VOL 21 / ISSUE 43 / 31 OCTOBER 2019 / £4.49

BOUNCING BACK

THE SECTORS WHICH RECOVER QUICKEST FROM A SELL-OFF... AND STAND TALLEST IN A DOWNTURN

GLAXOSMITHKLINE WHY ALTERNATIVE FUNDS EXPOSED TRANSFORMED BY ASSETS ARE IN TO HIGH-RISK NEW STRATEGY DEMAND DIVIDENDS EDITOR’S VIEW Why stewardship really matters with investing A new code draws the spotlight on how big investors engage with companies

he introduction of a new UK Stewardship in the eyes of the wider public has to be a good Code by the Financial Reporting Council thing, particularly if it opens people’s eyes to the T will look to raise the bar on how big opportunities provided by putting their cash to investors hold the companies in which they invest work in the markets. to account. A lot of the headlines around the news focused DON’T LOSE SIGHT OF UK STRENGTHS on the climate change angle but there is more to In fairness, if it wanted to distract from its own the code than environmental concerns, including shortcomings, the investment world could easily how institutions make their decisions and what point to failures of stewardship among the political they are doing about issues such as governance class in the UK. and diversity. As we write the country remains mired in a Brexit Fundamentally this is about recognising that stalemate with the potential joys of a Christmas investors are part-owners of a business. Even big election. Companies and markets are still denied asset managers are sometimes guilty of buying the clarity on the UK’s future relationship with the shares and seeing their work as done. EU that they crave. Amid the uncertainty it would be easy to lose RIGHTS AND RESPONSIBILITIES sight of some of the attributes the UK enjoys. But Taking true ownership involves both rights and there are plenty of them. responsibilities. It is easier for big institutional Alongside the release of Credit Suisse’s Global investors to engage with the firms they invest in Wealth Report the investment bank’s UK chief than it is for individual shareholders, however that Christian Berchem observed: ‘Equity markets doesn’t mean you shouldn’t try too. have risen and we continue to see UK-based Go to AGMs if you can and if you are invested in entrepreneurs thriving, businesses spotting smaller companies you may even find management new opportunities, and international mobile will respond if you get in touch directly on an issue wealth continuing to be attracted by a which exercises you. t r a n s p a r e n t l e g a l s y s t e m , o u t s t a n d i n g s c h o o l s The code is voluntary and lots of investors in UK and universities and an unrivalled cultural firms are from overseas and may feel under less proposition.’ pressure to abide by it, but hopefully the industry sees this as an opportunity to be grasped. Most responses have been very positive so far, which is a By Tom Sieber Deputy Editor promising start. Anything that makes the investing more relevant

2 | SHARES | 31 October 2018 SCOTTISH AMERICAN INVESTMENT COMPANY

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SAINTS (The Scottish American Investment Company) is designed to go on and on delivering an income that outstrips infl ation. It focuses on three areas – growth, income and dependability. Our analysis centres on the sustainability and long-term growth of a fi rm’s cash fl ow. This naturally leads SAINTS to invest in high quality global companies with strong balance sheets. The desired outcome is a dependable and growing income stream alongside the prospect of capital growth. It’s a solution that could be well suited to investors enjoying a long and happy retirement. Please remember that changing stock market conditions and currency exchange rates will affect the value of your investment in the fund and any income from it. The level of income is not guaranteed and you may not get back the amount invested. For an investment that aims to give you an income that will take you further, call 0800 917 2112 or visit www.saints-it.com A Key Information Document is available by contacting us. Long-term investment partners

Your call may be recorded for training or monitoring purposes. Issued and approved by Baillie Gifford & Co Limited, whose registered address is at Calton Square, 1 Greenside Row, Edinburgh, EH1 3AN, United Kingdom. Baillie Gifford & Co Limited is the authorised Alternative Investment Fund Manager and Company Secretary of the Company. Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority (FCA). The investment trusts managed by Baillie Gifford & Co Limited are listed UK companies and are not authorised and regulated by the Financial Conduct Authority. VIEWING SHARES AS A PDF? Contents CLICK ON PAGE NUMBERS TO JUMP EDITOR’S TO THE START OF 02 Why stewardship really matters with investing THE RELEVANT VIEW SECTION

BIG Brexit Latest / Metals outlook / Luxury stocks still in demand / 06 NEWS Banks round up - where next for the sector?

GREAT New: WHSmith / Caretech 11 IDEAS Updates: GB Group / Temple Bar IT TALKING 15 POINT Negative yields have forced investors to explore ‘alternative assets’ MAIN 19 FEATURE Bouncing back 25 ASK TOM ‘How are increases in pensions worked out?’ 27 FUNDS Discover where fund firms are looking for growth INVESTMENT 30 TRUSTS Know your fund: The Scottish Investment Trust UNDER THE 32 BONNET Find out about how GlaxoSmithkline is changing 36 AEQUITAS Why US earnings fears look overdone FRANKLIN 38 TEMPLETON The demographics driving India 40 EDUCATION What to expect from investing in different assets over the long-term MONEY 42 MATTERS Are you exposed to the Dividend Dangerzone? 45 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 | 31 October 2019 Equipped for every kind of saver

Investing in Witan through an ISA, SIPP or general savings account could be a wise move. We’re not limited by the performance of one manager. Instead, we draw on the wisdom of up to 12 experts with an aim to provide long-term capital growth and increase your income ahead of inflation.

Experience collective wisdom witan.com

Witan Investment Trust plc is an equity investment. Past performance is not a guide to future performance. Your capital is at risk. Investors brace for a Brexit election Will a vote provide the clarity on the UK’s relationship with the EU investors are craving?

omething has finally happened with Brexit. WHAT WILL HAPPEN NEXT? MPs have finally agreed to have a general The specifics of the result are unpredictable but S election on 12 December in attempt to find may go in one of two directions. a way forward. The first is that Johnson secures a majority The market appears to be taking the news in its and is able to steer his Brexit deal through stride for now, however there is little question that parliament. In the short-term at least this would uncertainty has been ratcheted up. provide more clarity to business and would The timing of the election and a volatile likely see a boost for sterling and other UK electorate, which seems less attached to the main assets including real estate and banking and parties, mean that many expect this to be the most housebuilding shares. unpredictable vote in generations. Longer term there remains the uncertainty of While Boris Johnson’s Conservative Party has a negotiations over a future trading relationship and commanding lead in the polls, there is a chance this whether the current transition period provides won’t translate into the majority in the House of enough time. Commons he craves. The other result which seems credible is another An election itself could be good news for Royal hung parliament. Johnson’s Brexit stance makes Mail (RMG) as it gets paid to deliver election it unlikely he could form a coalition but this might leaflets albeit the company also faces the prospect be easier for Labour leader Jeremy Corbyn if of a pre-Christmas strike. he pledged to hold a second referendum. This The timing isn’t great for the retail sector – would rely on the EU further extending the Brexit distracting people from their Christmas shopping deadline. just at the point you would expect festive trading to Such an outcome would imply more be in full swing. uncertainty for business, not least because a There is likely to be demand for the services of Labour-led administration raises the sceptre of polling firms like YouGov (YOU:AIM) although this nationalisation for utility providers, shake up the activity actually represents a modest slice of the transport sector and negatively impact some company’s business. infrastructure funds. Housebuilders will be pleased the election is On the flipside it could result in the market’s coming during a quiet period when they wouldn’t likely preferred outcome on Brexit of the UK be selling many homes anyway. staying in the EU.

Conservatives Johnson’s deal goes win majority though - UK exits EU

Brexit ELECTION ON Hung (poss diff deal) 12 DECEMBER parliament-coalition 2nd formed without referendum We remain Johson as leader in EU

6 | SHARES | 31 October 2019 BIG NEWS Metals lose shine with demand below forecast But nickel bucks the trend as the price soars

hat a difference a year makes. This and zinc, with actual demand for the former 1.5% time in 2018, the UK was still set to lower than forecast so far this year, and demand W leave the EU in 2019, the US and China for the latter down 0.9% on what was expected, were on speaking terms, and industry figures from according to Bloomberg. the world of metals were all optimistic as they Aluminium in particular is struggling as the industry gathered in London for the big annual bash at grapples with the triple whammy of lower supply but London Metal Exchange’s Metals Week. also lower demand and therefore lower prices. But this year couldn’t be any more different. Despite the gloom, there is one superstar in the Doom and gloom pervades the event as those room – nickel. What a difference a year makes for same industry figures now lament how three that metal too. important industrial metals – copper, zinc and All the talk at last year’s Metals Week was about aluminium – have all missed their growth forecasts, copper, with nickel barely mentioned. flashing the same warning signals that occurred But this year its price has surged as an 8.6% rise before the financial crisis. in stainless demand from China (nickel is a key The most important of them all, copper, is also metal in stainless steel), coupled with a surprise the most concerning. accelerating of a ban on unrefined nickel exports A year ago, it was estimated that demand for from Indonesia has got metal buyers panicking. copper would grow by 2.6% in 2019. In the first Nickel demand will rise 5% this year according to half of this year however, copper demand actually the International Nickel Study Group, while thanks fell by 0.7%, surprising market watchers. to the Indonesian ban actual stocks of nickel in Copper is closely watched as the metal is an London Metal Exchange warehouses fell off a cliff economic bellwether, given it is used in practically in October, with just 76,000 tonnes left compared everything. to the 230,000 tonnes in the warehouses this time Weak global manufacturing figures have led last year. to weaker copper demand, with the worldwide Though as with any metal that gets hyped, some manufacturing sector now in recession. The last in the market are warning against getting carried time things looked that bad was at the end of the away over nickel. financial crisis. Investment bank ING says: ‘We think the nickel Though the short-term picture is gloomy, many price is overdone and we also believe a pullback is investors believe the long-term fundamentals for justified, however, it’s too early to judge whether copper growth remain strong. the stainless steel sector will provide the significant The same gloom has also encircled aluminium downside some expect.’

