AJ Bell Shares magazine 09 January 2025

SIX OF THE BEST FUNDS FOR 2025

The Shares team reveal their personal favourites for this year

Three important things in this week’s magazine

SIX OF THE BEST FUNDS FOR 2025

Top revealmanagers

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Discover the Shares team’s top trust and fund ideas for 2025

From high-growth and ‘blue-sky’ funds to specialists in healthcare and global value, as well as a trust which pays a monthly dividend, there should be something for everyone.

Find out where the experts are putting their money to work this year and what keeps them up at night

In the second part of our survey, top fund managers reveal their top bets for 2025 and discuss what risks they think the market has yet to price in.

Visit our website for more articles

Did you know that we publish daily news stories on our website as bonus content? These articles do not appear in the magazine so make sure you keep abreast of market activities by visiting our website on a regular basis.

Over the past week we’ve written a variety of news stories online that do not appear in this magazine, including:

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Learn about the ‘Portfolio X-Ray’ tool and how it can help you manage risk better

Contrary to the old saying, you can have too much of a good thing when it comes to investing so make sure your portfolio maintains a healthy balance with this tool.

Crunch time for UK investment trusts and stock market bargain hunting

Shares at an apparent ‘discount’ can easily end up being value traps

It’s crunch time for UK investment trusts. Already dealing with issues around disclosure on charges, the intervention of US hedge fund Saba just before Christmas, leveraging its large stakes in several trusts, is also shaking the foundations of the industry.

We plan to look at this story in lots of detail in next week’s magazine, along with a broad view of trusts after a period when the universe has shrunk materially. This shrinkage has resulted from a series of mergers and several names being wound up amid a lack of investor interest and persistent discounts to net asset value.

A series of meetings requisitioned by Saba and aimed at shaking up the trusts in its crosshairs are now looming large, so it is the perfect time to take an in-depth look at the space.

Investment trusts may be in a ‘tough moment’, to borrow from football parlance, but some of them have been around since the 19th century and this longevity suggests they are likely to remain relevant for investors well into the future.

There are certainly plenty of trusts we at Shares really like. You can read about four of them as Steven Frazer, James Crux, Martin Gamble and Ian Conway reveal their top fund and trust picks for 2025. One of them, Ian Conway’s selection Edinburgh Worldwide (EWI), is actually caught up in the Saba-related drama,

Also, this week we have the second part of our exercise canvassing the opinions of the UK’s top fund managers. This time hopes and fears for 2025 are up for discussion for Terry Smith and co.

The start of the year is often dominated by bargain hunting as shoppers hit the January sales, hoping to pick up discount purchases as retailers slash prices to clear excess Christmas stock.

It seems a similar dynamic might be at play in the stock market. At the time of writing, four of the

The FTSE 350's worst performers in 2024 bounce back in 2025

Data to 9am, 7 January 2025

Table: Shares magazine •Source: Sharescope

top five worst performing FTSE 350 stocks of 2024 were beating the wider UK market in 2025 and all of them were in positive territory (see table).

While investing in stocks which have been heavily sold off can be a successful strategy, it is also one which is fraught with risk.

You need to have a really clear picture of why the shares have been so weak, whether the issues a company is facing are fixable and what catalysts there might be to shift market sentiment.

Unless these points are properly addressed then the danger is you simply end up in a ‘value trap’ – a situation where a seemingly attractive valuation remains depressed indefinitely.

I may well repeat this exercise at the end of the year to see if the momentum shown at the outset of 2025 ends up being maintained.

Investors see green shoots of life in a moribund new listings market

Most UK investors will be glad to see the back of 2024 which saw the largest outflow of companies from the main market since the global financial crisis, with 88 companies delisting or transferring their main listing, according to new research from consultancy EY.

It was also one of the quietest years on record for the number of new listings or IPOs (initial public offerings) with just 18 companies listing, the lowest since EY started tracking data in 2010.

The value of new listings increased by 256% to £3.4 billion, buoyed by the listing of media group Canal+ (CAN) which accounted for £2.6 billion, representing the largest debut on the London Stock Exchange since 2022.

Could the dismal statistics of the last 12 months mark the darkest point before a new dawn?

Recently Sky News reported that mid-size lender Shawbrook Group is considering an IPO in the first half of 2025 and is close to signing up Goldman Sachs (GS:NYSE) as lead manager, with other banks like Barclays (BARC) potentially coming on board.

The deal could value Shawbrook (SHAW), which

was taken private in 2017 by private equity groups BC Partners and Pollen capital at more than £2 billion.

Globally, the number of IPOs fell by a tenth to 1,215 deals which raised £121.2 billion, slightly below the value raised in 2023.

Across the pond, Wall Street bankers are also gearing up for a revival in IPOs with several private equity groups seeking to tap investor enthusiasm for US equities.

Double-digit gains in the S&P 500 index for the second consecutive year and hopes president-elect Donald Trump will push through deregulation and cut taxes are stoking demand for new companies coming to the market.

Also helping sentiment is the fact that nine out of the 10 largest IPOs of 2024 ended the year above their issue price, with half of them registering tripledigit gains, led by social media platform Reddit (RDDT:NYSE) which is up three-fold since March 2024.

US listings topped $32 billion in 2024, up nearly 60% on the prior year, but well below the 2021 peak of $150 billion which saw a surge in IPO activity driven by government and central banks stimulus packages. [MG]

Next bucks weak retail trend while Tesco and Sainsburys celebrate blow-out Christmas sales

Fashion and homewares seller issues its usual cautious outlook for the year ahead

It may not have been a ‘golden’ fourth quarter for UK retailers in general, but once again Next (NXT) – typically the first company to issue a Christmas trading statement –delivered the goods with forecast-beating sales and profit guidance.

At the same time, supermarket groups Tesco (TSCO) and Sainsburys (SBRY) appeared to be the clear winners in the food aisles as shoppers spent a record £13 billion on groceries in December alone.

According to the most recent survey by the British Retail Consortium and KPMG, retail sales by value in December were up 3.2% on the previous year led, as has been the case throughout 2024, by food.

Non-food sales, which include clothing, homewares, sporting goods, DIY items and a whole raft of other spending, showed an increase for just the second time in nine months.

At Next, full-price sales for the nine weeks to 28 December were up 6% against company guidance of 3.5% and analysts’ forecasts of 3.8% although the company admitted that figure was flattered somewhat by the timing of its end-of-season sale.

Growth was driven by online sales, and in particular overseas internet buying, which rose 31% year-on-year, while sales in UK stores were 2.1% lower.

Nevertheless, Next looks set to join the exclusive club of UK retailers with billion-pound profits as it nudged up its forecast for earnings for the year to January 2025 to £1.01 billion.

Looking ahead, the firm expects sales for the year to January 2026 to rise by 3.5% to around £5.2 billion and profit before tax to grow at a similar rate to £1.05 billion, although it flagged higher operating costs would be a constraint on earnings.

Next also said it expected UK growth to slow as employer tax increases and their potential impact on prices and employment start to filter through into the economy, while overseas growth will

moderate as the firm cuts back on its marketing spend.

For Tesco and Sainsbury, which are due to update the market on Christmas trading this Thursday (9 January) and Friday (10 January) respectively, the festive period was a resounding success as they took more market share from former Big Four rivals Asda and Morrison and put further clear water between themselves and the discounters.

The latest Kantar till roll data shows the UK’s two largest retailers added a combined 90 basis points or 0.9% to their share of grocery spending in the 12 weeks to 29 December, although the fact sales excluded spending on New Year’s Eve, unlike last year, may mean the gain is greater still according to some analysts. [IC]

UK grocery market share

12 weeks to 29 December 2024

Data excludes Iceland and smaller independents Table: Shares magazine•Source: Kantar Worldpanel

Investors sour on alcohol stocks after US surgeon general calls for cancer warning labels

This is another headwind for a sector facing a cocktail of challenges

Alcoholic drinks stocks are nursing hangovers in the wake of the US surgeon general’s call (3 January) for more prominent warning labels on boozy drinks to raise awareness of their link to cancer. A report addressed a ‘direct link’ between alcohol consumption and an increased risk of cancer; according to the advisory, alcohol is the ‘third leading preventable cause’ of cancer in the US after tobacco use and obesity.

Already contending with the demand impact of cost-of-living pressures, consumers switching to alcohol-free tipples in droves and concerns over tit-for-tat tariffs involving the EU, US and China, alcoholic drinks names including Johnnie Walker-toSmirnoff vodka maker Diageo (DGE), Jack Daniel’s distiller Brown-Forman (BF.B:NYSE) and wine and spirits powerhouse Pernod Ricard (RI:EPA) slid on the news.

