STOCKS | FUNDS | INVESTMENT TRUSTS | PENSIONS AND SAVINGS
VOL 19 / ISSUE 40 / 11 OCTOBER 2018 / £4.49 SHARES WE MAKE INVESTING EASIER SMARTERThe WAY to play the property market
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PLUS AN WHY THE THE CLEVER INTERESTING SUBSCRIPTION WAY TO TEACH FUND ECONOMY CHILDREN TARGETING BOOM HAS THE VALUE A 6% YIELD FURTHER TO GO OF MONEY EDITOR’S VIEW Four simple steps to educating children about saving and spending Financial education doesn’t have to be confined to the classroom
ising debt levels, struggles with • 10% charity – this might be making getting on the housing ladder a donation to animal protection or an Rand inflation rising faster than earthquake relief fund. pay reinforces the need for better • 30% something special – such as financial education to help individuals wanting new roller skates outside of a better manage their money. birthday or Christmas. The education push ultimately needs • 30% long-term savings – don’t to start from a young age, so as to specify what the money is for; just engrain a savings habit in individuals communicate that it is for important and prepare them for the financial items when they are older. In reality this pressures of later life. might help children with money towards Financial education isn’t a ticket to a house deposit when they are an adult, making you rich. Instead, it is arming you with the for example. skills to a) prepare for tougher times or financial • 30% ‘anything you want’ spending – this is hurdles through saving money; and b) understand money to be used for life’s casual pleasures how to avoid getting into unnecessary debt, or such as a new toy or a magazine. Even then, the minimising the severity, by having greater control child may have to save for a couple of weeks to over your spending. have enough to pay for the item. Simon Woods, chief investment officer at wealth Giving money to charity teaches children the manager Mattioli Woods, believes he has one value of helping others who have less than them. answer. He uses a savings model with his own The ‘something special’ bracket could help to children and with clients which dictates how pocket educate children about the need to save first, buy money is spent. A few simple rules can teach later – rather than borrow money to buy now. children the value of money plus help to develop Hopefully this will make them not want to rely on healthy savings habits. credit cards or loans when they become an adult. He says parents or grandparents should stipulate The long-term savings segment will give them a that pocket money is put into four buckets – the pot of money for important life events, and also get percentages are the same whether the child gets them used to putting aside cash on a regular basis £3 a week or £15 a week. – which essentially means they have developed a pensions saving habit from an early age. And the last bit refers to money they can spend as and when they want. A child may spend like crazy at the start, but they could soon appreciate what their money can buy and whether the product or service is worth it. That in turn could lead to more considered purchases in the future. This plan looks so simple yet with the potential to be highly effective. I’m certainly going to give it a go with my own children. (DC)
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TSETOPIX Total 11.4% 23.5% 4.1% 9.4% 11.1% Return Index Past performanceisnot areliable indicator of future returns. Source:Morningstar as 31.08.2018,bid-bid,net income reinvested. ©2018 MorningstarInc.All rights reserved.The TSE TOPIXTotal Return Indexisthe comparativeindexofthe investment trust.
The latestannual reports and factsheets canbeobtained from our websiteatwww.fidelity.co.uk/its or by calling0800 41 41 10.The full prospectus mayalsobeobtained from Fidelity. FidelityInvestment Trusts aremanaged by FILInvestments International.Issued by Financial Administration Services Limited,authorised and regulatedbythe Financial ConductAuthority.Fidelity, FidelityInternational,the FidelityInternational logoand Fsymbol aretrademarks of FIL Limited.UKM0918/22432/CSO8836/1218 VIEWING SHARES AS Contents A PDF? CLICK ON PAGE NUMBERS TO JUMP TO THE START OF THE RELEVANT SECTION EDITOR’S 02 VIEW Four simple steps to educating children about saving and spending Soaring US Treasury yields are driving down stocks / Understanding BIG weakness in Standard Life Aberdeen shares / Who is looking to connect 06 NEWS with French Connection? / Retailer QUIZ has questions to answer / Storm risk at Beazley and Hiscox / Packaging sell-off ‘way overdone’
GREAT New: Accesso / Clinigen 10 IDEAS Updates: AB Dynamics / Aviva / Sopheon / Tharisa / Unilever TALKING 18 POINT Best of new boom in subscriptions economy yet to come
MONEY What will Chancellor Hammond pull out of his red box on 22 MATTERS 29 October? / Make hundreds of pounds from your friends MAIN 28 FEATURE The smarter way to invest in property INVESTMENT 34 TRUSTS Grab a 6% dividend yield with secured lender Hadrian’s Wall 36 FUNDS Does taking greater risk equal greater reward with investing?
40 AEQUITAS How Italy could still knock the Eurozone off target UNDER THE 43 BONNET Why rat-catcher Rentokil is a standout stock in the FTSE 100 SECTOR 45 REPORT Want to tap into a market worth $340bn a year? 48 INDEX Shares, funds and investment trusts in this issue
securities, derivatives or positions with spread betting organisations that they have an interest in should first clear their writing with the editor. If the editor DISCLAIMER agrees that the reporter can write about the interest, it should be disclosed to Index of companies and funds in this issue readers at the end of the story. Holdings by third parties including families, trusts, IMPORTANT self-select pension funds, self select ISAs and PEPs and nominee accounts are included in such interests. Shares publishes information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters. 2. Reporters will inform the editor on any occasion that they transact shares, Comments published in Shares must not be relied upon by readers when they derivatives or spread betting positions. This will overcome situations when the make their investment decisions. Investors who require advice should consult a interests they are considering might conflict with reports by other writers in the properly qualified independent adviser. Shares, its staff and AJ Bell Media Limited magazine. This notification should be confirmed by e-mail. do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions. 3. Reporters are required to hold a full personal interest register. The whereabouts of this register should be revealed to the editor. Members of staff of Shares may hold shares in companies mentioned in the magazine. This could create a conflict of interests. Where such a conflict exists it 4. A reporter should not have made a transaction of shares, derivatives or spread will be disclosed. Shares adheres to a strict code of conduct for reporters, as betting positions for seven working days before the publication of an article that set out below. mentions such interest. Reporters who have an interest in a company they have written about should not transact the shares within seven working days after the 1. In keeping with the existing practice, reporters who intend to write about any on-sale date of the magazine.
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SOCIETE GENERALE BIG NEWS Why soaring US Treasury yields are driving down stocks around the world Bearish signal for stock markets while analysts get more nervous
s we write UK stocks have stabilised after Reserve increased rates to a range of 2% to 2.25% a hairy few days prompted by spiralling at the end of September – a level not seen since Ayields on US Treasury (government April 2008. bond) yields. Rising Treasury yields negatively impact stock Yields rise when the price of Treasuries is falling. markets as the income available from relatively Having exceeded 3% for the first time in four lower risk government debt becomes more years in May, the yield on 10-year Treasuries hit attractive than that from higher risk equities. 3.25% on 9 October, its highest level since 2011. As they also reflect higher costs of borrowing, Increased expectations for inflation in a strong they could put pressure on business and US economy have been spooking holders of consumer spending. bonds as rising prices erode the ‘real’ value of the If people are buying fewer products and fixed payments from a bond. This has prompted a services or if investment within businesses sell-off, driving down prices and driving up yields. declines then estimated cash flows for many The rise in yields also reflects expectations for listed companies will likely fall and this will faster increases in US interest rates; the Federal typically result in lower share prices. (TS)
INVESTMENT BANK Berenberg’s latest believe growth is slowing has doubled poll of a collection of analysts paints a from 24% to 49%. negative outlook, reflecting the most Berenberg analyst Nick Anderson says bearish reading since the broker started there are several factors that could be polling analysts in August 2015. behind the slowdown, specifically a rapid Berenberg expects a slowdown in reversal in monetary stimulus in China global growth, flagging the ‘broad-based and weaker US consumer data. nature’ of it suggests more than just Looking at US consumer spending trade disputes at work. data, Anderson says furniture In the data series, 27% of analysts sales, which indicate economic imply a positive outlook for economic factors such as disposable income, growth, down from 46% in January. confidence and credit availability, have And the number of analysts that recently softened. (LMJ)
6 | SHARES | 11 October 2018 1200 CLINIGEN GROUP 1150 1100 1050 1000 950 900 850 800 2017 2018 4600 UNILEVER (UK) 1100 SOPHEON 4500 1000 4400 4300 900 1100 SOPHEON 4200 800 1000 4100 700 900 4000 600 3900 800 3800 500 700 3700 400 BIG NEWS 600 3600 300 BIG NEWS 500 2017 2018 2017 2018 400 300 Weakness2017 2018 in Standard 150 THARISA AVIVA 560 140 550 540 130 Life 53shares0 is not 120a 520 510 110 500 100 490 480 90 buying470 opportunity80 460 2017 2018 Merger with Aberdeen2017 Asset201 Management8 yet to deliver the goods
espite three quarters of the analysts
which follow it liking the stock, Standard 460 STANDARD LIFE ABERDEEN Life Aberdeen (SLA) shares are down 440 1500 AB DYNAMICS 420 D 1400 400 more than 30% this year hitting recent lows 1300 380 below 290p. 1200 360 1100 It certainly hasn’t1000 been plain sailing for the 340 320 FTSE ALL SHARE 900 venerable Edinburgh800 firm since its tie-up with 300 460 Rebased to first 700 280 440 Aberdeen Asset Management600 in 2017 and 2017 2018 420 investors should resist500 the temptation to see 2017 2018 400 current weakness as a buying opportunity. 380 360 In February 2018 the shares slumped 14% after 340 one of Aberdeen’s biggest customers, Scottish 320 Widows, terminated a contract on the basis that 300 Standard Life was a material competitor. Widows bigger share of customer assets. had £109bn of assets at Aberdeen. Firms like Vanguard and Fidelity have offered The shares took another tumble in June when low-cost index funds for years. Now Fidelity has Lloyds Banking (LLOY), which owns Scottish launched a range of zero-fee index products with Widows, announced that it had dumped its entire the first two funds capturing over $1bn of assets stake in SLA. within a month of launching. Lloyds is now in talks to merge its wealth Added to these competitive pressures Standard management arm into a new joint venture with Life's bent towards emerging markets, which have Schroders (SDR) with the latter expected to win suffered from bearish sentiment all year, hasn’t the Widows mandate. helped its share price. Standard Life's assets under management and On the plus side the company is shedding its UK administration (AUMA) are still above £600bn but and European insurance businesses as it adopts first half results showed net outflows of £16.6bn, an ‘asset-light’ model. That will allow it to return mostly from higher-margin equity products like up to £1.75bn of capital or nearly 20% of its Standard Life Global Absolute Return Strategy current market cap to shareholders. (B7K3T22). That translated directly into a 7% fall There is also a renewed focus on costs to try to in operating profits. offset the impact of lower revenues and protect The GARS fund, seen as a ‘hedge fund for the profits, and this looks to be bearing fruit as first masses’, was the biggest in the UK in 2016 with half pre-tax profits were up on the previous half. assets of almost £27bn. However due to poor performance and outflows, assets have since SHARES SAYS: dwindled to £17bn. Cost-cutting alone is unlikely to turn the share price around. What's really needed is for fund performance A RACE TO THE BOTTOM to improve and net inflows to turn positive, neither of Standard Life is also caught in a ‘race to the which look likely to happen in the short term. (IC) bottom’ as industry rivals cut fees to try to grab a
11 October 2018 | SHARES | 7 BIG NEWS Who is looking to connect with French Connection? Faded fashion brand has put itself up for sale, sending the shares storming higher
mbattled fashion brand French Connection (FCCN) has confirmed media speculation E(8 Oct) it is considering strategic options including putting itself up for sale. As we write the news has sent the shares surging higher to 54p, within sight of 52-week highs. Founder, chairman and CEO Stephen Marks has reportedly approached bidders to offload his near- 42% stake and French Connection is in an offer period; any deal to buy Marks’ holding would likely trigger a mandatory offer for the entire enterprise. mortar estate but there look to be opportunities Fighting to arrest like-for-like sales declines and to expand the wholesale and licencing parts of the battle its way back to profitability amid cut-throat business. competition, French Connection has long been Mike Ashley’s Sports Direct International (SPD) viewed as a value trap for investors. has a 27% stake in French Connection, although it A sale of the business could be the required is unclear if Ashley is one of the interested parties. catalyst to unlock this value. Last year, French Connection received an A buyer would have to extricate the retailer unsolicited bid from an unnamed US group, but from leases and further streamline the brick and the suitor ultimately walked away from a deal. (JC) Retailer QUIZ has questions to answer after major profit warning Occasion wear specialist’s earnings alert has left the stock firmly out of fashion
