset margins. In effect brands such as Durex, Nurofen growth, stripping out the impact this is another way of saying he and Strepsils; and Hygiene of currency movements and might boost investment in the Home which sells everything acquisitions, began to slow. company’s brands. from Dettol disinfectant to The $18bn capture of the Shore Capital analyst Alex Vanish stain remover and Air Smith says: ‘As an outsider, Wick air freshener. 9000 he probably has more of a The Health business is RECKITT BENCKISER license (if he felt the need) to the more profitable of the 7000 reset Reckitt’s industry leading two and there is speculation 5000 margins and to reinvest in the

Reckitt might pursue a more 3000 business, including perhaps

permanent separation of the 10 11 12 13 14 15 16 17 18 raising capital expenditure which two units. has been notably below peers.’

20 | SHARES | 20 June 2019 UNDER THE BONNET

WILL HE SPLIT THE A big financial hit relating to TWO BUSINESSES? Indivior would do nothing to RBC Capital Markets analysts improve Reckitt’s balance sheet reckon a split has become less which remains stretched from likely due to Narasimhan’s the blockbuster takeover of appointment ‘We’re intrigued. Mead Johnson. At the last count Our assumption had been net debt totalled £10.4bn. that the new CEO would be A more existential threat an internal appointee. Our RECKITT LIKE- to the business is posed by reasoning was that Reckitt changing consumer tastes. Benckiser would be broken FOR-LIKE SALES People’s appetite for big up over the next 18 months GROWTH STALLS brands appears to be fading as into two separately owned LFL sales individuals look for increasingly businesses, Health and Hygiene/ Year growth customised products, with Home, following the completion 2011 4% smaller manufacturers better of the Reckitt Benckiser 2.0 able to compete with their larger programme.’ 2012 5% peers as sales have shifted from Narasimhan’s appointment as the shelves to the internet. 2013 5% head of the Health business as If Narasimhan matches the well as group CEO does suggest 2014 4% length of Kapoor’s tenure at the company’s future strategy Reckitt this trend is likely to will be more closely tied to the 2015 6% become an increasingly pressing Health arm. 2016 3% issue for him to address. WILL HE CHANGE THE 2017 0% SHARES SAYS:  CULTURE? At £65.65 Reckitt trades on a There has been criticism of the 2018 3% 2019 price-to-earnings ratio of high levels of executive pay and Source: Company Reports 18.5 – a discount to its closest corporate culture at Reckitt WHAT OTHER CHALLENGES peer on the UK stock market and it certainly appears to have WILL HE FACE? Unilever (ULVR) on more than insulated itself from change Among the other items likely to 20-times. However, we think through its leadership positions. pile up on Narasimhan’s desk investors should resist the Kapoor, a long-time employee, is Indivior. The pharmaceutical temptation to take advantage of took over from Bart Becht who firm has been charged with this disparity. had led the company since fraudulently marketing its We think there is a risk its 1999 formation through Suboxone Film opioid addiction Narasimhan will follow the the merger of the UK’s Reckitt treatment. Although the playbook of many incoming & Colman and Dutch group business was spun off in 2014, CEOs and kitchen sink (get Benckiser. the alleged wrongdoing largely all the bad news out early) on US investment bank Jefferies, falls in a period when Indivior the business to give himself commenting after Kapoor was a wholly owned subsidiary a realistic starting point for announced he was standing of Reckitt. progress. down in January, says: ‘The The former parent company The time to reassess the unique Reckitt Benckiser pay-for has set aside $400m to cover any investment case is once this performance model, so powerful liabilities relating to the case but process has been completed. for so long, is now under this remains a key uncertainty pressure, laying bare the fact for investors with the US that Reckitt Benckiser has the Department of Justice reported By Tom Sieber weakest culture and work-style to be pursuing a multi-billion Deputy Editor ratings in the peer group.’ dollar fine.

20 June 2019 | SHARES | 21 ULTIMATE GUIDE TO ESG INVESTING Why it matters and how to get exposure thical investing is not a fad. It is becoming As emerging markets investment guru Mark increasingly mainstream with figures Mobius, who runs the eponymous Mobius from the Global Sustainable Investment Investment Trust (MMIT), says: ‘By taking ESG E Alliance showing global sustainable factors into account, investors can significantly investment topped $30trn in 2018. reduce the risk profile of their investments, which Given that regulatory and political pressure over the long term not only translates into positive is helping to push the environmental agenda, risk-adjusted returns, but also positively impacts anger is growing over the gap between all stakeholders.’ executive pay and that of ordinary workers, and shareholders continue to count the cost of HOW TO FIND SUITABLE INVESTMENTS corporate scandals, all of us need to start thinking One problem for an investor looking to navigate hard about these issues. this emerging space is that it isn’t particularly Once seen as a trade-off between your well defined. Terms like ‘green’, ‘ethical’, ‘ESG’, conscience and your wallet, the good news is ‘sustainable’ and ‘impact investing’ are often used there is evidence to demonstrate that including interchangeably. environmental, social and governance (ESG) factors Less scrupulous companies and asset when investing can help boost long-term returns. managers have taken advantage of this fuzzy For example, the MSCI KLD 400 Social index, picture by engaging in ‘greenwashing’ – making focusing on 400 US firms which score highly in ESG unsubstantiated environmental claims for their terms, has generated annualised returns of 9.8% products or services. over the last 25 years against 9.6% for a wider But Shares is here to help. In this two-part series universe of US stocks. we will examine the ‘E’, ‘S’ and ‘G’ of ESG in turn as

22 | SHARES | 20 June 2019 ESG IN SUMMARY Environmental • Climate change risks • Raw materials and water scarcity • Pollution and waste innovation, clean tech, renewable energy

Social • Employment policies and industrial relations • Product and service liabilities • Treatment of customers • Impact on communities

Governance • Shareholder rights • Executive diversity • Accounting • Business ethics • Scrutiny of key directors

THIS WEEK • PART 1: We look at ‘E’ and ‘S’ from an investment perspective. This week’s magazine also includes a look at the most popular ESG exchange-traded funds. NEXT WEEK • PART 2 (published on 27 June 2019): Why ‘G’ is important to investors. We also reveal our top ESG picks and create an ESG portfolio. well as producing our own ESG portfolio of stocks Russell have come up with relevant indices such as and funds to help spark investment ideas. FTSE4Good and FTSE All-Share ESG. While there are clear differences between In some cases, these involve filtering out so- all three areas, they are often interconnected. called sin stocks – think arms manufacturers, For example, BP’s (BP.) Deepwater Horizon rig tobacco stocks, gambling outfits and booze explosion and subsequent oil spill in the Gulf of producers – but in others the weighting of shares Mexico was most obviously an environmental in the index is determined based on ESG criteria. issue but it also had a significant social impact, Investors might be surprised to learn, for example, given the employees killed and the communities that Royal Dutch Shell (RDSB) is still the biggest affected by the spill, as well as having governance stock in the FTSE All-Share ESG index. implications thanks to management failings in the And in recent years a more active approach run-up to the disaster. has developed in the form of impact investing, The ability to tap into ESG trends has been made directing investment towards companies that easier as index providers such as MSCI and FTSE actively do ‘good’.