Nickel-Stocks In LME Warehouses-MT- 000'S 000'S LME-Nickel 3 Months U$/MT INVENTORY VOLUME 19 350 LME-Copper, Grade A 3 Months U$/MT LME-Nickel 3 Months U$/MT 18 300 17 16 250 15 200 14 13 150 12 100 11 10 50 2018 2019 2018 2019

31 October 2019 | SHARES | 7 LVMH bid for Tiffany shines a light on luxury sector allure Mooted deal demonstrates the attractions of the high-end brands

lobal luxury leader LVMH has stunned Executive of Tiffany also being the CEO of Bulgari at sector watchers by launching a $14.9bn the time of the LVMH bid in 2011’, added Buxton. G all-cash takeover bid for US jewellery The Tiffany bid arguably shines a light on the retailer Tiffany & Co, famed for its engagement attractions of the London-listed luxury goods groups, rings and ties to Hollywood glamour. a small band of companies benefiting from coveted Despite being pitched at a 22% premium to brands, pricing power and robust cash generation. Friday’s closing price, analysts expect Tiffany to They include Burberry (BRBY), the trench coats- rebuff what it probably regards as a low-ball offer. to-handbags business where new creative chief A higher bid will be required to consummate a Riccardo Tisci is stamping his identity, and luxury planned acquisition that clearly demonstrates the watch-to-prestige jewellery retailer Watches of enduring allure of luxury brands, even as global Switzerland (WOSG), the UK’s biggest seller of growth falters and US-China trade tensions Rolex watches. rumble on. Another name on the list is the high-end fashion Tiffany said it was ‘carefully reviewing the bags-to-footwear retailer Mulberry (MUL:AIM). proposal’, yet added it was ‘not in discussions’ with And don’t forget, iconic footwear brand Jimmy LVMH, the owner of the Louis Vuitton, Christian Choo was taken over by US luxury retailer Michael Dior and Moët Hennessy brands. Kors (now known as Capri) for a decent premium The deal would help LVMH expand in jewellery, back in 2017. one of the fastest-growing segments of the luxury goods market. It could double the size and profitability of LVMH’s jewellery and watches division, a business often referred to as ‘hard luxury’. Jonathan Buxton, partner and head of consumer at Cavendish Corporate Finance, says that if accepted, ‘this acquisition would give LVMH its long-anticipated strategic move into hard luxury. LVMH made its first move into this sub-sector in 2011, with its purchase of Bulgari, yet Bulgari alone has not given LVMH a dominant position in the sector. This acquisition would significantly Luxury enhance LVMH’s hard luxury, putting it well ahead of rival Richemont.’ goods firms The audacious acquisition would are prized as also assist LVMH in penetrating their aspirational North America while consolidating image supports its grip on Asian, with China a key region for Tiffany. ‘Comparisons to the enduring brand Bulgari purchase in 2011 are hard to appeal ignore, with Alessandro Bogliolo, the Chief

8 | SHARES | 31 October 2019 BIG NEWS Banks face new headwinds after PPI storm passes

Rising provisions for bad loans and poor investment banking returns crimp returns

s Brexit uncertainty is prolonged, the banks seem to be stumbling out of one storm into Aanother. Fears of a spike in charges for mis-sold payment protection insurance (PPI) were well-founded as three of the big high-street lenders increased their provisions at the third quarter point due to the last-minute rush of claims ahead of the 31 August deadline. Royal Bank of Scotland (RBS) put aside another £900m of provisions, the top end of the range it forecast at the time of its half-year earnings, taking its total charge for PPI to £6.2bn. Barclays (BARC) added £1.4bn, in the middle continued to contract even after non-traditional of its forecast range of £1.2bn to £1.6bn, to take lenders like Sainsbury (SBRY) and Tesco (TSCO) its total charges to £11.4bn, while HSBC (HSBA) pulled out of the market. – which is less exposed to the UK given its global Also all three saw an increase in provisions for franchise – added $388m or £300m to bring its expected credit losses as the number of companies total charges to £4.6bn. and individuals in financial difficulty continues to Lloyds (LLOY) had yet to report its third-quarter mount despite the low interest-rate backdrop. earnings as Shares went to press but its most recent forecast was for a third quarter charge of A TALE OF THREE INVESTMENT BANKS £1.2bn to £1.8bn to bring its total provisions to Where the banks differed was in the performance almost £23bn. of their investment banking businesses. Barclays once again showed it is the class of the field and MARGINS DOWN, BAD LOANS UP can stand shoulder to shoulder with Wall Street’s Meanwhile margins on their traditional lending finest, delivering a 13% increase in revenues business continued to contract due to fierce and defying claims from activist investor Edward competition for mortgage customers. Net interest Bramson that it is failing to deliver. margins, or the gap between the rate banks RBS’s investment bank, NatWest Markets, charge on loans and they pay out on deposits, saw its income fall for a second consecutive quarter due to what it called ‘difficult market conditions’,

115 and the group as a whole ditched its 2020 return LLOYDS BANKING GROUP BARCLAYS on equity target. 110 ROYAL BANK OF SCTL.GP. HSBC HOLDINGS 105 Similarly, HSBC had another weak quarter in 100 its Global Banking and Markets division and cut 95 its 2020 return on equity target. Ominously for 90 those that work there, chief executive Noel Quinn 85 said the board is planning to ‘remodel’ under- 80 performing areas of the bank and ‘move capital JUL AUG SEP OCT into higher growth and return opportunities’.

31 October 2019 | SHARES | 9 IT’S TIME TO CAPTURE US QUALITY

Which is why the JPM US Equity Income Fund selects high quality US companies with attractive valuations and healthy dividends. In its first 10 years, the fund has proved a strong proposition for investors seeking stability throughout volatility. If you’re looking to strengthen your portfolio for what’s ahead, it could be the perfect time to invest. Find out more jpmorgan.co.uk/quality

Morningstar Analyst Rating™

A

Your capital may be at risk. Past performance is not a reliable indicator of current and future results.

Investment is subject to documentation which is comprised of the Prospectus, Key Investor Information Document (KIID) and either the Supplementary Information Document (SID) or Key features/Terms and Conditions, copies of which can be obtained free of charge from JPMorgan Asset Management (UK) Limited. Source: Morningstar rating ™: © Morningstar rating all rights reserved. FE Crown rating, Rayner Spencer Mills rating, Square Mile Research rating and The Adviser Centre rating as at 31 August 2019. The methodology and calculations used by companies that provide awards and ratings are not verified by J.P. Morgan Asset Management and therefore are not warranted to be accurate or complete. LV-JPM51900 | 06/19 | 0903c02a826cbbeb Buy WH Smith as it 410

390 travels to new370 horizons 350 CARETECH Why a big US acquisition has transformed330 the retailer’s growth prospects 2018 2019 HOW TRAVEL TOOK WH SMITH  BUY 2300 OVER AT WHSMITH 2100 (SMWH) £22.40 66m Stop loss: £17.92 aug-13 £ 1900 £56m WH SMITH 1700 aug-14 £73m 58m Market value: £2.6bn 2018 2019 £ aug-15 £80m £59m 87m hares aug-16 £ believes investors 62m should buy cash £ 96m generative books, aug-17 £ S £62m magazines and stationery seller aug-18 £103m WH Smith (SMWH). 60m We’ve long been fans of the £ aug-19 £117m business and following a bold 60m takeover roughly doubling the £ size of its international travel travel trading profit business we think there is scope high street trading profit Source: WHSmith for further upside. The £312m acquisition of to 31 August 2019 showing a Marshall Retail, announced on 17 £10m (7%) hike in pre-tax profit October, is being funded through to £155m on revenue up 11% debt and a £155m share placing. EARNINGS FORECASTS to almost £1.4bn. Profit rose sharply in travel and was stable TRAVEL TRANSFORMATION Year EPS in the legacy high street business, CONTINUES Aug-20 128.6p where WH Smith continues to WH Smith has been winning Aug-21 142.6p eke out cost savings. contracts to open airport stores Continuing to pay out Aug-22 157.7p around the globe and acquired generous dividends whilst digital accessories airport retailer Source: Peel Hunt using surplus cash to buy back InMotion last year. With 170 stores in North shares, WH Smith also delivered The acquisition of Marshall America at the last count, another healthy dividend hike, Retail, a high-growth US travel Marshall sells news, gifts and up 8% to 58.2p per share. retailer with stores in airports, convenience products in high Investors were also encouraged resorts and tourist locations, footfall locations to customers by news of a ‘good start to the will accelerate the growth of who are essentially ‘captive’, new financial year’. the international travel business giving it a fair bit of pricing power. and combined with InMotion, By James Crux enhance WH Smith’s potential ONGOING RESILIENCE Funds and Investment in a $3.2bn US airport travel The Marshall deal was bundled Trusts Editor retail market. up with robust full year results

31 October 2019 | SHARES | 11 Strong growth at an attractive valuation on offer at CareTech The market is underestimating the financial benefits from big acquisition

e think the benefits of CareTech’s (CTH:AIM) CARETECH HOLDINGS 410 W acquisition of its  BUY 390 rival Cambian are not fully (CTH:AIM) 391.3p 370 appreciated by the market and 350 Stop loss: 313p CARETECH investors should get in now as 330 they become more apparent. Market cap: £434m 2018 2019 Caretech is a national provider of care services for children 2300

and adults with complex needs, M2100 a r ke t g r o w t h i s d r i v e n b y operating in the circa £15bn a a continuing trend to outsourcing 1900 year UK social care sector. from local councils andWH the SMITH In October 2018 it purchased underlying1700 market growth of 5.5%. Cambian for £278m in a cash and depreciation and amortisation The 2018Cambian purchase2019 has share deal, receiving regulatory (EBITDA), but strong cash increased the proportion of clearance in February this conversion is expected to children’s services that to year. The acquisition further reduce leverage towards the the group provides. Adult consolidates a fragmented target of three times. services now represent a third market and brings more The debt is more than covered of revenues, down from two children’s care services to the by the value of the company’s thirds, while children’s services combined group. property portfolio which was now represent around 60% of Management has identified valued at £774m post the revenues, up from a third while £5m of pre-tax profit synergies Cambian deal. foster care remains the smallest by 2020, equivalent to a third of Over the last 25 years the segment at 10%. prior year profits, with £3m to be company has grown from a CareTech operates in a growing delivered by December 2019. single home to 550 facilities but fragmented market where According to consensus and 10,000 staff supporting the regulatory burdens are estimates earnings per share 4,500 users. becoming more acute, putting will grow by 20% this year and CareTech came to the market pressure on smaller operators. a further 18% next year to 31 14 years ago in 2005 and in that Once the acquisition has ‘bedded December, yet the price earnings time the UK market has grown down’ the company will have the ratio (PE) is a lowly 9.4 times from £2.1bn to its current size scale and competitive advantage while the dividend yield of 3% is of £15bn, a blistering compound be continue to exploit future covered three times. annual growth rate (CAGR) of growth opportunities. It should be pointed out 15%. The company has grown its that the acquisition has revenues and earnings per share increased net debt to £293m, at an even faster rate with a By Martin Gamble which represents four times CAGR of 20%, demonstrating its Senior Reporter earnings before interest, tax, growth in market share.