SHARES IN QUIZ (QUIZ:AIM) Glasgow-based QUIZ’s have been well-received, QUIZ have collapsed following a profit profit warning reflects an is seeing very strong growth warning (5 Oct) that triggered unforeseen slump in sales from through its own websites, which sizeable earnings downgrades. third party platforms, namely carry higher margins, and the Slipped out at 2.38 p.m. Next (NXT) and Zalando, brand is growing internationally. on a Friday afternoon, the and a poor September in its ‘We still believe QUIZ is a fast fashion brand warned stores and concessions as good, progressive brand with of a £1.5m first half EBITDA footfall softened. a loyal following but clearly (earnings before interest, tax, More predictable was the this is a backward step and the depreciation and amortisation) poor showing from concessions shares will likely tread water shortfall and materially with embattled Debenhams until the growth profile starts to downgraded full year sales and (DEB) and House of Fraser. reappear,’ laments stockbroker profit expectations. Encouragingly, TOWIE ranges Peel Hunt. (JC)
8 | SHARES | 11 October 2018 BIGBIG NEWSNEWS Watch out for storm hit at Beazley and Hiscox after Lancashire warning Big losses for insurers in store from Hurricane Florence and Typhoon Jebi
torm-related losses at non-life insurer Lancashire Holdings (LRE) have a negative Sread-across for rivals Beazley (BEZ) and Hiscox (HSX). Shares in Lancashire lost 10% of their value after the company warned of hefty third-quarter losses due to weather-related and marine losses (8 Oct). $3bn and $5bn. Even with re-insurance recoveries, losses from Losses from Typhoon Jebi, the strongest storm storm damage are seen at between $25m and to hit Japan in 25 years, are estimated at up $45m while losses in its marine portfolio are to $5.5bn. expected to reach $30m. Beazley is also likely to reveal a hit when it Before these losses Lancashire would have next gives guidance on 8 November although it returned a profit last quarter but it also cautions should be more modest according to analysts at that actual losses may vary from its estimates investment bank Berenberg. as the final settlement of all claims will take a Hiscox, which updates on trading on 6 considerable time. November, is more diversified away from Market estimates of total insured losses from catastrophe insurance and its earnings are larger Hurricane Florence, which hit the east coast of so a similar hit to Lancashire would have less of America last month, are seen anywhere between an impact. (IC) Packaging sell-off ‘way overdone’, insist analysts Structural growth in the online shopping industry remains a key driver of stock re-ratings
ANALYSTS HAVE launched a summer. Reported weakening Christmas sales bonanza, are robust defence of the European prices for containerboard is likely to reverse. packaging suppliers after a widely seen as the cause. ‘If anything, the sector steep decline in the three key Containerboard is the should have re-rated to London-quoted stocks. Analysts corrugated cardboard wrapping reflect the improvement in at stockbroker Davy called the used by Amazon and thousands longer-term growth dynamics sector sell-off ‘way overdone.’ of other online retailers to driven by these structural DS Smith (SMDS), Smurfit protect packages sent out to factors [online shopping] as Kappa (SKG) and Mondi customers. well as the positive earnings (MNDI), the largest of the But Davy’s own channel momentum that is likely to three London-listed packagers, checks suggest that any pricing continue well into 2019,’ says have all posted double-digit dips have been short-term and, Davy’s Barry Dixon and Flor share price declines since the as we head towards the vital O’Donoghue. (SF)
11 October 2018 | SHARES | 9 GREAT IDEAS Act now! Market sell-off offers superb chance to buy Accesso for a discount
Buck the risk-off markets theme with this outstanding growth story
ince positive half year results in September Accesso ACCESSO BUY Technology’s (ACSO:AIM) (ACSO:AIM) £23.60 S Stop loss: £18.80 share price has plunged more than 20%. This is potentially Market cap: £639m great for new investors because it means you can now buy the same business and growth opportunity for 20%-plus cheaper than you could last month. The obvious question to ponder is whether the sell-off America, the Middle and Far East, flow positive in every one of implies something uglier to including China. those years. come? Our own digging suggests Multiple vertical markets Future revenues will be not. We attribute the share price are also being explored, such impacted by new accounting performance to nothing more as sporting events, music rules, which change both how and than a global markets sell-off as concerts, ski resorts, museums when income is recognised. This the market mood changes. Our and theatres. does not change the underlying view is long-term and these sell- We believe Accesso has scope growth dynamics of the business offs can be good times to pick up to expand in many ways. There and it will make little difference to decent stocks. are thousands of theme and profit and earnings going forward, Accesso isn’t alone in terms of water parks, tourist attractions which implies better margins. recent share price declines for and other high footfall visitor Analysts expect operating profit popular AIM Stocks. For example, sites around the world that of around $42m in 2020. It is Fevertree (FEVR:AIM), Blue could potentially benefit from forecast1200 to report $25m or $26m Prism (PRSM:AIM) and GB Group the company’s integrated visitor this1150 year, implying a 2018 price to 1100 (GBG:AIM) have all taken a hit in ‘experience’ solutions. earnings1050 (PE) multiple of about recent weeks. There is also an extra growth 40.1000 That’s high, yet if forecasts are Accesso is an attractions and leg emerging in health via a to95 0be believed, the forward PE queuing solutions supplier. development agreement with could900 be slashed rapidly to about 850 CLINIGEN Over the years it has created an Henry Ford Health System. 22-times800 over the next 12 to 15 integrated platform for everything Accesso is a business that has months.2017 (SF) 2018 from buying tickets, queue- been ticking growth investors’ 3000 ACCESSO busting, merchandise purchasing boxes for years. Since 2012 it has 2800 and more. seen revenue soar from $46m 2600 Clients include Alton Towers to $133.4m, including last year’s 2400 operator Merlin (MERL) and (2017) 30% jump, and has an 2200 Six Flags and it has emerging equally impressive record on 2000 opportunities across Latin profits. It has been free cash 1800 2017 2018
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SAINTS (The Scottish American Investment Company) aims to build up investment capital and generate an income that grows faster than 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’s built to deliver a dependable income stream, 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. The Scottish American Investment Company P.L.C. is available through the Baillie Gifford Investment Trust Share Plan and the Investment Trust ISA, which are managed by Baillie Gifford Savings Management Limited (BGSM). BGSM is an affi liate of Baillie Gifford & Co Limited, which is the manager and secretary of The Scottish American Investment Company P.L.C. GREAT IDEAS Be brave and snap up Clinigen while its shares are weak The pharma company boasts upbeat prospects despite temporary setbacks
ecent share price weakness made a management in speciality pharma CLINIGEN BUY change in March to address firm Clinigen (CLIN:AIM) (CLIN:AIM) 865p underperformance of CTS R Stop loss: 692p presents an attractive entry and better position it in point for a business expected to Market cap: £1.14bn the US and drive future deliver significant profit growth development globally. in the coming years. Another share price sell-off Stockbroker N+1 Singer licensed drugs. The rest came happened in late September forecasts it will grow pre-tax from its Clinical Trial Services when Clinigen raised £80m profit from £69m in the year to (CTS) arm where Clinigen to help buy packaging and June 2018 to £124m over the acquires drugs that will be used distribution services specialist next three years. in clinical trials on behalf of CSM. The acquisition price While one of Clinigens’s pharmaceutical companies. looks a bit rich in our view recent acquisitions looks very at approximately 15 times expensive, the future rewards WHY HAVE THE earnings before interest, tax, could be significant as Clinigen SHARES BEEN WEAK? depreciation and amortisation now has a stronger position Over the last year, shares in (EBITDA). However, strategically in Europe and ‘the pieces are Clinigen have fallen from a one- it looks important to Clinigen’s now coming together to create year high of £11.77 last October desire to expand geographically. a true global platform’ says to 865p. The sell-off was It is now the job of the N+1 Singer contributing analyst triggered by half-year results in management to deliver on Chris Glasper. February following a ‘significant earnings expectations, or divergence’ in divisional hopefully smash them, in order WHAT DOES IT DO? performance, according to to win back the market’s favour. Clinigen sends pharmaceutical investment bank Berenberg. This is a high-risk investment products to hospitals around While its Commercial given current weak market the world for patients with a Medicines arm smashed sentiment, yet we believe high unmet medical need. It forecasts of 15% growth with anyone taking the plunge works with pharma businesses a 37% surge in profit, both could see handsome rewards to make their drugs available unlicensed medicines and in time. (LMJ) for a volume-based fee or CTS missed expectations. The sales margin, or acquires and performance of unlicensed 1200 revitalises drugs so they can medicines has since reversed 1150 be applied to different markets but the trend in CTS has 1100 than historically. continued. 1050 1000 In the past financial year, the It is important to recognise 950 sale of unlicensed medicines that CTS only contributes 900 850 CLINIGEN comprised 45% of group profit a small amount of overall 800 while 44% was generated via profitability. Clinigen also 2017 2018
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UNILEVER SOPHEON (ULVR) £40.31 (SPE:AIM) 990p
Loss to date: 5.2% Gain to date: 6.5% Original entry point: Original entry point: Buy at £42.53, 2 November 2017 Buy at 930p, 13 September 2018 OUR LATE 2017 ‘buy’ call on packaged consumer IT IS EARLY DAYS with our current Great Idea on goods giant Unilever (ULVR) may be slightly in Sopheon (SPE:AIM) so investors would be wise the red, but we’re sticking with the high-quality to resist getting too carried away with this week’s business. upbeat trading update. That said; the business In a seismic development, the board at the is developing quite the reputation for beating Persil, PG Tips, Marmite and Magnum maker has forecasts, a habit that goes back at least a couple capitulated to shareholder pressure and scrapped of years. its plan to shift Unilever’s headquarters to the Management are clearly being very careful Netherlands. about how investor expectations are handled, This means Unilever is going to stay in FTSE which is a good sign. 100, although the board’s reputation has arguably Innovation and product lifecycle software been damaged by the episode. provider Sopheon now expects 2018 full The blue chip company is a unique asset, a year numbers to come in ahead of compounding star turn offering exposure to market expectations. emerging markets. That prompted stockbroker FinnCap to raise Boasting an enviable portfolio of brands, deep its revenue estimates for this year from $31m entrenchment in the supply chains of its retailers to $32.5m and lift earnings before interest, tax, is the source of Unilever’s wide economic moat depreciation and amortisation (EBITDA) forecasts and the company has reasonably predictable 5% higher to $8m. earnings. What’s really interesting is that the third Strong cash flows have enabled Unilever to quarter is usually the quiet period before the consistently grow its dividend in real terms for fourth quarter storm. This suggests to us that decades and the shareholder reward is being perhaps some new business has been done early 1200 CLINIGEN GROUP supplemented by share buybacks. although we certainly couldn’t rule out future 1150 1200 CLINIGEN GROUP 1100 1150 positive surprises. 1050 1100 1000 1050 950 1000 900 950 850 900 800 850 2017 800 2018 4600 UNILEVER (UK) 1100 SOPHEON 4500 2017 2018 4600 UNILEVER (UK) 1000 1100 SOPHEON 4400 4500 4300 900 1000 1100 4400 SOPHEON 4200 4300 800 900 1000 1100 SOPHEON 4100 4200 700 800 4000 900 1000 4100 600 700 3900 4000 800 900 3800 500 600 700 3900 800 3700 3800 400 500 600 700 3600 3700 300 400 2017 2018 500 600 3600 2017 300 2018 400 500 2017 2018 2017 2018 300 400 2017 300 2018 SHARES SAYS: 2017 2018 A quality corporate colossus worth clasping tight, SHARES SAYS: we’re delighted Unilever has seen sense and150 decidedTHARISA (LON) We remain upbeat about the stock’s prospects. Keep AVIVA 560 not to ‘go dutch’. (JC) 140 150buying.THARISA (SF) (LON) 550 560 AVIVA 130 140 540 550 530 540 120 130 520 530 110 120 510 520 500 14 | 51 SHARES0 | 04 October 2018 100 110 490 500 90 100 480 490 470 480 80 90 460 470 2017 80 2018 2017 460 2018 2017 2018 2017 2018
1500 AB DYNAMICS 1400 1500 AB DYNAMICS 1300 1400 1200 1300 1100 1200 1000 1100 FTSE ALL SHARE 900 1000 800 460 FTSE ALL SHARE 900 Rebased to first 700 800 440 460 Rebased to first 600 700 420 440 500 600 2017 2018 400 420 500 2017 2018 380 400 360 380 340 360 320 340 300 320 300 Never heard of our investment trusts?