20 June 2019 | SHARES | 23 THE IMPORTANCE OF ‘E’ IN ESG INVESTING: WHY ENVIRONMENTAL ISSUES MATTER

ompanies must now demonstrate But the question is more nuanced than it they are being run responsibly and appears at first sight. For example, Shell is have adopted policies to address investing in a network of electric charging stations, C environmental issues. so one needs to think about how to quantify this More and more people want to know about into the equation. the provenance of foods they purchase, labour It has also introduced a policy whereby any practices, whether products are tested on animals, project producing more than 50,000 tonnes of if the manufacturing process contaminates the greenhouse gasses per year must have an energy local rivers and so on. plan in place. This resulted in a project in Malaysia One place to find out if a company is using solar panels as a source of energy supply and environmentally-friendly is to look at a company’s a plant in Qatar using a fuel byproduct to power report and accounts to see if it articulates a policy. the plant. One might think that a company such as Royal The debate extends to less obvious companies. Dutch Shell, which extracts fossil fuels, is not For example, one might think that Tesco (TSCO) environmentally-friendly. has a large carbon ‘footprint’ due to its large

BENEFITING FROM THE GREEN SCENE

MANY BUSINESSES ARE promote safety. In addition, benefiting from the shift the rapid move towards to green investing, and electric and hybrid vehicles range in activity from is a potential bonanza. solar, lighting, packaging, A car run on fossil and even, perhaps fuels contains around counter-intuitively, £230 worth of electronic component suppliers to car components while manufacturers. an electric car has One example is Infineon, £700 pounds worth of an electronics supplier to electronics, a boon for the global car industry. suppliers like Infineon as Its components help cars the market moves towards become more efficient and electric vehicles.

24 | SHARES | 20 June 2019 numbers of energy sapping stores and food €260m. The company has lowered water usage waste. However, it built the UK’s first 100% carbon through innovations such as low rinse laundry ‘positive’ store, which recycles rain water, utilises products. low power light emitting diode (LED) lights and is powered by solar panels. TAP INTO FUND MANAGERS’ SCREENING SKILLS ENVIRONMENTAL POLICIES Unfortunately not all companies are this good at Some listed companies have explicit environmental communicating their environmental practices; policies on their websites such as Next (NXT). The some don’t have a policy at all. That’s why it can retailer aims to reduce energy used, cut back on pay to use the services of a fund manager when carbon dioxide, increase energy efficiency and seeking to make investments explicitly linked to reduce waste by doing more recycling. good environmental practices. Last year, despite increasing floor space, Next These fund managers will either have their own reduced its carbon dioxide output by 14% and screening techniques or they employ a third party recycled 95% of waste, which otherwise would specialist to do the hard work. have gone into landfill. The company has installed Liontrust has a three stage approach to its smart building management systems in 97% of its investment process when it comes to constructing buildings to increase efficiency and reduce usage. It its sustainable portfolios. It screens for companies has installed LED lighting and solar panels. Next has which it considers are negatively impacting the also set a target of producing 100% of renewable environment, such as miners, airlines, and oil and electricity by 2030. gas companies. It explicitly excludes investing in Another good example is consumer goods giant companies which have more than 5% of revenues Unilever (ULVR). Owning iconic brands such as Ben involved in any form of fossil fuel extraction. & Jerry’s, Unilever touches a lot of areas which The second screening process is more about impact the environment from manufacturing plants which companies to include and it has an to packaging. interesting take on the environmental issue. It It has produced a blueprint for what it calls believes that the climate change challenge is sustainable living, which is the cornerstone of providing good growth opportunities for some its business activities. It defines sustainability as companies, at the expense of incumbents. creating a world where everyone can live well It believes investing in companies that are within the natural limits of the planet. focused on providing solutions to environmental A key pillar of the policy is reducing costs and issues is the best way forward, both for a cleaner using key resources more intelligently. Over the planet and its investors’ returns. last 10 years, Unilever claims it has avoided energy Finally, the team engage with investee company costs in its factories equivalent to saving €490m, managements to encourage greater responsibility while using fewer raw materials and in turn and to move towards a greener future. The resulting in less waste has saved the company over screening process reduces the potential universe

20 June 2019 | SHARES | 25 FOUR STOCKS INVOLVED IN RECYCLING

Pennon (PNN) waste into energy to sell back recycling over 2.5bn coffee cups Although best known as a water to the grid. It operates the UK’s every year. company, half of its business is in largest commercial and industrial waste management and recycling, waste processing business as Smurfit Kappa (SKG) through subsidiary Viridor. It has well as collecting waste from local A global packaging business 800 waste collection trucks and councils. with 350 production sites across operates eight energy recovery the globe, Smurfit Kappa has centres. It produces enough DS Smith (SMDS) strong credentials as a green power to keep the lights on in over The company is a supplier of company. It replaces all the natural 400,000 homes. corrugated packaging in Europe resources used to make its boxes and plastics across the world. Its by replanting trees and Smurfit Biffa (BIFF) packaging is used to transport also uses 75% of recycled fibres Biffa is engaged in collection, food, beverages, chemicals and in its products. The company treatment, processing and pharmaceuticals among other operates a ‘chain of custody’ disposal of waste and recyclable items. The company boasts that whereby it verifies the traceability materials, as well as turning its paper mill in Kent is capable of of suppliers.

of investment candidates in half, but still plenty company called Sustainalytics, which is a leading big enough to construct diversified portfolios. ESG and corporate governance provider. It measures companies on a number of metrics DIGGING DEEPER WHEN SCREENING to come up with a rating on over 11,000 Edentree Investment Management runs one companies worldwide. of the oldest socially responsible funds, Amity The positive screening aims to identify UK Fund (0937175), which launched in 1988. It companies with strong green credentials and then too starts its process by employing a negative conducts individual research on what it believes are screen and a positive screen to whittle down the the best companies. available universe. As one might expect, it excludes companies involved in tobacco, alcohol, gaming, A GROWING MARKET armaments and mining. Asset manager Impax takes a different approach, It also excludes companies doing business aiming to give its investors exposure to profitable in countries with poor human rights records. It companies which have material revenues from fast claims that it checks firms’ supply chains and growing environmental markets. fair trade practices as well as the provenance of It offers a number of funds and strategies raw materials. including investment trust Impax Environmental It outsources some of the heavy lifting to a Markets (IEM) which is focused on benefiting from

26 | SHARES | 20 June 2019 long term themes, such as growing populations, lead to inferior investment returns, but that didn’t increasing urbanisation and depletion of natural matter because the primary purpose was to ‘take resources. the moral high ground’. Today that is not the case. It invests in small and mid-cap companies which In fact, due to the weight of money now have more than half of their revenues generated by dedicated to ESG, the chances are that companies sales of environmental products. considered to be ‘green’ are more likely to Elsewhere, there are a number of specialist outperform. investment trusts which give investors exposure A report by BNP Paribas highlighted empirical to renewable energy and the environment. For data suggesting that strong performance on example, John Laing Environmental Assets (JLEN) ESG measures improved corporate financial invests in a portfolio of operational environmental performance and investment returns. infrastructure projects. Its portfolio includes But, as far as many of the next generation of onshore wind, solar and waste and wastewater investors are concerned, the profit motive is processing projects in the UK. not important when compared to wider issues There are also a number of exchange- like climate change, as the Extinction Rebellion traded funds which provide exposure to the protests showed. Younger people care about environmental theme such as iShares Global Clean companies behaving responsibly and doing the Energy UCITS ETF (INRG). right thing.

