AJ Bell Shares magazine 13 February 2025

CYBER

SECURITY

THE SECTOR CAN DEFEND DATA AND YOUR PORTFOLIO

Three important things in this week’s magazine

Everything you need to know about cybersecurity and how to invest in this crucial tech subsector

Discover the companies which are ‘holding the line’ against ever more frequent hacks and cyberattacks and how they can help defend your investments.

Why gold could go on to top the $3,000 mark

In the last five years the gold price has doubled, beating even the return on the S&P 500 index – read why it could climb even further in 2025.

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:

Are these the most unloved stocks in the UK?

The list of companies whose shares are among the mostshorted by professional traders and hedge funds includes some well-known names.

What could get Japanese stocks moving again?

Japanese prime minister Shigeru Ishiba could have been forgiven for a degree of trepidation before his recent visit to the White House.

Tariffs would have a major impact on Japan given how reliant its economy is on exports.

Therefore, beyond a mild warning from president Donald Trump that Japan could face the T word if it didn’t get its trade deficit with America down to zero, Ishiba will have left Washington a relieved man.

This begs the question of what else is holding back Japanese stocks. Since hitting a new all-time high for the first time since the early 1980s last year, the flagship Nikkei 225 index has basically traded sideways, bar a brief period in late July and early August when concern over the yen carry trade saw a frenzied but ultimately brief sell-off.

Against this backdrop, the optimism of valueoriented investment trust AVI Global (AGT) and manager Joe Bauernfreund is particularly striking. He observes: ‘Over the last eight years, the weight of evidence that Japan is changing has grown. We previously described 2023 as a seminal

year in which global investors, spurred on by the efforts of the Tokyo Stock Exchange and its attempts to address the issues of companies trading below book value, woke up and smelt the coffee. Japanese equities have gained global relevance once again.

‘As we have learnt over time, the path to progress can be frustratingly slow at times, and it is not always linear with steps back along the way. With that said, as we survey the landscape in 2025, we are as optimistic as we have ever been.’

In terms of broad catalysts for equities in Japan, Bauernfreund notes brewing interest among private equity, citing the battle between KKR and Bain for Fuji Soft (9749:TYO) as an example.

He adds: ‘Importantly, and in many ways connected to this, we are seeing management teams become increasingly active in their attempts to boost and unlock corporate value. As active engaged owners, these are two attractive forces to have moving in the right direction.’

There is an interesting snippet on the early knockings of the European earnings season from analysts at Bank of America, who note stocks missing EPS (earnings per share) estimates have faced heavy punishment, with a median one-day underperformance of 2.6%, the sharpest since they started tracking the data 13 years ago, while those beating estimates have recorded outperformance of 1.7%, the second strongest level on record.

This paints a picture of a nervous market, of a mind to punish any signs of weakness but also very grateful for signs a business is thriving despite the uncertain backdrop. One manager is as ‘optimistic as he has ever been’

Murray International Trust

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A resilient jobs market and spiking inflation expectations likely to keep US rates on hold

Jerome Powell likely to face tough questions when he testifies to the senate this week

The resilience of the US labour market looks likely to keep Federal Reserve rate cuts on hold for the foreseeable future.

Although non-farm payrolls for January showed the economy added 143,000 jobs, below the median estimate of 170,000, figures for the prior two months were revised up by 100,000 taking the three-month average increase to 204,000 in the fourth quarter from 170,000 previously.

The unemployment rate ticked down to 4%, while average hourly earnings increased by 4.1% on an annual basis against the 3.8% expected by economists.

Fed chair Jerome Powell has previously argued wage growth needs to remain below 4% to be consistent with the bank’s medium-term 2% inflation target, meaning more progress is needed if interest rates are to fall further.

David Page, head of macro strategy at AXA Investment Management, agrees: ‘To our mind, these are certainly not data to encourage the Fed to cut rates over the coming months.’

The University of Michigan Consumer Confidence index was released on 7 February, and surprisingly dropped to a seven-month low missing expectations by some way.

Michigan Survey director Joanne Hsu noted the drop in sentiment occurred across all age and wealth groups, with all five index components down led by a 12% slide in buying conditions for durables, ‘in part due to a perception that it may be too late to avoid the negative impact of tariff policy’.

University of Michigan Consumer Sentiment Index

which showed participants believe inflation will average 4.4% over the coming year up from 3.4% in the previous survey.