The news also soured sentiment towards the likes of beer, wine and spirits producer Constellation Brands (STZ:NYSE), cognac maker Remy Cointreau (RCO:EPA) and brewing giants Anheuser-Busch Inbev (BUD:NYSE) and Heineken (HEIA:AMS).

The timing for Shares is inauspicious given we selected Diageo as one of our top stock ideas for 2025, although the market response has been relatively measured so far.

Investment bank Jefferies, commenting on the impact on Diageo, says: ‘On regulation, we take no view on the likelihood that alcoholic drinks carry health warnings linking alcohol to cancer in the US, however our view is unchanged that there are a number of key differences between the set up for alcohol and tobacco.’

‘Health warning labels are well-established and effective approaches to increasing awareness of health hazards and fostering behaviour change. Considerable evidence supports the use of health

Chart: Shares magazine•Source: LSEG

warning labels, including promising evidence toward their role in raising awareness about alcohol-related risks,’ stated the advisory.

Surgeon general Vivek Murthy said: ‘Alcohol is a well-established, preventable cause of cancer responsible for about 100,000 cases of cancer and 20,000 cancer deaths annually in the US - greater than the 13,500 alcohol-associated traffic crash fatalities per year in the US – yet the majority of Americans are unaware of this risk.’

According to a 2024 World Health Organization (WHO) report, around 2.6 million annual deaths are due to alcohol consumption, and regulators and consumers are taking notice. In May 2023, Ireland became the first European Union country to mandate health labelling on alcoholic drinks and this law is expected to take effect from 22 May 2026.

Survey data from Nielsen shows that total wine consumption in France is down over 80% since 1945, with red wines in particular falling out of favour with health-conscious younger consumers. [JC]

On The Beach shares hit 52week high in January

Booking momentum and £25 million share buyback lift online holiday provider

Shares in beach holidays specialist On The Beach (OTB) have been on a roll since the announcement of its record full-year results on 3 December.

The strong momentum saw the stock hit a 52-week high of 258p on 2 January, also its highest level since 2022.

A combination of factors have seen investors warm to the story including resilient holiday bookings by consumers despite the squeeze on household budgets.

Beach’s latest numbers. The company reported record revenue of £128.2 million for the year ending 30 September.

On The Beach also announced a £25 million share buyback and a full year 2024 final dividend –the first regular income for shareholders since dividends were axed in 2020 because of the pandemic.

This is borne out in On The

Canaccord Genuity analyst Karl Burns does offer a note of caution on expansion into city destinations: ‘While the

The Beach

move to City breaks make sense, in our view, more detail around execution is needed.

‘City breaks are a commoditised part of the market, with huge competition and, as a result, lower revenue margins and lower revenue per customer compared to beach, while customer acquisition costs are likely to be higher. [SG]

Poolbeg Pharma shares go into freefall after merger talks with US biotech firm revealed

Shares in Poolbeg Pharma (POLB:AIM) nearly halved after the company announced it was in merger talks with US biotech firm Hookipa Pharma (HOOK:NASDAQ).

If the all-share proposition goes ahead the newly combined group, with a special focus on next-

generation immunotherapies for the treatment of cancer and other serious diseases, would be listed on the Nasdaq Composite index.

Poolbeg would become a private subsidiary of Hookipa and cancel its listing on AIM .

As part of the deal Poolbeg shareholders will receive 0.03 Hookipa shares for each Poolbeg share held resulting in Poolbeg’s shareholders owning around 55% of the equity of the merged company with Hookipa’s shareholders holding approximately 45% of the equity in the combined group.

Hookipa plans a $30 million fundraise on completion of the deal. This would dilute Poolbeg’s stake in

the combined firm to a little more than 40%, with Hookipa holding around 33% and new investors about 27%.

The talks are ‘non-binding’ and ‘non-exclusive’, both firms said in a statement and are dependent on the satisfactory completion of customary due diligence. [SG]

7 DAYS

14 Jan: Ramsdens

15 Jan: Victorian Plumbing

16 Jan: Safestore FIRST-HALF RESULTS

14 Jan: Games Workshop TRADING ANNOUNCEMENTS

10 Jan: Sainsbury (J)

14 Jan: Grafton Group, Knights Group, Ocado, Persimmon, Robert Walters

15 Jan: Currys, Fuller Smith & Turner, Hays, Vistry

16 Jan: Bakkavor, Dunelm, Harbour Energy, Rathbones, Taylor Wimpey, Whitbread

Could this year herald a change of fortune for the big UK housebuilders?

Activity and prices are up but stamp duty changes could stymie progress

After a disappointing stock market performance last year, investors will be hoping the major listed housebuilders can turn things around in 2025.

Shares in Barratt Redrow (BTRW) and Berkeley (BKG) were down around 20% in 2024 while those in Persimmon (PSN) and Taylor Wimpey (TW.) lost just shy of 15% each.

Shares in partnership housing group Vistry (VTY) fared even worse, losing close to 40% after the firm warned three times in three months profit would be below expectations due to delays in yearend transactions and completions and serious mismanagement in its South division.

Both Persimmon and Vistry report fourth-quarter and full-year sales next week (on 14 and 15 January respectively), with Persimmon expected to post annual sales in the region of £2.9 billion, up slightly on the previous year’s £2.77 billion, and completions of around 10,500 units.

The firm said in November visitor numbers and new

Vistry

home enquiries were ‘strong’ and sales rates were ‘well ahead’ while average selling prices were ‘robust’ and the forward order book was 17% higher than the previous year.

Meanwhile, Vistry is expected to report sales of just under £4.5 billion for the year, up from £3.7 billion previously, and completions of 17,5000 with selling prices at a similar level to the prior year.

The latest surveys from Halifax and Nationwide provided a mixed picture, with mortgage affordability and the size of the deposit needed by first-time buyers proving a constraint on demand.

However, both surveys suggest upcoming changes to stamp duty are likely to generate volatility as buyers rush to complete before the end of March, leading to a spike in transactions, before a period of weakness for three to six months over the spring and summer (as occurred following previous stamp duty changes). [IC]

US banks set for a bumper quarterly earnings season

Next week sees the publication of fourth-quarter and full-year results from Wall Street’s finest, starting with Citigroup (C:NYSE) and JPMorgan Chase (JPM:NYSE) on 15 January followed a day later by Bank of America (BAC:NYSE), Goldman Sachs (GS:NYSE) and Morgan Stanley (MS:NYSE).

By all accounts these should be blockbuster figures as trading volumes have been way above normal levels for the fourth quarter across all asset types, including cryptocurrencies, driven by an increasing contribution from retail investors.

‘Momentum across retail trading is building off a strong equity market in 2024, solid account growth and new product offerings,’ says Jefferies analyst Daniel Fannon.

‘With regulatory barriers potentially easing and demand from retail investors for broader markets and asset classes on the rise, we also see a few structural tailwinds that will likely gain momentum in 2025, specifically the resurgence in crypto, new product development in event contracts and sports betting

and growth in growth in overnight trading.’

At the same time, corporate deal activity is ‘poised to accelerate’ says Fannon thanks to healthy backlogs at investment banks and maturing private equity portfolios which should mean a sharp improvement in revenue compared to the last couple of years.

The market has high hopes for bank earnings in general in 2025, with less regulation and red tape and oversight potentially being handled by a single agency bringing together the FDIC (Federal Deposit Insurance Corp), the OCC (Office of the Currency Comptroller) and the Federal Reserve to cut costs.

For JPMorgan, analysts have pencilled in fourth-quarter EPS (earnings per share) of $3.86 against $3.97 in the year-ago period and full-year EPS of $17.31 against $16.80 the prior year, but given the firm’s ability to beat forecasts we suspect the actual outcome could be significantly stronger. [IC]

Broadcom is the ultimate tech picks and shovels play

Chip designer enjoying strong AI momentum from a diversified portfolio

Market cap: $1,108 billion

Traditional investing wisdom says back picks and shovels stock options. The 21st Century’s gold rush is the technology revolution, and you’ll struggle to find a better tech picks and shovels supplier than Broadcom (AVGO:NASDAQ), in our view.

The semiconductors and ASICs (application specific integrated circuits) it designs and develops help power almost every part of the tech sphere. An estimated 99% of all internet traffic passes across its chips, which means it touches pretty much every major tech theme; automation, ecommerce, cybersecurity, cloud computing, and of course, AI (artificial intelligence).

San Jose, California-based Broadcom today

operates across two primary segments: Semiconductor Solutions and Infrastructure Software. The former designs chips for networking, server storage, broadband, wireless communication and industrial applications, the traditional knitting of the business.