INVESTORS CAN REAP HIGHER RETURNS One upshot of all these trends is the appearance By Martin Gambleand Tom Sieber of a new zeitgeist (‘spirit of the age’). A few years ago it was assumed that investing in ESG would DON'T MISS PART 2 ON 27 JUNE WE LOOK AT THE ‘G’ IN ESG AND WE REVEAL OUR TOP ESG INVESTMENTS

20 June 2019 | SHARES | 27 TRACKING THE ‘S’ IN ESG: WHAT YOU NEED TO KNOW ABOUT SOCIAL FACTOR INVESTING erhaps the lesser sung of the ESG playlist, experts hope that social factors will start to emerge from the chorus line to take P a more centre stage spot in investment selection and performance. The social leg of the ESG stool has typically focused on areas like worker rights, equal opportunities and gender pay equality but the reality is that social factors are a far more broad a complex collection of issues. ‘Social looks at things like working conditions, including child labour and employee diversity, a business’ interaction with local communities and health and safety issues,’ say experts at M&G Investments. But while many organisations have made to drivers, Facebook selling user data without significant strides forward in environmental and permission, or a supermarket’s overuse of plastic in governance reporting, measuring social factors has product packaging might all be seen as social issues been largely left behind. in varying guises. What they share is a reputational risk to the THE WEAK LINK organisations in question, a breakdown in trust that ‘The S in ESG has been the weak link in investment could cost sales, lose customers and see business analysis so far, and investors have lacked a shared partners (such as advertisers) walk away. framework to assess companies’ approaches,’ says Sharan Burrow, general secretary of HARD FACT AND SUBJECTIVE IMPRESSIONS the International Trade Union Confederation, a The fact that many social issues must be assessed global worker’s rights organisation. qualitatively rather than quantitatively is another In a study of 12 leading ESG frameworks in March gap in the analysis process. 2017 the NYU Stern Center for Business and Human Lara Blecher, shareholder engagement executive Rights found that despite the growing interest in at investor adviser group PIRC, uses low trade union ESG investing, reporting of the social element had membership as an example. ‘It could be that people failed to keep up with reporting on environmental feel comfortable enough with approaching their and governance issues. employers so they don’t feel the need to join a ‘Measuring things that are complex, trade union,’ she says. multidimensional and sometimes intangible is But it could equally be that staff have been a unique challenge,’ say study authors Casey bullied away from trade unions and are too scared O’Connor and Sarah Lebowitz. to do so. ‘Unless you have a good qualitative grasp ‘Social phenomena is inherently reductive in a of the issues, you don’t have a great sense of what’s way that measuring revenue is not.’ going on,’ says Blecher. Uber refusing to give holiday or sick pay rights When it comes to evaluating companies on

28 | SHARES | 20 June 2019 their toxic waste emissions (environmental) or society, but risk short-term performance that could vulnerability to fraud and corruption (governance), put their own jobs at risk. ­­ investors now have tools to assist them. There are also timeframes to be considered. But The NYU Stern analysis shows that social The impact of social investments might take years measurement almost exclusively targets efforts, to manifest themselves. ‘Measuring customer not effects. satisfaction levels, or the value of intangibles, such ‘Only 8% of the more than 1,700 “S” indicators as investment in innovation, brand recognition or we examined evaluated the effects of company culture, are things companies and investors have practices,’ say O’Connor and Lebowitz. The other been able to do, despite their complexity,’ notes the 92% of indicators look at areas like policies or NYU Stern study. commitments, conducting audits, risk assessments, Companies now need to find a way to report training or other collaborative and stakeholder progress on social factors and impact ‘in a way that engagement actions, but with little or no heed paid allows investors to see a good trajectory for their to the actual impact they have. investment purposes,’ says Blecher. This filters through to limited tools for investors. NYU Stern authors O’Connor and Lebowitz accept According to the NYU Stern study just 14% of social that plenty of heavy lifting is still needed but they ratings products aggregated by the Global Initiative remain optimistic. ‘With sufficient demand and for Sustainability Reporting target investors. ingenuity, there is every reason to believe that ‘This suggests either that investors do not believe the challenge of developing sound, easy-to-use these factors are likely to improve investment measurements for “S” can be overcome,’ even if it outcomes (and therefore do not demand social does require a different approach. products and services), or that there is something about social factors that make them difficult to package for investor use,’ says the report. The NYU Stern study highlights four areas where companies, and the ESG industry, should focus in a bid to move social E 97% reporting forward: 1. Measure real-world effects, not 14% just efforts S 2. Diversify the data – the ESG industry should look beyond the information provided by companies, such as data from G 80% trade associations ‘Of the 580 ratings products aggregated by the 3. Establish and rely upon clear standards Global Initiative for Sustainability Reporting, 97% of environmental efforts and 80% of for evaluating social impacts. O’Connor governance efforts target investors as the and Lebowitz suggest industry-specific primary audience. When it comes to social frameworks efforts, only 14% similarly targeted investors.’ 4. Target investors as the primary audience. NYU Stern Companies and the ESG industry need to package their social data with investors IMPACT ON RETURNS in mind. Understanding what to measure, and how to measure it, is part of the puzzle but social factors’ impact on returns is also to be determined. That leaves company bosses with an By Steven Frazer News Editor uncomfortable problem; prioritise long-term goals first for the good of the company and broader

20 June 2019 | SHARES | 29 EXCHANGE-TRADED FUNDS The top five ETFs with an ESG focus as inflows surge Discover the most popular products and how they play the ESG theme

nvestors’ capital flooded into according to Morningstar. index, designed to capture those environmental, social and companies best at managing I governance (ESG) exchange- NEGATIVE SCREENING ESG risks and opportunities. traded funds (ETFs) at the start The other bestselling European Its largest positions include of the year. Total assets globally fund is iShares MSCI Europe ESG Microsoft, Proctor & Gamble, reached a record $25bn at the Screened UCITS ETF (SAEU), a Walt Disney and Home Depot. It end of January, a 10% increase in relatively new product which has returned 17% so far this year just a month, according to data tracks the MSCI Europe ESG (to 11 June) and costs 0.3%. from research provider ETFGI. Screened Index, based on the There are 210 ESG ETFs listed MSCI Europe universe. EMERGING MARKETS FOCUS globally, and the top 20 took It uses only negative screening to There are two emerging market nearly $900m in net new assets exclude stocks from controversial ETFs completing the top five. in January. Among the top five industries such as nuclear and One is iShares JP Morgan most popular globally at the start tobacco. Top 10 holdings include ESG USD EM Bond UCITS ETF of the year were a mix of socially Nestle, Roche, HSBC (HSBA) and (EMSA), which launched last responsible investing (SRI) BP (BP.), and it has an expense year. It invests in sovereign and ESG funds covering broad ratio of 0.12% and has returned and quasi-sovereign debt from geographical regions, plus a fund 13.2% so far this year (to emerging markets governments based on religious values. 11 June). that pass its ESG screening. The US-focused product in the It tracks the JP Morgan ESG ETFS FOR UK INVESTORS top five, iShares MSCI USA SRI EMBI Global Diversified index, Of the London-listed top five by UCITS ETF (SUAS), launched in and excludes controversial net new assets, the most popular 2016. It tracks the MSCI USA SRI sectors such as thermal coal, was iShares MSCI Europe SRI UCITS ETF (IESE), taking a net $70m in January. TOP 5 ESG ETFS BY NET NEW ASSETS It aims to track the Net new Name performance of the MSCI Europe assets ($m) SRI Index, which includes large UBS ETF (LU) MSCI Emerging Markets and mid-cap stocks from 15 166 developed markets in Europe, Socially Responsible UCITS ETF counting Roche, Total, SAP and Allianz among its top 10 holdings. iShares MSCI EAFE ESG Optimized ETF 95 Its approach is a mix of best- in-class selection of firms with iShares MSCI Europe SRI UCITS ETF (IESE)* 70 outstanding ESG ratings, and values-based exclusions of UBS ETF (LU) MSCI World Socially 68 companies with a negative social Responsible UCITS ETF or environmental impact. It has an ongoing charge of 0.3% and Global X S&P 500 Catholic Values ETF 52 has achieved 7.07% annualised returns over the past five years, All overseas-listed ETFs apart from *. As of end Jan 2019. Source: ETFGI