12 | SHARES | 31 October 2019 ADVERTORIAL FEATURE

A CONTRARIAN APPROACH CAN PAY DIVIDENDS

As contrarian investors, we prefer to plot our own course rather As long-term investors, we have time on our side as we wait for a than follow the herd. Our quest is to find ‘ugly ducklings’ – nascent recovery to become established. Patience is key to contrarian companies that are shunned by others but offer a real prospect investing. A certain fortitude is also required to withstand the anxiety of of improvement. And while the obvious upside to this the market, while holding steadfastly to our convictions. But the potential approach is the potential for share price appreciation, it can pay-off can be more than worth the wait. also offer another valuable source of returns as unfashionable companies often have higher than average dividend yields. From sour grapes to an exceptional vintage One of the most notable successes of this patient approach is Treasury Seeing the value in ugly ducklings Wine Estates, formerly the biggest holding in our portfolio. We invested It goes without saying that the ‘ugly ducklings’ we choose are unloved, but we believe that they have the potential to improve their businesses. a return while we wait We look for companies that have the strength and flexibility to adapt and for our thesis to unfold thrive over the longer term. A sustainable dividend from such companies is attractive to us as it offers a return while we wait for our thesis to unfold. in this company in August 2015, when it was very much out of favour. Of course, not every investment in our portfolio pays dividends and The catalyst for change was a new management team, whose strategy we wouldn’t necessarily overlook a prospective investment for that reason. transformed the business from an ‘ugly duckling’ to an elegant swan, A company navigating the low point in its cycle might opt to forgo a before we decided to sell our stake (or, to continue with the metaphor, it dividend to reinvigorate its business. This prudent approach can hasten flew our nest) leaving a £39 million profit – almost three times our original the company’s recovery and potentially allow more sustainable dividend investment. While not all of our investments will prove fruitful, this example payments to recommence. Indeed, a dividend reinstatement can be an demonstrates why patience can be such a virtue. important signal that the company’s rehabilitation is underway. This scenario is currently playing out at Tesco, one of our biggest Enduring growth holdings. Tesco cut its dividend after a difficult period, during which Paying dividends to our own shareholders has been part of our profits fell and discounting rivals gained market share. Since then, the heritage of 132 years. We've recently increased the frequency of our company has regained its footing, allowing management to reintroduce dividend payment to quarterly. One of our aims is to grow the dividend the dividend. While Tesco, in line with all the other UK based retailers, will ahead of UK inflation and this is supported by a record of raising our need to cope with the potential fall out from the Brexit process, it remains, dividend in each of the last 35 years. However, it should be remembered in our view, well placed to be able to execute its turnaround plan. that dividends are not guaranteed and can fall as well as rise. ■

28 October 2019

RISK WARNING Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest. The Scottish Investment Trust PLC has a long-term policy of borrowing money to invest in equities in the expectation that this will improve returns for shareholders. However, should markets fall these borrowings would magnify any losses on these investments. Investment trusts are listed on the London Stock Exchange and are not authorised or regulated by the Financial Conduct Authority. Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this article should be considered to High conviction, global contrarian investors be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor. For more information visit Issued and approved by SIT Savings Ltd, registered in Scotland No: SC91859, www.thescottish.co.uk registered office: 6 Albyn Place, Edinburgh, EH2 4NL. Authorised and regulated by or follow the Financial Conduct Authority.  @ScotInvTrust Telephone: 0131 225 7781 | Email: [email protected]   Website: www.thescottish.co.uk The Scottish Investment Trust PLC GB GROUP TEMPLE BAR (GBG:AIM) 609p FANTASTIC INVESTMENT TRUST STOCKS (TMPL) £13.48 Gain to date: 44.1% FOR 2019 Original entry point: Gain to date: 15.2% Buy at 422.5p, 20 December 2018 Original entry point: Buy at £11.70, 29 August 2019 BACK IN JUNE we explained why it was not very surprisingly that GB Group’s (GBG:AIM) SHARES IN INVESTMENT trust Temple Bar share price had paused for breath, having rallied (TMPL) have surged higher since our late roughly 28% since being selected as one of our summer ‘buy’ call, leaving our recommendation top picks for 2019. a handsome 15.2% in the money. A 24 October half year trading update saw In anticipation of a rotation from growth to the identity data intelligence expert get its value, other investors have cottoned on to the sprint back, jumping nearly 16% to 609p, just a attractions of this portfolio of cheap, dividend- fraction below the stock’s 631p all-time high. paying stocks and the discount has narrowed The update spelled out that the company from 6.3% to 3.2% accordingly. expects revenue to jump 64% to £93.7m on a We’re happy to remain buyers of Temple combination of solid 18% organic growth and Bar, managed by renowned contrarian investor contributions from the acquisitions of Australian Alastair Mundy, in the belief the undemanding firm Vix Verify and, particularly, the IDology valuations in the underlying portfolio should limit deal in the US, its biggest acquisition so far. downside during a market sell-off. One of The Adjusted operating profit is expected to Association of Investment Companies’ ‘Dividend increase 138% to £20.9m on organic growth and Heroes’, those trusts that have increased annual acquisition synergies, whilst net debt reduced dividends for 20 consecutive years or more, from £66.3m in March to £53.8m. Temple Bar has recently seen strong NAV growth. Importantly, organic growth is still holding It has benefited from share price increases strong despite what must have been significant from support services group Capita (CPI), drugs distractions to management from February’s giant GlaxoSmthKline (GSK) and builders’ £160m fundraising, the acquisitions and merchant Travis Perkins (TPK), integration process. banking groups Lloyds (LLOY) This brilliantly illustrates and Barclays (BARC). Also GB’s technology-led strategy lending support has been and the advantage this gives Britain’s biggest retailer it over more credit-focused Tesco (TSCO) and recent competition, such as gold price strength. Experian (EXPN).

1400 650 1350 TEMPLE BAR 600 GB GROUP 1300 1250 550 1200 500 1150 450 1100 2018 2019 400 2018 2019 SHARES SAYS:  SHARES SAYS:  Don’t be tempted to take profits. Now is the time to GB remains a stand-out UK technology growth story. hold onto Temple Bar.

14 | SHARES | 31 October 2019 Negative yields have forced investors to explore ‘alternative assets’ As with stocks, liquidity is a key factor for retail investors

t is little wonder that interest has proved a sound long-term in ‘alternative assets’ has investment and has typically I exploded. generated a return above the We live in a world of negative rate of inflation if not quite as interest rates, where $17tn of high as the return on equities. bonds including government However, specialist knowledge is bonds trade at nominal yields required as values can vary even below zero – meaning that if down to the level of city streets. investors held them to maturity, Moreover the cycle is they would lose money not notoriously vicious and following make money – and more than more than a decade of steep double that amount trades on price rises, particularly in prime yields which track below the and super-prime property, this rate of inflation. is probably not the time to be Alternative assets typically getting in. Particularly when you include property, precious consider many of us already metals, hedge funds, structured have significant exposure to products, private equity, venture residential property if we own capital, fine art, fine wine, classic our home. cars or watches, rare stamps and In fact the Begbies Traynor pretty much any other type of (BEG) Red Flag Alert published asset which is expected to hold last week showed a significant its value due to its scarcity factor. increase in UK residential Given the option of making property investment companies a certain loss on the ultimate in what it calls ‘significant safe investment, government financial distress’. bonds, many investors are opting Commercial property is a for less safe investments even more interesting proposition, though the prospective returns that promises to beat zero-rate and as well as the big quoted on offer may be low by historical bonds has been so dramatic real estate firms such as British standards. In other words they that equities, junk bonds, Land (BLND) and Land Securities feel forced to buy risky assets property, private equity and a (LAND) there are a wide range of rather than accept a negative host of other more abstruse investment trusts. return on safe assets. (obscure) areas of investment Office developer Regional REIT This isn’t just happening have spiralled in value.' (RGL), for example is a running among retail investors, as the Great Idea. Financial Times flagged in PROPERTY AS A August: ‘The flow of pension LONG-TERM PLAY GOLD AND OTHER ‘HEDGES’ fund money into any asset Historically residential property We have covered precious

31 October 2019 | SHARES | 15 TALKING POINT

220 metals, in particular gold, on acquisition of BCA Marketplace many occasions and there are and180 £1.3bn acquisition of EI arguments in favour of them Group, and Thoma Bravo’s not least from the point of view £3.1bn140 bid for Sophos (SOPH). 220 AN GROUP of portfolio diversification. 100There are a handful UK-listed Investing via a fund or an ETF private2015 equity 2016 firms, 2017 of 2018 which 2019 like180 iShares Physical Gold (SGLN) one of the biggest and best- rather than holding the physical performing2600 is the Harbourvest 140 ISHARES PHYSICAL GOLD ETC assets themselves is ANprobably GROUP Global2200 (HVPE) investment 100 the cheapest2015 2016 and 2017easiest 2018 route 2019 trust. The £1.4bn fund owns of to ownership. hundreds1800 of private businesses in1400 the US and across the globe 2600 ISHARES PHYSICAL GOLD ETC through2015 its holdings 2016 2017 in other 2018 2019 2200 Harbourvest funds.

1800 1800 HARBOURVEST GLOBAL 1400 1400 2015 2016 2017 2018 2019 1000 Hedge funds have been 1800 600 unkindly referred to as a 2015 2016 2017 2018 2019 compensationHARBOURVEST system GLOBAL rather 1400 than an asset class, given the of the action is to buy shares Its estimated net asset value high1000 level of fees which they in Man Group (EMG), which (NAV) as of 30 September was charge and their patchy record offers exposure to the AHL and £20.94 against a current price of 600 of beating2015 the 2016 market. 2017 2018 2019 Numeric strategies as well as the £17.08 meaning its shares trade In the beginning, hedge GLG business. at a discount of almost 20%. funds were indeed a useful Investing in private equity hedge for investors as they 220 through a listed investment

weren’t highly correlated 180 trust has the advantage that with markets. The ability to ‘short’ stocks and indices 140 meant that when markets AN GROUP 100 went down they made 2015 2016 2017 2018 2019 In the money, but over time their beginning, performance has become 2600 more correlated. PRIVATEISHARES EQUITY PHYSICAL AND GOLD ETC hedge funds When stocks are going up that VENTURE2200 CAPITAL were indeed isn’t a problem, but when they As1800 the name suggests, private go down the correlation often equity is primarily investment a useful rises sharply so that just when in1400 privately-owned rather than hedge for investors need them to perform publicly-owned2015 2016 companies, 2017 2018 2019 well they don’t. although recently private investors as As most hedge or ‘absolute equity firms have shown quite they weren’t return’ funds require a an1800 appetite for listed UK HARBOURVEST GLOBAL highly sizeable minimum investment businesses1400 no doubt due to - typically £100,000 although their relative cheapness. correlated some demand as much as 1000Deals this year include with markets £500,000 – the easiest way for Advent’s £4bn acquisition of 600 retail investors to get a slice Cobham,2015 TDR 2016 Capital’s 2017 £1.9bn 2018 2019