This part of the business is also one of the world’s leading custom silicon developers, working closely with customers like Alphabet (GOOG:NASDAQ), for example, to create ASICs which deliver superior performance and energy efficiency at lower cost for targeted workloads.

Infrastructure Software was traditionally the smaller part of the business, although not so much following the acquisition of VMware which completed in November 2023. A leader in cloud computing and virtualisation, VMware brought its software solutions into Broadcom’s portfolio, substantially diversifying its revenue and propelling the segment’s contribution massively.

VALUE-ADDING GROWTH

Broadcom shuns the growth-at-any-cost approach and works closely with its largest 600 to 700 customers to expand their use of its software,

resulting in a highly attractive margin profile. Gross margins ran above 75% in full year 2024, with operating margins coming in at 26%.

Shares has written about Broadcom’s emerging revenue and earnings story as far back as May 2022 yet the wider investment community largely ignored the promising signs until late last year, when its AI revenue growth took markets by surprise.

Broadcom’s shares jumped 43% in December 2024, catapulting the firm into the exclusive $1 trillion club, as Shares speculated it might back in August.

Results for the 12 months to 31 October 2024 were strong but grabbing the headlines was commentary that Broadcom’s hefty investment in VMware and AI are paying off. ‘We are well on the path to delivering incremental adjusted EBITDA (earnings before interest, tax, depreciations and amortisation) at a level that significantly exceeds the $8.5 billion we communicated when we announced the deal’, Broadcom CEO Hock Tan said of the VMware deal on the earnings call. AI revenue spiked 220% in 2024 to $12.2 billion.

Broadcom is tapping into a fast-growing AI infrastructure market that’s just getting started. AI chip peer Nvidia (NVDA:NASDAQ) believes AI data centre spending could reach $2 trillion over the next five years as organisations ramp spending to compete in their own markets, and Broadcom’s processors are well positioned to benefit.

PAUSE FOR THOUGHT

December’s sharp share price rally is a cause for investors to pause for thought, which may explain why it’s been a slow start for the stock in 2025, but

Broadcom's bumper earnings growth

Table: Shares magazine • Source: Stockopedia, year end October

we believe beyond that Broadcom’s AI kit is driving significant growth. Crucial to the stock’s performance over the coming months will be evidence that momentum is being maintained, such as last year’s Tomahawk and Jericho switching product launches, which could prove crucial to keeping its leadership in networking, for example.

Supply chain trips could undermine the stock, while there will always be regulatory scrutiny, and the European Commission is investigating the VMware acquisition, which could lead to penalties of some nature. A final fact to consider is Broadcom’s balance sheet. With its history of jumbo acquisitions, Broadcom doesn’t look like the rest of the big tech universe, which typically have large cash piles.

By contrast, Broadcom needs to service gigantic net debt of around $58 billion, yet equally it throws off enormous amounts of cash every year, $19.4 billion in fiscal 2024, demonstrating its ability to handle its financial obligations and invest in future growth.

Analysts see revenue growing incrementally to more than $80 billion by fiscal 2027, nearly 60% up on last year, based on Koyfin consensus, implying EPS (earnings per share) of $9.11, versus $4.87 last year. This makes its three-year average forward PE (price to earnings) multiple of 31 and 1.3 average PEG (price to earnings growth) look attractive in our view. In short, Broadcom provides crucial kit right across the tech sphere, presenting decent defensive moats to its revenues. It is also enjoying strong AI momentum but from a diversified portfolio. [SF]

Seize on a slip in Zotefoams which has created a compelling buying opportunity

Recently appointed CEO, ongoing Nike partnership and focus on core foams businesses all reasons to like speciality chemicals firm

Zotefoams (ZTF)

306p

Market cap: £150 million

Shares in Zotefoams (ZTF) have been under pressure in recent months and suffered their latest setback after the specialty chemicals maker said it was withdrawing from its carton packaging initiative ReZorce last month.

The potential of ReZorce had generated significant excitement so this is a setback but the current valuation is not given Zotefoams anywhere near enough credit for its core business.

As a third-quarter update on 4 November revealed this remains healthy – with a 54% increase in sales to £39.7 million with footwear-related revenue – representing 48% of sales in the period –higher than anticipated.

Over the past six months Zotefoams shares have fallen more than 30% and are currently trading on 10.5 times consensus forecast earnings for 2025 – well below the long-term average valuation based on Shares calculations.

In fact, the last time it was trading anywhere near this cheap was during the 2007/8 financial crisis.

WHAT DOES ZOTEFOAMS DO?

Zotefoams ongoing partnership with US footwear brand Nike (NKE:NYSE) since the Rio Olympics in 2016 is a key strength.

focusing on distance road running shoes and track spikes to later extending into trail running footwear with the Nike Zegama (launched in 2022).

The Croydon-headquartered firm has an exclusive supply agreement with Nike to collaborate on ‘technical foams’ for high-performance footwear until 31 December 2029.

Their partnership has evolved from originally

New Nike chief executive Elliott Hill has announced plans to return the sportswear company’s focus to sport and product innovation as part of a turnaround plan and this could bode well for Zotefoams.

The company’s foam-based products are used in everything from air conditioning units to the aircraft industry, cars, chips, electronics, healthcare, transport and even sports and leisure equipment like cricket pads.

Its main markets are footwear, as discussed, product protection and transportation, which includes aviation and aerospace, automotive and rail.

Earnings growing at Zotefoams

Footwear sales form a significant part of Zotefoams’ High-Performance Products Division (HPP) – its most profitable division.

The specialty chemicals’ aim is to become the world leader in cellular-materials technology in markets with elevated levels of organic growth, both through its own brands and through partnerships and targeted acquisitions.

The plan for the ReZorce product was to use proprietary microcellular foaming technology to create a circular packaging solution for beverage cartons – representing a fully recyclable monomaterial.

In December 2024 Zotefoams said it was winding down the operations of its MuCell business, which encompasses ReZorce, because it had been unable to find a strategic partner for ReZorce and specialist external advisers to support commercial development.

Ronan Cox CEO of Zotefoams said at the time: ‘This decision will allow us to redirect the considerable financial resources that we have been dedicating to the ReZorce project to focus on the exciting opportunities we have within the core Zotefoams business, and we will be sharing our plans in this regard at a capital markets day expected early in 2025.’

Broker Peel Hunt did not adjust its forecasts for the ReZorce exit with analyst Lauren Baker Iguaz commenting: ‘Although this announcement is disappointing, the decision to pause investment into ReZorce and remain focused on the core businesses is sound.’

CATALYSTS FOR RECOVERY

We think CEO Ronan Cox, who took the helm in April 2024, has the credentials to energise the business.

His experience from various executive roles at Coats Group (COA), the world’s largest thread and structural components’ manufacturer for apparel, footwear, and performance materials, should serve him well.

The company is due to deliver its year-end trading update on 23 January and if this confirms expectations for 2024 and the outlook for 2025 then we would expect the market to react positively. A promised investor day early this year is another potential catalyst which could drive the shares higher. [SG]

CrowdStrike bounces back to reward us with 40% gain

It is often a good strategy to buy quality companies when something goes wrong and we saw the opportunity to play this dynamic at cyber security giant CrowdStrike (CRWD:NASDAQ) last summer. The company had a central role in a massive global IT outage involving Microsoft (MSFT:NASDAQ) operating systems in July 2024 but we made the brave call that these issues would not weigh on the stock in the long term.

WHAT HAS HAPPENED SINCE

WE SAID

TO BUY?

As we hoped they would, the shares have recovered all of the ground lost at the time. CEO George Kurtz perhaps stretching things by suggesting to the Financial Times that in going through such an experience, something none of its rivals have, it has a competitive edge.

What undoubtedly seems to be the case is customers are sticking with CrowdStrike, the company reporting a 97% customer retention rate for the three months to 31 October while also beating analysts expectations for the quarterly period with $1 billion in revenue, up 29% yearon-year.

Chart: Shares magazine•Source: LSEG

The company has received credit for its handling of the outage once it had occurred although one customer – Delta Airlines (DAL:NYSE) – has filed a lawsuit seeking damages which estimate the impact at more than $500 million.

Even if they want to, it may be hard for CrowdStrike clients to go elsewhere given how embedded the firm’s products and tools are in their systems and day-to-day operations. There have also been suggestions that Microsoft’s systems might have been just as, if not more culpable in the outage.

WHAT SHOULD INVESTORS DO NOW?