Hsu noted a full percentage point jump is unusual and is just the fifth time it has occurred in 14 years. Interestingly, the first reading was taken on 4 February, the day Trump suspended the 25% tariffs on Mexico and Canada. A final reading for February will be taken at the end of the month.

The reading for five-year inflation expectations also ticked up to 3.3% from 3.2%, the highest since June 2008.

Ernie Tedeschi, director of economics at Yale’s Budget Lab, believes uncertainty around tariffs risks fueling inflation even if tariffs aren’t actually implemented.

That said, the Michigan inflation survey does possess some quirks.

A worrying element of the report was the measure of short-term inflation expectations,

Bloomberg columnist John Authers points out there is a wide political divide, with survey participants identifying as republican forecasting zero inflation while democrats are bracing themselves for more than 5% inflation over the coming year. [MG]

BP faces day of destiny as activist Elliott builds stake

It already felt like a day of destiny, postponed so chief executive Murray Auchincloss could undergo an undisclosed medical procedure, but the stakes have been raised ahead of BP’s (BP.) strategy day on 26 February.

News US activist investor Elliot has joined the share register has got the share price moving in the right direction for the first time in a while, but has also ratcheted up the pressure on management to demonstrate they can revive the fortunes of a company which has fallen behind its rivals.

As the 15-year share price chart shows, this not only includes US peers like Exxon Mobil (XOM:NYSE) but its UK-listed counterpart Shell (SHEL).

BP kicked off 2020 with a shiny new energy transition strategy under Auchincloss’ predecessor Bernard Looney, including targets to ramp up renewable energy capacity and reduce oil and gas production.

Then the invasion of Ukraine put the emphasis less on energy transition and more on energy security. This saw the company abandon its target to dial down output of hydrocarbons – although the stated ambition to achieve 50 gigawatts of renewable energy generation remains for now.

Elliott might push for the company to divest its renewable assets and focus capital spending on the upstream oil and gas assets which generate the lion’s share of the company’s cash flow. The activist may also seek to oust chair Helge Lund who has been

in place since 2019.

BP’s fourth-quarter and full-year results did little but provide further fodder for Elliott as annual profit slumped to its lowest level since the pandemic hit in 2020.

Pre-tax replacement cost profit for the final quarter of 2024 tumbled 79% to $764 million against $3.57 billion a year earlier, while underlying replacement cost profit (a widely used measure in the oil industry) fell 61% to $1.17 billion from $2.99 billion.

For the full-year, pre-tax replacement cost profit declined 59% to $11.8 billion from $28.6 billion and underlying replacement cost profit fell 36% to $8.92 billion from $13.8 billion.

BP said the underlying result reflected weaker realised refining margins, a greater impact from turnaround activity, seasonally lower customer volumes and fuel margins and higher other business costs.

The company said that as part of the upcoming strategic update it plans to review aspects of its financial guidance, including its expectations for 2025 in terms of share buybacks and capital expenditure.

This is unsurprising given net debt, despite being trimmed slightly in the final three months of last year, still totals a whopping $23 billion.

Nonetheless, in the fourth quarter BP maintained its quarterly buyback at $1.75 billion, which it plans to execute before publishing its first-quarter results. [TS]

Investment trust consolidation era continues in 2025

JGGI and HINT merger makes sense, while BBGI bid comes as ‘bolt from the blue’

Consolidation across the investment trust sector continues, against a backdrop of wide NAV (net asset value) discounts, pressure on sub-scale funds and shareholder activism.

2024 proved a record year for mergers and acquisitions (M&A) across the sector, with 11 mergers and eight trusts being acquired, and this trend has continued into 2025.

On 7 February, JPMorgan Global Growth & Income (JGGI) and smaller rival Henderson International Income Trust (HINT) announced a merger which adds further scale to the former, seemingly the merger partner of choice for global income trusts having absorbed Scottish Investment Trust, JPMorgan Elect and JPMorgan Multi-Asset Growth & Income in recent years.

Due to conclude by July 2025, the deal will create a trust with net assets of roughly £3.4 billion, cementing JGGI’s position as the Association of Investment Companies’ (AIC) Global Equity Income sector big beast.

merging into a larger, more liquid vehicle which has consistently traded at a premium or close to NAV, as well as from lower ongoing charges, and there is significant overlap between HINT’s and JGGI’s top 20 shareholders.