16 | SHARES | 31 October 2019 shares can be bought and sold at will whereas the underlying investments are highly illiquid, and it offers diversification from listed equities. However due diligence is needed when choosing a trust as performance and therefore discounts can vary dramatically. Venture capital investing is similar to private equity but even higher-risk as the target companies are typically small start-ups and As well as vintage Ferraris and producers changing hands for often have no profits. Aston Martins, prices of more tens of thousands of pounds. Like Trying to calculate NAVs mundane cars such as 1970s stocks, investors in wine need to for early-stage businesses is and 1980s BMW and Mercedes be patient and ride out the cycles fiendishly difficult, and unlike sports saloons have raced ahead but with limited production and private equity funds liquidity in the last decade. with older vintages running out in quoted venture capital A recent GQ magazine feature there is constant demand for the vehicles is virtually nil so private suggested that would-be best wines. investors are advised to give collectors start buying original At the very top end of the them a wide berth. examples of the Fiat 500, Jaguar market is Domaine de la XJS and Porsche Boxster as Romanee-Conti, a Burgundy LESS OBVIOUS BUT LESS investments to tuck away for the which costs almost ten times LIQUID ASSETS next decade. As well as rarity, as much as some first-growth It’s debatable whether fine art originality and provenance are wines from the finest chateau is a serious investment asset. key considerations for collectors in Bordeaux. Eye-wateringly The Fine Art Fund, which was In terms of watches, age and expensive (Berry Bros currently launched in 2004, closed to new rarity don’t necessarily make has one bottle of the 2002 investors some time ago and a watch valuable. Generally vintage on offer for over there a few options for retail speaking the maker and the £21,000), it is almost exclusively investors to participate. Also, intricacy of the movement are for collectors. art like beauty is in the eye of more important and many Ironically though, the wine the beholder so values can be modern watches can sell market isn’t that liquid although subjective. for seemingly astronomical the volume and value of Unless you have a copy of amounts. transactions is growing each Leonardo da Vinci’s Salvator However, the world’s most year. Also, if you sell your Mundi (market value $450m) expensive watch – which was wine through a merchant they stashed in the loft, pictures are sold at auction two years ago – is will typically charge a hefty better off hung on the wall than actor Paul Newman’s 1960s Rolex commission (15% is the bare being used for investment. Daytona. It was neither exclusive minimum with some agents Classic cars and watches have nor particularly complicated but charging more than 20%) always been go-to investments due to its provenance it fetched which can put quite a dent in for wealthy collectors and prices a staggering $15.5m, or nearly your profits. have soared in the last decade £12m at today’s exchange rate, as low interest rates have forced before the buyer’s premium. high and ultra-high net worth Fine wine is another individuals to find a return on recognised investment field their money. with single bottles from the top

31 October 2019 | SHARES | 17 WATCH OUR LATEST VIDEOS

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William discusses the company’s focus on developing rare earths in Malawi.

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Kieran discusses plans to build a commercial, orphan, rare disease biopharmaceutical company.

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www.sharesmagazine.co.uk/videos BOUNCING The sectors which recover quickest from a sell-off... and stand BACK tallest in a downturn

ould you like to know which areas crisis – which had already engulfed Greece, Ireland of the UK stock market held up and Portugal on the periphery of the euro-zone – best during past sell-offs and which suddenly spread to major continental economies. performed the best once the French, Spanish and Italian bonds were sold off marketW bottomed. Shares has got you covered. aggressively on worries that their sovereign credit Rather than going back to the tech bubble of ratings could be downgraded. the early noughties and the global financial crisis, The panic spread to equity markets and the UK which are already well-trodden ground, we have was dragged down with the FTSE 350 index losing focused our research on the last ten years of price 17% in a matter of weeks between early July and movement and in particular three short but sharp mid-August of that year. market declines.

DIFFERENT CAUSES, SAME REACTION 4400 The three episodes in question – which occurred 4000 FTSE ALL SHARE - PRICE INDEX in mid-2011, mid-2015 to early 2016, and the final 3600 quarter of last year – all came about for different reasons. None of them had their origins in the UK, 3200 yet all three caused the FTSE 350 to decline by 2800 more than 10%. 2400 2010 2011 2012 2013 2014 2015 2016 2017 2018 In 2011, worries over a European sovereign debt

31 October 2019 | SHARES | 19 CAPTURING UPSIDE AND LIMITING THE DOWNSIDE Average % Average % Downside Upside Upside/ Sector Index Downside Upside Return Capture Capture Downside Return Beverages -3.5 23.6 0.21 1.25 5.97 Software & Computer Services -9.0 29.7 0.53 1.58 2.97 Personal Goods -9.8 20.5 0.58 1.08 1.87 Pharmaceuticals & Biotechnology -9.8 20.6 0.58 1.09 1.88 Health Care Equipment & Services -12.1 20.1 0.71 1.07 1.50 FTSE All-Share Index -16.9 18.9 Source: Datastream, Sharepad, Shares magazine Downside periods: 7 July 2011 to 19 August 2011; 27 May 2015 to 11 February 2016; 27 September 2018 to 27 December 2018 Upside periods: 19 August 2011 to 20 February 2012; 11 Februry 2016 to 11 August 2016; 27 December 2018 to 30 July 2019

The seeds of the 2015 to 2016 sell-off were sown in late 2014 when the US Federal Reserve withdrew its programme of quantitative easing Between the end of (QE). Compounding this, China’s gross domestic product (GDP) grew at a slower rate than expected September and the end leading it to devalue its currency, and after years of of December, the FTSE 350 struggling with its economy the Greek government lost 13.3%, recording one defaulted on its debt. All told, between May 2015 and mid-February of its worst quarters since 2016 the FTSE 350 lost just over 20%, although the financial crisis it wasn’t a straight line by any means. Just when investors thought the selling had exhausted itself and the market was set to rally, it took another leg down. The sell-off in the fourth quarter of 2018 was sparked by an inversion in the US yield curve, as long-term Treasury bond yields fell below short- term yields. An inverted yield curve tends to point 13.3% to a slump in the economy. Adding to fears of a recession, president Donald Trump ramped up his trade war with China threatening another round of tariffs on Chinese December, the FTSE 350 lost 13.3%, recording one goods. Finally, volatility rose even more than it of its worst quarters since the financial crisis. normally does in October – a month which has a history of delivering big stock market losses. SHORT SHARP RECOVERY Between the end of September and the end of In all three cases, stocks had recovered their losses six months on from the market lows. In the bounce-back from the 2011 slump, the FTSE 350 gained 17.5%, while in 2016 it rallied 23.3% from the low and in the first six months of this year it gained 15.8%. On average, over six months the index bounced by 18.9% against previous losses of 16.9%. At no point was there a single, obvious catalyst for any of the sell-offs, nor was there an obvious

20 | SHARES | 31 October 2019 SMASHED UP IN A DOWNTURN AND STRUGGLING TO RECOVER Average % Average % Downside Upside Upside/ Sector Index Downside Upside Return Capture Capture Downside Return Automobiles & Parts -31.5 6.8 1.86 0.36 0.19 Banks -24.9 16.6 1.47 0.88 0.60 General Retailers -18.5 11.5 1.09 0.61 0.56 Food & Drug Retailers -14.3 2.0 0.85 0.11 0.13 Industrial Transportation -28.0 23.1 1.66 1.22 0.74 Source: Datastream, Sharepad, Shares magazine Downside periods: 7 July 2011 to 19 August 2011; 27 May 2015 to 11 February 2016; 27 September 2018 to 27 December 2018 Upside periods: 19 August 2011 to 20 February 2012; 11 Februry 2016 to 11 August 2016; 27 December 2018 to 30 July 2019 reason for stocks to stop falling and to start rising. in theory allowing you to stay invested throughout All of which goes to prove the wisdom of the without having to chop and change your portfolio, old adage that ‘time in the market beats timing and which lagged the market during both phases the market’. and are therefore best avoided. More important than having exposure to the market, however, was having the right exposure. TREBLES ALL ROUND Some sectors fared better than others during the The sector which held up the best on average sell-offs and some fared better during the rallies. during all three market sell-offs, and actually gained Some repeated the same behaviour each time during the last two major declines, was Beverages. despite the causes of the sell-offs being different. Its average loss of just 3.5% was almost 80% less Most interestingly, some fell less than the market than the average 16.9% loss for the market over all on the way down and gained more than the market three periods. on the way up. Surprisingly, for what is usually considered a ‘defensive’ sector, it was also one of the most GETTING DOWN TO BUSINESS consistent winners during subsequent rallies, rising In compiling our research we screened Sharepad by an average of 23.6% with very low variation over for data on FTSE 350 sector returns for each of each of the following six month periods. That’s an the three market declines and for the returns six average out-performance of 25% versus the typical months after the market had bottomed. We then ranked the sectors by their average 000'S FTSE 350 BEVERAGES £ - PRICE INDEX return over each of the three down periods 30 and each of the three up periods to see if there 25 were any obvious similarities or patterns in their 20 behaviour. We also compared each sector’s returns 15 against the market. 10 As some sectors are by nature more volatile than 5 others, even under normal market conditions, we 2010 2011 2012 2013 2014 2015 2016 2017 2018 measured the standard deviation of returns. We also measured the extent to which each sector beat or lagged the market on the way down and the way up, to give us an idea of their ‘upside capture’ and ‘downside capture’. Some sectors held up well during market sell-offs but lagged on the way back up, while some lagged on the way down but made up for it on the way up. Finally, we divided the upside capture by the downside capture to see which sectors beat the market in both the down phase and the up phase,

31 October 2019 | SHARES | 21 market recovery of 18.9%. Most impressive of all, the Beverage sector’s ratio of upside capture to downside capture was For Software to almost six to one, beating the rest of the market into a cocked hat. Beverages are therefore a beat the market under must-own if the market is heading into a downturn. any conditions, with a The next best-performing sector was Software, ratio of upside capture to which on average lost 9% or just over half as much as the index during the sell-offs and beat it by more downside capture of nearly than 50% during the rallies with an average return three to one, and to do it of almost 30%. Like Beverages, the variation in returns was extremely low both on the way down with low volatility, is an and on the way up. impressive feat

2600 2400 FTSE 350 SOFTWARE - PRICE INDEX 2200 2000 1800 1600 1400 could not only have produced smaller losses 1200 1000 than the market on the downside, but generated 800 considerably bigger gains on the upside without 600 400 needing to try and time the bottom. 2010 2011 2012 2013 2014 2015 2016 2017 2018 STEER WELL CLEAR For Software to beat the market under any The worst-performing sector during the three conditions, with a ratio of upside capture to sell-offs was Industrial Metals, with average downside capture of nearly three to one, and to do losses of 37.3% or more than double those of the it with low volatility, is an impressive feat. index. Moreover losses varied from -14% to -63% Third place is more or less a tie between Health meaning that at one point investors lost almost two Care, Media, Personal Goods and Pharmaceuticals. thirds of their money. All lost significantly less than the market on the The fact that they also rallied the most in the way down, with Personal Goods the best and recovery phase, with an average return of 68.8% Media the worst of the bunch, and all beat the or more than three times that of the index, doesn’t market by between 5% and 10% on average on make them any more appealing in our view. the way up again. The three sectors which consistently destroyed Owning a basket of stocks in these sectors value both on the way down and the way up were

22 | SHARES | 31 October 2019 Automobiles & Parts, General Retailers and Banks. Granted the Auto sector is a shadow of its former self, thanks to the takeover and de-listing of GKN, so the data may not be that useful as a guide when markets sell off in the future. However the other two sectors are still large enough to have a negative impact on the index and generally speaking investors should give them a wide berth. General Retailers lost an average of 18.5% during the sell-offs but it was their poor showing when the market rallied – lagging the index by 40% on average - which really did the damage. Banks on the other hand lost considerably more than the market during the sell-offs – an average of nearly 25% with a maximum loss of nearly 40% - and then lagged during the recovery phase meaning not only were they no help when FTSE 350 GEN RETAILERS £ - PRICE INDEX 3400 3200 3000 2800 2600 2400 The three sectors 2200 2000 which consistently 1800 1600 1400 destroyed value both 2010 2011 2012 2013 2014 2015 2016 2017 2018 on the way down and the going got tough but they didn’t make up for it the way up were when the rest of the market was going up either. Automobiles & Parts, General Retailers BAD STOCKS IN GOOD SECTORS Finally, although it may sound like heresy – and and Banks professional investors would never admit to it – but when markets turn ‘bad’ stocks in a good sector typically perform better than ‘good’ stock in bad sector. When the tech bubble burst at the beginning of the noughties, investors clung onto a diminishing number of ‘good’ tech stocks despite evidence that the sector was imploding. The right strategy would have been to own no tech stocks at all and to load up with cheap mining, utility and staples stocks, even if that meant buying what on the face of it were ‘bad’ stocks. Similarly, in the last three market sell-offs 5500 investors would have done better if they had 5000 owned ‘bad’ Beverage and Software stocks than if 4500 they had picked ‘good’ Banks or General Retailers. 4000