Cyber security remains a growth area and CrowdStrike is a leading player in this space. However, the shares do look expensive, notwithstanding the fact it only recently moved into profitability and earnings are poised to grow rapidly, on a January 2026 PE of 83.5 times. Given what we were looking to achieve with this trade has already played out, we reckon taking profit now might be prudent. [TS]

SIX OF THE BEST FUNDS FOR 2025

The Shares team reveal their personal favourites for this year

Funds play a really important role in most investors’ portfolios. Many of us may not have the time or the inclination to research our own investment ideas and would rather entrust a professional to pick stocks (and other investments for us).

The strength of broad market indices, particularly global and US ones, has made it difficult for actively managed funds to outperform over the last decade and this has seen investors turn to trackers and ETFs which are typically lower cost. However, the market outlook is becoming

less predictable and this could set the scene for active management to come into its own and justify the accompanying higher charges.

On this basis, the Shares team has identified six of their best fund ideas for 2025. This is not intended as a balanced portfolio, instead these selections are dictated by the personal preferences of our team based on their decades of market experience. Read on to discover the names Steven Frazer, Martin Gamble, Ian Conway and James Crux think can outperform both this year and into the future.

Blue Whale Growth (BD6PG78)

259.14p

I prefer my active fund managers to be active, and Blue Whale Growth (BD6PG78) is certainly that. Manager Stephen Yiu and his team are willing to make bold calls backed by deep inhouse research with superior returns first and foremost of his objectives.

With a solid covering of global indices (S&P 500, Nasdaq, for example) in my portfolio, it makes me very comfortable backing a fund that is betting it can find better returns away from most of the ‘Magnificent Seven’, with AI chips firm Nvidia (NVDA:NASDAQ) its only pick from that group.

Blue Whale Growth is not a tech fund – it has previously deployed capital into oil sands in Canada and railroads in the US – merely one that sees many of the better investment opportunities in and around the tech sphere, a theme that has been in play since the internet emerged more than two decades ago. Since then, we’ve seen rampant growth in ecommerce, automation, cloud computing and, now AI and possibly quantum computing down the line, sets the scene for that to continue.

So far, infrastructure technology specialists have stolen the AI show, providing crucial chip technology to lay the foundations for what many experts see as a brave new AI world ahead of us. Blue Whale was ahead of the curve when it

Blue Whale Growth (p)

Steven Frazer News Editor

first invested in Nvidia nearly four years ago, and the fund continues to see the best opportunities in infrastructure, hence names like Broadcom (AVGO:NASDAQ), TSMC (TSM:NYSE), Lam Research (LRCX:NASDAQ) and Applied Materials (AMAT:NASDAQ) featuring prominently in the portfolio.

This year could a big one for AI-powered software applications, according to many experts, another call that sets Blue Whale apart from peers. The fund agrees that AI will transform software applications but at this stage, believes it too early to call winners and losers, so it chooses to wait and watch from the relative sidelines and deploy capital where it has much higher conviction.

Perhaps Blue Whale’s take will be proved overly cautious, who’s to say, yet with that foundation of S&P 500, Nasdaq in my portfolio, it makes Blue Whale’s bold calls a more comfortable fit.

Last year the fund celebrated its seventh year since launch, and the track record is good, having

outstripped its Investment Association Global benchmark every single year bar 2022, often by wide margins – it’s done better than twice as well as its benchmark in each of the past two years. Since launch, cumulative returns are 164.1% versus 83.7%.

Past conversations with Yiu also reveal that, barring some property investments, his private portfolio is exclusively in the Blue Whale fund, so you can hardly ask for more in

Blue Whale's track record since launch

Edinburgh Worldwide (EWI) Price: 195.8p

I wouldn’t say I’m a cautious investor, but I like to balance my portfolio so when markets have a wobble I’m neither ‘all-in’ nor ‘all-out’.

I achieve this by having around two-fifths of my investments in income-generating UK stocks and investment trusts, reinvesting the dividends every quarter (or every month) so my money compounds.

Another two-fifths is invested in what I believe are truly great UK growth companies bought at a good price – obviously the dream is to buy great companies at a great price, but you don’t often get the chance.

The remaining fifth is in cash and more whizzy ‘blue-sky’ stocks which I think could double or treble (although some have halved, which is why they are only a small part of my portfolio).

This is where Edinburgh Worldwide (EWI) comes in. The trust, which is managed by Baillie Gifford, aims for capital growth from ‘a global portfolio of initially immature entrepreneurial companies’ which are typically fairly small at the

terms of aligning his interests with those who invest in the fund. Annual charges are 1.09%, available for both accumulation or incomebearing units, which I don’t see as unreasonable for the performance delivered to date and the potential for more superior returns down the line.

DISCLAIMER: Steven Frazer has a personal investment in Blue Whale Growth.

Ian Conway Deputy Editor

point of initial investment and offer long-term growth potential.

The two biggest holdings are private companies – Space Exploration Technologies, also known as SpaceX, and PsiQuantum, which aims to build the world’s first useful quantum computer (note the word ‘useful’).

However, the majority of the holdings are quoted US companies across the software, biotech and aerospace and defence sectors,

Blue Whale Growth IA Global

20

with a smattering of UK names like Oxford Nanopore (ONT).

So, how is it working out? Given it’s a fairly recent purchase, I’m not in the same boat as longer-term shareholders who are sitting on losses of 40% over the three years to November, but I could have timed it better as the shares are up over 30% in the last year, so I certainly didn’t buy at the bottom. Currently the trust trades at a modest premium to net asset value.

Why did I buy it? It sits in the ‘blue-sky’ part of my portfolio, where I owned Seraphim Space Investment Trust (SSIT) from its IPO in 2021, sold for a small profit and then forgot about until it more than doubled in the first half of last year.

Since then, space has become seriously big business, with the valuation of SpaceX rocketing this year (pardon the pun), while quantum computing is ‘the next big thing’, plus the trust gives me exposure to game-changing businesses in parts of the market I wouldn’t normally venture into and all for a very reasonable (in my view) 0.7% ongoing charge.

Finally, the trust has committed to share buybacks and a capital return programme of up to £130 million this year which will be earnings accretive. The recent push for change at the trust by activist US hedge fund Saba (along with several other peers) is a source of uncertainty

to weigh but could ultimate result in a positive outcome for shareholders.

DISCLAIMER: Ian Conway has a personal investment in Edinburgh Worldwide.

Data as at 31 October 2024 Table: Shares magazine•Source: Baillie Gifford, 30 November 2024

HgCapital Trust (HGT)

One thing fund managers keep telling me is that tech businesses are staying private for longer. There’s plenty of capital sloshing about private markets and less red tape, so founders keep kicking the IPO (initial public offering) can further down the road, denying many ordinary investors access to some exceptional businesses.

Elon Musk’s SpaceX, for example, has become a crucial leader in the wider space economy, developing the first ever reusable rockets without needing a public market listing. Institutions have piled ever more enthusiastically into private markets over the last two decades, and pension funds increasingly feel they have no choice.

There’s a handful of very good private equity specialists and other funds that ordinary investors can buy that will give them access to many exciting privately-owned enterprises, but HgCapital Trust (HGT) really stands out to me for a few reasons. One, its deep layers of experience and expertise; two, a broad portfolio of around 50 largely subscription-based tech business models generating predictable revenues and cash flows drawn from across the technology sphere; and three, a long track record of superior returns.

Trustnet data puts the fund’s cumulative five-

Steven Frazer News Editor

year performance at 126.3%, versus a 52.6% return across the investment trust private equity segment, an impressive outperformance. Yet outstanding longer run performance demonstrates that HgCapital’s strategy is sustainable, with average annualised returns of more than 16% going back 15 years, according to Morningstar.

Many of the prominent names in the portfolio might be unfamiliar to those outside the industries they serve, but that doesn’t mean they aren’t among the leaders in their fields. Visma, for example, has developed a range of software automation tools sold across Europe and Latin America, generating €2 billion-plus revenues, and rumour has it that it has started to think about an IPO possibly in 2026, an event

which would only increase its global profile, so it’s something to watch.

Names you might know include FE Fundinfo, an investing data company that some of you may use… we do at Shares. There’s also Ideagen, previously listed on AIM before its 2022 take-private, a specialist governance, regulations and compliance software firm that is fast carving out a leadership spot among its peers.

There are drawbacks, not least the costs. The ongoing charges figure of 1.99% a year may look steep at first glance, although I believe this is reasonable given the private equity market exposure it gives you and its ability to repeat outlier returns performance for years into the future.

The NAV (net asset value) discount has also narrowed in recent years as increasing numbers of investors chase a relatively small number of private equity investment options. That said, at -1.2%, even if the discount did widen towards its five-year -6.6% average,

Ranmore Global Equity (B61ZVB3)

it would likely have only a modest impact on overall performance.