30 | SHARES | 20 June 2019 EXCHANGE-TRADED FUNDS tobacco, weapons and any it’s no surprise these products and accurate screening of violator of the UN Global are growing in popularity, as ESG stocks. ‘We’re only scratching Compact principles. investing is known to have the the surface, it is going to get The ETF gives exposure to ability to improve returns. much more important and I more than 300 bonds with at ‘The reason ESG has become think you’ll see ESG versions least 2.5 years maturity, issued such a topic across the industry of all the common themes in by countries including Uruguay, is because there are hundreds the investment world, whether Poland and Peru. It has returned of studies that have shown, by equity income or commodities or 6% year to date with an expense implementing ESG factors into factor indices.’ ratio of 0.45%. your process, you can reduce The emerging markets equity your downside risk and enhance PRICE FOCUS product is iShares MSCI EM SRI returns,’ he says. So are these products a good UCITS ETF (SUES) which tracks The inflows also reflect option for DIY investors wanting the MSCI Emerging Markets investors’ desire to hold to bring an element of ESG SRI index. It comprises large companies to account and the investing to their portfolios? ‘Yes and mid-cap stocks from 24 evolution of the ETF market I think they are,’ says McNeil. emerging markets countries, to offer more complicated ‘What affects returns is largely including those with outstanding products, says Hector McNeil, co- price and having that ESG sleeve ESG ratings and excluding CEO at independent ETF platform [available on ETFs] is important those with negative social and HANetf. ‘The industry is a bit because it allows investors environmental activities. of a smorgasbord because one to keep a sub-50 basis point Holdings include Taiwan person’s moral or ethical stance portfolio.’ Semiconductor, Infosys, Banco will be different for someone Lardoux adds: ‘For your Bradesco and Tata. The ETF has else, so trying to capture some general investor, it makes sense delivered 1% year-to-date with sort of commonality is difficult.’ to use those ETFs.’ He says price an expense ratio of 0.35%. He predicts there will be is important, but he thinks the many more ESG-focused ETFs slightly more expensive SRI A SMORGASBORD OF FUNDS coming to the market in the products are worth the extra cost Damien Lardoux, head of impact future, and artificial intelligence versus the ESG-screen-only ones investing at EQ Investors, says will allow much more granular which are ‘quite old school’. For example, the non-SRI version TOP 5 LONDON-LISTED ESG ETFS of the MSCI Europe fund costs BY NET NEW ASSETS 12 basis points, compared to 30 basis points for the SRI version. Net new Name ‘It’s a bit more expensive, but still assets ($m) you could argue relatively cheap.’ In this growing investment iShares MSCI Europe SRI UCITS ETF (IESE) 70 universe, what’s the starting point for investors wanting to dip a toe? They should do their iShares MSCI USA SRI UCITS ETF (SUAS) 45 research, read factsheets and methodologies to see exactly iShares MSCI Europe ESG Screened UCITS ETF 34 what a particular ETF does (SAEU) and how it screens stocks, concludes Lardoux. iShares MSCI EM SRI UCITS ETF (SUES) 32 iShares JP Morgan ESG USD EM Bond UCITS ETF 24 (EMSA) As of end Jan 2019. Source: ETFGI

20 June 2019 | SHARES | 31 The next generation of ETFs is born.

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INVESTORS MAY BE EXPOSED TO THE RISK OF CAPITAL LOSS. For professional investors only. Financial Promotion issued in the UK by Amundi Asset Management London Branch, 41 Lothbury, London, EC2R 7HF represented by Amundi Asset Management which is authorised by the AMF under registration no. GP04000036 - 90 boulevard Pasteur, 75015 Paris, France and subject to limited regulation by the Financial Conduct Authority under number 401883. This material is not intended for citizens or residents of the United States of America or to any “U.S. Person”, as this term is defi ned in SEC Regulation°S under the U.S. Securities Act of 1933. This advertisement is for information purposes only and does not constitute a recommendation to buy or sell. Investment in a Fund must only be made on the basis of the key investor information document (“KIID”) and its prospectus, which include information on the investment risks, and are available in English upon request or on amundietf.com. Transaction costs may occur when trading ETFs. *Source Amundi: Comparison based on the ongoing charges (OGC) of equivalent “core” ETF ranges available in Europe. Data from Bloomberg as of 31/01/2019. Important: some individual Funds may not be cheaper than their European peers or may not have an equivalent to compare with and vice°versa. Analysis excluding third party commissions/costs incurred directly by investors when trading. (1) Source IPE “Top 400 asset managers” published in June 2018 and based on AUM as of end December 2017. | IN PARTNERSHIP WITH.... EXCHANGE-TRADED FUNDS ETFs to gain exposure to the US, Europe and China

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hile there are For this article we’re going to many compelling focus on the passive side and W opportunities for explore the range of exchange- investors in companies on the UK traded funds (ETFs) offering stock market, there is a whole exposure to three different world of opportunity out there geographic markets. for people to make money. And more importantly, ETFS TO investing in companies in other PLAY THE US countries can provide important portfolio diversification benefits, It can be hard to beat a market particularly as a domestic- over a long period which focused firm on the other side of makes it a fairly easy choice the world is rather unlikely to be to buy a fund which tracks the affected by Brexit, for example, whole thing. and the whims of British While there will always be politicians. some savvy stock pickers who It’s not always easy to directly happen to beat the market in invest in companies in other any one year, even the legendary countries, and in some cases Warren Buffett has conceded it’s impossible. That’s where he most likely can’t outperform investment funds come to the performance of a specific index. the US S&P 500 index in the rescue. They provide instant In the latter case, the index will long-term. diversification and give you have specific rules to determine Indeed, a study earlier this access to different geographic which stocks and/or other year from S&P Dow Jones Indices markets at the click of a button. assets qualify for inclusion. Costs revealed that 64% of active US Many of these funds overcome for passive funds tend to be large cap funds underperformed the hurdles about foreign much lower than active funds the S&P 500 in 2018. ownership of stocks and there is because the index is essentially Over 10 years, 85% of rarely the form-filling you often maintained by computers and such funds underperformed get when investing in individual there isn’t an expensive fund compared to the index, and companies listed on overseas manager salary to pay. over 15 years the figure rose to exchanges. We see merit in considering almost 92%. both strategies. On one hand So at a time when the outlook TWO PATHS TO TAKE there are some very good fund for the US economy over the Investors have two main choices managers with the skills to next few years is considered to get geographic exposure – outperform the market. On the to be better than most other either buy an actively-managed other hand, passive products do developed countries, a great way fund where someone is picking help to keep your costs down – to play the US market is through stocks or other assets to go into which really matters in investing an ETF. a portfolio, or buy a passive – and they provide simple, easy AJ Bell’s head of passive fund which simply tracks the access to a broad range of assets. portfolios Matt Brennan says: ‘US

20 June 2019 | SHARES | 33 EXCHANGE-TRADED FUNDS IN PARTNERSHIP WITH....

financial markets have always He also points out that even as been 10 to 15 years ahead of bad news was piling up on GDP everywhere else, and even active and other economic indicators, managers now understand the unemployment rate in the that it is really hard to beat the Eurozone kept declining, to 7.8% US market, as there is a lot of in January 2019 from 8.6% a year information out there and it is earlier. so efficient.’ In addition, Perrier says employment has remained THE ISHARES ETF strong, and most importantly, Brennan flags iShares Core S&P wages rose by about another 2% 500 (CSP1) and says its size and last year. its low price, particularly when He adds: ‘All of these figures taking into account dealing should mean an increase in real charges, make it a standout household consumption far candidate. above last year’s 1.2%, while year-on-year inflation recedes 23 ISHARES CORE S&P 500 rapidly under the base effects 22 tough time recently, having been of energy prices (even when 21 singled out as the global laggards assuming a slight increase in oil 20 when it comes to growth. prices this year).’ 19 Proclamations of doom were There are risks, particularly 18 2018 2019 made at the start of the year, around Brexit and persistent when fears grew that the euro threats of tariffs on exports of While its headline 0.07% fee area could be heading for a European vehicles, as well as the is marginally higher than others recession. continuing populist movement on the market, it has significantly And while there have been across the continent. But from lower dealing charges and shocks and various little nasties an economic point of view the bid/offer spread, bringing the from unexpected slowdowns and clouds appear to be lifting in overall fee down compared to trade tensions, things may be Europe. other ETFs which also track the about to turn. US market. According to Amundi strategist THE AMUNDI ETF Some of the names being and economist Tristan Perrier, One way to play the turning tide tracked by the index include some of the factors that were of Eurozone growth is Amundi Microsoft, Apple, Amazon and ‘highly negative’ in 2018 are only Prime Eurozone (PRIZ). Warren Buffett’s investment temporary and are likely to fade. vehicle Berkshire Hathaway. For starters, the German auto 1960 industry is expected to pick up 1920 OTHER ETFS again as the year continues, 1880 If you want to look further down while people in France should be 1840 AMUNDI EUROZONE the market cap spectrum, among spending more again as the gilets 1800 the ETFs tracking the Russell jaunes protests start to wane. MAR APR MAY JUN 2000 small-cap index in the US Across Europe, Perrier adds is Lyxor Russell 2000 ETF (RUS2) that household income in recent The ETF aims to replicate the with a 0.19% ongoing cost. months has been on a ‘steep performance of the Solactive upward trajectory’, with the Euro 50 index, a benchmark ETS TO PLAY amount of cash people have in which follows the 50 largest EUROPE their pockets this year expected companies in 10 Eurozone to be even better as inflation countries. European economies have had a goes down. It has an ongoing charges