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Marketing material. Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registration No 4191730 England. Authorised and regulated by the Financial Conduct Authority. UK12828 GREAT IDEAS UPDATES
AVIVA THARISA (AV.) 467.9p (THS) 100p
Loss to date: 8.3% Loss to date: 0.5% Original entry price: Original entry point: Buy at 510.5p, 14 December 2017 Buy at 100.5p, 7 December 2017 THE PLANNED DEPARTURE of chief executive SOUTH AFRICAN CHROME and platinum miner Mark Wilson next April could help Aviva (AV.) take Tharisa (THS) was caught up in the summer sell- the step from rehabilitation to accelerated growth off in commodity producers amid weaker metal and support a share price which has drifted prices and volatile currency rates. However, the since we added the company to the Great Ideas shares have more recently started to claw back portfolio towards the end of 2017. lost territory. After a period in the doldrums at the beginning The fourth quarter production figures on 8 of this decade, the insurance firm has been October were slightly below expectations yet simplified under Wilson’s leadership and both the full-year targets were met thanks to better than 1200 CLINIGEN GROUP financial performance and balance sheet have expected recovery rates. 1150 been drastically improved. A deal to buy 90% of Zimbabwe-based chrome 1100 1050 However, it is notable that the company miner Salene has been restructured to an option 1000 has underperformed its rivals under Wilson in agreement to buy the business only if initial 1200 950 CLINIGEN GROUP share price terms, up 27% since he took over exploration is satisfactory. 1150 900 1100 850 in January 2013 compared with a 94% advance Tharisa’s investment case remains the same as 1050 800 for Prudential (PRU) and a 78% rise for Legal & when we said to buy the shares nearly a year ago. 1000 2017 2018 4600 UNILEVER (UK) 1100 SOPHEON General (LGEN) over4500 the same period. This1000 is a low-cost producer trading on a cheap 950 4400 900 Wilson will leave4300 in six months’ time to rating900 with the potential to churn out masses 8501100 SOPHEON ensure an orderly succession.4200 Non-executive of cash.800 A lot of time is spent on improving 8001000 4100 700 4000 900 2017 2018chairman Adrian4600 MontagueUNILEVER will(UK) take up executive operational1100 600 SOPHEON efficiency which should provide a 45003900 800 responsibilities aided3800 by a committee of senior further1000 500 boost to earnings over the longer-term. 700 4400 400 directors. 43003700 900 1100 600 SOPHEON 42003600 800 300 2017 2018 2017 2018 1000 500 Shore Capital 4100analyst Paul De’Ath says: ‘The key 700 900 400 4000 600 question is whether3900 Mr Wilson’s replacement will 800 300 500 2017 2018 3800 700 come from outside3700 the group or perhaps could be 400 600 one of the three3600 existing executive directors. As 300 500 2017 2018 2017 2018 400 was seen with Mr Wilson himself, an external CEO 150 THARISA AVIVA 560 140 300 is likely550 to bring a much greater change in strategy 2017 2018and direction540 for the group.’ 130 530 120 520 110 510 150 THARISA (LON) 560 500 AVIVA 100 490 140 550 90 540 480 130 470 80 530 120 520 460 2017 2018 510 2017 2018 110 500 100 490 SHARES SAYS: 480 90 470 80Investors shouldn’t get spooked by the ups and 460 2017 2018 2017 2018 downs of commodity prices. If you’re going to invest in a mining stock, make sure you back a low-cost 1500 AB DYNAMICS 1400 producer which can survive in more difficult times. SHARES1300 SAYS: Tharisa certainly ticks the right boxes. Keep buying. 1200 We remain1100 positive on Aviva. (TS) (DC) 1000 FTSE ALL SHARE 1500 900 800 AB DYNAMICS 460 Rebased to first 1400 1300 700 440 1200 600 420 16 |1100 SHARES500 | 04 October 2018 2017 2018 400 1000 900 38FTSE0 ALL SHARE 800 460 36Rebased0 to first 700 440 340 600 420 320 500 2017 2018 400 300 380 360 340 320 300 1200 CLINIGEN GROUP 1150 1100 1050 1000 950 900 850 800 2017 2018 4600 UNILEVER (UK) 1100 SOPHEON 4500 1000 4400 4300 900 1100 SOPHEON 4200 800 1000 4100 700 900 4000 600 3900 800 3800 500 700 3700 400 600 3600 300 500 2017 2018 2017 2018 400 300 2017 2018
150 THARISA (LON) AVIVA 560 140 550 540 130 530 120 520 510 110 500 GREAT IDEAS UPDATES 100 490 480 90 470 80 460 2017 2018 AB DYNAMICS 2017 2018 (ABDP:AIM) £14.00
Gain to date: 49% 1500 AB DYNAMICS 1400 Original entry point: 1300 1200 Buy at 937.5p, 21 December 2017 1100 1000 FTSE ALL SHARE 900 A VERY IMPRESSIVE trading update on 4 800 460 Rebased to first October has given another lift to AB Dynamics 700 440 600 420 (ABDP:AIM), one of our top picks of the year. 500 2017 2018 400 The automotive testing expert says revenue and 380 360 pre-tax profit for the year to 31 August 2018 has 340 ‘significantly’ exceeded previous market forecasts. and deliveries in the ADAS targets and steering 320 We’ll get a better idea of the numbers when the robot businesses,’ says Gareth Evans, an analyst at 300 results are published on 14 November. Progressive Equity Research. That event will also be the first chance to hear from new chief executive James Routh who SHARES SAYS: started on 1 October, although it may be too early AB Dynamics is one of those companies which just for him to comment on any big strategic plans. keeps delivering the goods. It is one of our favourite ‘We think that the group is likely to have stocks in the small cap universe and we believe the shares are still worth buying, even after this year’s seen strength across a number of global impressive rise. (DC) geographies with commensurate levels of sales
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FIND OUT MORE www.ajot.co.uk 04 October 2018 | SHARES | 17 TALKING POINT Our views on topical issues Best of new boom in subscriptions economy is yet to come We explain why this old-hat model is getting a new lease of life and how this can benefit investors
he subscription business model is booming and T could be considerably bigger in the coming years, so investors need to sit up and take notice. We tend to think of subscriptions in terms of newspapers, magazines, gym memberships and pay-TV services. You could argue that utility bills and mobile phone contracts are also types of subscription even though they are deemed as non-discretionary spending. has something like 8m UK BIGGER THAN ARTIFICIAL Business-to-consumer subscribers. INTELLIGENCE subscription businesses attracted Amazon reported having more While the subscription model more than 11m subscribers than 100m people signed up is hardly new, the ability to in the US in 2017, according to its Prime service at the start embrace the internet means to Harvard Business Review, of this year, which gives users we may be at the early and the industry as a whole access to its own exclusive TV stages of something far more has been growing at 200% and film content and next-day transformational. annually since 2011. There are delivery on thousands of items It could be more disruptive now thousands of consumer- purchased through its online even than the adoption of focused subscription businesses store. personal computers in the tailoring products and services Supermarkets are trying to 1980s and 1990s, or artificial to the diverse requirements get in on the game such as intelligence and the connected and preferences of millions of encouraging customers to sign world of the internet of customers. up for monthly or annual delivery things (IoT) that grab so many To give you a sense of the plans to lower the cost of home headlines today, according to scale, Netflix has more than deliveries. analysts at Gartner. 130m people worldwide paying It is not just consumers either; According to the market monthly fees to access its vast increasingly businesses are researcher, transformational and often exclusive library buying goods or services via disruptor subscription models of TV and film content. Sky subscriptions, most typically seen are ‘renovating existing markets, (SKY), about to be taken over via software-as-a-service (also generating large-scale societal by US media giant Comcast, known as SaaS). effects, aggregating capabilities,
18 | SHARES | 11 October 2018 TALKING POINT
GARTNER DISRUPTION SCALE 2O18
Source: Kantar, 12 weeks to 9 September 2018
and enhancing existing or There’s also the promise of service. Equally important is what creating new business models.’ networking effects, where a service providers can learn about The underlying premise is that service becomes more valuable their customers, gaining valuable almost anything could eventually to users as overall users grow. usage insight on which extra or be sold on an as-a-service basis. Facebook is perhaps the best premium services might be sold. For example, think about example of this situation in that This last point is really transport-as-a-service, where we the more of your friends and important when it comes are starting to see car sharing family use the platform, the more to understanding the future schemes as a real alternative to you are likely to use it to socialise profitability potential of a owning a car yourself. It might with them. subscription business. even be healthcare-as-a-service, Analysts at stockbroker Peel Market research commissioned data-as-a-service or a thousand Hunt says subscriptions also end by cloud computing business other ‘as-a-service’ subscription up as customer retention tools Zuora last year suggests options. too, in that if the subscriber that something like 70% of If it can work for Harry’s with cancels, they stop getting the subscription businesses prioritise razor blades and shaving cream, it can probably work for anything. THE DIFFERENCES FOR THE CUSTOMER AND DEVELOPER One-time fee Subscription THE INVESTMENT APPEAL Subscription models go down Customer Pay once and forget Low upfront cost well with investors because of Transparent Spread out over lifetime their repeatable and predictable X High cost upfront X Hard to keep track of cost income streams which are X Often needs to pay for X Eventually more normally referred to as recurring major releases expensive revenue. Steady income to support Customers build up familiarity Developer Easier to sell development with a service and can often be Easier to charge psychologically reluctant to move Cash upfront to another provider. In some higher rates cases, a subscription service can X Can’t support X Hard to ask customers to become so embedded in an end developement sign up user’s own operating model that X Harder to sell X No incremental revenue it becomes almost impossible to incremental services for updates switch away. Source: Peel Hunt
11 October 2018 | SHARES | 19 TALKING POINT Our views on topical issues a customer land grab, with little rather than in a large upfront But it is not really surprising effort put into customer retention chunk. That takes a lot of pressure that some of the UK market’s (circa 20%) or upselling existing off a user’s own cash flow, moving most highly-rated businesses users (10%) and increasing annual the purchase from capital cost are, at least in part, on this revenue per user, or ARPU as it into everyday operating expenses. subscriptions ‘as-a-service’ is known. Putting that situation into curve. Think Rightmove (RMV), This is at odds with research an everyday context, a Netflix Auto Trader (AUTO) or cyber findings that show upselling subscription of £7.99 a month will security specialist Sophos (SOPH), additional services to the existing seem to many ordinary people for example. subscriber base is, by far, the as incidental – it is effectively the Even Rolls-Royce (RR.) sells most effective way to generate same price as a cheap cinema many of its plane engines at extra revenue. ticket or a pie and a pint. little better than cost to milk the With no customer acquisition But how different would you ‘servicing-as-a-service’ profits costs (you already have them) feel being asked to cough up stream for many years into subscription models can deliver nearly £100 upfront? Most of us the future. what Peel Hunt calls ‘add-on get paid monthly and £7.99 is As Zuora founder and former creep’. This means pushing easier to manage than £100 gone Salesforce executive Tien Tzuo incremental features or products, in month one. puts it, companies like Netflix, perhaps for free at first, and then It’s not a one-way street; Spotify and Salesforce are slowly turn subscription taps there is the cost of attracting just the tip of the iceberg later on. new customers to think about for the subscription model. It also has advantages for (marketing cost, for example), ‘The real transformation, buyers, making relatively small customer churn (users that drop a and the real opportunity, is payments on a regular basis service) and other factors. just beginning.’ (SF)
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AJ Bell includes AJ Bell Holdings Limited and its wholly owned subsidiaries. AJ Bell Management Limited and AJ Bell Securities Limited are authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales at 4 Exchange Quay, Salford Quays, Manchester M5 3EE MONEY MATTERS Helping you with personal finance issues What will Chancellor Hammond pull out of his red box on 29 October? We look at how savers and investors could be affected by the forthcoming Budget