JPMorgan Asset Management will continue to manage the enlarged JGGI, a retail investor favourite thanks to its strong performance and attractive yield.

Deutsche Numis number-crunchers Ewan LovettTurner and Ash Nandi believe the tidy-up of subscale trusts has legs and boards will have to be more pro-active in facilitating M&A activity.

From HINT shareholders’ perspective, the deal makes sense since they will benefit from

‘We believe Saba Capital’s presence should be a wake-up call to the sector and boards will need to be more proactive in managing discounts, focusing on shareholder returns and assessing the relevance of a strategy.’

Also last week (6 February), BBGI Global Infrastructure’s (BBGI) shares spiked after the progressive dividendpaying fund recommended a £1.06 billion cash offer from Canadian institutional investor BCI.

Analysts at Panmure Liberum described the bid, pitched at 147.5p per share - a premium to estimated NAV - as ‘a bolt from the blue that will reverberate around the industry’ and ‘the most significant news in several years within renewables and infrastructure funds.’

According to the broker, the deal suggests there is ‘a market for cash takeouts of project/ concession-based funds on the larger end of the market cap spectrum’ and that ‘some of the discounts are too steep, or that pricing based on spreads to gilts perhaps does not entirely capture the value proposition’.

If the boards of the largest renewable and infrastructure funds also step up efforts to narrow discounts, perhaps by adopting a more aggressive approach to disposals, this should help to bring down discounts, the analysts added. [JC]

Filtronic hits all-time high on latest SpaceX order

Shares in communications kit designer have gained 184% in the past year

Shares in Filtronic (FTC:AIM) have been on a roll over the past year as the communications kit designer has benefited from successive contract wins from SpaceX, Elon Musk’s rocket and spacecraft maker.

On 10 February, the company signed a new £16.8 million contract

to be fulfilled between now and the end of 2026.

Katherine Thompson, director at Edison, said: ‘The close working relationship with SpaceX provides the company with good visibility into full year 2026 and the conversion of recent design wins in the aerospace and defence market into orders could provide further support to our full year 2026 forecasts.’

Filtronic isn’t just a one hit wonder when it comes to contract wins, however it has also secured business with QinetiQ (QQ), BAE Systems (BA.) and the European Space Agency.

Recent first-half results impressed, with group revenue of £25.6 million, a jump of over 200%

Chart: Shares magazine • Source: LSEG from £8.5 million the previous year. The company also announced two new production lines and the opening of a new design centre at the Cambridge Science Park together with a healthy cash position of £5.1 million excluding leases. [SG]

ELF Beauty stock hits two-year low as cashstrapped US consumers rein in spending

Trump tariffs and emerging inflation could make for a bumpy 2025 for budget make-up firm

With sales of its cut-priced makeup seemingly going gangbusters investors might ponder why ELF Beauty’s (ELF:NYSE) share price performance is anything but pretty.

The Californian business posted strong third-quarter fiscal 2025 revenues on 6 February, showing 31% year-onyear growth, yet earnings were flat and marginally light of consensus, suggesting ELF Beauty is having to spend more on marketing to keep the sales machine going.

That ELF Beauty revised its outlook

for the rest of the year, based on a softer-than-expected January, also weighed heavily, with CEO Tarang Amin’s claims that LA wildfires and a possible TikTok ban lowering social media sales conversions sounding a little hollow.

The stock tanked, falling 20% in response and leaving the shares at their lowest in two years. Donald Trump’s new 10% tariffs on imports from China are on the horizon, which could force the company to raise prices, with about 80% of its products manufactured in

Chart: Shares magazine • Source: LSEG

China, down from 100% percent five years ago. That’s hardly a backcloth likely to entice cash-strapped US consumers to spend more, and with interest rates still higher, and inflation starting to emerge again, it could be a bumpy 2025 for ELF Beauty. [SF]

14 Feb: NatWest, Segro

17 Feb: Mony Group

18 Feb: Antofagasta, InterContinental Hotels Group

19 Feb: BAE Systems, Conduit Holdings, Glencore, HSBC

20 Feb: Anglo American, Centrica, Indivior, Lloyds Banking, Mondi

FIRST-HALF RESULTS

17 Feb: Wilmington

20 Feb: Hays

HSBC to show

a small rise in pre-tax profit for 2024

There may be a sense of poignancy when Europe’s biggest bank HSBC (HSBA) reports full-year earnings next week as for several hundred staff it will be the last call.