3500 3000 FTSE 350 BANKS £ - PRICE INDEX By Ian Conway Senior Reporter 2500 2010 2011 2012 2013 2014 2015 2016 2017 2018

31 October 2019 | SHARES | 23 LISTEN TO OUR WEEKLY PODCAST Recent episodes include:

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How are state pension and Those are just the basics, the triple-lock. If you built up lifetime allowance annual so if you want to check your any earnings-related pension increases decided? own state pension try this (SERPS or state second pension) Colin government tool. under the old system this will Whether you built up rise in line with CPI. This is Tom Selby entitlements under the old or also true of any amount AJ Bell the new state pension system you receive above the full Senior Analyst says: you’ll benefit from the ‘triple- flat-rate amount of £175.20, lock’, which guarantees the referred to in the jargon as a Both the state pension and payment rises by the highest ‘protected payment’. the lifetime allowance – the of growth in average earnings, total amount you can save tax- prices or 2.5%. THE LIFETIME ALLOWANCE free in a pension – have been The government uses the The lifetime allowance has been subject to significant change in average earnings figure for the cut several times since 2010, recent years. three months to July and the being reduced from £1.8m The state pension was Consumer Prices Index (CPI) to £1m in 2016. Each time reformed in 2016, with the inflation figure for September the allowance was reduced previous means-tested system to determine which part of people were allowed to apply replaced by a flat-rate payment the triple-lock kicks in the for ‘protection’, meaning they for any UK resident with a following tax year. could retain the previous higher complete 35 years’ National For the 2020/21 tax year, allowance subject to certain Insurance (NI) record. pensioners will enjoy a bumper conditions. A deduction is made for every 3.9% increase in their state Since 2016 the lifetime year below this, with a minimum pensions, in line with the growth allowance has increased in line 10-year NI record required to in average earnings. with CPI inflation, protecting qualify for the benefit. As a result, the ‘old’ basic state savers against rising prices. Those who had already pension will rise by £5.05 a week So in 2020/21 the lifetime retired by 2016 will continue to £134.25, while the ‘new’ state allowance is expected to rise by to receive payments under pension will increase by £6.60 a £18,000 to £1,073,000, meaning the old system, while people week to £175.20. an extra £4,500 of tax-free cash who build up rights under a Note that it is only these two (a quarter of £18,000) will also combination of the old and elements that are protected by be available. n ew syste m w i l l re c e i ve the higher of their two DO YOU HAVE A QUESTION ON RETIREMENT ISSUES? entitlements. If you ‘contracted-out’ Send an email to [email protected] with the words under the old system – which ‘Retirement question’ in the subject line. We’ll do our best to Shares just means you paid lower respond in a future edition of . Please note, we only provide guidance and we do not provide NI in exchange for a lower financial advice. If you’re unsure please consult a suitably state pension entitlement - a qualified financial adviser. We cannot comment on individual deduction will be made to your investment portfolios. flat-rate payment.

31 October 2019 | SHARES | 25 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 Discover where fund firms are looking for growth New product launches show asset managers are looking outside more traditional areas of investing.

earlier this month was pretty telling about where investors see opportunities. Data from the Association of Investment Companies (AIC) shows that over the past decade, private equity investment companies have generated returns for investors averaging 300%, more than double the 125% gain from the FTSE All Share over the same period. While it is often too complicated (and risky) for ordinary investors to invest in private companies on their own, there are some investment trusts t is always good to have in all three of the major asset and now a rising number of an insight into market classes – equities, bonds, and funds available to help people Isentiment as, in the short- property – suffered net outflows, access this area of investing. term, it can impact how different i.e. more money was taken One such fund is the assests and sectors perform. out by investors than money aforementioned Schroders one, Sometimes it can be useful being put in. which the firm’s head of private to take a cue from investment Equities and bond funds lost equity, Rainer Ender, said will fund companies, who often £1.6bn and £968m respectively, ‘give a greater pool of investors’ launch new funds when they while property lost £91m. access to an asset class which think a particular area of Instead of blue chip stocks in has ‘traditionally been out investing will do well. developed countries, fund firms of reach of the vast majority For instance, with Brexit are looking to asset classes like of investors apart from big uncertainty, trade wars that private equity, investing in shares institutions’. have threatened to go global of companies which are not Although in this instance, and economic growth stagnant listed on a stock exchange. it’s important to note its key in virtually all developed market investor information document economies, not many fund firms ‘INCREASINGLY RELEVANT (KIID) states the fund is intended are rushing to launch traditional ASSET CLASS’ for sophisticated retail and UK, European or US equity funds. Schroders description of private institutional investors. Data from the Investment equity as an ‘increasingly Meanwhile, a number of Association for August (the relevant asset class’ when it fund firms are still interested latest available at time of launched its Schroder GAIA II in emerging markets, looking publication) shows that funds Specialist Private Equity fund to take advantage of specific

31 October 2019 | SHARES | 27 themes in certain regions. to pick a selection of UK-listed French fund giant Amundi for companies that are set up example has launched a New Silk for growth. Road fund, aiming for long-term Sub-advised by active capital growth from it what said Ethical and managers Baillie Gifford and will be the ‘expected expansion climate change Marathon Asset Management, in trade’ and ‘associated funds continue it tries to identify UK firms economic growth’ from China’s with growth potential which Belt and Road Initiative (BRI), a to be popular, will benefit from the flow of project which effectively intends especially the investments in and out of UK to create a new silk road. industries. This particular fund is only latter as it Unlike a lot of other active available to professional becomes more funds however, it has a lower investors for now. established than normal fee for an active In addition, ethical and climate fund with an ongoing charges change funds continue to be in the minds figure of 0.45% a year. popular, especially the latter as it of the public becomes more established in the and therefore Somerset EM Discovery minds of the public and therefore (BK5SP70) companies too, generating new companies too, Following the trend of fund opportunities to make money generating new managers looking to emerging while also being seen to ‘do the opportunities markets for growth, this right thing’. fund from Somerset Capital Aviva Investors has launched to make money Management aims to find a Climate Transition European while also being pockets of growth from Equity fund, which will invest in seen to ‘do the companies unloved by the wider companies that make money market. from goods and services right thing Skewed towards EMEA addressing climate change (Europe, Middle East and Africa) mitigation and adaptation, and and Latin America, the fund will also focus on firms aligning targets small and mid-caps with a their business models with a market cap of between $1bn and warmer, low-carbon world. $7.5bn, run by emerging markets Here are two others funds, small cap expert Mark Asquith. available to retail investors in the For the first six months of its UK, which give an idea of where launch, the fund is waiving its the investment world is looking annual management charge to for growth. investors, meaning people who put money in now won’t have to Vanguard Active UK Equity start paying 0.75% per annum (BK1XRK6) fee until 1 May 2020. Going against the grain when it It’s worth pointing out though comes to recent fund launches that this fund is significantly is Vanguard, which is usually higher up the risk spectrum, as known for its exchange-traded emerging markets – particularly funds (ETFs). throughout EMEA and Latin This active mutual fund is America – face more political similar to other active UK- and economic challenges, and focused funds in that it aims therefore more volatility.

28 | SHARES | 31 October 2019 SIPPs | ISAs | Funds | Shares

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AJ Bell Youinvest does not provide advice. Capital at risk. Know your fund: The Scottish Investment Trust

Patience is required to profit from the fund’s contrarian approach

he Scottish Investment Trust (SCIN) is an Tindependently managed global trust seeking to provide shareholders with longer-term capital appreciation and above- inflation annual dividend growth. Investing in undervalued, unfashionable companies that are ripe for improvement, at 824p ‘The Scottish’ trades on an 8% discount to net asset value (NAV) with scope to narrow in given a market rotation from growth to value. One of the trust’s key attractions is an enviable 35-year record of annual dividend growth – The Scottish is an Association portfolio is unlike any benchmark ‘As contrarian investors, we of Investment Companies’ (AIC) or index and we fully expect to think a better balance between ‘Dividend Hero’. have differentiated performance’. risk and reward can be found And additionally, ‘our approach by focusing on unloved and THE STYLE will not always be in fashion but unfashionable stocks,’ McKinnon The Scottish is managed by we believe it delivers above- informs Shares. patient contrarian Alasdair average returns over the longer ‘We don’t set out to be McKinnon, who seeks to ignore term, by which we mean at least boring but we find that by the ‘madness of crowds’ and five years.’ the time everyone agrees that invest in deeply out of favour the prospects for a company areas of the global stock market GETTING ITS DUCKLINGS look rosy, it’s instead time to where recovery potential is being IN A ROW start worrying about what can overlooked. McKinnon believes markets go wrong.’ Based on behavioural finance are driven by cycles of emotion He continues: ‘In some ways, theory, the team’s process rather than dispassionate we think about things in terms results in a ‘best ideas’ portfolio calculation, which creates of expectations management. To of global names with scope to profitable investment use a real life example, most of re-rate thanks to operational opportunities. us have fairly low expectations and/or cyclical improvements. He aims to exploit the natural if we stay at a budget hotel but McKinnon also looks for downside tendency of investors to ‘follow fairly high expectations if we stay protection in the form of cash- the herd’ and chase stocks that at a more upmarket place. generative business models and have already done well, while ‘It’s only human. Even though strong balance sheets. other areas of the market remain the actual experience is almost As the factsheet states, ‘our largely ignored. certain to be better at the