mbattled Chancellor Philip Under the current system Hammond has already tax relief is granted at your E dropped one surprise marginal rate, meaning higher by announcing an earlier-than- and additional-rate taxpayers get expected Budget on Monday a bigger upfront savings bonus 29 October. In doing so he has than basic-rate taxpayers. broken with the tradition of Some campaigners want to holding the economic set-piece see this system overhauled, on a Wednesday, immediately either through the introduction after Prime Minister’s questions. of a flat rate of tax relief set at As always the event will be somewhere near 30% or the a must-watch for savers and abolition of higher-rate relief investors. That is particularly the altogether. Others have called for case after Hammond effectively the tax-free lump sum – currently scrapped the Spring Statement, 25% – to be capped. making October’s event his only Given pension tax relief costs opportunity in the financial the Exchequer around £25bn a year to announce major tax and year (when income tax received spending changes. on pension withdrawals is The economic and political taken into account), it would be backdrop is challenging. naïve to think the Treasury isn’t Uncertainty over Brexit hangs considering changes to raise over Whitehall like a foreboding short-term cash. mist in a gothic Victorian horror, However, a fundamental while the Treasury must find overhaul seems unlikely in somewhere in the region of the current political climate. £20bn to meet a funding promise Furthermore, attacking the for the NHS. tax-free lump sum would be In the midst of all this noise, extremely unpopular among core what major changes should you Tory voters. expect when the Chancellor Instead, the Chancellor might opens his famous red briefcase in look to raise funds by reducing just under three weeks’ time? the annual tax-free allowance – which currently sits at £40,000 PENSION TAX RELIEF for anyone who hasn’t accessed Rarely does a Budget go by their pension flexibly – or without rumours that pension lowering the point at which the tax relief for higher earners could annual allowance ‘taper’ kicks in. Philip Hammond. Photo: Chris McAndrew be set for the chop. At the moment those with
22 | SHARES | 11 October 2018 Helping you with personal finance issues MONEY MATTERS an ‘adjusted income’ above £150,000 could see their annual allowance fall as low as £10,000. Alternatively, the Chancellor could restrict ‘carry forward’ rules which currently allow savers to utilise up to three years of unused annual allowances in the current tax year – potentially generating an annual allowance of £160,000 if used to the maximum. In the meantime, if you were planning to top up your pension this tax year anyway, it makes Year Annual Lifetime Tapered annual Money Purchase sense to do so before the Budget Allowance (£) Allowance (£millions) allowance (£) Annual Allowance (£) to make sure you maximise the 2007/08 225,000 1.6 incentives on offer. 2008/09 235,000 1.65 2009/10 245,000 1.75 DEATH BENEFITS 2010/11 255,000 1.8 It’s not just payments into your pension that benefit from 2011/12 50,000 1.8 generous tax treatment at the 2012/13 50,000 1.5 moment. Anyone with a pension 2013/14 50,000 1.5 who dies before age 75 is able 2014/15 40,000 1.25 to pass on their entire unused 2015/16 40,000 1.25 10,000 fund to loved ones without the recipient(s) paying income 2016/17 40,000 1 40,000-10,000 4,000 tax – provided the money is 2017/18 40,000 1 40,000-10,000 4,000 transferred to their beneficiary 2018/19 40,000 1.03 40,000-10,000 4,000 (or beneficiaries) within two years of them dying. take when accessing your 25% the Treasury review its rules and If someone dies after their tax-free lump sum. consider ‘decoupling’ tax-free 75th birthday, tax is charged at Under existing rules anyone cash. If introduced, this would the beneficiary’s marginal rate of who wants to take a lump sum simply mean you could take your income tax. from a defined contribution tax-free cash from your scheme This regime was introduced pension must first ‘designate’ without making a decision about alongside the pension freedoms how they want to take an income how you want to take your reforms in April 2015, and from it. This could be through the income. replaced previous rules which purchase of an annuity providing It is possible that none of meant pensions could be hit with a guaranteed income for life, or these things will happen – or a 55% tax charge on death. Given taking a flexible income through the Chancellor could pull an the fiscal pressures currently drawdown. entirely different rabbit from his facing the Chancellor, it would A third option, known in the hat. Whatever happens on 29 not be surprising to see this jargon as UFPLS, allows you to October, we’ll ensure you stay come under review. take chunks of your money out fully informed on how it will and receive 25% of each chunk impact you both today and TAKING YOUR TAX-FREE CASH tax-free. into the future. A potential technical tweak at The Financial Conduct the Budget may involve the Authority (FCA), the City Tom Selby, senior analyst, decisions you are required to regulator, has recommended AJ Bell
11 October 2018 | SHARES | 23 MONEY MATTERS Helping you with personal finance issues Make hundreds of pounds from your friends How to get more from banking, investing and even your TV provider
hanks to lucrative offers from a number T of businesses you can now make hundreds – or even thousands – of pounds just by referring friends to sign up to services and companies. These ‘recommend a friend’ schemes often give both the referrer and the friend money off, vouchers or cash. Here we round up the best on offer at the moment. If you have been recommended a service you should always check it’s the cheapest and best provider for you, even with the referral bonus, otherwise you could end up paying more in the long term. BANKING, MORTGAGES AND INVESTING
Nationwide customers who recommend a friend can make £100 for themselves, with their friend getting £100 The friend must use the then automatically saves money too. This is one of the more current account switch service, for you each month – by moving generous schemes, and you can which means their old current it from your current account to recommend up to five friends in account will be closed. If all your Chip account. a year – making up to £500. the criteria are met there is no You earn 0% on the money in You’re eligible as long as waiting time before you both your Chip account unless you you have a current account, get your cash. recommend a friend, upon which mortgage or savings account Free finance app Chip doesn’t the rate you earn is boosted with Nationwide, and the friend offer money for signing up by 1 percentage point for each will need to switch their current friends, but instead the ability friend recommendation. You account to a FlexAccount, to boost the interest rate you can increase your rate to 5% by FlexPlus or FlexDirect account, earn on your savings. The app recommending a maximum of including transferring two connects to your bank account five friends. Each recommend direct debits. and looks at how you spend, and (and so 1 percentage point boost
24 | SHARES | 11 October 2018 Helping you with personal finance issues MONEY MATTERS to your interest rate) lasts for Your friend must not have a year. been a Virgin Media customer You can earn £50 with peer- in the past six months, and must to-peer lender Zopa. Both you sign up to at least a 12-month and the friend get £50 if you broadband, TV or home phone recommend they sign up, and to contract. You can make up to 25 be eligible they need to deposit referrals in any 30-day period. £2,000. There’s no limit on the Both Three Mobile and BT number of recommends. Mobile offer a £25 Amazon gift Online mortgage broker Habito card for both you and your friend offers £100 cash to both you and when they sign up. With Three a friend when you refer someone. they must sign up to a 12-month
You must be a registered user SIM-only plan or a 24-month Pay of Habito in order to generate a Monthly plan. In a unique twist, referral link. You’ll both get your you don’t actually have to be a £100 once your friend completes recommend they sign up. Rather Three customer to refer a friend, their mortgage application. The than being cash, the money comes you just sign up to their referral reward is unlimited, so you can in your choice of M&S, John programme online. “ recommend as many people as Lewis or Amazon gift cards. First you like. Utility pays a more generous AJ Bell Youinvest offers £100 £50 each to both the referrer to anyone who recommends and the friend, and you can pick You don’t have to be a friend to sign up to the between Amazon, John Lewis a Three customer to investment platform. The friend and Tesco vouchers. refer a friend, you just must be new to AJ Bell Youinvest sign up to their referral and open a self-invested personal TV AND programme online pension (SIPP) or ISA account ENTERTAINMENT with £10,000 or more. You “ can recommend an unlimited Sky offers one of the most number of people, so there’s no generous referral schemes in With BT you do need to be cap on how much you can earn. the entertainment space – with a customer to recommend you and a friend getting a £100 someone, and they can be an ENERGY SUPPLIERS Majestic Wine gift card when existing BT customer, as long they sign up. as they don’t have a BT Mobile Smaller, less-well-known energy You need to send your friend account. companies often offer decent a referral code and once their Online shopping service bonuses for recommending a first month’s bill has been paid Ocado has a referral scheme friend as they seek to attract you will be sent your gift card. where you and your friend each more customers. Currently small The friend must subscribe to Sky get £20 off an £80 shop when green-energy provider Bulb is TV, with a minimum cost of £20 they sign up. They also get free offering £50 to both you and a month, and live at a different deliveries for a year as part of the a friend when you refer them. UK address to you to be eligible. deal. You’ll only get the voucher Crucially, this referral bonus is There’s no limit on the number after they have had their first uncapped, so you potentially of friends you can refer. order delivered and your friend earn hundreds – Bulb even Virgin Media is less generous must have a different email claims one customer has made but you get a different reward address and delivery address more than £100,000 from rather than a gift card. It will to you. referring new customers. give both you and a friend £50 OVO Energy offers a similar each off your bill when you refer Laura Suter, deal, but will give you and someone. It’s not open to Virgin personal finance analyst, your friend £25 each if you Mobile customers. AJ Bell
11 October 2018 | SHARES | 25 THIS IS AN ADVERTISING PROMOTION
WHY YOU SHOULD CONSIDER EMERGING MARKETS FOR THE LONG TERM TODAY The term “emerging markets” is used to describe developing economies across the world. These include some of the most populous nations, such as China, India, Brazil and Russia as well as smaller countries including Mexico, South Africa and Saudi Arabia.
hese fast-growing regions WHY INVEST IN EMERGING MANAGING EMERGING MARKET are driving global growth MARKETS NOW? RISKS at present and look set to Emerging markets have matured This is not to say that investing Tbe the leading economic in recent years and now offer a in emerging markets is not powerhouses of tomorrow. Meaning different investment environment to without risk. today’s investors should not that of the 1990s and early 2000s. One of the inherent challenges overlook emerging markets. Political and economic reforms in these markets is dealing with These countries may be have helped build stronger and volatility. Share prices, as well as diverse yet they typically exhibit more stable economies, with larger currency valuations, can be subject attractive demographics and a reserves and far less debt. to more sudden price movements, growing “middle class” which A more mature corporate particularly when compared to are the key drivers behind their market is reflected in the fact developed markets. economic growth. that far more companies in these Recent newspaper headlines The figures speak for themselves. regions now share profits with concerning the economic problems According to J.P. Morgan Asset investors via dividends payments. in Argentina and Turkey certainly Management, emerging GDP in Emerging markets today have serve to highlight such short- emerging markets is estimated outperformed many European and term risks. to be 4.5 per cent in 2018; this US markets, where growth has For investors, the key is to focus compares to just 1.75pc in the US slowed in recent years. Valuations on the longer-term structural and 1.25pc in the UK.1 are also looking attractive relative story, typically driven by the EM These are materially important to long-term averages, as short- consumer. Volatility may present markets which allow investors to term market movements mean short-term challenges but it can diversify their portfolios and access that share prices and markets also offer longer-term investment more sustainable, long-term growth have had a challenging period opportunities and the ability to buy opportunities versus developed in 2018 but fundamentals into weakness. markets peers. remain compelling. This emphasizes the importance THIS IS AN ADVERTISING PROMOTION
of working with emerging market specialists, who have on-the- ground experience and in-depth knowledge of these markets, to enable them to make longer-term appraisals and not be side tracked by short-term noise.