At the end of January, the company informed managers in its UK, European and US corporate advisory and equity underwriting teams it was closing down operations as it finally gave up chasing a place at investment banking’s top table.

While HSBC may stand shoulder-toshoulder with Wall Street rivals such as JPMorgan Chase (JPM:NYSE) and Goldman Sachs (GS:NYSE) in debt issuance, in M&A and equity underwriting it was never more than a bit-part player ranking outside the top 20 in US M&A and just 15th in underwriting.

The cuts are part of new chief executive Georges Elhedery’s plan to slash some $3 billion from HSBC’s annual cost base, which has already seen the board reduced by around a third and a reorganisation

into four distinct businesses.

Partly thanks to the cutbacks, Elhedery – like his counterpart CS Venkatakrishnan at Barclays (BARC) – could be in for a nice pay rise, as the board mulls new UK rules allowing a larger proportion of remuneration to come from variable performance awards.

In terms of numbers, analysts are forecasting a 1% drop in revenue to $65.2 billion but a 4% increase in pre-tax profit to $31.7 billion.

The banking net interest margin is expected to be around 1.5% from 1.66% the previous year, while provisions for expected credit losses are seen dipping to $3.1 billion and return on tangible equity is seen at 14.4% against 14.6% previously.

Given the bank has almost completed the $3 billion share buyback announced with the third quarter results, investors will be expecting a new buyback programme along with refreshed financial targets for 2025 and 2026. [IC]

Will Walmart lose its retail crown to Amazon?

Investors should look for margin expansion hints and any signs of a spending slowdown

Whisper it, but Walmart (WMT:NYSE) may be about to have its global retail crown swiped off its head by online giant Amazon (AMZN:NASDAQ). Walmart has been the top shopping dog since blowing past Sears more than 30 years ago, but its status as worldwide number one (in revenue terms) could be tested when the $827 billion retailer posts fourth quarter 2024 results on 20 February. Amazon confirmed a 10% jump in overall revenue for its own Q4 (6 February), hitting $187.8 billion, versus $170 billion in the same period last year. Walmart is projected to post rough 4% sales growth in Q4 (to 31 January) at $178.8 billion, according to consensus forecasts, although the comparison is a little disingenuous – about a third of Amazon’s top-line comes from non-retail operations, including areas like online advertising and its cloud computing arm AWS.

Either way you look at it, Walmart remains a supreme business, with excellent returns on capital and equity of 18% and 23.5% respectively. Even margins are decent given the ultra-competitive

market it operates in, with operating margins running at around the 4.3% mark, about the same as the UK’s Tesco (TSCO), and far better than US rivals like Costco Wholesale (COST:NASDAQ) or Kroger (KR:NYSE), at 3.7% and 2.8% respectively ─ Target (TGT:NYSE) has 5.5% margins.

This is reflected in a pretty chunky rating, the shares trading on 37 times consensus forecast earnings for the 12 months to 31 January 2026. US consumer spending has been extremely resilient but recent signs of weakening confidence among American households could be headwind for Walmart. [SF]

14 Feb: Coco-Cola European, Moderna

18 Feb: Arista Networks, Cadence Design, Medtronic, Occidental 19 Feb: Analog Devices, Copart, Garmin

20 Feb: Booking, Hasbro, MercadoLibre, Walmart

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Hargreaves Services is hard to ignore despite its strong performance

Patient shareholders could almost double their money on some forecasts

Hargreaves Services (HSP:AIM) 620p

Market cap: £200 million

It’s always a test of our conviction if we can recommend a stock just as the shares are touching a 12-month high, but in the case of environmental services, property and materials group Hargreaves Services (HSP:AIM), its shares are trading at a 10-year high.

In our defence, we did flag the company a year ago at 475p in our ‘Five small-cap stars to buy today’ feature, so we haven’t just stumbled on the idea recently, and although the shares have racked up a decent gain since we believe there is much more to come.

AN ASSET-BACKED STORY

Hargreaves is made up of three fairly unglamorous but profitable businesses – Services, which includes earthmoving, transportation, recycling and wasteto-energy; Land, which mainly entails preparing

Major services contracts

HS2 Work Continuing through FY25 and FY26

Sizewell C Enabling projects under way

Lower Thames Crossing Preferred partner to Balfour Beatty

FCC Five-year contract renewal (new)

Yorwaste Two-year contract (new)

Enfinium Waste-to-energy management (new)

Table: Shares magazine • Source: Hargreaves Services

Hargreaves Services (p)

and selling plots to housebuilders for development; and HRMS, a German materials recycling business.