34 | SHARES | 20 June 2019 IN PARTNERSHIP WITH.... EXCHANGE-TRADED FUNDS figure of just 0.05%, which is last decade or longer how much better than most other similar of a role China is playing in the ETFs on the market, and provides global economy. exposure to some of the biggest ‘There’s a lot of opportunity. and well-known companies in You’ve got some domestic Europe like Siemens, Unilever companies in China that have a (ULVR), Airbus and Santander. larger consumer base than big multinationals because of the OTHER ETFS size of the population there.’ Further products offering The Lyxor ETF tracks the MSCI exposure to the Eurozone China A Net Total Return index territory include Vanguard FTSE which captures Chinese large Developed Europe ex-UK ETF and mid-cap A-shares listed on (VERX) which tracks an index of the Shanghai and Shenzhen large and mid-cap stocks in such exchanges. It covers only those countries as France and Germany. securities accessible through the It charges 0.12%. ‘Stock Connect’ link between China’s mainland markets and ETFS TO PLAY CHINA the Hong Kong Stock Exchange. Now could be the time to take OTHER ETFS the plunge and invest in China’s Another way of getting access to growth story as the country has China is Xtrackers CSI 300 Swap become more accommodating to ETF (XCHA). It tracks the CSI foreign investors. 300 index which covers the 300 In a two-stage process which largest and most liquid A-share began in June last year, over 200 stocks. 150 large cap Chinese companies on LYXOR HWABAO The ETF is synthetically both the Shanghai and Shenzhen 140 replicating an index of Chinese stock exchanges have been 130 stocks rather than physically added to the MSCI Emerging 120 owning the underlying shares. Market and ACWI indices, two 110 Synthetic ETFs use derivatives 100 globally accepted investment 2018 2019 such as swaps to track the indices. underlying index. This process Companies trading on these THE LXYOR ETF can be difficult to understand Chinese stock exchanges are One way to access China and many investors stay clear of known as A-shares, and unlike A-shares is Lyxor Hwabao WP such ETFs as they don’t like the companies on the Hong Kong MSCI China A ETF (CNAA) which idea that the product doesn’t Stock Exchange which overseas charges 0.65%. Adam Laird, physically own the assets. investors have always been able Lyxor’s head of ETF strategy However, the Xtrackers ETF to buy, they are considered more for Northern Europe, says the has significantly outperformed representative of the Chinese country is a ‘high performing the Lyxor ETF since the start economy as they are a lot more area’, which provides good of 2017, generating nearly domestically focused. opportunity for investors as 26% total return versus And given their inclusion in ordinary people in the world’s 3.1% respectively. the aforementioned indices, most populous country continue overseas investors are now able to get richer. to invest in them, albeit only via He adds: ‘The big story about By Yoosof Farah investment funds due to Chinese China is that factor of opening Reporter government regulation. up. Everyone’s seen over the

20 June 2019 | SHARES | 35 INVESTMENT TRUSTS

Syncona sees John Laing Environmental surge in net looks beyond wind and solar asset value LIKE WHEN A little- digestion (AD), biomass, growth known band comes out energy-from-waste and with a banger and then hydro power. everyone likes it, John Laing Chris Holmes, co- INVESTMENT TRUST Syncona Environmental Assets manager of the trust, (SYNC) has reported 38% growth (JLEN) is looking to tilt believes the ‘opportunity in net asset value (NAV) for the its portfolio as its biggest set’ is big for AD in year ended 31 March. It invests in exposures, wind (43%) and particular, and says it could life science businesses and the solar (25%), have become soon make up more of the past year’s performance has been too much of a scene. portfolio than solar. helped by valuation increases to Citing ‘competitive The trust’s full-year its stakes in Autolus, Nightstar and pressure’ in the sectors, results on 13 June showed Blue Earth. JLEN is looking to add more a 5.1% increase in net Syncona says it will no longer positions to its portfolio asset value and 3.2% pay dividends, adding its investee in areas like anaerobic dividend growth. companies are ‘fast growing and capital intensive’ which implies it will use spare cash to back their growth plans rather than return money to shareholders. A final dividend of 2.3p will be paid in July. Why cash levels have The trust is focused on so- called ‘Third Wave’ innovation, shot up at Schroder which include gene and cell therapies. With no incumbents, AsiaPacific these technologies are expected to revolutionise the healthcare industry. MATTHEW DOBBS, THE spat to spin out of manager of Schroder control. AsiaPacific (SDP), has Since late 2018, Dobbs increased the fund’s cash has moved the portfolio levels to their highest from a modestly geared level for at least a decade position to 5% net cash as according to investment at 30 April while dialling bank Stifel. down the China and While Dobbs Korea exposure. acknowledges Asian Stifel believes Dobbs’ markets are modestly 30 years of experience of cheap, he is concerned Asian markets investing about the weak growth ‘will be invaluable outlook and the scope to navigate these for the US-China trade changing markets’.

36 | SHARES | 20 June 2019 The number cruncher

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AJ Bell includes AJ Bell Holdingsplc and its Limited wholly andowned its wholly subsidiaries. owned AJ subsidiaries. Bell Management AJ Bell LimitedManagement and AJ Limited Bell Securities and AJ Bell Limited Securities are authorised Limited are authorisedand regulated and by regulated the Financial by the Conduct Financial Authority. Conduct All Authority. companies All companiesare registered are in registered England andin England Wales at and 4 Exchange Wales at 4Quay, Exchange Salford Quay, Quays, Salford Quays,Manchester Manchester M5 3EE M5 3EE FUNDS Five different ways to play the bond market rally We look at BlackRock Sterling Strategic Bond Fund and other collectives targeting fixed income markets

he bond market is back in favour as investors seek Tsolace in fixed income amid fears of a potential recession in the near future. In particular, prices of US government bonds, known as Treasuries, have gone up in recent months thanks to increased demand fuelled by concerns about interest rates and global growth. And investors have been keen to own very short-dated bonds such as those with less than 12 months to maturity. US government bonds have been in big demand It’s an interesting turn of events as stocks and shares were all the As you can see from the chart, it in exposure to bonds as part of rage for much of last year with is among the list of bond funds a diversified portfolio for the many investors uninterested in which have seen their prices long-term. bonds. But the big equity market appreciate since early 2019. ‘If you are building a risk- sell-off in the fourth quarter of controlled portfolio, having 2018 and growing fears about 114 100% in the share market is the global economy have shifted rarely done, particularly among investors’ attention back to fixed 110 advised clients. The vast majority income. of people will have exposure to 106 Also fuelling the bond space BLACKROCK STERLING bonds,’ says Ben Edwards, co- STRATEGIC BOND FUND are rising expectations for central 102 manager of BlackRock Sterling banks to consider restarting 2016 2017 2018 2019 Strategic Bond Fund. quantitative easing (QE) where ‘If the world is moving into they buy bonds and other The broader question is a slower growth phase and assets to boost liquidity in the whether investors are now markets are pricing in a higher financial system. too late to play the recovery chance of recession then I think in demand for bonds as prices central banks will move into BLACKROCK’S THREE have gone up and yields have supportive mode and bond- YEAR TRACK RECORD come down. buying will form part of that.’ This is an interesting backdrop While returns may be harder Edwards is among the for BlackRock Sterling Strategic to achieve in the near term, investors preferring to put Bond Fund (BZ6DDH5) which particularly if investors have got money into shorter-dated has just celebrated its third year, it wrong and over-estimated bonds. He likes knowing that delivering 17.3% return since central banks’ willingness to prop a bond will soon mature so he inception or 5.5% annualised. up the markets, there is merit can have a plan how to recycle