THE IMPORTANCE OF SPECIALIST KNOWLEDGE the JPMorgan Emerging Markets investments in HDFC and IndusInd, J.P. Morgan Asset Management Investment Trust says this long- two private Indian banks that takes a very active approach to term strategy is reflected in continue to capture market share. emerging market investments. It the company’s stock choice. Its The Company has recently takes what is known as a “bottom- investment philosophy is to choose added a holding in MercardoLibre, up” approach: looking at the growth profitable companies rather than the largest e-commerce company potential of specific companies successful countries, in other in Latin America . Given that UK rather than simply taking a view on words to focus on micro not macro. consumers spend around 19pc of individual countries. He says: “We have a bias their income online but only 3pc in This, it believes, is a sound way towards companies with Brazil, Austin says such companies to deliver value to investors over sustainable competitive offer huge potential.2 the longer-term, by differentiating advantages, consistent cash- He adds: “This approach has winners from losers flow generation and strong worked well for the portfolio Investment trusts are ideally management teams.” over the long term and the team suited to facilitate this longer term “The portfolio continues to be remains confident that this is the approach. The fact that these are positioned to benefit from the right strategy to pursue in current closed-end funds means that secular growth in emerging market market conditions.” managers are not forced to sell consumption, including increasing For more information on stock in times of market turbulence penetration of financial products in the JPMorgan Emerging to fund redemptions. under-banked markets.” Markets Investment Trust visit Austin Forey, Fund Manager of This includes long-term jpmorgan.co.uk/jmg
12018 Long-Term Capital Markets Assumptions Paper, J.P. Morgan Asset Management 2The companies above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell
DISCLAIMER : Investment Objective: The JPMorgan Emerging Markets Investment Trust plc aims to maximise total returns from Emerging Markets worldwide and provides investors with a diversified portfolio of shares in countries and sectors we believe offer the most attractive opportunities for growth. The Company can hold up to 10% cash or utilise gearing of up to 20% of net assets where appropriate.
Risk information: Exchange rate changes may cause the value of underlying overseas investments to go down as well as up. Investments in emerging markets may involve a higher element of risk due to political and economic instability and underdeveloped markets and systems. Shares may also be traded less frequently than those on established markets. This means that there may be difficulty in both buying and selling shares and individual share prices may be subject to short term price fluctuations. Where permitted, a trust may invest in other investment trusts that utilise gearing (borrowing) which will exaggerate market movements both up and down. l External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds could decline at the same time, or fluctuate in response to the performance of individual companies and general market conditions. This trust may utilise gearing (borrowing) which will exaggerate market movements both up and down. This trust may also invest in smaller companies which may increase its risk profile. The share price may trade at a discount to the Net Asset Value of the company. The Trust may invest in China AShares through the ShanghaiHongKong Stock Connect program which is subject to regulatory change, quota limitations and also operational constraints which may result in increased counterparty risk.
This is a marketing communication and as such the views contained herein are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the products or underlying overseas investments. Past performance and yield are not reliable indicators of current and future results. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment products, there can be no assurance that those objectives will be met. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. Investment is subject to documentation (Investment Disclosure Document, Key Features and Terms and Conditions), copies of which can be obtained free of charge from JPMorgan Asset Management (UK) Limited. This communication is issued by JPMorgan Asset Management (UK) Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No: 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP. 0903c02a82386a04 SMARTERThe WAY to play the property market
Forget housebuilders and estate agents, we’ve spotted a better way to obtain exposure to bricks and mortar
hey say an Englishman’s home is his portfolio. First of all, as a physical asset class it castle and plenty of investors like the is relatively uncorrelated with stocks and shares idea of retreating to the safety of or bonds and so offers genuine diversification in T bricks and mortar and pulling up the terms of return. drawbridge during spells of market volatility. Real estate offers the prospect of yield (from In this article we examine why it’s not rental income) alongside capital gain; property necessarily that simple, plus we look at some stocks are typically valued using their yield and smarter ways to invest in the property market. net asset value. We highlight two property stocks which For investors with limited capital, investing operate in attractive niches and a third one directly in property is tricky. Your own home headed to the stock market which looks an should certainly not be considered an investment interesting story. in the traditional sense though you do have the option of investing in, for example, a holiday THE CASE FOR PROPERTY home abroad or flat or house to rent in the UK. There are several reasons why investors might It is worth remembering that most of us consider property as part of a diversified will be ‘overweight’ residential property in
28 | SHARES | 11 October 2018 our portfolios, either through circumstance or THE PROBLEMS FACING INVESTORS through choice. Housebuilders have historically been popular ways for investors to play the property market. HOW TO INVEST This strategy is no longer an easy trade as Companies on the stock market, investment trusts housebuilders are facing pressure on profit and funds can provide exposure to the property margins due to rising costs. market via construction firms, housebuilders, The other issue to consider is a potential property developers and landlords of commercial slowdown in the housing market. Housebuilders’ property. share prices can be highly leveraged to the Holding shares in a property developer may housing market and can display volatile not have the same effect as owning a house, but movements as new bits of market data these companies should generate higher profits are published. when house prices rise, which in turn should One alternative is to look at commercial deliver higher dividends and capital growth. property. REITs have traditionally invested in Real estate investment trusts (REITs) are assets like shops, shopping centres and office a relatively recent innovation, having been blocks but several factors are undermining the introduced in 2007. The government has allowed valuation of these assets. these companies, which face extra regulation, a Economic uncertainty created by the Brexit tax regime that almost replicates the situation you process means commercial property is at best a would face if holding property directly. They have mixed bag, reflected in the weak performance of become a very popular way for investors to gain REITs like British Land (BLND) and Land exposure to property. Securities (LAND). The core business of REITs is protected from A slowdown on the high street has seen corporation tax, allowing the distribution of rent retailers struggle and several have used Company payments from their tenants to flow straight Voluntary Agreements to close loss-making stores through to your dividend without being hit by and to trim the rent they owe to their landlords. extra levies. In theory a REIT should provide good This has hit big investors in retail properties like levels of income as they are forced to pay out 90% Hammerson (HMSO) and Intu Properties (INTU). of the profits from their core business within one The weakness in Intu’s share price recently year, meaning a steady stream of dividends. attracted a takeover bid with a consortium including near-30% shareholder Peel making a preliminary approach for the group on 4 October.
POTENTIAL NEW RULES ON PROPERTY FUNDS The Financial Conduct Authority, a regulator, has and varies according to supply and demand. If proposed that property funds and other portfolios investors want to sell or redeem their interest in invested in illiquid assets should be badged as an open-ended fund, then the fund needs to sell having ‘high liquidity risk’. assets to meet these redemptions. Investment Trading in these funds would also have to trusts fall under the category of closed- be closed off as soon as there was ‘material ended funds. uncertainty’ expressed by an independent In 2016 some (but not all) open-ended property third party over the valuation of at least 20% of funds suspended trading as they wanted to avoid their assets. asset fire sales in order to generate the necessary Several property funds suspended trading in cash to meet a flood of redemption orders from July 2016 as investors scrambled to get their cash investors. out amid widespread concern the Brexit vote The problem is that investors want to be able would severely damage the UK property market. to buy and sell funds whenever they want but the The FCA is looking to avoid a repeat of this underlying asset class held by these funds doesn’t situation. work this way. The problems specifically impacted open- A fund manager trying to sell their interest in ended funds (unit trusts and Oeics), rather than an office block, for example, would struggle to listed property vehicles, as their size isn’t limited achieve a sale in a short timeframe.
11 October 2018 | SHARES | 29
This helped lift share prices across the REIT space, however Jefferies’ head of real estate Mike Prew says ‘REITS are “just bugs looking “ for a car windscreen” and will probably find it with the portfolio valuations in the November earnings season’. Don’t forget, the return on a Essentially Prew’s argument is that the current property has a direct influence valuations used for the majority of assets in on how much money a REIT portfolios are too high and will need to be trimmed. British Land reports its first half company can pay in dividends results on 14 November and Land Securities on to shareholders. 15 November. At the same time, the more buoyant area “ of logistics assets – which benefit from the shift towards online shopping which is dogging the high street – is becoming an increasingly crowded trade, with some observers warning a bubble has formed in the sector. The clamour for assets of this type is putting yields under pressure as the chart demonstrates. Segro (SGRO) is probably the most high-profile The yield on prime logistic properties has investor in the logistics property market and now been weakening in parts of the world such as only yields 2.8% based on the forecast dividend Germany and the UK. This is a result of a highly for 2018. Many investors may expect property in competitive market to own large warehouses – general to generate a dividend yield more in the so property investors are paying a higher price to region of 4% to 5%. own the building. The yield is calculated as a percentage, based WHERE DO YOU GO FROM HERE? on the property’s acquisition cost, annual income Against this backdrop, you may think property from rent and running costs. The higher the is a no-go area from an investment perspective. purchase price, the lower the yield or annual Think again, as we can see numerous return on the investment. And don’t forget, opportunities including student accommodation, the return on a property has a direct influence a less mature part of the e-commerce-related on how much money a company can pay in warehouse market, and the rental market where dividends to shareholders. falling supply and increased demand could lead For example, FTSE 100 constituent to higher rents.
PRIME LOGISTICS YIELDS VS 10 YEAR BOND YIELDS %
Source: CBRE, Bloomberg
30 | SHARES | 11 October 2018 OUR PROPERTY PICK #1: STUDENT PROPERTY
EMPIRIC STUDENT PROPERTY (ESP) 97P BUY Yield: 5.2% Discount to NAV: 7.2% Source: AIC, Stifel
EMPIRIC’S TENANTS BY NATIONALITY
EU (EX-UK) 10%
NON-EU 52% UK 38%
Source: Empiric Student Property as at 31 October 2017 Student accommodation as an asset class offers returns which are relatively uncorrelated with the Student accommodation rental growth in the wider financial markets. The fortunes of this space UK – 3% per year between 2014 and 2016 – has are reliant instead on UK universities’ reputation surpassed all other real estate asset sectors for excellence. and significantly outpaced the RPI measure Empiric Student Property is on the comeback of inflation. trail after being forced to cut its dividend payments Source: Empiric Student Property in November 2017 amid spiralling administration costs. dividend for the 2019 financial year. The progress made under acting chief executive Empiric’s portfolio encompasses nearly 100 Tim Atlee and chief financial and operating officer properties across 29 cities and towns including Lynne Fennah is not currently reflected in the some of the UK’s top academic institutions. valuation. At current levels the REIT trades at a Brexit is a risk to consider as it might depress the 7.6% discount to net asset value compared with number of students coming from the European a 2% discount at its counterpart GCP Student Union; however it is worth noting the large number Living (DIGS). of non-EU students which come to the UK to The plan is to sell non-core assets but only once study. As the pie chart shows, just 10% of Empiric’s these assets are fully let so the best possible price tenants are from the EU (ex-UK). can be achieved. The management of its portfolio is Investment bank Stifel says: ‘The shares also being brought in-house with the development have been steadily re-rating, and we believe of its Hello Student platform. This should improve will continue to do so over the next year as we margins and, with the company approaching full see more evidence of the management team’s occupancy for the 2018/19 academic year, should turnaround of the company’s financial and support its target of delivering a fully covered operational performance.’