As we said a year ago, this isn’t a go-go growth story, it’s an asset-backed income play, by which we mean there is a steady revenue stream from the services business, periodic revenue from the sale of sites from development and now a steady stream of dividends from the German subsidiary.

All three operations are ticking over nicely, but the kicker is the land and the German business are in the books at extremely low valuations and in time, as the assets are realised, there will be a substantial return of cash to shareholders.

In a time when markets are at the whim of politicians, there’s a lot to be said for owning a smaller, under-the-radar company which minds its own business, pays a dividend of around 6% per year (which was 7.5% a year ago, for the record) and offers the potential for substantial capital returns.

SO FAR, SO GOOD

Looking at the group from an operational point of view, the results for the first half to the end of November last year show significant progress financially and strategically.

Services revenue and EBITDA (earnings before

Chart: Shares magazine • Source: LSEG

Earnings forecasts

Table: Shares magazine • Source: Cavendish, Singer Capital Markets

interest, tax, depreciation and amortisation) grew by double digits to £125 million and £15 million respectively, the Land business began marketing seven sites for renewable assets on top of its housing plots, and HMRS returned to profitability.

The Services business enjoyed strong growth thanks to additional earthmoving activity, which is expected to be sustained throughout the year with 65 term and framework contracts in place and 90% of revenue already secured.

The HS2 contract, the group’s largest, has been operational for three years and there are at least two more earthmoving ‘seasons’ to come, while work at Sizewell B saw ‘a substantial uptick’ in the first half.

Looking ahead, there could be two major projects in the pipeline – the Lower Thames Crossing looks like it is going ahead, and the Labour government has re-floated the idea of a third terminal at Heathrow, where Hargreaves was involved in consultations some years ago when it was first mooted.

HMRS posted a first-half profit of £0.1 million against a year-earlier loss of £1.9 million due to cost reductions while pig iron prices have ticked up due to EU sanctions on Russian imports and gate prices for incoming recycling materials have been raised.

THE BEST IS YET TO COME

The Land division has sold six plots at Blindwells in East Lothian, just 12 miles from Edinburgh city centre, with another 80 acres remaining in phase one, and 90 acres awaiting planning permission in phase two.

Meanwhile, seven renewable energy land assets are being marketed with a total value of up to £13.5 million, and the firm has further land worth the same amount again, with permission to build a 500 megawatt battery energy storage scheme.

At an operational level, the strong first-half results have spurred a round of upgrades to 2025 and 2026 revenue and earnings forecasts, mainly at the Services business, adding to the mediumterm valuation upside.

The company is moving to a capital-light model, which means no acquisitions and no equity raises, and as it already has a net cash position it will start returning surplus capital to shareholders.

Analyst Greg Poulton at Singer Capital Markets estimates the firm could return up to £150 million of capital – consisting of £80 million from Land and £70 million from HMRS – which is equivalent to three quarters of its current market cap, while the Services business continues to throw off cash.

Meanwhile, Shares has seen various sumof-the-parts valuations suggesting the shares could be worth between 900p and 1,200p in the medium term.

With the stock paying an annual dividend of 36p, or roughly a 6% yield at the current price, income seekers can afford to sit and wait for the cash to roll in. [IC]

BlackRock Frontiers Investment Trust offers a passport to profits

This differentiated trust is delivering capital growth and progressive dividends from the globe’s most dynamic countries

BlackRock Frontiers

Investment Trust

( BRFI ) 158.5p

Market cap: £300 million

Investing in frontier markets might seem too risky for some, yet the world’s youngest economies present exciting growth opportunities for adventurous portfolio builders. When high quality, lowly valued companies with their own growth drivers and significant re-rating scope are held in a portfolio diversified by stock, geography and sector, risk is dampened down and the results can be exceptional. This is why patient investors should consider putting money to work with BlackRock Frontiers (BRFI), an investment trust whose near7% share price discount to net asset value (NAV) presents a buying opportunity.