HgCapital's top 10 stakes

Table: Shares magazine•Source: Trustnet

One fund I reckon can continue to deliver in the New Year, particularly if the US market has a wobble, is Ranmore Global Equity (B61ZVB3), a differentiated, value-oriented portfolio managed by Ranmore Fund Management’s Sean Peche alongside Andrew Lapping. This pair prefers exposure to companies that have upside potential with limited downside risk and the bulk of the fund’s portfolio is invested outside of the expensive and concentrated US market.

Adorned with five FE fundinfo Crowns and a five-star Morningstar rating, Ranmore Global Equity is ranked first quartile over five years and to my mind, looks a savvy satellite pick to complement core fund holdings given its high active share of 99%.

Peche and Lapping are a tight-knit, nimble team who invest around the world guided by value, as opposed to following the crowd or hugging the benchmark. They put in the hard yards to unearth often small and mid-cap

James Crux Funds and Investment Trusts Editor

companies offering value; given its meaningful mid cap exposure, the fund could benefit from Donald Trump’s election should takeover activity increase as regulators are forced to step back. Focused on long-term cash flow streams and the calculation of ‘normal’, unadjusted earnings

Ranmore Global Equity

and fair value, Peche and Lapping eschew meetings with slick company management teams and avoid highly rated businesses and over-indebted firms.

Admittedly, ongoing charges of 1.3% are on the onerous side, but Ranmore Global Equity has no performance fee and I also like the fact Peche and Lapping invest their own money in the fund.

As of 30 November, Ranmore Global Equity’s exposure to North America was 23%, significantly below the benchmark MSCI World Index’s 76%. As Peche explained in the latest factsheet: ‘Being significantly underweight the USA relative to the major benchmarks raises some eyebrows, but we worry more about the risk of capital loss than being differently positioned to benchmarks. Most US equities are expensive relative to historical valuations and international peers and over the long-term that means lower returns and higher risk of capital loss.’

Ranmore Global Equity had a materially higher exposure to Europe than the benchmark, 33% versus 16% respectively, and meaningful allocations to Hong Kong/China and South America. Top 10 holdings at last count ranged from Brazilian oil and gas company Petrobras (PBR:BCBA), Dutch bank ABN Amro (ABN:AMS) and French retailer Carrefour (CA:EPA) to budget airline Ryanair (RYAAY:NASDAQ) and Chinese search engine Baidu (9888:HKG).

Another position is Mattel (MAT:NASDAQ), the cash-generative toy company which has been turned round by what Peche describes as an ‘astute management team’ and is buying back stock. Mattel, whose well recognised brands include Barbie, Hotwheels and Fisher Price, is also building upon the success of

the Barbie movie by working to monetise other content.

Differences between Ranmore Global Equity and MSCI World

International Biotechnology Trust (IBT) – Price: 678p

Biotechnology-focused trust International Biotechnology (IBT) ticks a lot of boxes for me, including the fact the managers have worked together for over a decade and deploy a differentiated and proven investment process.

The biotech sector has historically outperformed the S&P 500 index, driven by positive structural demographic trends, but over the last five years it has lagged by around 70% presenting an attractive long-term entry point in my view.

Meanwhile, the trust trades on an attractive 12% discount to net asset value, which is likely to narrow over time as the sector recovers and fund managers Ailsa Craig and Marek Poszepczynski continue to deliver market-beating returns.

Another big attraction is that the trust pays a dividend equivalent to 4% of NAV distributed twice a year.

The £300 million trust became part Schroder’s healthcare platform in August 2023 after the manager beat 19 other investment groups to win the mandate from SV Health Investors, which had decided to focus on its core private equity healthcare businesses.

Managers Craig and Poszepczynski have worked on IBT since 2006 and 2013 respectively before becoming joint mangers in March

Martin Gamble Education Editor

2021, and the trust outperformed the Nasdaq Biotechnology index over one, three, five and 10 years to 30 August 2024. This justifies the relatively high ongoing charges of 1.4%.

Pleasingly, performance has been accompanied with lower volatility than the index and across both rising and falling markets, demonstrating the trust’s ‘all-weather’ appeal. Its performance also reflects the team’s flexible, value-driven approach and ability to adapt to evolving market conditions with a focus on capital preservation and selective risk-taking.

A large part of the manager’s success in recent years is down to positioning the portfolio towards acquisition targets ahead of

International Biotechnology Trust (p)

an anticipated pick up in M&A (merger and acquisition) activity as large pharma firms face patent expiries during the second half of the decade – since 2020, the portfolio has benefited from no fewer than 25 takeovers.

Craig and Poszepczynski believe the lion’s share of the bigger deals have been done, which means the next phase is likely to involve smaller and earlier clinical-stage firms.

The managers have positioned the portfolio accordingly and created baskets of smaller- and medium-sized stocks to capture the anticipated upside and spread overall risk, including a basket for the next generation of obesity treatments which are currently in clinical trials.

The team have increased exposure to therapies for the central nervous system, which has the largest weighting in the portfolio, and lowered their exposure to oncology (cancer) therapies.

They have also made tactical use of the trust’s borrowing facility with gearing of 8% as at the end of November 2024.

TwentyFour Select Monthly Income (SMIF) – Price: 87p

There is a lot to like about the TwentyFour Select Monthly Income Fund (SMIF), not least of which is the opportunity for income seekers to better meet their monthly outgoings.

For investors focused on capital growth, the opportunity to compound monthly instead of biannually or quarterly is equally valuable. The managers invest in a diversified portfolio of fixed income credit securities which are less liquid and therefore offer a yield premium over equivalent high-yield corporate bonds.

The managers believe this part of the fixed income market has been overlooked in the recent liquidity-driven rally, which has pushed high-yield corporate spreads to one of the narrowest levels on record.

This means it can invest in higher-yielding securities without talking on as much credit risk, so around 60% of the fund is currently invested in investment-grade or double-B rated (just below investment-grade) credit.

International Biotechnology Trust – top 10 holdings

Company Weighting (%)

Data as at 31 October 2024

Table: Shares magazine•Source: Schroders, 30 November 2024

Martin Gamble Education Editor

TwentyFour Select Monthly Income

(p)

Chart: Shares magazine•Source: LSEG

Around 80% of the portfolio is in CLOs (collaterised loan obligations), subordinated debt such as AT1s (additional tier one securities) and restricted tier-one bonds, European high-yield corporate credit and floating-rate ABS (assetbacked securities), which benefit from higherfor-longer interest rates.

Subordinated debt is an unsecured loan which ranks below senior debt, while AT1s are bonds which form part of a bank’s regulatory capital which can be converted into equity if its tier one capital ratio falls below a certain threshold.

The managers invest across a wide spectrum of fixed income credit allocating to areas of the market they believe represent attractive relative value. This is reflected in an 8.9% dividend yield.

At the recent full year results (12 December 2024), portfolio manager George Curtis commented: ‘We continue to focus on our rigorous bottom-up process to find areas of the market where we see attractive relative value. Both the CLO and subordinated financials sectors have benefitted from supportive fundamental and macro tailwinds, whilst offering a pick-up in spread and yield on a risk-adjusted basis.’

The company has a target net total return of between 8% and 10% per year comprising a dividend of 6p per share and a capital return of 2p to 4p, both based on the original issue amount of 100p.

However, in the year to 30 September the company delivered an above-target dividend of 7.38p per share and an impressive NAV (net asset value) total return of 22.5%.

At a time when most investment trusts are trading at a discount to NAV and struggling to raise capital, the company’s strong performance and premium allowed it to issue 18.3 million shares to meet investor demand.

Over the last decade the fund has delivered compound annual growth in NAV per share including dividends of 6.4% per year. Ongoing charges are 1.24%.

TwentyFour Select Income

Data as at 31 October 2024

Table: Shares magazine•Source: TwentyFor Asset Management

Top managers reveal their hopes and fears for the year ahead

Valuation and volatility cited as risks while AI is still expected to dominate

As we ease into 2025, we asked some of the UK’s best-known fund managers to outline what they felt were the risk and opportunities facing markets in the year ahead along with a few of their top sector and stock ideas.

We start with the potential risks the managers see for markets and end on a high note of sorts.

MARKETS HAVE PRICED IN LOWER RATES

‘There are always things to worry about as an investor, but ultimately, it is changing sentiment which creates mis-pricing opportunities in markets,’ says Stephen Anness who manages the Invesco Global Equity Income Trust (IGET)

‘Perhaps the biggest risk is that both 2023 and 2024 surpassed macroeconomic expectations, as an economic ‘hard landing’ never materialised, and markets performed very strongly as a result, which has raised the bar for another year of outperformance in 2025.’

Markets are already pricing some benign outcomes when it comes to further rate cuts from the Federal Reserve and the European Central Bank, cautions Anness, so given what is already priced in, the bar for 2025 is much higher than it was going into the last two years.