11 October 2018 | SHARES | 31 OUR PROPERTY PICK #2: THE IMMATURE PART OF THE LOGISTICS MARKET
TRITAX EUROBOX (EBOX) 103.8P BUY Sep 2019 yield: 2.3% Premium to NAV: 3.8% Source: AIC, Stifel
THE EUROPEAN LOGISTICS MARKET E-commerce as % of total sales Estimated online sales growth (2016-2021)
While the logistics property market in the UK orders and returns, providing support to the yields might be looking very expensive, Mike Prew, the Eurobox can achieve from its assets. property expert at investment bank Jefferies, says The £300m raised alongside its stock market the European logistics space is five years behind flotation will be invested in a €1.8bn pipeline the UK. of logistics properties – with Tritax actively This should create positive dynamics for Tritax negotiating the purchase of assets worth upwards Eurobox (EBOX), launched in July 2018 by the of €600m. people behind the £2bn-plus Tritax Big Box It is targeting an initial dividend yield of 4.75% REIT (BBOX). once fully invested, to be paid quarterly in sterling, The plan is to take the extremely successful Big and a total return in the medium-term of 9% a year. Box template to continental Europe. The strategy On 26 September the company announced its has been to rent out high quality logistics assets of first acquisition with the purchase of the global 500,000 square foot or more to institutional-grade distribution centre for clothing retailer Mango in tenants on long leases. Barcelona for €150m. The reason the European logistics sector is The purpose-built facility was constructed in lagging the UK is that shoppers do not currently 2016 and is let to Mango on a 30-year lease. There buy as much online in Continental Europe. As the is also potential to extend to an adjacent plot chart shows, 18% of UK retail trade is done online of land. with Germany the next closest in Europe at 15% Eurobox expects to be fully invested by and many other large European countries having December with several other deals in progress. The much lower levels of online penetration. shares do trade at a small premium to net asset Unsurprisingly these immature markets are value, probably reflecting investors’ hopes that it expected to grow more quickly. This growth will can match the impressive performance of Big Box. require warehousing facilities to store and process We’re certainly confident, so buy its shares now.
32 | SHARES | 11 October 2018 ONE TO WATCH: PRIVATELY RENTED HOMES
THE MULTIFAMILY HOUSING REIT possible appeal.’ The plan is for the proceeds from the float to go Keep an eye out for The Multifamily Housing REIT towards the acquisition of a portfolio of properties in which is scheduled to join the stock market on Bristol, the West Midlands, East Anglia, Manchester 26 October. and Leeds. The investment trust hoped to float in September These are ‘mid-market’ properties with average but pushed back the date to give potential investors rents of £500 to £700 per month – equating to more time to do due diligence. 30% of the median salary for around 70% of the Assuming the listing does happen, we think it local populations in these areas. The trust says this could be a good option for investors who want to compares with average one-bedroom build-to- add something property-related to their portfolio rent propositions requiring 46% of average local which offers a more resilient slant. regional salaries. The real estate investment trust is focused on pre- Most of the properties are low-rise apartment built privately rented homes in ‘regional’ England (or blocks of traditional brick construction. As well as in other words outside London). the initial seed portfolio, an immediate pipeline In other geographies most institutional investment of £422m has also been identified. A total return goes into pre-built stock but in the UK the focus up of 10% is being targeted including a 5% dividend until now has been on build-to- rent schemes. yield and the trust intends to have a progressive Jonathan Whittingham, CEO of Harwood Real dividend policy. Estate Asset Management and non-executive The company will operate a ‘hub’ strategy director of The Multifamily Housing REIT, notes there with four separate hubs dedicated to managing was a perception from some potential investors that the properties which, because they are in the market it is targeting simply doesn’t exist. close proximity to each other, should result in He says: ‘We have first mover advantage and efficient operations. a sustainable bespoke hub operation. Build-to- ‘These are real homes for real people, housing rent, including those already built and those the likes of office workers, nurses and teachers,’ in the planning stage, accounts for just 1.75% Whittingham adds. He notes renters in arrears of the regional residential market proposition. account for less than 0.5% of the prospective We are targeting the market with the broadest rental roll. (TS)
Set to focus on mid-market rental properties outside of London
11 October 2018 | SHARES | 33 INVESTMENT TRUSTS Grab a 6% dividend yield with secured lender Hadrian’s Wall This investment trust can help you obtain a much better return on your money than cash in the bank magine a bank or building society with a poster in I the window offering a savings account that pays 6% annual interest. It would be quite feasible to expect queues down the road as the general public seizes the opportunity to get a much better return on their money than has been the norm over the past decade. Sadly that 6% rate is nothing but a dream for savers at the moment unless they are prepared to take on higher risks and invest their money in the markets. The idea of buying individual company shares can be too daunting for many individuals so they look for solace in investment funds as a source of of the credit market. 9% interest rate – the full range is regular income. Many investors are reluctant 7.5% to 11%. It is fairly easy to find equity to go down this path as debt After paying the costs of funds which yield in the region markets can be difficult to running the trust and keeping of 3% to 4%. These products will understand. If this resonates with back 15% of income to help have a portfolio made up of lots you, we may have something to pay dividends in tougher of stakes in individual companies. win you over. times, Hadrian’s Wall typically To get a higher yield, you We’ve come across a debt- has enough money to pay a would have to look at places like focused fund that is very easy to 6% dividend yield each year, property or infrastructure funds understand, looks to be lower based on its 100p stock market which may offer 5%. risk relative to some of the other flotation price. ‘alternative investments’ on the WHERE TO FIND EVEN market, and strives to pay that ADDRESSING A NICHE HIGHER INCOME YIELDS all-important high income. PART OF THE MARKET Hitting the magic 6% income Hadrian’s Wall Secured ‘We’re kind of like what a figure would inevitably mean Investments (HWSL), an bank used to do 30 years venturing into more complicated investment trust listed on the ago,’ says Michael Schozer, investment products such as London Stock Exchange since chief investment officer at funds that invest in higher risk June 2016, lends money directly Hadrian’s Wall Capital, the corporate bonds or other parts to small businesses at an average trust’s investment adviser. ‘For
34 | SHARES | 11 October 2018 INVESTMENT TRUSTS example, a £7m manufacturer in you will lose a high percentage. Norwich who needed to borrow If you are making secured EXAMPLES OF £3m would visit their local bank loans, you will lose a very small LOANS IN THE manager who’d they known for percentage if you are properly HADRIAN’S WALL 15 years and get a loan.’ structured. If you look at data over PORTFOLIO Schozer says mainstream many years, senior secured bank banks have since phased out loans tend to recover about 80%, • £2m loan to a specialist that method of lending in unsecured might recover 50%.’ engineer which has made preference of having a more equipment for subsea formulaic way of making loans A LOAN SITUATION infrastructure for nearly via a centralised location. ‘That IN PRACTICE 30 years method has got rid of expensive The investment trust now has people in the branches and nearly 20 loans in its portfolio. • £4m loan to finance introduced clear criteria to The weighted average life of a mission critical equipment whom they will lend.’ loan is almost four years. for a civil engineer Hadrian’s Wall specialises Among its portfolio is a £5.5m in loans to small businesses loan to the owner of petrol • £1m loan (secured against which may have been rejected stations and mini-marts located property) for a medical by these banks because their in places where there is no practice serving both situation was complicated immediate competition from private and NHS clients rather than being a bad credit large supermarket operators. risk. It competes for these The owner wanted to buy back • £6.5m loan so a short-term opportunities against challenger two sites they built 10 years ago, car hire company banks like Shawbrook rather than plus they were also building a can buy more vehicles private equity which prefer larger new site. sized loans. ‘A bank would easily lend Schozer believes the against a petrol station and SHARES SAYS: investment trust’s downside a mini-mart, but they would The investment trust has is limited because its loans are want to see two to three attracted numerous big secured against physical assets. years’ financial performance name shareholders including If someone can’t pay back before they would lend. In our asset managers Investec the loan, Hadrian’s Wall takes situation, the banks would only Wealth, Old Mutual and CCLA ownership of assets and sells lend against two of the three which manages investments them to recover its money. properties as the third was too for the Church of England and ‘Any loan book has defaults; new. So we got the loan instead various charities. It is easy to it is part of the industry. Imagine as we were prepared to lend see why they’re on board. an equity fund manager saying against all three sites. These are Ultimately Hadrian’s Wall all the stocks they buy have nice cash flow operations.’ is suitable for investors who gone up – it is unlikely. We’ve Hadrian’s Wall is often a want a nice income from a low had one full repayment so bridge to future bank lending. volatility asset, recognising far and no defaults yet,’ In the petrol station example, they won’t get much in terms explains Schozer. it recognises that the owner is of capital gains. ‘When we look at loans, we are likely to refinance the loan at a The 6% yield, while not doing secured lending. We look much cheaper rate with a bank guaranteed, means you at a) can the company pay?; b) if once they have three years’ can expect a nice return on they can’t, do I have the legal right worth of financial performance your money and one that is to take the asset?; c) How certain from the newly-developed site. significantly beating the current am I that I can convert that asset It uses brokers and arrangers rate of inflation which can’t to cash? to source new loans rather be said for most cash savings ‘If you are making consumer than employ a large salesforce accounts. Buy now. (DC) loans, every loan that defaults of its own.
11 October 2018 | SHARES | 35 FUNDS Does taking greater risk equal greater reward with investing? We look for evidence by analysing 10 years’ worth of data in parts of the funds market
he greater the risk, the greater the potential RISK RETURN – GLOBAL Treward is a common adage 10 years to 31 August 2018 in investment. After all, if you Standard Return Peer group could generate the best returns Group/Investment Deviation (Annualised) percentile by investing in UK government (Annualised) bonds (also known as gilts), why would you ever think of putting LOWEST Troy Trojan Global any money into racier assets? 10.22 11.9 16 But measuring risk is difficult, Eq O Acc and determining whether the MT Total Return 11.43 9.8 43 rewards are commensurate with BNY Mellon Long- 11.70 11.6 18 the level of risk you have taken is Term Global Equity largely a matter of opinion. Jupiter Merlin Experts measure risk in 11.87 8.8 64 a number of complicated Worldwide Portfolio Morgan Stanley UK ways. One of them is through 11.95 14.7 3 something known as standard Global Brands deviation. In investment, this HIGHEST figure is a way of expressing how Pictet-Clean Energy 19.03 2.4 98 far a fund sways from its average Harris Associates 19.12 5.3 96 return. In essence, it shows how Global Equity volatile the performance of a Sanlam Global fund has been. The greater the 19.86 10.4 34 standard deviation, the greater Financial First State Global the swings up and down in a 25.58 -0.5 99 fund’s returns. Resources It’s a crude measure and by no Schroder ISF Global 27.65 -5.8 100 means a perfect science, but it is Energy one way of ascertaining how risky a fund may be. Number of investments ranked 151 Tom Becket, chief investment Peer Group Average 14.71 9.5 officer at Psigma Investment Management, says: ‘Investors time horizon for investing, your have performed at certain points should be compensated for patience and capacity for risk. in the investment cycle and how taking higher risk in the form of ‘Using quantitative analysis they might blend with the rest greater returns, but whether this such as standard deviation can be of your portfolio, but it shouldn’t materialises depends on your helpful to determine how funds be the main factor on which you
36 | SHARES | 11 October 2018 FUNDS base an investment decision.’ compared to an average of 15.64 the highest standard deviation – and has produced a stonking have produced negative WHAT DO THE FIGURES annualised return of 18.6% over annualised returns over the SHOW? the past 10 years, putting it in past decade. The correlation between a the third percentile. fund’s standard deviation and its Meanwhile the average UK TAKING RISKS DOESN’T performance is patchy at best. smaller companies fund has GUARANTEE REWARDS Analysis from stockbroker AJ Bell an annualised return of 13.8% Wesley McCoy, manager of the shows the performance of funds over the same period and SLI UK Equity Unconstrained with a track record of at least 10 Janus Henderson UK Smaller fund, says: ‘People think years, detailing their standard Companies (0744762), the of volatility as risk and as a deviation and annualised return fund with the highest standard bad thing, but it creates the over that period, as well as the deviation, achieved 14.8%. opportunity to make money. But percentile ranking of the fund In the Global sector, taking risk doesn’t guarantee within its peer group. meanwhile, the two funds with rewards, that isn’t how it works. With thousands of funds available to UK investors, the RISK RETURN – UK ALL COMPANIES tables in this article show 10 years to 31 August 2018 only a snapshot of the data, Standard illustrating the five funds with Return Peer group Group/Investment Deviation the highest and the lowest (Annualised) percentile standard deviation within (Annualised) the UK All Companies, UK LOWEST Smaller Companies and Global Invesco Perpetual 10.22 7.9 53 investment sectors. Income In the UK All Companies sector, Invesco Perpetual 10.26 8.2 46 greater risk certainly seems High Income to produce greater rewards: Invesco Perpetual the Standard Life UK Equity 10.54 8.9 35 Unconstrained (B7LK223) fund Strategic Income Newton UK has a standard deviation of 11.91 8.8 38 24.24 – significantly higher than Opportunities the peer group average of 14.75 Schroder MM UK 12.00 6.9 73 – and it has also produced an Growth annualised return of 13.9% over HIGHEST the past decade, putting it in the Quilter Investors third percentile of performers. 19.04 11.4 14 Meanwhile, the Invesco Equity 1 A River and Mercantile Perpetual Income (BJ04HX6) 20.45 12.2 8 fund, which has the lowest UK Recovery standard deviation in the sector, SVM UK 21.53 12.2 9 has produced an annual return Opportunities of 7.9% over the same period. SLI UK Equity High 21.77 11.0 15 But, it’s the Liontrust UK Alpha Smaller Companies (B57TMD1) SLI UK Equity fund which is the standout 24.24 13.9 3 Unconstrained performer in the UK Smaller Companies sector. The fund has Number of investments ranked 195 the lowest standard deviation of its peer group at 11.65 – Peer Group Average 14.75 8.4