The £300 million market cap is managed by Sam Vecht, Emily Fletcher and Sudaif Niaz, whose extensive travels across emerging and frontier markets take them away from the well-trodden investment path in their quest for capital growth. Their differentiated approach is demonstrably working, BlackRock Frontiers being the best five and 10-year share price total return performer in the Association of Investment Companies’ (AIC) Global Emerging Markets sector. The cherry on top is a 4.4% yield from a growing dividend, although ongoing charges of 1.41% (excluding a performance fee) are a bear point, albeit justifiable given the costs and complexities of investing in farflung developing economies.

PASSPORT TO OUTPERFORMANCE

BlackRock Frontiers seeks to deliver long-term capital growth by investing in companies domiciled

BlackRock Frontiers

or listed in, or doing the bulk of their business in, less developed countries. The frontiers universe includes any country which is neither part of the MSCI World Index of developed markets, nor one of the MSCI Emerging Markets Index’s eight largest by market cap, namely China, Brazil, India, Korea, Mexico, Russia, South Africa and Taiwan.

Shares concedes frontier markets tend to be more volatile than more established markets, are less well regulated and often impacted by political and social instability. Corruption remains an issue, as does currency risk, with recent strength in the US dollar a headwind.

And yet, frontier markets are also a terrific source of portfolio diversification, since these smaller countries are at such an early stage of

The managers target under-researched markets such as Vietnam

BlackRock Frontiers geographic breakdown

Table: Shares magazine • Source: BlackRock, 31 December 2025

economic and political development. As a result, their economies are subject to their own internal dynamics and their growth potential often depends largely on their domestic outlook, which means they can thrive independently of the wider global economy and broader stock markets.

POSITIVE OUTLOOK

BlackRock Frontiers provides shareholders access to fast growing and high-quality companies operating in a diverse range of fascinating countries that are often under researched, which means they often trade at low valuations. The managers target under-researched markets – think Vietnam, Indonesia, Turkey, Poland, Chile and Kazakhstan for example - which can help investors to diversify their sources of long-term income and growth. Their rigorous approach leads to a unique, well-diversified portfolio spread across a range of

frontier markets and between 35 to 65 companies.

As Deutsche Numis explains, this approach ‘also results in a high active share, meaning that performance can deviate markedly from the index, although over time the managers have proven that they get more calls right than wrong’. In the December factsheet, BlackRock Frontiers’ managers enthused: ‘Our investment universe, in absolute and relative terms, remains underresearched and we believe this should enable compelling alpha opportunities.’

Relative to developed markets, Vecht, Fletcher and Niaz are positive on the outlook for smaller emerging and frontier markets, where they are seeing the best opportunities, and excited about the outlooks for Bangladesh, Egypt, Kenya and Pakistan, where they have initiated positions after not being invested for some time. Prospective investors are purchasing a portfolio whose top 10 holdings range from Saudi Arabia’s Al Rajhi Bank and UAE property developer Emaar Properties to Indonesia’s Bank Central Asia and Vietnamese IT services provider FPT Corp.

AIC data shows BlackRock Frontiers has delivered a share price total return of 118.7% on a decadelong view, comfortably ahead of the 82.9% from the Global Emerging Markets sector, while the trust is up 65.2% over five years versus 12% for the sector. Morningstar data shows a five-year annualised total return of 11%, ahead of the 9.2% from the Global Frontier Markets Equity category.

Results for the year to 30 September 2024 highlighted a strong period of absolute performance, with NAV total returns of 16.5% in US dollars beating the MSCI Emerging Markets ex Selected Countries Index benchmark. An under-appreciated fact is that companies in smaller emerging markets are often cash generative, but have fewer investment options, so cash is often returned to shareholders as dividends. Accordingly, BlackRock Frontiers rewarded investors with an 18.8% increase in the total dividend to 9.5 cents last year. And Deutsche Numis notes that BlackRock Frontiers is also differentiated ‘through its five yearly exit opportunity at NAV, with the next taking place in 2026’. [JC]

HgCapital Trust continues to deliver impressive returns amid challenging times

Investing in companies which it has tracked for years key to trust’s success

HgCapital Trust (HGT) 520p

Gain to date: 13.2%

Private equity investment trust HgCapital (HGT) has continued to put in a robust performance since we said last March that it can add growth and value to your portfolio.

The businesses it invests in provide software and services ranging from tax, accounting and payrolls to factory automation, fintech, insurance, healthcare and crisis and incident management. This side of tech may not be as optically exciting as areas like AI and the metaverse but it is absolutely crucial to the day-to-day running of most 21st century businesses.