38 | SHARES | 20 June 2019 FUNDS the capital. Barclays (BARC) you simply buy Edwards explains that prior ‘The overriding theme of the shares when they are at a to launching the fund BlackRock the fund is defensive credit desirable price, or not at all. looked at the strategic bond positioning. We haven’t bought ‘But there are 2,000 Barclays space and how others promised a lot of high yield or emerging bonds with different maturities to allocate to certain assets. market bonds despite the ability and risk characteristics, all with It identified the best way to to do so in the fund.’ different returns. Once you’ve structure the BlackRock fund was The fund manager thinks the done your analysis to invest in a to do certain parts as efficiently Fed’s rate hikes are near the certain company, you then have and with the least possible costs end of their current cycle so an opportunity to find mispriced through passive instruments. he believes it is better to have bonds,’ says Edwards. ‘If we want exposure to a good quality assets in the fund if Thirdly, the ‘beta’ component sector we buy an ETF, if we like markets could soon turn. involves allocating money to the debt of a certain company the most attractive areas of the we buy the bonds,’ he says. THREE-PRONGED APPROACH global bond markets including The bond is currently yielding BlackRock Sterling Strategic high yield and emerging markets, circa 3% which is the same as Bond has three different pots although the fund manager when it launched. However, a which make up its overall reiterates that he hasn’t bought 5.5% annualised return shows portfolio. The ‘income’ a lot of the latter two categories. it has managed to generate component sees the asset ‘The returns from the fund have additional returns elsewhere. manager lend to high quality been pretty good over its first Edwards attributes the broader (largely BBB and BB-rated) three years and we haven’t mix of returns to income from companies with the goal of needed to add a lot of extra risk the portfolio, capital appreciation obtaining attractive yields to get there.’ from government bond yields from corporate entities with falling, credit spreads coming historically low default risk. MIXTURE OF down, and bonds getting closer The ‘alpha’ component ACTIVE AND PASSIVE to maturity. involves the team taking Interestingly for an actively- advantage of inefficiencies in managed fund, it tends to use the global fixed income markets. passive exchange-traded funds By Daniel Coatsworth ‘For example, if you are an (ETFs) to get exposure to high Editor equity fund manager and like yield bonds.

OTHER WAYS TO GET EXPOSURE TO THE BOND MARKET

There are a variety of ways to add bonds to your investment EXAMPLES INCLUDE: portfolio. Perhaps the easiest way is to buy a bond fund, either Lyxor FTSE Actuaries UK Artemis Strategic Bond one that tracks an index of bonds 1. Gilts 0-5yr ETF (GIL5) which 3. (B2PLJR1) which seeks via an exchange-traded fund or tracks UK government bonds with to achieve income and capital an actively-managed investment remaining maturities of less than growth by investing mainly in fixed fund where an expert is doing all five years. income markets. the hard work for you. iShares GBP Corporate Bond BMO Barclays Global High 2. ETF (SLXX) which tracks an 4. Yield Bond ETF (ZHYG) which index of large and liquid corporate tracks an index of global high yield bonds with investment grade rating. corporate bonds.

20 June 2019 | SHARES | 39 THIS IS AN ADVERTISING PROMOTION

Having bond exposure in a world of uncertainty

For an investor looking for income, the ability to invest in both equities and bonds can be beneficial, particularly in the current investment climate, says David Smith, Fund Manager of Henderson High Income Trust.

When economic growth is looking fragile and has been reflected in the Trust’s positioning uncertainty creeps into equity markets, having with around 90% typically invested in equities. the flexibility to diversify your exposure to However, with yields becoming more attractive different asset classes can be beneficial – recently we decided to move part of the portfolio particularly for income-seeking investors. out of equities and into bonds, specifically US At Henderson High Income Trust (HHI), we investment grade corporate bonds, including have the ability to invest in bonds (government some well-known companies like Amazon and and/or corporate debt) in order to diversify the McDonald’s. income generated from the underlying holdings and reduce the overall volatility of the Trust. In END OF CYCLE? recent years, government and investment grade Over the past 12 months there have been corporate bonds (the higher quality bonds as signs that the global economy is slowing at the defined by the rating agencies), have offered same time as corporate profitability and equity little in way of income for investors given the markets are close to peak levels. Closer to home, level of interest rates and bond yields. That the UK is surrounded by Brexit and political THIS IS AN ADVERTISING PROMOTION

uncertainty so we believe it’s prudent to both move defensively and consider other markets for investment opportunities. Having the ability to own bonds and invest overseas are key benefits of the Trust in this regard. WHY US BONDS? With the US Federal Reserve increasing interest rates, we saw an opportunity late last year to buy investment grade US corporate bonds, yielding on average an attractive 4.5%, which hasn’t been possible for some time. The rationale was two-fold: firstly, it meant we could reduce our exposure away from equity markets by allocating more to bonds without impacting the income of the Trust; and secondly, it presented an opportunity to diversify away from the UK by buying the debt of US companies. DAVID SMITH, Increasing the bond exposure also helps reduce FUND MANAGER – HENDERSON HIGH INCOME TRUST the overall volatility of the Trust’s net asset value (NAV), given bond prices, especially investment portfolio, which boosts the revenue generation grade credit, generally fall less than equities and helps support the Trust’s 5.5% dividend in more challenging economic environments. yield. It also means that within the equity Having increased the Trust’s exposure to US portfolio we don’t have to chase the highest investment grade bonds, the overall bond yielding areas of the market where dividend portfolio is now 19% of net assets. cuts and value traps are more prevalent. With this structure the equity portfolio can continue BORROWING to own some high quality companies with The bond portfolio has always been a key attractive dividend growth prospects. feature of the Trust; it dampens the overall Given the increasing probability of an volatility of the NAV and offers a predictable economic slowdown and uncertainties in the revenue stream. The other important aspect of UK, we have utilized the Trust’s ability to own the Trust is its ability to use gearing*, especially bonds and invest overseas to position the Trust to fund the bond portfolio given its relative more defensively. stability, to help enhance the overall income of the Trust. *Gearing is a measure of the debt level of a company. With the Trust’s borrowing costs currently Within investment trusts it refers to how much money the lower than the yield on the bond portfolio, we trust borrows for investment purposes and is normally have utilized gearing fully to fund the bond expressed as a percentage of net assets