11 October 2018 | SHARES | 37 FUNDS
veers towards quality companies, which are ‘robust, dependable and better able to weather external economic shocks’. Becket at Psigma adds: ‘People should take any measurements such as standard deviation with a huge pinch of salt because, ultimately, they tell you about Ladbrokes Coral’s stock fell out of favour amid the government crackdown on the betting industry the past and not the future. Just because something has or If an investment is offering you to competition as well as those hasn’t been volatile in the past a high return, there’s a reason where the directors have a large doesn’t mean that will continue for that. It’s rare to find a high stake in the business. The fund in the future.’ (HB) return in something that is very certain.’ He says periods such as RISK RETURN – UK SMALLER COMPANIES Brexit and the global financial 10 years to 31 August 2018 crisis, when stock markets Standard are at their most volatile, are Return Peer group Group/Investment Deviation when his fund has produced (Annualised) percentile (Annualised) some of its strongest returns. He explains: ‘We’re looking for LOWEST companies that are mispriced or Liontrust UK Smaller 11.65 18.6 3 misunderstood by the market, Companies where a volatile share price is Unicorn UK Smaller 12.95 14.0 45 expressing something that won’t Companies matter in years to come.’ Schroder Instl UK He points to Ladbrokes Coral 13.98 16.1 18 as one recent example where Smaller Companies Royal London UK the stock fell out of favour amid 14.08 12.6 62 concerns about a government Smaller Companies crackdown on the betting FP Octopus UK Micro 14.11 11.1 87 industry. In the end, the share Cap Growth` price shot up as the company HIGHEST was bought by GVC (GVC). M&G Smaller 17.50 11.5 77 Companies STRATEGIC MOVES Franklin UK Smaller Victoria Stevens, co-manager 17.90 9.6 97 of the Liontrust UK Smaller Companies Companies fund, aims to reduce JPM UK Smaller 18.07 11.3 85 risk by only taking small positions Companies in stocks that the team deem MI Discretionary 18.24 13.5 52 as being potentially riskier. She Unit says: ‘This is especially important Janus Henderson UK in the small cap market, where 18.39 14.9 28 Smaller Coa individual stocks can be very volatile.’ Number of investments ranked 41 To limit risk the team looks for companies with strong barriers Peer Group Average 15.64 13.8
38 | SHARES | 11 October 2018 OCT 302018 etc.venues - St Paul’s 200 Aldersgate London EC1A 4HD
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Registrations 18:00 Lisa Frankel Daniel Coatsworth Presentations start at 18:30 [email protected] Editor Complimentary drinks and buffet 020 7378 4406 Shares Magazine available after the presentations AEQUITAS Insightful commentary on market issues How Italy could still knock the Eurozone off target What are the potential implications for markets in Europe and beyond?
he old saying that ‘markets like to climb a 2019 and Spain 2.7% while in America the Trump wall of worry’ is getting a good work-out this tax cuts are being lauded as a key driver of growth Tautumn. As if a rising oil price, a strong dollar, even if they will take the annual budget overspend tighter monetary policy in the US, emerging market to 5% of GDP. debt crises and the Brexit negotiations were not enough for investors to ponder, you can now add WATCH THE TARGET Italy to the list. The markets seem as unimpressed as the EU After three months of haggling, March’s general authorities and this can be seen in two ways. election eventually led to the formation of a The first is a sell-off in Italian government coalition government in Rome. And given their bonds, or BTPs. The yield on the 10-year paper has victory on an anti-austerity ticket, no-one should rocketed to 3.58% as supply is about to increase be surprised that the two leading Italian parties, just as the European Central Bank (ECB) prepares the right-wing, separatist Northern League and to stop its quantitative easing programme in the anti-establishment Five Star Movement, are December, knocking a potential buyer out of now looking to push through a more expansive the equation. Budget, even if Brussels and the EU rule-makers are unhappy about it. ITALIAN GOVERNMENT BOND YIELDS ARE RISING AGAIN This begs three questions: 1. Why are markets as unhappy as the EU’s bean counters? 2. How can investors tell? 3. What are the potential implications for markets in Europe and possibly beyond?
BUDGET SHIFT The Italian government has drawn up a Budget which has three key thrusts, all designed to boost growth and tackle unemployment, especially Source: Thomson Reuters Datastream among the young. As a result, Italy’s projected annual budget deficit for 2019 will be 2.4% of GDP, The second is capital flight from Italy. This can rather than the 0.8% agreed with the European be monitored via the Trans-European Automated Commission in 2017. Plans for a balanced budget Real-time Gross Settlement Express Transfer (or by 2021 have also been scrapped. Target-2) mechanism. Brussels seems unamused, arguing that the In essence the system is there to help balance plans are not compatible with the prior agreement trade flows but it also reflects capital flows. and wider European stability. Italy already has Bears and sceptics of the single currency in an aggregate debt-to-GDP figure of 130% and it particular assert that Target-2 flows merely is home to the world’s third-biggest government highlight huge capital flight from the south. The bond market. It is too big to bail out. good news is that eight Eurozone members are The Italians may be entitled to feel miffed, given now in credit (up from five a year ago) – Germany, that France is forecasting an annual 2.8% deficit for Luxembourg, the Netherlands, Finland, Ireland,
40 | SHARES | 11 October 2018 Insightful commentary on market issues AEQUITAS
Slovakia, Cyprus and Malta – and Greece’s deficit is Tier 1 reserves. still shrinking. If bond prices keep falling, Italy’s banks will get The bad news is that Germany’s positive balance weaker; and if its banks and economy get weaker, is higher still and it looks like money is leaking then its bonds could keep falling, in the very doom out of Spain and Italy. If this trend continues loop that the ECB launched QE to avoid. And if through 2019 – and the data is released with a Italy’s banks wobble, the markets may start looking two-to-three-month lag – it could in turn imply the at who else is lending them money, if they are Eurozone edifice is coming under increasing strain, not already – the Stoxx Europe 600 banks index is with Germany and the select number of other already doing badly. creditors bankrolling the rest. ITALIAN AND EUROPEAN BANK STOCKS ARE IMBALANCES ARE GROWING WITHIN THE EU’S PERFORMING POORLY TARGET-2 SYSTEM
Source: Thomson Reuters Datastream Source: European Central Bank, € billions None of these concerns have to be borne out. BANKS BACK IN THE SPOTLIGHT Italy’s finance minister, Giovanni Tria, is arguing that Target-2 suggests Italy’s budget battle could have the annual deficit will start to shrink as economic continent-wide implications, although any reversal growth accelerates (the same argument put of flows back south would be a positive sign. forward by the Trump administration in the US). But the most pressing concerns are strictly But investors with exposure to Europe or the Italian. The rise in BTP yields increases the cost of banking sector, via their chosen funds, may need funding for Italian banks and could restrict their to keep an eye on events in Rome over the coming ability to lend. Moreover, falling bond prices erode weeks and months, just in case. Italian banks’ capital, as they are huge owners of Italian government debt. According to analysis from the Bank of International Settlements, Italian government debt represents nearly one-fifth of Italian banks’ total assets, more than 140% of the regulatory Tier 1 capital at leading lenders Unicredit, Intesa Sanpaolo By Russ Mould, investment and more than 200% of Monte dei Paschi di Siena’s director, AJ Bell
11 October 2018 | SHARES | 41 Only SHARES magazine subscribers benefi t from an investment INVESTMENTtoolkit that gives them the edge and helps them make the very FACTS.Do you have best investing decisions. WHO CAN YOU TRUST? the SHARES • Live share prices • Customisable live watch list In uncertain times, when the • Portfolio manager economyadvantage? is buffeted by change, • Fund selector and prices it can be hard to know who to • Intraday and historic charts trust when investing. • Latest broker forecasts with alerts • Latest director deals with alerts Shares magazine is produced by our expert editorial team, offering 24/7 coverage and insight into today’s vibrant • Fundamentals and investor tools investment markets. • Online discussion forum A subscription to Shares gives you access to the SHARES • Priority booking for investor digital investment hub and a host of benefits including: events > Your weekly digital magazine brimming full • Educational and company videos of investment ideas • …and of course, the weekly > Market news and company updates digital Shares magazine with the > Exclusive investor tools including live share prices latest news and views from the Shares experts Try it now for just £1 for the 1st month and then just £12 a month*. £
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* The £1 for 1 month and then £12 a month offer is only available to new subscribers. Your fi rst payment will be £1 and thereafter subscriptions will automatically continued, billed at £12 per *month The £1 unless for 1 monthcancelled. and thenSubscriptions £12 a month can offer be cancelled is only available at any time to new by callingsubscribers. 020 7378 Your 4424 first between payment 8am will - be4.30pm £1 and on thereafter Monday tosubscriptions Friday. No refunds will automatically are offered duringcontinued, the cancellationsbilled at £12 per monthperiod unlessbut all cancelled.outstanding Subscriptions issues and services can be cancelled will be fulfi at lled.any time For enquiresby calling contact 0207 378 us 4424 at [email protected] between 8am - 4.30pm on Monday to Friday. No refunds are offered during the cancellations period but all outstanding issues and services will be fulfilled. For enquires contact us at [email protected] UNDER THE BONNET Why rat-catcher Rentokil is a standout stock in the FTSE 100 Investors can sleep soundly at night with this solid growth story
growing at the same rate but thanks to acquisitions total sales growth is much higher (13% in the first half of this year). On top of this, vector control is a rapidly-growing market already worth over $3bn globally. This entails preventing the spread of diseases like malaria and dengue fever which are on the rise due to climate change and increased travel. Rentokil has recently bought the leading US vector specialist VDA, giving it access to this key market. Meanwhile the hygiene n the face of it few share country management, services arm, which accounts businesses might seem administration, infrastructure for 22% of sales and 23% of Oless attractive than rat- and technology, which saves operating profit, is a slower- catching and loo-cleaning, but on costs. growth but equally high-margin few other FTSE firms can boast Also, both businesses are business. Again targeted Rentokil’s (RTO) high operating non-cyclical and are growing acquisitions are propelling margins or are world leaders in due to the same big industry growth with two big deals their field. trends, most obviously the announced in the last year, CWS Thanks to a mix of steady need to prevent the spread of in Italy and Cannon in the UK. if undramatic organic growth bacteria, germs and disease and opportunistic bolt-on as populations grow and more WHERE DOES THE REST OF acquisitions, over the last people live and work in cities. ITS MONEY COME FROM? five years Rentokil has turned According to UN estimates, The remaining 15% of sales itself into the global leader in by 2050 nearly 70% of the and 9% of operating profit commercial pest control. At the world’s population will live in come from watering office same time, Initial has grown urban areas compared with just plants, supplying work-wear to become the world’s biggest over 40% in 1990. Most of that and treating dry rot, collectively hygiene services business. growth is expected to come titled Protect & Enhance. While from Asia and Africa. these businesses benefit from STRONG LOGIC BEHIND The pest control division, the group’s global footprint, COMPANY’S STRUCTURE which accounts for 63% of sales they are non-core and some There’s a strong logic to having and 68% of operating profit, assets have already been sold or these businesses under one operates in an $18bn global put into joint ventures. roof. They tend to serve the market which is seen growing by The UK property-care same customers in the same 5% a year for the next five years. business, which treats dry rot areas which means they can Rentokil’s underlying sales are and woodworm, has been
11 October 2018 | SHARES | 43 UNDER THE BONNET We explain what this company does
struggling for the past year as the housing market has slowed and revenues are just 1% of the group total (£11m out of £1.2bn in the first half). With little sign of an upturn we wouldn’t be surprised if Rentokil sold this unit to a more natural owner like Homeserve (HSV) and re-invested in its higher-margin core businesses, as it has with Cannon Hygiene and more recently with the purchase of Mitie’s (MTO) pest- control business.