Given current valuations, the manager says investors need to keep their expectations in check when it comes to share re-ratings.

‘We expect returns in 2025 to be predominantly delivered from earnings growth and dividends, and this remains a central focus of our work,’ he adds.

That’s a view echoed by Nicolas Khuu, chief investment officer at J. Rothschild Capital Management Limited, which manages RIT Capital Partners (RCP).

‘While 2025 presents a range of familiar risks, such as economic slowdown, fiscal and monetary policy uncertainty, elevated valuations and geopolitical tensions, one underappreciated concern is the potential need for higher interest rates,’ says Khuu.

Asset prices are currently underpinned by expectations of declining rates and stable inflation, but US growth and trade policies, including tariffs and protectionist measures, are fueling domestic demand while accelerating the erosion of globalisation.

‘This fragmentation, combined with globally easing monetary policies, could ignite unexpected inflationary pressures. If inflation surprises to the upside, central banks may have no choice but to raise rates again, creating significant headwinds for global markets and valuations,’ he warns.

‘If inflation surprises to the upside, central banks may have no choice but to raise rates again, creating significant headwinds for global markets and valuations.’

Nicholas Khuu RIT Capital

THE RETURN OF ‘TARIFF MAN’

Unsurprisingly, many investors are concerned about tariffs – according to the latest Bank of America fund manager survey, 39% of those polled cited a trade war as the most bearish 2025 risk.

Cormac Weldon, head of US equities at Artemis, is less concerned: ‘We’re inclined to believe Trump is likely to use tariffs as a negotiating tool – he is a dealmaker after all – rather than enacting them in full. That said, he has famously described tariff as “the most beautiful word”, so the disruption caused by potential trade wars, similar to last time, should not be underestimated.’

Weldon and his team are looking carefully at importers and at the supply chains of all the companies they hold, screening out companies which are overly reliant on China.

James Cook, co-manager of JPMorgan Global Growth & Income (JGGI), flags the paucity of economic activity outside the US as a concern.

While real wages are rising in Japan, manufacturing sector weakness has been a drag in Europe and domestic demand in China remains sluggish, flags Cook.

‘We recognise that while global equities remain an attractive opportunity for an active stock picker, crucially, it is an environment which pays to be selective with increasing dispersion between regions.’

‘While global equities remain an attractive opportunity for an active stock picker, it pays to be selective.’

James Cook

JPMorgan Global Growth & Income

INCREASING VOLATILITY AND CONCENTRATION RISK

Investors should anticipate more share market volatility, as is typical early in a new technology cycle, says Ben Rogoff, manager of Polar Capital Technology Trust (PCT)

‘This was the case during 1995-1998 – a period early on in the internet cycle which we consider analogous to today – when strong overall sector

returns were punctuated by seven 15%-plus pullbacks in the Nasdaq 100.’

Volatility could be caused by macro factors such as geopolitics, interest rates or tariffs, or a negative AI (artificial intelligence)-related datapoint which challenges the near-term narrative, cautions Rogoff.

For Terry Smith and Julian Robins, chief investment officer and head of research at Fundsmith Equity (B41YBW7), the biggest risk is the concentration caused by the rise of index funds, which now represent more than 50% of global assets and are ‘distorting’ markets, the pair warn.

‘Calling index funds or index ETFs a form of “passive” investment is simply wrong. They don’t have a fund manager making stock decisions, they are in fact a form of momentum investing. ‘

As money goes into index funds it is spread on the basis of the market value of the companies in the index, dominated currently by the so-called Magnificent Seven and AI stocks, irrespective of their valuations or fundamental outlook.

This creates demand for their shares, which makes them perform even more, which in turn attracts more money from active funds to index funds, ‘and so the upward spiral goes on, and it will keep distorting markets until something happens to send it into reverse, but we have no idea what that might be or when it may occur,’ warn the duo.

STILL BACKING AI IN 2025

Despite the risk of a negative datapoint, Polar Capital’s Rogoff is still ‘hugely excited’ about 2025, calling the pace of innovation in generative AI ‘like nothing we have seen in our 25-plus years of investing across many technology cycles’.

‘We believe generative AI is the next major GPT (general purpose technology) platform, a rare leap forward in technological capabilities rather than a gradual improvement, which will drive radical innovation, fundamentally changing industries and creating significant new market opportunities.’

He is also excited by the potential for generative AI to turbocharge Polar’s own investment process, with the development of task-specific GPTs for screening, idea generation, analyst productivity, and to verify the team’s analysis.

‘We believe Generative AI is a rare leap forward rather than a gradual improvement, which will drive radical innovation.’

Ben Rogoff

Polar Capital Technology Trust

JPMorgan’s Cook also counts advances in AI as a key area of opportunity for 2025, alongside the shift towards renewable energy.

The trust has added exposure to companies providing memory capacity for computers and smartphones, including SK Hynix (000660:KRX), a Korean-listed market leader in leading edge memory services.

‘The transition to renewable energy sources and electric vehicles will provide further impetus

to this growing demand for semiconductors and related tech, and we see many attractive structural investment opportunities in this arena’, says Cook.

The trust also owns US utilities, which are leaders in the energy transition and the use of renewables, such as NextEra Energy (NEE:NYSE)

ESCHEWING THE MAINSTREAM

Artemis’s Weldon has a more contrarian approach, pointing out that sometimes it’s what you don’t own which can help your performance.

Given all the talk around tariffs, he significantly cut the firm’s holding in Magnificent Seven consumer electronics firm Apple (AAPL:NASDAQ) last year.

‘Being a business which relies heavily on China from both a demand and a supply perspective, Apple could suffer under a Trump presidency,’ the manager explains.

On the more positive side, says Weldon, any escalation in trade conflict will accelerate reshoring to the US which should benefit a wide range of industrial and manufacturing companies down the market-cap spectrum which generate the majority of their revenue domestically.

‘Apple could suffer under a Trump presidency.’

Cormac Weldon head of US equities Artemis

For Rothschild Capital Management’s Khuu, the main attraction this year isn’t the US or AI but Japan.

Wheatridge Solar, Wind and Battery Energy Center ©NextEra Energy

‘We have decades-long experience in investing via regional managers with proven track records of outperforming the benchmarks. We believe 2025 will be another great year for our managers in Japan as they continue to identify and engage with undervalued businesses benefitting from the ongoing corporate governance reforms as well as unlocking significant value in non-core assets, real estate being one example.’

Predictably, Fundsmith’s Smith and Robins are sticking to their knitting this year just as they have done every year.

‘We are always a bit wary of people’s best ideas, such as so-called Best Ideas Funds and brokers’ lists. Anything which is described as best ideas makes us wonder what the rest of their ideas are like,’ say the duo.

‘Our best idea is also our only idea, which is to keep on doing what we seek to do, namely to own a portfolio of good companies at reasonable valuations. We realize that this may not always outperform the market and it certainly hasn’t in the past few years, but unlike the returns generated

from playing AI or crypto or any of the other current chart toppers, it has a high likelihood of delivering a good return rather than the chance of a spectacular return which could of course become spectacularly bad.’

‘Our best idea is also our only idea, which is to keep on doing what we seek to do.’

Terry Smith & Julian Robins

Fundsmith

Disclaimer: The author (Ian Conway) owns shares in Fundsmith Equity.

Discovering exceptional opportunities for

By Ian Conway Deputy Editor

MIGOplc @MIGOplc

How to use the X-Ray tool to keep your investments on track

This portfolio analysis widget can be really helpful in giving you a snapshot of your portfolio

Staying on top of your investments is important if you want to make a success out of putting your money to work in the financial markets.

A useful tool, created for this purpose, is the Morningstar Portfolio X-Ray which is available to AJ Bell customers.

It’s particularly helpful in determining if you have the appropriate mix of investments. Diversification is about spreading your investments into assets which have different risk and return profiles and, by doing so, smoothing your portfolio returns.

X-RAY SHOULD REFLECT YOUR RISK APPETITE

The proportion of your portfolio allocated to distinct asset classes will depend on your investment profile and risk appetite. To maintain these proportions, you will need to manage your portfolio actively through a process known as

rebalancing.

For example, if you have a portfolio with 60% stocks and 40% bonds, and the stocks perform well while the bonds’ returns decrease, the value of your holdings may change to 70% stocks and 30% bonds. Rebalancing involves selling some of the stocks which have appreciated in value and purchasing more bonds until the portfolio returns to its original allocation of 60% stocks and 40% bonds.