The past performance of an investment is not a reliable guide to its future performance. For UK investors only. For promotional purposes. The value of investments, and the income from them, can go down as well as up, and you may not get back the amount you invested. Nothing in this communication is intended to be or should be construed as advice. Before investing in any investment referred to in this communication, you should satisfy yourself as to its suitability and the risks involved. Nothing in this communication is a recommendation or solicitation to buy, hold or sell any investment. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). Janus Henderson, Janus, Henderson and Knowledge. Shared are trademarks of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc. MONEY MATTERS Helping you with personal finance issues Wine, a warm house and holidays: planning for the retirement you want The steps you need to take enjoy a comfortable post-work life

hat do you think of when you picture W retirement? Daytime television adverts usually depict an impossibly healthy couple sailing into the sunset, laughing manically at nothing in particular. At the other end of the spectrum, campaigners and the media often highlight the struggle older people face heating their homes or simply making ends meet. I suspect most Shares readers are aspirational when thinking about retirement, aiming for the financial freedom to enjoy life. But what steps do you need to take to get to the retirement average earnings, inflation or If you keep your pot invested you want? 2.5% each year. in drawdown and withdraw 4% While annual incomes are on It’s worth noting you may get each year (rising annually with average £6,000 a year lower in more or less than this if you built inflation) you’ll need a fund retired households (£23,900) up state pension rights under of around £375,000 in today’s compared to non-retired the old system or have a patchy money to reach that target. households (£29,700), there National Insurance record. The If your target is a more frugal are some things we continue to state pension age is currently retirement or you have other splash out on regardless of age. rising to 66 by October 2020, sources of income, a pot worth with further increases planned £250,000 should generate an HOW MUCH YOU’LL NEED FOR to 67 by 2028 and 68 by 2039, income of £10,000 a year. For RETIREMENT LUXURY so you’ll need to factor this into those eyeing a more luxurious You’ll need to consider both your retirement planning. retirement, a fund of £500,000 your state and private pension If we assume you get the full could deliver a 4% annual income entitlements when figuring flat-rate amount from age 65, of £20,000, while you’ll need out the income you’ll have in plan to retire at that age and £750,000 to generate an income retirement. The current flat-rate have no other income sources, of £30,000 a year. state pension is worth £168.60 you’ll need roughly £15,000 a These numbers are just a a week (£8,767.20 a year) and year more to enjoy an ‘average’ guide on what might represent a rises in line with the highest of retirement (based on ONS stats). sustainable retirement income,

42 | SHARES | 20 June 2019 Helping you with personal finance issues MONEY MATTERS

THE RISING (RELATIVE) COST OF HEATING OUR HOMES Retired households are significantly more exposed to shifts in energy and fuel prices than their younger counterparts. The cost of heating your home tends to remain relatively unchanged throughout your life, but represent a far bigger proportion of expenditure for retired households. Average annual bills for over 65s were north of £1,100 in 2017/18, representing almost 5% of the average retired person’s so it’s vital to review your plans However, to give you an idea income. A non-retired person regularly to make sure you’re on of what your costs might be would face broadly similar the right track. let’s consider official data energy costs but with their While hundreds of thousands from the Office for National income higher, the impact of any of pounds might sound like Statistics (ONS). price changes would be lower. a mountain to climb, it is People’s spending patterns achievable if you start early fluctuate throughout NICE PACKAGE and save often. For example, their working lives and Thankfully retirement is about someone earning £30,000 who into retirement, reflecting more than drinking, smoking saves 8% of their salary from age shifting priorities as we and worrying about your fuel 25 will get to a fund of almost grow older. bills, with those who have just £200,000 in today’s prices Former Oasis frontman Liam reached state pension age (assuming investment growth of Gallagher was in his twenties spending around £1,700 a year 3% above inflation). when he complained his search on package holidays, more than That works out as an annual for ‘action’ only led him to any other age group. contribution of £2,100 a year, ‘cigarettes and alcohol’, but it That could buy a week all- or about £40 a week. Save turns out those aged 65 to 74 are inclusive in the Canary Islands for more and that number will more likely to splash the cash on two people in a four-star hotel or escalate – although if you delay fags and booze than most other a seven night cruise round Spain contributing to a pension you’ll age groups. and Portugal. need to set aside more to reach On average those aged 65 to By comparison, those aged your goal. 74 spend just over £550 a year under 30 spend just £700 a year And don’t forget your on alcoholic drinks, equivalent on package holidays while the contributions will be topped up to £10.60 a week. That’ll buy 30 to 49 age group splurge just by a tax relief bonus of at least you a decent bottle of plonk or under £1,300 a year – although 20%, with even more available a couple of four-packs of lager this might reflect the fact for higher and additional-rate every weekend. younger people are more likely taxpayers. Perhaps unsurprisingly money to arrange their own trips rather spent on alcohol away from than opt for a package deal. WHAT DOES RETIREMENT home tends to fall as we get COST? older, suggesting a big night on Clearly what you spend in the town for many is replaced retirement will depend on by a more frugal and potentially your personal circumstances. quieter night in.

20 June 2019 | SHARES | 43 Only SHARES magazine subscribers benefi t from an investment INVESTMENTtoolkit that gives them the edge and helps them make the very FACTS.Do you have best investing decisions. WHO CAN YOU TRUST? the SHARES • Live share prices • Customisable live watch list In uncertain times, when the • Portfolio manager economyadvantage? is buffeted by change, • Fund selector and prices it can be hard to know who to • 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. • Online discussion forum A subscription to Shares gives you access to the SHARES • Priority booking for investor digital investment hub and a host of benefits including: events > Your weekly digital magazine brimming full • Educational and company videos of investment ideas • …and of course, the weekly > Market news and company updates digital Shares magazine with the > Exclusive investor tools including live share prices latest news and views from the Shares experts Try it now for just £1 for the 1st month and then just £12 a month*. £

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* The £1 for 1 month and then £12 a month offer is only available to new subscribers. Your first payment will be £1 and thereafter subscriptions will automatically continued, billed at £12 per 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 but all outstanding issues and services will be fulfilled. For enquires contact us at [email protected] Insightful commentary on market issues AEQUITAS FTSE 100 needs more momentum to make further gains A lack of earnings upgrades is causing the market to tread water

e are six months into the year and FTSE 100 IS EXPECTED TO PASS the FTSE 100 is up nearly 9%, with the 2011’S PROFITS PEAK IN 2019 W prospect of a decent dividend on top. Given everything that is going on in the world right now, it seems fair to assume that many investors would have taken that return for 2019 as a whole, had they been offered it on 31 December last year. The index’s advance is at least partly the result of its valuation, since a forward price-to-earnings ratio of 13.1-times and a dividend yield of 4.7% look attractive, in absolute terms and also relative both to the benchmark’s history and to other geographic options available to investors.

Bulls of UK stocks may therefore be drawing Source: AJ Bell, company accounts, Sharecast, comfort from how aggregate profit forecasts for consensus analysts’ forecasts for 2019 and 2020 the FTSE 100 are holding up, despite the prevailing uncertainty over issues such as global trade and thanks to soggy commodity prices. tariffs, central bank monetary policy and the growth Financials and industrial stocks are seen by trajectory of the Chinese and US economies, let analysts as taking up this slack. The rebound in alone Brexit. industrials stems mainly from Rolls-Royce (RR.) and Equally, bears can point to a lack of upgrades in Melrose (MRO), as the former sorts out its engine earnings (at least of any magnitude) and downgrades problems and cost base and the latter gets to work to dividends to back up their cautious outlook. on 2018’s acquisition of GKN. Whether investors feel comfortable relying on the PROFIT PROGRESS banks is another matter. While the banks are already The good news is that analysts are, in aggregate, heavily provisioned for a final surge in claims, the expecting the FTSE 100 to generate an all-time high PPI deadline probably cannot come quick enough pre-tax profit of £225.5bn in 2019. That is a meaty for them. 16% increase on 2018 and finally takes the index past Meanwhile, challenger and digital rivals continue the £202bn peak of 2011, when over £100bn in pre- to nip at their heels and central banks’ U-turn tax profit came from the then-buoyant mining and in interest rate policy, with the next movement oil sectors. now likely to be down rather than up, will only In 2019, oils and miners are forecast to churn hurt net interest margins at a time when they are out £74bn in profit, so the base of the FTSE 100’s already thin. earnings power seems more broadly based than it was eight years ago. LACK OF MOMENTUM On balance, this should be a good thing, especially The unhelpful contribution from miners and oils as the aggregate profit contribution from oils and may not be a surprise given the lack of clarity on the miners is expected to drop by some £1.6bn in 2019 global economic backdrop but the index is relying on