30 | SHARES | 31 October 2019 superior establishment, it won’t TOP TEN HOLDINGS (As at 30 September 2019) necessarily create greater overall satisfaction as it has to meet (and exceed) a lofty standard. ‘It’s the same with stocks. Holding Country % When expectations are high, Newcrest Mining Australia 5.5% the scope for disappointment Tesco UK 4.6% increases. We’ve seen this Target US 4.5% multiple times in recent years – GlaxoSmithKline UK 4.3% hot themes rise then fall with the later entrants burned.’ Barrick Gold Canada 4.1% McKinnon places his Newmont Goldcorp US 4.0% companies into three categories; Royal Dutch Shell UK 3.1% ‘ugly ducklings’ are very out- Pfizer US 3.0% of-favour firms where poor sentiment is coupled with PepsiCo US 2.8% operational challenges, yet Roche Switzerland 2.5% which boast recovery potential. Source: The Scottish Investment Trust Examples include supermarket Tesco (TSCO). ‘We still hold Tesco as one Exxon Mobil and Chevron, Marks Investment Trust currently sits of our “ugly ducklings” but & Spencer (MKS) and Dutch towards the bottom end of the that may be reviewed in light lender ING. McKinnon has also AIC Global sector in share price of encouraging progress with invested in select telecoms and total return terms, although its turnaround plan,’ explains gold miners. medium and long term total McKinnon. ‘(CEO) Dave Lewis He regards the outlook for returns have been respectable leaves the business with a the yellow metal as positive and year-to-date absolute pat on the back, having taken given lax monetary and fiscal returns strong. the business from laggard policy, a deteriorating economic Results for the six months to leader.’ backdrop and an era of populist to 30 April 2019 revealed a The ‘change is afoot’ category politics which leaves gold disappointing NAV total return spans stocks where operational looking increasingly attractive of -0.1% in a less fruitful time for improvements are beginning as a store of value. contrarians, with growth having to take hold, but which remain A recent strong performer outperformed value for such a overlooked by the majority of has been BT (BT.A), which has prolonged period. investors, whereas the ‘more ‘a turnaround strategy in place, to come’ bucket is a small part with a focus on cutting costs and SHARES SAYS:  of the fund including stocks investing in network leadership. The Scottish Investment Trust’s that have moved up through Philip Jansen, the new CEO, has active contrarian strategy and the other categories, are more added fresh impetus to this inflation-beating dividends favoured by the market, yet plan. We see BT as an interesting have strong appeal, although where underappreciated growth contrarian opportunity given patience may be required potential still exists. the scope for operating before McKinnon’s value calls recovery and an improving come good. Buy and hold for WHAT ELSE IS IN environment – we believe this the long term. THE PORTFOLIO potential is not yet reflected in Other holdings include the share price.’ By James Crux US clothing retailer Gap, Funds and Investment GlaxoSmithKline (GSK) Japanese PORING OVER PERFORMANCE Trusts Editor brewer Kirin, energy giants On a ten year view, The Scottish

31 October 2019 | SHARES | 31 Find out about how GlaxoSmithkline is changing

Pharma giant hopes investing in cancer drugs and spinning-off consumer healthcare can re-invigorate its growth profile

hen new chief HOW DRUG DEVELOPMENT WORKS executive Emma Walmsley took over W 6-7 YEARS the reins of GlaxoSmithkline TO GET TO (GSK) in April 2017 she MARKET conducted a strategic review of SMALL % ON A 20 YEAR the business. The upshot is that GET PATENT 13 over the last year the company THROUGH YEARS TO TRAILS EXPLOIT has been undergoing a complete Source: Shares change of direction to become a more focused specialised Then on 3 December 2018 revenues. The plan is to demerge pharmaceutical outfit. GSK announced the sale of its the new business from 2022. GSK is the fourth largest quoted Horlicks and other consumer The combined business will company in the UK, representing nutrition brands by merging the boast iconic brands such as just over 4% of the FTSE 100. unit with Hindustan Unilever for Panadol, Sensodyne and Advil. The company generates a total deal value of £3.1bn. £30.8bn of annual revenues and Just four hours later on GSK’S FOUNDATIONS GO employs over 100,000 people the same day it announced BACK OVER 300 YEARS across 150 countries. Each the $5.1bn acquisition of US GSK is the result of the year it spends nearly £4bn on biotech firm Tersaro, Walmsley’s amalgamation of many different researching and developing new first as CEO. smaller businesses that would drugs and currently has 44 new This was a huge initial step later come together through medicines in its pipeline. designed to bulk up its oncology many mergers and acquisitions. Last year it delivered around (cancer) pipeline and commercial But it may be surprising to 2.3bn packs of medicine, capability. learn that the company’s humble 770m vaccine doses and 3.8bn Later in the same month, on beginnings go as far back as Consumer healthcare products. 19 December GSK announced 1715 with the opening of a the spin-off its Consumer small apothecary shop in Plough UNDER NEW MANAGEMENT Healthcare division by joining Court, London. Historically the firm had perused forces with Pfizer and combining Over the years its scientists a diversification strategy the two company’s respective have made Nobel Prize winning around the three pillars of healthcare franchises to create discoveries in their fields Pharmaceuticals, Vaccines and a business with circa £10bn of of expertise. The company Consumer Healthcare. In June 2018 GSK bought-out Novartis’ minority interest in its consumer healthcare business, so that it controlled 100%.

32 | SHARES | 31 October 2019 developed the first treatment for GSK BY DIVISION leukaemia and gout, as well as HIV in the 1980’s. PHARMACEUTICALS In 2014 it produced the first Turnover £m vaccine candidate for malaria and is now embarking on a Respiratory 6,928 pilot implementation of the HIV 4,722 candidate vaccine involving Immuno-inflammation 472 750,000 children in Ghana, Established Pharmaceuticals 5,147 Kenya and Malawi. Total 17,269 HOW DOES GSK MAKE MONEY VACCINES GSK’s financial metrics are Turnover £m typical for a pharmaceutical company, and reflect the Meningitis 881 unique characteristics of the Shingles 784 underlying economics. Influenza 523 The biggest challenge is Established Vaccines 3,706 to discover new drugs and Total 5,894 successfully bring them to market. The cost of employing CONSUMER HEALTHCARE thousands of highly qualified Turnover £m staff is also relatively high compared with other industries. Wellness 3,940 According to a study published Oral health 2,496 in the Journal of Health Nutrition 643 Economics it costs around $2.6bn Skin health 579 to find a new drug and achieve a commercial launch. Total 7,658 More than that, the probability Source: GlaxoSmithKline of success is small. Of the entire a fraction of the price of the and solvents for £3 and turns drug compounds in clinical protected product. them into around £10 of ‘added development, on average only This means that in order to value’. Saving lives is clearly a 7% will eventually be approved be sustainable, companies like very valuable activity and this is for marketing. GSK need to have a lot of new reflected in high gross margins. Medical patents are usually medicines in development to The low probability of bringing granted for a fixed 20 years. But replace the current crop of ‘star’ new drugs to market means on average its takes between drugs when they go off-patent. that lots of drugs need to be six to seven years to bring a All of these factors have an developed in order to get just new medicine to market, which impact on the business financials a few to the marketing stage. reduces the available time and are specific to pharma Therefore R&D is the life-blood to commercially exploit the businesses like GSK. of every pharma company and invention to around 13 years. The gross margin, (revenue this is reflected in the £4bn of Once a patent expires, revenue divided by direct costs), annual expenditure (13% of usually collapses due to the sometimes known as value-add, sales) that GSK incurs just to keep fact that there are a number is relatively high compared with the drug pipeline healthy. of specialty generic pharma other sectors and at GSK it has One could argue that GSK has companies which have the scale averaged around 69%. been under-investing relative to and expertise to manufacture Effectively this means that GSK its peers because according to and distribute the product at buys raw materials like proteins consultancy EvaluatePharma,

31 October 2019 | SHARES | 33 spending as a percentage of programme. The two companies sales has averaged around 20% are planning an ambitious over the last decade for the development with eight trials pharma industry. planned before the end of Once GSK gets a drug ready the year. and approved to go to market, GSK virtually exited the cancer it needs to effectively market market when it sold its products the drug into multiple territories to Novartis in 2015, but with the around across the world and two big oncology deals in 2019 these costs are part of the selling and the separation of consumer and general administration healthcare division in 2020, the charges, which represent around company has a renewed focus on a third of revenues. cancer treatments. The company historically makes an average operating GOOD MANAGEMENT margin of around 29%. EXECUTION IS KEY consensus estimate is for the Analysts believe that the THE DRUGS THAT vaccine to achieve peak annual strategic rationale for the WILL DETERMINE GSK’S revenues of £1.5bn to £2bn. demerger within the next three FUTURE SUCCESS As we mentioned earlier years makes a lot of sense. The The Pharmaceuticals division GSK is one of the pioneers in thinking is that a standalone generates £17.3bn of revenues treating HIV and they have a consumer company will be able split between respiratory strong franchise in this field. The to support higher debt levels, products contributing £6.9bn, company is pinning its hopes given that the established HIV products contributing on a novel two-drug regime brand portfolio throws-off £4.7bn and established products (Juluca) for the treatment of good cash flows. including Immuno-inflammation HIV, compared with the normal This will allow the GSK to with £5.7bn. The Vaccines treatment which uses three effectively de-leverage the division has £5.9bn of sales. medicines to suppress the virus. remaining pharma and vaccine Currently the drug with the Sales are still under £100m but divisions as the debts will move largest annual sales is Advair, there are expectations that the into the demerged business. (£3.1bn) which is used to treat drug could reach peak annual Not only will this facilitate chronic bronchitis but now faces sales of £4bn to £5bn. further investment in growth, generic competition in the US. but with good execution, permit Although the company has been BETTING ON CANCER DRUGS the company to maintain the reducing the price of the drug to GSK has big ambitions to rebuild dividend. minimise the impact, it expects its oncology division through to lose up to a £800m of Advair increased R&D, acquisition and SHARES SAYS:  revenues this year. licensing. The $5.2bn acquisition Not without risk but, subject There are three drugs which of Tersaro brought a strong to maintaining the dividend, analysts believe hold the key to pipeline of drugs including bulking-up the cancer franchise, GSK’s future. ovarian cancer drug Zejula, a rival and successfully spinning-off The company’s shingles to AstraZeneca’s (AZN) Lynparza. consumer health on schedule, vaccine, Shringrix has seen Analysts at Jefferies reckon shareholders should be amply rocketing sales recently, so that Zejula will achieve peak rewarded over time. much so that GSK can’t produce annual revenues of $550m. enough of it to meet demand. It made another bold move In 2018 the vaccine notched when it signed a $4.2bn By Martin Gamble up sales of £784m, from just licensing deal with Merck KGaA Senior Reporter £22m in 2017 and ultimately the for a cancer immunotherapy