This practice can help maintain a consistent level of risk exposure and promotes the discipline of selling assets which have appreciated in value and buying those that may be relatively undervalued. This is not necessarily something you would want to do too regularly as it obviously there are costs to trading investments but doing so on an annual basis is a sensible rule of thumb for most people.

The first section of the X-Ray is particularly helpful in this regard as it shows the balance of your portfolio between stocks, bonds and cash as well as ‘other’ and ‘not classified’ categories. In the example shown, stocks make up the vast majority of the portfolio – suggesting a pretty high tolerance

for risk.

You can also see a geographic breakdown, in this case the US accounts for a large proportion of the portfolio, although lower than MSCI All-Country World Index where it has a rough two-thirds weighting.

BREAKING DOWN INVESTMENTS BY TYPE

The X-Ray tool also analyses the underlying stocks within the portfolio, categorising them as Cyclical, Sensitive, or Defensive based on their correlation to the business cycle. Cyclical stocks, like housebuilders, are highly sensitive to the economy, while Defensive stocks, such as utilities, are not. Sensitive stocks, such as industrial companies, fall in between.

Additionally, you get insight into your exposure

to different investment styles. Diversifying across investment styles (value, growth, size) can help manage risk and reduce volatility, as different styles perform better at different times in the economic cycle. The information includes valuation metrics for the stocks and shares component of the portfolio and, for the bonds, details of how long they have until they mature and the average level of creditworthiness.

The report shows your performance in absolute terms and compared to a benchmark. The ‘+/- Benchmark’ indicates how much you have outperformed or underperformed, not the benchmark’s actual performance. If you are drastically underperforming the benchmark, particularly if the underperformance has been over an extended time period, it is worth taking a closer look at your investments and trying to work what might be going wrong.

MORE COMPLICATED STUFF

Some sections of the X-Ray tool are slightly more complicated although they can still be useful. The finance industry uses standard deviation to measure risk, indicating how much your portfolio’s value fluctuates. If your portfolio consistently delivers 5% annually without variation, its standard deviation would be zero. In this case, lower deviation signifies less risk.

Education: X-Ray tool

The Sharpe ratio incorporates the standard deviation to compare the returns on offer from an investment with the level of risk. The higher the figure the better and any value greater than one is considered good. Two is very good and three is excellent.

Another item is the correlation matrix. If you think of the shares and funds in your portfolio as magnets, attracting or repelling others, the correlation matrix measures this attraction. Positively correlated shares move together, while negatively correlated ones move oppositely. The numbers indicate the strength of correlation between asset pairs. A +1.0 means perfect

synchronisation in the same direction, -1.0 means opposite directions, and zero means no relationship.

DISCLAIMER: AJ Bell referenced in this article owns Shares magazine. The author (Tom Sieber) and editor (Ian Conway) of this article own shares in AJ Bell. By Tom Sieber Editor

How self-employed investor BrokenBanker brings his experience to bear in the markets

Knowledge of macro-economics and a high risk tolerance are a key part of his approach

For the last five years, ‘BrokenBanker’ or BB for short as he goes by online, has been managing his own financial affairs as a self-employed investor after working for more than 30 years in capital markets.

With a background in fixed income and economics, it is not surprising his investment style is mainly top-down and macro-driven, but he has also developed bottom-up, fundamental stock-picking skills which complement his portfolio construction.

BB describes himself as risk tolerant which means he is comfortable taking on risk to make a commensurate return.

As well as managing his own capital, he operates a one-man company so he can contribute to ‘alphacapture’ programmes which reward participants on the basis of their stock-picking in European and US markets and their macro trading ideas.

BB owns a SIPP and an ISA and has an external pot of money which sits outside these tax wrappers. He is able to live off the profits made in the external pot, which come from foreign exchange trading, and each year he transfers cash from the pot into the SIPP and the ISA leaving them to grow.

To measure how well he is doing, he has constructed his own benchmark which is weighted 60% to the FTSE All-Share index and 40% to the Core Gilts index.

A TOP-DOWN APPROACH

Despite being risk-tolerant, BB is aware of the need to manage risk within his limits and constantly monitors the economic backdrop to inform his investment decisions and how much exposure to take.

Using his macroeconomic background, he systematically analyses central bank policies, interest rates, the shape of the yield curve (how

interest rates change over time), foreign exchange rates, oil and metals prices, employment trends in the G10 and the outlook for growth.

As a result, although he is generally risk tolerant, there are times when he will play defence and move his entire portfolio into cash – a good example was the summer of 2024, when he became less confident on risk assets.

By keeping close tabs on US, European and UK corporate earnings, and how companies performed relative to analysts’ expectations, he reasoned the second-quarter earnings season was disappointing, and bonds weren’t acting in a way which inspired confidence either, so he moved into cash.

This turned out to be great timing because stock markets had a wobble, losing close to 10% through July and into early August, allowing him to re-enter at lower prices.

PORTFOLIO CONSTRUCTION

BB uses his SIPP to invest in FTSE 350 stocks and gilts and his ISA to invest in small-cap and AIM companies.

Although he does invest in individual companies in the SIPP, it is predominantly invested in ETFs (exchange-traded funds) to gain exposure to indices and thematic products as they are a cheap and liquid way to get exposure to stocks quickly and can

Aviation PLC is a commercial passenger aircraftleasing company whos customers include EasyJet

BB's UK small cap portfolio

Table: Shares magazine•Source: Investor's own records

mitigate cost drag.

The ISA on the other hand is comprised of between 10 and 15 individual stocks, equally weighted and with a sector-agnostic approach.

What BB is ideally searching for is companies whose shares have been reacting positively to good news, and where he believes there is the potential for the company to consistently deliver good earnings growth.

One example would be in the spring of 2024, when he picked up UK construction stocks such as geotechnical specialist contractor Keller (KLR), Kier Group (KIE) and Galliford Try (GFRD).

Other examples include specialist UK financial services companies such as global broking firm TP ICAP (TCAP), pensions specialist XPS Pensions (XPS) and retirement income specialist Just Group (JUST) which he believed were trading on low valuations and delivering sustainable positive earnings momentum.

Inevitably, stock picks don’t always work out as intended – at the start of 2022, BB bought a position in biotech firm Synairgen (SNG:AIM) after the respiratory drug development company reported favourable early clinical trial results for its leading drug candidate.

In a matter of weeks, however, the firm revealed the drug had failed a late-stage clinical trial,

blowing a hole its plans and sending the shares 60% lower.

BB cut the position immediately in line with his disciplined risk management approach and has since vowed never to invest in biotech companies because he lacks the scientific knowledge to properly assess the risks.

The episode also provided some valuable lessons on the risks of single-product companies and the need to size positions according to risk.

BB takes an active approach to managing the portfolio, reflecting his investment style: ‘I’ve found that an active style of trading with positions held from days to a few months max, which suits how I think about catalysts coming and going,’ he explains.

TAKING ADVANTAGE OF OPPORTUNITIES

A good example of his opportunistic approach, which allows him to finesse shorter-term market moves, is his investment in over-50s cruise and insurance company Saga (SAGA)

When the company announced in early October 2024 it was in exclusive talks with Benelux insurer Ageas (AGS:EBR), the shares responded positively gaining around 7% on the day.

BB believed this was an underreaction to the potential financial benefits for shareholders and,

BB's large cap portfolio

given the shares were bombed out, he bought a position, which proved prescient and nine days later allowed him to exit the shares for a 25% gain. In closing, shortly before our interview with BB, Donald Trump was elected US president for the second time.

Reflecting on some of the challenges facing investors under a Trump administration, BB said he believed financial markets would turn out to be the ultimate arbiter on some of Trump’s more extreme policies and provide the final checks and balances which are missing at the executive level.

DISCLAIMER: Please note, we do not provide financial advice in My Portfolio articles, and

we are unable to comment on the suitability of the subject’s investments. Individuals who are unsure about the suitability of investments should consult a suitably qualified financial adviser. Past performance is not a guide to future performance and some investments need to be held for the long term. Tax treatment depends on your individual circumstances and rules may change. ISA and pension rules apply.

Martin Gamble Education Editor

WE WANT TO HEAR FROM YOU

We are looking for individuals or couples to share their experiences of managing their own investment portfolios.

If you would like to take part, we want to know why you chose certain stocks, funds or bonds, why you might have subsequently sold some of them, and what you hope to achieve from investing.

We will pay £50 in John Lewis vouchers as a thank you to anyone whose story is published in the digital magazine.

Drop us a line with your name and two lines describing your investment experience. For those picked to feature in the magazine, we’ll be in touch to get the full story.

CONTACT: shareseditorial@ajbell.co.uk with the words My Portfolio

DISCLAIMER: Shares/ AJ Bell does not provide advice or personal recommendations. The My Portfolio articles are for information only. You must do own research and consider your own personal circumstances before making investment decisions.