20 June 2019 | SHARES | 45 AEQUITAS Insightful commentary on market issues

FTSE 100 EARNINGS GROWTH FORECASTS RELY HEAVILY ON FINANCIALS AND INDUSTRIALS

Percentage of forecast FTSE 100 profits Percentage of forecast FTSE 100 profits growth Financials 24% Financials 37% Oil and gas 17% Industrial goods and services 24% Mining 16% Health care 19% Consumer staples 14% Consumer staples 13% Consumer discretionary 9% Consumer discretionary 5% Industrial goods and services 8% Telecoms 4% Health care 6% Utilities 4% Telecoms 3% Technology 0% Utilities 2% Oil and gas (0%) Technology 1% Real estate (1%) Real estate 0% Mining (5%) Source: AJ Bell, Sharecast, analysts’ consensus pre-tax profit forecasts, company accounts

banks and industrials – which are also cyclical and DIVIDEND FORECASTS HAVE STARTED TO SAG sensitive to the economy to varying degrees – for this year’s earnings growth. That may be a concern for some and bears may continue to growl unless we see some genuine upgrades to profit (and dividend) forecasts for 2019 and 2020, so that some positive momentum can carry the FTSE 100 to, and then beyond, May 2018’s all-time high of 7,877. The news here is mixed. We are not seeing any downgrades but we are not seeing upgrades of any note when it comes to earnings.

In aggregate, analysts’ earnings forecasts for the Source: AJ Bell, company accounts, Sharecast, consensus analysts’ forecasts FTSE 100’s members have dropped by 7% so far this year, to £226bn from £242bn at the end of last year. The battle lines therefore remain drawn. Bulls like The only good news is that the rot stopped in the UK equities because they have underperformed their second quarter, when earnings forecasts ticked up global peers for more than three years, look cheap from £224bn in March. on both an earnings and a yield basis as a result, and The absence of profit upgrades or downgrades it will just need a bit of positive forecast earnings suggests that neither FTSE 100 boards nor analysts momentum to stoke fresh interest. know much more than investors, as analysts will Bears will counter that the FTSE 100 is cheap tend to use guidance from management teams as because it deserves to be, given concerns over the the basis for their forecasts. quality of profits, the quantity of dividends and how Aggregate dividend payments are expected any downgrades in the event of a global slowdown to grow by 7% (excluding special dividends) but could leave the index bereft of a positive catalyst. momentum is negative. Thanks to cuts from Vodafone (VOD) and Marks & Spencer (MKS) dividend payment forecasts have fallen for the By Russ Mould second quarter in a row and, at £91.2bn in total, now AJ Bell Investment Director stand 3% below where they began in 2019.

46 | SHARES | 20 June 2019 JULY

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KEY iShares Global Clean 27 Softcat (SCT) 13 Unilever (ULVR) 21, 25, Energy UCITS (INRG) • Main Market Sopheon (SPE:AIM) 15 35 iShares JP Morgan ESG 30 • AIM SThree (STHR) 16 Vanguard FTSE 35 • Investment Trust USD EM Bond UCITS Developed Europe Syncona (SYNC) 36 • Fund ETF (EMSA) ex-UK ETF (VERX) • Exchange-Traded Fund iShares MSCI EM SRI 31 TalkTalk (TALK) 7 Vodafone (VOD) 7, 46 UCITS ETF (SUES) • IPO Coming Soon Tesco (TSCO) 6, 19, Xtrackers CSI300 Swap 35 iShares MSCI Europe 30 24 ETF (XCHA) 4imprint (FOUR) 13 ESG Screened UCITS 888 (888) 10 ETF (SAEU) AG Barr (BAG) 2 iShares MSCI Europe 30 SRI UCITS ETF (IESE) Airtel Africa 7 KEY ANNOUNCEMENTS iShares MSCI USA SRI 30 Amity UK Fund 26 UCITS ETF (SUAS) (0937175) OVER THE JD Sports Fashion (JD.) 6 Amundi Prime 34 NEXT WEEK Eurozone (PRIZ) John Laing 27, 36 Environmental Artemis Strategic Bond 39 Full year results Assets (JLEN) (B2PLJR1) Just Eat (JE.) 8 24 June: Cake Box, Civitas Social Housing, Barclays (BARC) 39 Kingfisher (KGF) 6 Polar Capital. 25 June: Gear4music, Biffa (BIFF) 26 London Stock 18 IMImobile, Mind Gym, Northgate. 26 June: BCA BlackRock Sterling 38 Exchange (LSE) Strategic Bond Marketplace, Stagecoach. 27 June: Greene Fund (BZ6DDH5) Lyxor FTSE 39 King, Liontrust, Manolete Partners, SDCL Actuaries UK Gilts BMO Barclays Global 39 0-5yr ETF (GIL5) Energy Efficiency Income Trust, XPS Pensions. High Yield Bond ETF (ZHYG) Lyxor Hwabao WP MSCI 35 China A (CNAA) Half year results BP (BP.) 23, 30 Lyxor Russell 2000 34 Britvic (BVIC) 2 24 June: Porvair. 25 June: Pressure ETF (RUS2) BT (BT.A) 7 Technologies. 26 June: Autins. Marks & Spencer (MKS) 46 Cineworld (CINE) 6 Melrose (MRO) 45 Trading updates Crystal 8 Merlin 8 Amber (CRS:AIM) 26 June: Bunzl, Tullow Oil, John Wood. Entertainment (MERL) Domino’s Pizza (DOM) 8 27 June: Serco. Mobius Investment 22 DS Smith (SMDS) 26 Trust (MMIT) Ferguson (FERG) 8 Morrisons (MRW) 6 WHO WE ARE Fevertree (FEVR:AIM) 2, 18 Next (NXT) 6, 25 EDITOR: DEPUTY NEWS Daniel EDITOR: EDITOR: Filta (FLTA:AIM) 16 Nichols (NICL:AIM) 2 Coatsworth Tom Sieber Steven Frazer @Dan_Coatsworth @SharesMagTom @SharesMagSteve FirstGroup (FGP) 8 Northgate (NTG) 8 FUNDS AND SENIOR REPORTERS: CONTRIBUTORS GB Group (GBG:AIM) 15 Pennon (PNN) 26 INVESTMENT Martin Gamble Russ Mould TRUSTS Tom Selby Ian Conway Greggs (GRG) 6 Playtech (PTEC) 8 EDITOR: Hannah Smith @SharesMagIan James Crux Laura Suter Hollywood Bowl (BOWL) 6, 13 Polypipe (PLP) 13 @SharesMagJames REPORTER: HSBC (HSBA) 30 Reckitt Benckiser (RB.) 20 Yoosof Farah @YoosofShares Impax Environmental 26 Restaurant Group (RTN) 8 Markets (IEM) ADVERTISING PRODUCTION Restore (RST:AIM) 13 Senior Sales Executive Head of Design Designer Indivior (INDV) 20 Nick Frankland Darren Rapley Matt Ely Rolls-Royce (RR.) 45 020 7378 4592 Invesco Perpetual UK 12 [email protected] Royal Dutch 23 Shares magazine is published weekly every Smaller Companies Thursday (50 times per year) by Shell (RDSB) CONTACT US: AJ Bell Media Limited, 49 Southwark Bridge Road, Investment Trust (IPU) London, SE1 9HH. Sainsbury’s (SBRY) 6 [email protected] iShares Core S&P 34 Company Registration No: 3733852. 500 (CSP1) Schroder 36 All Shares material is copyright. AsiaPacific (SDP) All chart data sourced by Refinitiv Repro­duction in whole or part is not permitted iShares GBP Corporate 39 unless otherwise stated without written permission from the editor. Bond ETF (SLXX) Smurfit Kappa (SKG) 26

48 | SHARES | 20 June 2019