WHAT HAS HAPPENED SINCE WE SAID TO BUY?

The trust recently delivered an upbeat fourth

quarter trading update (3 February) driven by a strong portfolio operating performance.

HgCapital has a spread of around 50 unquoted investments across the software and service sector with the top 20 making up roughly 75% of total assets by value.

The trust reported a 31 December NAV (net asset value) of 544.1p, up 4.4% and generated a total share price return of 25.7%.

The company has chalked up an impressive string of new and follow-on investments in 2024 totalling £601 million.

WHAT SHOULD INVESTORS DO NOW?

We are positive about HgCapital and while its shares have re-rated from a 13% discount to 2% premium we still think it could be a useful option as part of diversified portfolio.

Iain Scouller, analyst at Stifel, adds a note of caution about the trust. He says that the ‘share price tends to be quite sensitive to the tech/growth stock listed and any sell-off in [that area]’.

Ultimately the trust knows what it is good at and will continue to focus on companies within the end-market, mission-critical software, and services ‘clusters’ which it has tracked for years. For us that justifies the ongoing charges of 1.7%. [SG]

The factors putting gold on course to hit $3,000 per ounce

Precious metal has outpaced the S&P 500 over the past five years

If there were any doubts over gold’s status as a safe haven they have been blasted away as the precious metal makes a push towards the $3,000 mark for the first time amid volatility elsewhere in the financial markets.

Gold’s status as a safe haven asset is based on its historic role as a store of value and the fact that, unlike currencies, its value cannot be manipulated through adjustments to interest rates. Plus, it is actually hard to find and costly to mine so its supply grows slowly, unlike the supply of money.

Since the price bottomed out during the pandemic, gold has nearly doubled in value. As of 10 February, it had outperformed even the highflying S&P 500 index in the US on a five-year view. This perhaps comes as less of a surprise when we consider the events we have seen over the last half decade.

It is a heady list which includes: an escalation in conflicts in the Middle East and Ukraine; the aftereffects of the global pandemic; political uncertainty at home and across the Atlantic; and a period of significant inflationary pressure. Now we have the prospect of a global trade war as the Trump administration mulls a range of tariffs.

Another driver for gold, which has been bubbling away in the background, is buying by global central banks looking to diversify their reserves out of dollars.

This trend has been particularly evident in countries like Russia and China which have a difficult relationship with America. The shift to a round of interest rate cutting, even if it has not been aggressive as initially expected, is also helpful for gold. Because you receive no income from holding gold its attractions stack up better when rates are falling.

The dollar is actually one of the few factors not in gold’s favour right now. Because it is denominated in dollars, the US currency’s recent strength has been a headwind. However, there have been signs of this strength evaporating, with the US Dollar Index modestly lower over the last month. This could reflect a big fiscal deficit in the US and the risk of this getting larger.

Investors can gain exposure to gold through exchange-traded commodity vehicles which track the price and are backed by actual bullion in a vault. Alternatively gold miners offer indirect exposure and, as the relative performance of the iShares Gold Producers (SPGP) exchange-traded fund demonstrates, they have lagged the move higher in gold since 2020.

By Tom Sieber Editor

Which? rate no other investment platform higher than us for ease of use.

Explore a Dealing Account today.

ICYBER

SECURITY

THE SECTOR CAN DEFEND DATA AND YOUR PORTFOLIO

magine going for a night out in a busy pub, and when the time comes to use the loo, you leave your phone and wallet on the table unguarded. You wouldn’t. Yet your online data is, in theory, just as exposed.

Don’t panic, fortunately, most of your information is secured by the clever digital locks and latches of cybersecurity, be that your personal banking details, your Facebook identity, or your Amazon shopping

account. Yet the rapid increase in data means none of us can afford to be complacent. And this is good news for cybersecurity firms, which, at a time of volatility in tech firms, is arguably more defensively positioned.

According to current estimates, around 147 zettabytes of new data was created globally last year, and that’s projected to increase to 181 zettabytes in 2025.

UNITS OF DATA

To put that into context, the Utah Data Centre, owned by the US National Security Agency, is the world’s fourth largest data centre and stores an estimated 4.5 exabytes of data (the three larger ones in China, Nevada and India don’t provide data storage information). In other words, you would need 32,667 Utah data centres to store all of last year’s newly created data. Let that sink in.