ACQUISITIONS ARE KEY TO EXPANSION PLANS Sourse: Rentokil Acquisitions are an important part of Rentokil’s growth pest control arm are for new something of a cold shoulder in strategy. Both pest control products and the relatively new recent months but we note that and hygiene are fragmented online portal MyRentokil has the shares jumped last week on markets with hundreds of been a big hit with around 80% the news of the Mitie deal while small competitors ripe for of customers using it to monitor those of Mitie dropped, which consolidating into Rentokil’s their products and pest activity. suggests that investors are trusted-supplier model, and the Unusual as it may sound, warming to Rentokil’s growth company is often the ‘buyer of bed bugs are another growth story again. choice’ for smaller firms. opportunity. The potential Analysts are more positive By increasing scale and market for a successful ‘smart’ than negative with eight density, particularly in urban solution is huge as there are ‘buy’, four ‘hold’ and just two areas and emerging markets, 17m hotel rooms across the ‘sell’ ratings but they haven’t the company can better globe and traditional tools pushed the boat out with their leverage the benefits of scale. for treating the problem are price targets as the 12-month Another part of the growth very hit-and-miss. One US consensus is just 14% above the strategy is investment in hotel chain is already piloting current share price at 370p. innovation, both in terms Rentokil’s bed-bug monitoring Sales and earnings estimates of products and technology. scheme across 1,000 of its for this year and next year have A third of new orders in its rooms. been creeping up slowly over the summer but again analysts INVESTORS WARMING aren’t overly bullish so it looks TO THE SHARES AGAIN as though there is room for Investors have given Rentokil more earnings upgrades.
SHARES SAYS: The shares aren’t cheap at 27 times this year’s earnings and 25 times next year’s so upgrades wouldn’t go amiss but with EBIT (earnings before interest and tax) margins of 13% (30% higher than the FTSE 100 average) and the leading global position in two crucial and growing sectors we think Rentokil is a keeper. Buy at 325p (IC)
44 | SHARES | 11 October 2018 SECTOR REPORT HEALTHCARE Want to tap into a market worth $340bn a year? We reveal the biggest names in the healthcare equipment and services sector and explore their mixed fortunes
edical devices and healthcare equipment Mare vital to helping people live longer and healthier lives, and globally this market is worth an estimated $340bn every year according to leading operator Smith & Nephew (SN.). As well as developing and manufacturing life-changing and enhancing products, there is also a significant market for helping meet demand for quality care and treatment. TAKEOVER TARGETS Jones argues maintaining Among the biggest London- Two businesses in the sector guidance of 2% to 3% sales listed healthcare equipment and have been regularly considered growth and margins at 2017 services specialists are ConvaTec to be takeover targets, namely levels will reassure investors as (CTEC), Spire Healthcare (SPI), Smith & Nephew and Spire. there were concerns new chief UDG Healthcare (UDG), NMC Smith & Nephew executive Namal Nawanda might Health (NMC), Mediclinic (MDC) manufactures advanced wound look to reset expectations. and Smith & Nephew. care products, knee and hip In this article, we will explore implants, as well as products and WHY SPIRE AND MEDICLINIC why the performance among this technologies that aim to help HAVE NOSEDIVED grouping of stocks has been mixed heal severe fractures. It is fair to say that 2018 despite the strong demographic Previous speculation includes has been a difficult year for drivers underpinning the space. interest from US rival Stryker, private hospital provider Spire Medtronic and Johnson & Healthcare as NHS-related HEALTHCARE SPENDING Johnson. troubles have dragged on TO SOAR In May 2018, Smith & Nephew trading. One of the biggest drivers for the warned annual sales growth Spire recently warned sector is growth in healthcare would slow from 3% to 2%, of ‘significantly declining’ spending, which is necessary to which was blamed on softer NHS admissions, lower than tackle an ageing population and market conditions and a weak anticipated growth in private more lifestyle-related illnesses performance from Advanced admissions and investment in such as obesity. Wound Bioactives. the business, pushing the share Global healthcare spending While trading has improved price to an all-time low of 138p. is expected to rise from $9tn in since then, the performance has In 2017, the private hospital 2014 to $16tn in 2030 and $24tn been at best solid rather than group rejected a takeover in 2040 according to a study spectacular with Berenberg approach from 29.9% commissioned by the Bill and analyst Tom Jones claiming ‘not shareholder Mediclinic on Melinda Gates Foundation. bad is good’. grounds that it significantly
11 October 2018 | SHARES | 45 SECTOR REPORT HEALTHCARE
up to €23m. WHICH FUNDS INVEST IN THESE COMPANIES? In August, the company BlackRock Global Allocation Fund, Vanguard Total NMC Health said it would review International Stock Index Fund Ashfield and reshuffle its ConvaTec FP Crux Special Situations Fund management team following an underwhelming performance Franklin UK Mid Cap Fund, M&G European Spire Healthcare due to the phasing of contracts Strategic Value Fund and a lack of business UDG Healthcare M&G Recovery Fund development opportunities. Smith & Nephew Invesco Pan European Structured Equity Fund ROCKY RIDE FOR CONVATEC undervalued the business. 29.5% of sales last year. Through Since its stock market debut in Liberum’s Graham Doyle is this division, NMC offers over 2016, ConvaTec has experienced sceptical that Spire’s shares 108,000 products across a series of highs and lows as can recover, flagging guidance pharmaceuticals, medical it entered the FTSE 100 only for annual earnings before equipment and consumables, seven weeks after its IPO and interest, tax, depreciation and consumer, education and beat profit expectations in amortisation was 9% worse than veterinary. March 2017. expected at £120m to £125m. In June, NMC announced ConvaTec develops medical He argues if the company plans to create a new national products, including wound was to miss the bottom of its healthcare company in Saudi care dressings, colostomy bags earnings range by 5%, it could Arabia via a joint venture with and catheters. breach its debt covenants. Hassana Investment, potentially Its strong performance helped Mediclinic itself has struggled creating one of the largest the stock hit an all-time high of late with investors concerned private operators in the country. of 344p, but falling profit, the about problems in its Swiss Berenberg analyst Charles departure of chief financial hospital business where it has Weston reckons NMC can more officer Nigel Clerkin and slashed taken significant impairments. than double sales by 2023 – annual sales growth guidance even without further M&A. in October 2017 amid supply A SECTOR CONSOLIDATOR issues, hurt the share price and Rather than a bid target, NMC RESHUFFLE AND REVIEW contributed to the company’s Health is a consolidator in this AT UDG ejection from the FTSE 100. space as it continually looks for UDG Healthcare has an untypical Numis analyst Paul Cuddon interesting businesses to take business model compared says new hires Stephen over in a bid to supplement to the rest of the sector. The Bonnelycke and Sten Scheibye its offering. Ashfield division focuses on should help to revive growth in Recent acquisitions include communications, commercial the ostomy business and 2018 cosmetics business CosmeSurge and clinical services, including performance has been more and the largest private general scientific communication encouraging so far. (LMJ) hospital in the United Arab content. It is the biggest Emirates, Al Zahra Hospital. contributor of group profitability CONVATEC GROUP SPIRE HEALTHCARE GP. NMC Health is the largest at 63.1%. NMC HEALTH private healthcare company UDG also provides contract UDG HEALTHCARE PUBLIC in the United Arab Emirates. packaging services such as SMITH & NEPHEW 800 MEDICLINIC INTERNATIONAL In 2017, 70.5% of overall sales packaging design and labelling 700 were generated through medical through the Sharp division, 600 500 services at its network of clinics generating 31.9% of group profit. 400 and hospitals. Its smallest business, 300 The company also has pharmaceutical products 200 a distribution business, distributor Aquilant is being 100 0 representing the remaining sold to H2 Equity Partners for 2 2
46 | SHARES | 11 October 2018 OCT 2018
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KEY Homeserve (HSV) 44 Standard Life Global 7 The Multifamily 33 • Main Market Absolute Return Housing REIT Intu Properties (INTU) 29 Strategy (B7K3T22) Tritax Big Box REIT 32 • AIM Invesco Perpetual 37 • Investment Trust Standard Life UK 37 (BBOX) Income (BJ04HX6) Equity Unconstrained • Fund Tritax Eurobox (EBOX) 32 Janus Henderson UK 37 (B7LK223) • IPO Coming Soon UDG Healthcare (UDG) 45 Smaller Companies Tharisa (THS) 16 (0744762) Unilever (ULVR) 14 Lancashire Holdings 9 AB Dynamics 17 (LRE) (ABDP:AIM) Land Securities 29 Accesso Technology 10 (LAND) (ACSO:AIM) Liontrust UK Smaller 37 Companies (B57TMD1) Lloyds Banking (LLOY) 7 Mediclinic (MDC) 45 Merlin (MERL) 10 KEY ANNOUNCEMENTS
Auto Trader (AUTO) 20 OVER THE NEXT SEVEN DAYS Aviva (AV.) 16 Full Year Results Beazley (BEZ) 9 16 Oct: Bellway. 17 Oct: ASOS, Softcat. Blue Prism 10 (PRSM:AIM) Mitie (MTO) 44 Half Year Results British Land (BLND) 29 Mondi (MNDI) 9 18 Oct: Unilever. Clinigen (CLIN:AIM) 12 Next (NXT) 8 Trading Statements ConvaTec (CTEC) 45 NMC Health (NMC) 45 Debenhams (DEB) 8 QUIZ (QUIZ:AIM) 8 12 Oct: Ashmore. 15 Oct: Rio Tinto, Schroders. 16 Oct: Rentokil (RTO) 43 Merlin Entertainments. 17 Oct: BHP Billiton, Barratt Developments. 18 Oct: Domino’s Pizza, National Rightmove (RMV) 20 Express, Rank Group, Rentokil Initial. Rolls-Royce (RR.) 20
WHO WE ARE
EDITOR: DEPUTY NEWS Daniel EDITOR: EDITOR: Coatsworth Tom Sieber Steven Frazer DS Smith (SMDS) 9 @SharesMagDan @SharesMagTom @SharesMagSteve Empiric Student 31 FUNDS AND SENIOR REPORTER CONTRIBUTORS INVESTMENT TRUSTS Ian Conway Holly Black Property (ESP) EDITOR: Russ Mould Segro (SGRO) 30 REPORTER: Fevertree (FEVR:AIM) 10 James Crux Tom Selby @SharesMagJames Lisa-Marie Janes Laura Suter Sky (SKY) 18 French Connection 8 @SharesMagLisaMJ (FCCN) Smith & Nephew (SN.) 45 ADVERTISING PRODUCTION GB Group (GBG:AIM) 10 Smurfit Kappa (SKG) 9 Senior Sales Executive Head of Design Designer Nick Frankland Darren Rapley Matt Ely GCP Student Living 31 Sophon (SPE:AIM) 14 020 7378 4592 (DIGS) Sophos (SOPH) 20 [email protected] Shares magazine is published weekly every Thursday (50 times per year) by GVC (GVC) 38 Spire Healthcare (SPI) 45 CONTACT US: AJ Bell Media Limited, 49 Southwark Bridge Road, [email protected] London, SE1 9HH. Hadrian’s Wall 34 Sports Direct 8 Company Registration No: 3733852. Secured Investments International (SPD) All Shares material is copyright. (HWSL) All charts’ data sourced by Refinitiv Reproduction in whole or part is not permitted Standard Life 7 unless otherwise stated without written permission from the editor. Hammerson (HMSO) 29 Aberdeen (SLA) Hiscox (HSX) 9
48 | SHARES | 11 October 2018