Five big themes to watch in 2025

The factors which could move markets over the next 12 months

Perhaps, thanks to AI, we need to heed the words of American industrialist J. Paul Getty, who once asserted: ‘In times of rapid change, experience can be your worst enemy.’

Right now, investors who are sticking to longheld valuation disciplines are getting left behind, as US equities generally, AI-related names more specifically and cryptocurrencies are all on a roll. And once markets start rolling, then they can run for a long time, especially when their preferred narrative continues to play out, as it is right now, in the shape of cooling inflation, steady economic growth and falling interest rates.

Valuation only really matters when a catalyst appears to change perception and persuade investors an asset class or individual security is too dear or too cheap, so investors need to be on the look-out for changes that might change the narrative, in the former of either hotter inflation, faster or slower growth, or interest rates that stay higher for longer (or even start to rise again). These five themes could have a major say on all fronts in 2025 and beyond.

DEBT

The new Labour Government in the UK still taking brickbats as it seeks to address Britain’s fiscal deficit, a French administration is in tatters after just three months as its efforts to raise taxes and cut spending get the thumbs down and, all the while, America’s federal debt continues to mushroom. President-elect Trump’s policy package could even accelerate growth in government borrowing from what is already a record-high of $36 trillion.

America keeps adding to its deficit at near-record pace

America’s annualised interest bill on that debt already exceeds $1 trillion, a sum that exceeds the defence budget. There could be trouble ahead, unless Elon Musk and Vivek Ramaswamy really do cut spending, or Trump’s tariffs really do raise income and boost domestic output.

Either bond yields rise in the face of growing supply, or interest rates stay higher for longer, or the Fed looks to cut rates and take a chance with inflation to lower the interest bill (contrary to the prevailing narrative of cooler inflation). This final scenario may be why gold (and Bitcoin, for that matter) are on a roll, as investors seek perceived stores of value.

WORLD TRADE

Trump talked loudly and carried a big stick on the subject of tariffs during his first term, but he only really wielded the stick at China. Other nations, such as France and Mexico, were spared, albeit only once they offered concessions. We may see the same again this time around given Trump’s propensity to seek a deal.

Source: FRED- St. Louis Federal Reserve database, Congressional Budget Office, LSEG Refinitiv

Tariffs could affect global trade flows and growth in 2025

Source: CPB World Trade Monitor, www.cpb.nl

If all of the planned tariffs are imposed, it seems logical to assume this will boost inflation, as the price of imported goods will rise owing to the duties, or the higher cost of domestic production. But the best cure for higher prices is higher prices, as they ultimately curtail demand (or stoke output), and tariffs are seen as a major contributor to the deep global downturn suffered in the 1930s, so the picture may not be so simple. Markets still think growth is set fair in 2025, and tracking world trade flows will help to gauge whether that is the case or not. At the moment, the picture looks healthy.

THE DOLLAR

If Trump’s tariffs succeed in reducing America’s trade deficit, that will mean fewer dollars leave America. If they produce America’s first trade surplus since 1975, dollars will actively flow back into the US. That could be a problem, according to professor Robert Triffin’s theories, because of the dollars status as the world’s reserve currency. In essence, greenbacks are the green grease that oils the global economy and financial markets and without them global liquidity could dry up quickly, with potentially deleterious consequences. Emerging markets are traditionally very sensitive to the dollar, as many developing nations tend to borrow in bucks, and a strong US currency increases the cost of servicing that debt, to the detriment of growth and investment. Investors here will therefore be watching US trade policies with particular care.

Emerging markets are particular sensitive to the dollar

Source: LSEG Refinitiv data

OIL AND FOOD PRICES

Inflation continues to hover around the 2% target given to central bankers around the world, thanks to a marked easing in goods prices. Food and oil prices are helping here, but they remain highly unpredictable, thanks to the vagaries of the weather and geopolitics. It should be worth tracking both in 2025, especially as services inflation remains elevated and that could in turn yet stoke wage demands.

Global food prices are starting to rise again

Source: United National Food and Agriculture Organization

THE MAGNIFICENT SEVEN

The scientist and science fiction writer Arthur C. Clarke is on record that: ‘Any sufficiently advanced technology is indistinguishable from magic.’ Investors certainly seem as bedazzled as ever by the so-called Magnificent Seven. This year’s average 65% gain across the septet leaves them with an aggregate market capitalisation of $18 trillion, or 35% of the S&P 500. That powerful performance in turn means the S&P 500 represents 63% of the FTSE All-World’s market valuation, a level that exceeds even the high seen at the peak of the technology, media and telecoms bubble in 2000.

The share price and profit wobbles of 2022 showed that this group are not entirely immune to the economic cycle, so an unexpected recession could be one challenge. Sustained inflation could be another if it keeps rates higher than expected and boosts nominal growth from downtrodden cyclicals and value stocks. Again, only a perfect middle path may do.

US equities represent a record percentage of global stock markets’ value

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Source: LSEG Refinitiv data

What is ‘carry forward’ and how can it help with my pension planning?

Find out how to increase your pension contributions above this year’s annual allowance

I’ve read that anyone who exceeds the maximum annual allowance of £60,000 for pension contributions in 2024/25 is liable for tax on the contribution above their allowance.

However, I gather you can ‘carry forward’ up to three preceding years that you didn’t fully use your maximum annual allowance but the process isn’t automatic.

I have a workplace pension where my monthly contributions are a percentage of my earnings. I also pay into a SIPP and would like to pay in the maximum I can this tax year.

Therefore, how do I transfer any unused annual allowance to the current tax year? Should I contact my SIPP provider? Also, as the process is not automatic, are there any special forms I should complete and is there a cut-off dates for the process?

Abdu

Rachel Vahey, AJ Bell Head of Public Policy, says:

In theory, it should be easy to work out how much can be tax-efficiently paid into a pension but the rules can be quite complicated with an assortment of different allowances to get your head around.

The amount anyone can pay into a pension and benefit from tax relief is based on their earnings and how much tax they pay. The general rule is they can personally pay in up to 100% of their earnings, including any tax relief.

But there are three annual allowances you need to be aware of. The standard annual allowance is £60,000 and includes personal

contributions, an employer’s contributions and tax relief on contributions to a SIPP.

There are two other annual allowances. The tapered annual allowance applies to very high earners and reduces their annual allowance on a sliding scale depending on how much they earn, so anyone paid over £200,000 a year could be caught. If they earn £360,000 or more, their annual allowance falls to just £10,000.

The money purchase annual allowance (MPAA) is triggered if someone has ‘flexibly accessed’ their pension – usually by taking money from an income drawdown plan – and reduces their annual allowance to £10,000.

If an individual’s total contributions go over the annual allowance, then there’s a tax charge on the excess which effectively cancels out the tax relief they receive above the allowance.

If someone wants to pay in more than their standard or tapered annual allowance in a tax year, without tax charges, then they may be able to do so by using carry forward, although it doesn’t apply if the MPAA has been triggered.

Unused annual allowances from the last three tax years can be ‘carried forward’ to the current tax year, but there are rules to follow.

First, the individual must have been a member of a pension scheme for those tax years, although they don’t need to have contributed to the pension or have been a member of the pension scheme they are planning on contributing to now.

They must use the full annual allowance for this tax year before they start on any unused allowance from previous years. And remember that first rule of contributions – no-one can pay in more than 100% of what they earn.

If you are looking to contribute during the 2024/25 tax year, then you want to consider if you have any unused allowances from the 2021/22, 2022/23 and 2023/24 tax years. Once you have used up the current year’s annual allowance, you then use up the

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oldest tax year and work forwards.

Here’s an example. The table shows the contributions paid to Mr Smith’s pension scheme. Remember the annual allowance was £40,000 in 2021/22 and 2022/23, then it increased to £60,000 in 2023/24 and 2024/25:

Once Mr Smith has used up all his £60,000 annual allowance for 2024/25, he is able to carry forward up to £50,000 from earlier tax years as well.

There is no requirement to provide further information or forms when making a carry

forward contribution.

If you go over the annual allowance, the scheme administrator will provide information about how much annual allowance you have used that year and the previous three tax years.

You can use that information to confirm you have made use of carry forward when you complete your self-assessment form.

It’s a good idea to document all your carry forward calculations and keep them on file, so you have them to hand if HMRC asks for more information.

How carry forward works in numbers

Chart: Shares magazine•Source: AJ Bell

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Shares magazine is published weekly every Thursday (50 times per year) by AJ Bell Media Limited, 49 Southwark Bridge Road, London, SE1 9HH. Company Registration No: 3733852.

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