34 | SHARES | 31 October 2019 NOV

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BATTERSEA PARK u m e o a l h l N S p ew la R C d Why a sectoral shift raises big questions What the performance of different market By Russ Mould groupings can tell us AJ Bell Investment Director he agricultural revolution introduced by TOP 10 PERFORMING SECTORS 18th century British statesman Charles T ‘Turnip’ Townshend may, at first glance, Q1 2019 Q2 2019 have no bearing at all on how investors could think Industrial Metals & Mining 28.8% Leisure Goods 51.5% about their portfolios and any tactical or strategic Software & Computer Electronic & Electrical 22.9% 16.9% asset allocation decisions. Services Equipment Tobacco Health Care Equipment & Townshend argued that crop rotation was a 22.8% 10.9% vital tool in the farmers’ toolkit when it came to Services maximising yields from the fields. By the same Food & Drug Retailers 22.0% Industrial Engineering 10.7% token, investors need to be aware of the power of General Retailers 21.8% Media 10.6% Technology Hardware & Software & Computer 19.1% 10.0% sector rotation within stock markets. Equipment Services Even if the market will never always be right, Mining 17.0% Financial Services 9.5% its views must always be respected and shifts Food Producers 14.6% Industrial Metals & Mining 8.5% in performance momentum between the 39 Construction & Personal Goods 13.8% 8.5% industrial groupings will reflect wider thinking on Materials the overall backdrop. Sometimes, one sector’s Industrial Engineering 12.3% Support Services 8.5% fall from grace and another’s return to favour FTSE All-Share 8.3% FTSE All-Share 2.0% can be no more than a knee-jerk reaction to a specific event. But when sectors that share similar Q3 2019 Q4 2019 (to date*) Technology Hardware & Fixed Line Telecoms 24.1% 12.4% characteristics start to do well (or badly) as a pack Equipment then attention should be paid, especially if their Mobile Telecommunications 23.9% Life Insurance 7.6% momentum (positive or negative) represents a Health Care Equipment & General Retailers 12.1% 6.1% major change from prior trends. Services Pharmaceuticals & Real Estate Investment & 11.5% 5.3% SUBTLE SHIFT Biotechnology Services Electricity Software & Computer 10.3% 5.2% The tables show the best and worst performing Services sectors within the FTSE All-Share index, on a Aerospace & Defense 10.2% Electricity 4.9% quarterly basis, in 2019 to date. Financial Services Real Estate Investment 8.2% 4.7% To this column’s eye, there is a clear difference Trusts between the type of sectors that did well (and Travel & Leisure 7.3% Construction & Materials 3.6% badly) in the first two quarters of the year and those Tobacco 7.1% Gas, Water & Multi-Utilities 3.0% which have risen to the top of the pecking order Construction & Materials 6.7% General Industrials 3.0% (or sunk to the bottom) since summer came to an FTSE All-Share 0.1% FTSE All-Share -0.6% end. In general cyclical sectors that are sensitive Source: Refinitiv data. *To 28 October 2019 to the global economy took charge in Q1 and to a lesser degree in Q2. This includes Industrial Metals Parts and Industrial Metals & Mining down among & Mining, Mining and Industrial Engineering. Such the dead men in both Q3 and Q4. sectors have since fallen from favour, with Autos & As a mirror image of the first trend, defensive

36 | SHARES | 31 October 2019 sectors have started to work their way back to BOTTOM 10 PERFORMING SECTORS investors’ affections. Healthcare and Pharmaceuticals both had a good Q3 and Electricity and Gas, Water Q1 2019 Q2 2019 and Multi-Utilities are ending 2019 with a flourish. Automobiles & Parts -8.1% Tobacco -17.9% Mobile Oil Equipment, Services & This may reflect concerns over the UK economy, -6.3% -11.4% given its apparent pre-Brexit state of paralysis, Telecommunications Distribution Fixed Line Fixed Line and the slow rate of progress in the US-China talks -5.7% -10.0% Telecommunications Telecommunications that are trying to resolve the trade dispute which Health Care Equipment & General Retailers 0.3% -8.9% seems to be weighing on global trade volumes. Services The utilities’ renaissance may surprise some given Leisure Goods 0.7% Electricity -7.9% the promise of nationalisation offered by the Banks 1.8% Mobile Telecommunications -7.1% opposition Labour Party, so it remains to be seen Travel & Leisure 1.9% Food & Drug Retailers -5.4% whether investors are underestimating the chance Nonlife Insurance Technology Hardware & 3.1% -4.4% of Jeremy Corbyn and John McDonnell entering Equipment 10 and 11 Downing Street respectively. Industrial Transportation 3.6% Gas, Water & Multiutilities -4.2% Oil Equipment, Services & Household Goods & Home A number of serial underperformers from the 3.9% -4.1% first half are doing much better in the second. This Distribution Construction again includes the utilities but also brings in Fixed FTSE All-Share 8.3% FTSE All-Share 2.0% Line Telecommunications, Life Insurers and sectors Q3 2019 Q4 2019 (to date*) such as General Retailers, Real Estate Investment Industrial Metals & Mining -31.9% Industrial Metals & Mining -16.5% Trusts, Real Estate Investment & Services and Automobiles & Parts -29.1% Autos & Parts -9.0% Construction & Materials. Some of these groupings Software & Computer Healthcare Equipment & -17.4% -8.9% rely heavily on the UK economy for their bread Services Services Oil Equipment, Services & Tobacco and butter, so this could represent a move toward -13.4% -8.3% Distribution ‘value’ stocks. If that is too bold a call, it could Forestry & Paper -13.0% Beverages -7.2% at least mean investors are reappraising those Mining -12.3% Personal Goods -6.8% domestically-focused sectors that have been out in Life Insurance -10.3% Leisure Goods -6.3% the cold since the EU referendum vote of summer Industrial Engineering Non-life Insurance 2016. Even if we are still lacking clarity on Brexit, -8.9% -5.6% Fixed Line Food Producers -8.9% -3.4% hopes for some kind of deal may be tempting some Telecommunications to take another look to downtrodden names and Chemicals -8.3% Media -2.8% this can be seen in how ‘value’ stocks are rallying FTSE All-Share 0.1% FTSE All-Share -0.6% while ‘growth’ stocks are losing some momentum Source: Refinitiv data. *To 28 October 2019 for the first time in a while. ‘momentum’ or ‘quality’ toward ‘value’ would be a GLOBAL ANGLE huge change and have huge implications for asset Such a move from strategies based on ‘growth’, allocation and fund and stock selection if it persists. Value-disciples suffered false dawns in 2016 and ‘VALUE’ STOCKS ARE TRYING TO FORGE A RALLY (AGAIN) late 2018 so they will not be getting carried away yet, although there are tentative signs that this is not just a UK phenomenon. The sectors which make up the S&P Global 1200 show some similar trends, with cyclical/value plays like Banks doing better while ‘expensive defensives’ such as Consumer Staples are lagging. But Technology is still holding up well and Real Estate is making heavy weather of the fourth period of the year, so it is by no means a clean sweep for those who are awaiting a decisive shift from ‘growth’ to Source: Refinitiv data ‘value.’ Watch this space.

31 October 2019 | SHARES | 37 EMERGING MARKETS OUTLOOK SPONSORED BY TEMPLETON EMERGING MARKETS INVESTMENT TRUST The demographics driving India Corporate tax cuts are a potential catalyst to get the economy back on track in the short term

he introduction of new more generous T tax laws has helped to revive interest in the Indian investment story. Although growth expectations have taken something of a knock in recent months the long-term picture in the country is underpinned by several drivers not least the country’s favourable demographics. A recent report from the United Nations projected that India would overtake China 2019 Population as the world’s most populous country around 2027, with China 1.3bn around 273m new Indians being added to the population between 2019 and 2050. India 1.3bn Having a growing and youthful population, around half of S 329m to the manufacturing and which is under 25, means services sectors and internet plenty of new recruits for the penetration is increasing rapidly. jobs market and should also Indonesia 217m Meanwhile India is a democracy underpin long-term demand and has a relatively strong for housing, health care and 2050 Population education system. consumer goods, particularly The backdrop is not as incomes go up. India 1.bn unblemished however. The The growth of the middle class International Monetary Fund in India has been promised since China 1.bn recently downgraded growth the 1990s but has taken longer expectations for 2019 from than forecast thanks to slower 7% to 6.1%, citing weaker urbanisation than in other Nigeria 01m domestic demand and issues emerging economies like China in the financial sector, but the and a more geographically and S 379m organisation expects growth to

culturally diverse population. SouSource:rce: United United Nations Nations return to the 7% mark in 2020. However, the country now appears to be catching up with a middle class more than 100m This outlook is part of a series being sponsored by Templeton Emerging Markets Investment Trust. strong. There has also been For more information on the trust, visit here a shift away from agriculture

38 | SHARES | 31 October 2019 EMERGING MARKETS OUTLOOK SPONSORED BY TEMPLETON EMERGING MARKETS INVESTMENT TRUST Emerging Markets: Views from the Experts Three things the Franklin Templeton Emerging Markets Equity team are thinking about today

India’s Finance foreign investment may Minister Nirmala not be drastic, we think the 1. Sitharaman announced initiative signifies China’s a meaningful reduction in commitment and long- India’s corporate tax rates to term strategic decision to help spur investment and boost further increase access to its growth in the country’s slowing financial markets. economy. These changes came as a positive surprise and Brazil: Optimism send a strong signal that the surrounding the government has recognised the 3. government’s stress that corporates face from economic agenda, including the weak sentiment and subdued key social security reform, has economic activity. While there resulted in a more favourable has been some concern that the climate. A major privatisation measure will result in a decrease plan has also been announced, in revenues, we believe and we expect tax and other there are mitigating factors reforms that could improve the that could reduce the loss in ease of doing business to follow. revenues. Overall, we think We maintain a positive outlook India’s corporate tax cuts should on the equity market and help spur investment over the take majority stakes in joint continue to have a favourable longer term. ventures. While the overall view on domestic-oriented immediate impact of China’s themes, including financials and China recently move to lift restrictions on consumer-related sectors. announced the removal 2. ͏ of the investment TEMPLETON EMERGING MARKETS INVESTMENT TRUST (TEMIT) quotas under its Qualified Foreign Institutional Investor Porfolio Managers (QFII) and RMB Qualified Foreign Institutional Investor (RQFII) programs. Increasing market access for foreign investors has been an ongoing process, as China undertakes structural reforms to its capital markets and allows foreign firms greater Chetan Sehgal Andrew Ness control over their assets. The Singapore Edinburgh move also follows a recent TEMIT is the UK’s largest and oldest emerging markets decision to allow foreign investment trust seeking long-term capital appreciation. financial firms an option to

31 October 2019 | SHARES | 39 What to expect from investing in different assets over the long-term There is a well established hierarchy of risk and return from shares, bonds and cash efore embarking on a Another important point journey it is important to mention here is the B to have a realistic effect that inflation has on expectation of how long it will purchasing power, because the take, how bumpy or smooth aforementioned 5.75% per year it will be and the likelihood of is reduced to 0.66% per year reaching the final destination. if measured in today’s money, Likewise there are many types quite a stark difference. of asset to choose from in the That said, cash is a very capital markets which will be important element of any long- appropriate for different levels of term plan, both as an emergency risk appetite and time frames. fund for unseen problems as There’s no point for example well as ‘dry powder’ to take putting your hard earned money advantage of unseen investment into an instant access cash opportunities. account and expecting to earn high rates of return, especially providing data and analysis on BONDS over longer periods. long-term asset returns in the A bond is like an ‘IOU’- a UK. Shares has used that data to company or a government RISK AND RETURN shed some light on investing in borrows money from an investor Assets which produce higher relation to cash, bonds, equities by issuing bonds in exchange for rates of return are normally and inflation. cash. They pay a fixed or variable associated with higher levels of rate of interest over a specific risk, but the savvy investor will CASH time period, and at maturity the always be looking for situations Cash held in an instant access investor would expect to get which maximise returns for a account is very safe as amounts their money back. given amount of risk. up to £85,000 are insured by the Government bonds are less Barclays has been publishing UK government even if the bank risky than corporate bonds an annual study since 1956, goes under. As one might expect, idle cash shouldn’t provide much TODAY’S VALUE OF £100 TODAY’S VALUE OF £100 of a return, but today’s low rates INVESTED AT THE END INVESTED AT THE END haven’t always been this measly. OF 1945, GROSS OF 1945 WITHOUT For example since 1945 the INCOME REINVESTED, £ REINVESTING INCOME, £ value of £100 invested in cash and assuming that interest was Nominal Real Nominal Real re-invested (an important point) Equities 9,517 244 would be worth £6,349 today. Equities 9,517 244 Gilts 8,991 231 That works out at a compound Gilts 68 1.75 annual growth rate (CAGR) of Cash 6,349 163 Source: Barclays Research 5.75% a year. Source: Barclays Research

40 | SHARES 31 October 2019 BARCLAYS TOTAL RETURN INDICES – NOMINAL TERMS, GROSS INCOMEREINVESTED A £100 investment in government bonds in 1945 with interest re-invested would have turned into £8,991 today

Adjusted for inflation the CAGR has been 5.6%, 5.5 times more than bond returns and 8.4 more than cash.

RISK The 10.94% achieved since 1945 has not been a straight line for stocks, sometimes they have delivered negative returns, even over 10-year periods. That makes Source: Barclays Research them an unsuitable investment because the bank of England is A £100 investment in for shorter holding periods. able to print money if necessary government bonds in 1945 with It’s important to build a in order to pay back its loans, interest re-invested would have diversified portfolio of stocks, while a company has to make t u r n e d i n to £ 8 , 9 9 1 to d ay, a as single companies can and do cash profits in order to pay CAGR of 6.25%. That is 42% go out of business from time to back its loans. This introduces more than cash returns. If we time. Loss of capital is more of a credit risk. adjust the return for inflation a risk with stocks and corporate That’s why corporate bonds the CAGR falls to 1.1%, still bonds than with cash and pay higher rates of interest about 1.6 times better than the government bonds. than government bonds, to return from cash. Although today’s investment compensate for the possibility As you can see, over longer environment is different to that the loan isn’t fully repaid periods inflation can have a those in the past, dominated as at maturity. brutal impact on cash and bond it is by ultra-low interest rates, As you might expect, the less real returns. This is because the the ranking of expected returns financially secure a company rates of interest paid are fixed and the risks attached to those is perceived to be, the more through the life of the bond, returns remain a good guide for interest it has to pay to investors while future inflation can rise the future. to compensate them for the unexpectedly. It is very important to higher risk. remember that around 96% However some bonds are of EQUITIES of the total return comes from a higher quality, such as senior Historically stocks have provided re-investing the income bonds which are secured on real the best long-term returns. £100 received, whether from cash, assets that a company owns. invested in 1946 would have bonds or stocks. If a company struggled to pay turned into £217,045 today, interest, it would ‘default’ on the equivalent to a CAGR of 10.94%. loan and the owners of the bond That is £208,054 more than By Martin Gamble would be legally entitled to seize government bonds and £210,696 Senior Reporter the company’s assets. more than cash.

31 October 2019 | SHARES | 41 Are you exposed to the Dividend Dangerzone?

Highlighting the funds with exposure to stocks with skinny dividend cover

ots of UK companies are offering very meaty L dividends, but some investors are nervous about future cuts to payouts. In total, 26 companies in the FTSE 100 are forecast to pay a dividend at a yield of 6% or more in 2019, but dividend cover, so the amount that earnings income funds. investing in and assess their covers the dividend payouts, In an ideal world you’d want exposure to these stocks. The is shrinking. Average dividend income stocks to have a dividend presence of these companies cover across the 26 stocks is cover ratio at two times or in a portfolio is not a reason to just 1.56 so investors need to above, meaning annual earnings avoid the fund, but investors just proceed with caution. are twice the level of dividends. need to understand what they’re This provides a safety buffer exposed to. RUNNING FOR COVER in case there is an unexpected By looking at the 83 funds in According to the Henderson downturn in trading, or in the the UK Equity Income sector International Income Trust’s UK or global economy. with holdings data, we can see (HINT) Global Dividend Cover However, 10 of the UK’s which are most exposed to the report, dividend cover is highest yielding stocks have Dividend Dangerzone companies. expected to fall to its lowest level cover of less than 1.5, meaning Of this group 30 funds hold five in a decade this year, meaning they are in the danger zone for or more of the top 10 list in their investors will understandably potential cuts. Fund investors holdings, while five funds have be jittery about what lies under should be aware of what the seven or eight of them. the bonnet of their favoured income funds they own are Oil giants BP (BP.) and Royal

HIGHEST YIELDING SHARES WITH DIVIDEND COVER OF LESS THAN 1.5 (DIVIDEND DANGERZONE) DIVIDEND YIELD (%) DIVIDEND COVER (X) 1 Standard Life Aberdeen 8.10% 0.87 x 2 Taylor Wimpey 11.90% 1.12 x 3 Persimmon 11.50% 1.15 x 4 Phoenix Group 7.10% 1.21 x 5 Royal Dutch Shell 6.60% 1.23 x 6 BP 6.70% 1.26 x 7 Evraz 15.30% 1.34 x 8 Imperial Brands 11.10% 1.34 x 9 HSBC 6.90% 1.41 x 10 Centrica 7.20% 1.43 x Source: Shares, Sharepad

42 | SHARES | 31 October 2019 Dutch Shell (RDSB) are the most widely held of the stocks in the Dangerzone, with 63 of t h e f u n d s h o l d i n g e a c h o f t h e stocks. Both are hefty dividend payers, yielding just shy of 7% each, while they are also predicted to be in the top three dividend payers in cash terms. Meanwhile, just two funds have holdings in Russian miner Evraz (EVR). 1.5 does not necessarily mean investors who own more than the dividend will be cut and one income fund will also ENTERING THE DANGERZONE many managers aim to have want to check on the overlap Collectively the funds have a mixture of dividend payers between the funds’ holdings, £7.14bn of investor money in in the portfolio. These include to ensure they are not overly the shares with dividend cover some high payers to provide exposed to any one stock, of less than 1.5, equating to 14% income today, some that are as any dividend cuts could of the total assets in the funds. likely to grow their payouts each deliver a heavier blow to their Just five funds have none of year with inflation, and other income levels. the top 10 list in their holdings, stocks that will see a higher one of which is a fund of funds, pace of growth and so might not By Laura Suter and the others focus more on pay much now but will be the AJ Bell Personal mid-cap stocks. dividend payers of the future. Finance Analyst Dividend cover of less than Most importantly, fund

THE FUNDS WITH THE HIGHEST EXPOSURE TO THE DIVIDEND DANGERZONE Number of Dividend Size of Total fund exposure Dangerzone exposure Fund to Dividend Fund Size(m) companies in to Dividend Dangerzone holdings Dangerzone UBS UK Equity Income 26.30% 5 £55.70 £14,654,670 JPM UK Equity Income 25.20% 8 £3.90 £981,240 Man GLG UK Income 25.10% 8 £1,245.60 £312,022,800 Ardevora UK Income 24.20% 5 £36.70 £2,258,150 Lazard Multicap UK Income 21.90% 5 £68.30 £14,930,380 ASI UK High Income Equity 21.60% 6 £468.40 £101,080,720 BNY Mellon Equity Income 21.00% 3 £175.00 £36,785,000 Kames UK Equity Income 20.70% 6 £51.00 £10,567,200 Liontrust Macro Equity Income 19.90% 6 £89.30 £17,797,490 M&G - M&G Dividend 19.90% 6 £1,132.90 £225,333,810 Source: Shares, Sharepad

31 October 2019 | SHARES | 43 SHARPEN YOUR INVESTING SKILLS WITH

A SUBSCRIPTION TO SHARES HELPS YOU TO: • Learn how the markets work • Discover our best investment ideas • Monitor stocks with our customisable watchlists • Enjoy our guides to sectors and themes • Get the inside track on company strategies • Find out how fund managers make money

Digital Online Investment magazine toolkit ideas INDEX

KEY • Main Market KEY • AIM • Investment Trust ANNOUNCEMENTS • Fund • ETFs OVER THE NEXT WEEK Marks & Spencer 31 Full year results (MKS) 5 November: Associated British Foods, Imperial Barclays (BARC) 9 Mulberry (MUL:AIM) 8 Brands. 6 November: Connect Group, Gattaca. BP (BP.) 42 Regional REIT (RGL) 15 British Land (BLND) 15 Half year results Royal Bank of 9 1 November: Millennium & Copthorne. 4 November: Burberry (BRBY) 8 Scotland (RBS) Kosmos Energy. 5 November: First Derivatives, Warehouse Reit. 6 November: Marks & Spencer. 7 November: Auto Trader, Halfords, Inmarsat, JZ Capital Partners, Lancashire Holdings, Sainsburys, Tate & Lyle.

Trading statements 5 November: Direct Line, Gem Diamonds. Capita (CPI) 14 Royal Dutch Shell 42 6 November: Intu Properties. 7 November: Caretech (CTH:AIM) 12 (RDSB) Derwent London, Flutter Entertainment, Hikma Evraz (EVR) 42 Pharmaceuticals, Howdens, IMI, Inchcape, Provident Experian (EXPN) 14 Financial, Persimmon, RSA. GB Group (GBG:AIM) 14 GlaxoSmithKline 14, 31, (GSK) 32 WHO WE ARE

EDITOR: DEPUTY NEWS Sainsbury's (SBRY) 9 Daniel EDITOR: EDITOR: Coatsworth Tom Sieber Steven Frazer Scottish Investment 30 @Dan_Coatsworth @SharesMagTom @SharesMagSteve Trust (SCIN) FUNDS AND SENIOR REPORTERS: CONTRIBUTORS Somerset EM 28 INVESTMENT Martin Gamble Russ Mould TRUSTS Tom Selby Ian Conway Discovery (BK5SP70) EDITOR: Hannah Smith Harbourvest Global 16 @SharesMagIan James Crux Laura Suter (HVPE) Temple Bar (TMPL) 14 @SharesMagJames REPORTER: Yoosof Farah Royal Mail (RMG) 6 Tesco (TSCO)w 9, 31 @YoosofShares Travis Perkins (TPK) 14 HSBC (HSBA) 9, 14 ADVERTISING PRODUCTION iShares Physical 16 Vanguard Active UK 28 Senior Sales Executive Head of Design Designer Nick Frankland Darren Rapley Matt Ely Gold (SGLN) Equity (BK1XRK6) 020 7378 4592 [email protected] Shares magazine is published weekly every Land Securities 15 Watches of 8 Thursday (50 times per year) by (LAND) Switzerland (WOSG) CONTACT US: AJ Bell Media Limited, 49 Southwark Bridge Road, [email protected] London, SE1 9HH. Lloyds (LLOY) 9, 14 WHSmith (SMWH) 11 Company Registration No: 3733852. YouGov (YOU:AIM) 6 All Shares material is copyright. Man Group (EMG) 16 All chart data sourced by Refinitiv Repro­duction in whole or part is not permitted unless otherwise stated without written permission from the editor.

31 October 2019 | SHARES | 45