‘As the world creates more data and accesses networks in more ways, cybercriminals find new vulnerabilities to exploit,’ says James Ferraioli, investment strategist, at Morgan Stanley Wealth Management. And as the volume of cyber-attacks increases, so does the cost of fixing them, as the table from data provider Statista shows.

Average cost of a data breach worldwide, 2014-2024

ADAPTING TO THE MODERN WORLD

As The Jam once sang, ‘This is the modern world…’ and it is one where all of our most sensitive information is constantly at risk of being stolen or manipulated by cybercriminals or political actors. A world where businesses face the threat of significant losses due to data breaches, and governments struggle to protect their critical infrastructure.

For example, in 2017, credit data provider Equifax (EFX:NYSE) was hacked and the data of 146 million US customers compromised. The episode ultimately cost the company $1.5 billion. Another well-documented incident

Cybercrime expected to skyrocket

involved the IT provider SolarWinds (SWI:NYSE), resulting in massive data theft from US government agencies and large US companies. The organisations involved reportedly spent billions of dollars to remedy the data breach, which US officials linked to Russian intelligence services.

‘These threats underscore the critical nature of robust cybersecurity measures and have underpinned a surge in IT spending on cyber security’, says Schroders investment manager Josh Barber. ‘Forecasts suggest that global spending was set to reach $240 billion in 2024, and could exceed $400 billion by 2030, a near 10% annual growth rate.’

Chart: Shares magazine • Source: Statista

WHAT AI MEANS FOR CYBERSECURITY –CROWDSTRIKE’S TAKE

Generative AI has potential for use in numerous fields not likely identified or popularized in mainstream public discourse. AI’s continuous development will undoubtedly increase the potency of its potential misuse

– particularly within the scope of information operations and especially for less digitally literate audiences. The degree to which popular generative AI tools can be used maliciously will likely adapt over time as companies, tool owners and governments respond to new developments and perceived misuse.

Source: CrowdStrike, Global Threat Report 2024

In the financial sector, entities such as financial regulators, investment banks, and commercial banks are often the targets of cybercriminals who aim to steal and manipulate sensitive financial data for their benefit. Healthcare providers and health insurance companies also rely on cybersecurity to safeguard the digital services they offer, like telehealth, fitness tracking devices, and electronic health records.

This is the reality that makes cybersecurity crucial to safeguarding our lives, and those of future generations. It also makes the

Most targeted industries

cybersecurity space one of the most expansive, robust and, theoretically, reliable growth themes around, one that investors with a reasonable time horizon ahead of them, cannot afford to ignore.

In theory, investing in cybersecurity stocks isn’t complicated. Most of the world’s top specialists are US listed and accessible across most investment platforms. Yes, you’ll have to complete a W-8BEN form online to avoid any tax on income demanded of all overseas investors in US markets, but the process is simple enough.

THREE STOCK PICKS

PALO ALTO NETWORKS (PANW:NASDAQ)

Price: $187.37

Palo Alto Networks has historically focused on securing data transfer and storage across cloud networks. It now aims to provide a much broader range of cybersecurity services to customers and become their key provider.

As it stands, most mid to large-sized businesses have multiple cybersecurity specialists, partly to derisk single supplier factors. However, this can make it more difficult to manage security across large organisations, creating a strong incentive for companies to reduce the number of vendors they work with.

This approach is starting to become very popular, with an estimated 1,000-plus of Palo Alto Network’s top 5,000 customers now exclusively using the company for their cyber security needs, according to Allianz Technology Trust (ATT).

This has led to the highest free cash flow margin the company has ever seen, which will allow for more R&D, acquisitions and shareholder returns.

FORTINET (FTNT:NASDAQ)

Price: $104.72

Fortinet is another prominent cybersecurity provider, best known for its firewalls, and one of Terry Smith’s selections for Fundsmith Equity (B41YBW7).

Firewalls act as filters to ensure that only legitimate data is allowed into a company’s systems and prevent hacks. Fortinet has also been increasing its foothold in higher margin, cloud-based solutions, which now represent a substantial chunk of its revenue. This push into cloud solutions should also make the business less cyclical, with annualised recurring revenues growing 96% in its latest quarter to 31 December 2024.

Fortinet is known for offering the best value products and services in the cyber market, meaning it has significant room to increase pricing over the next few years. We believe that Fortinet will continue to grow at a faster rate than the overall market.

Crowdstrike (CRWD:NASDAQ)

Price: $420.51

Captured all the wrong sort of headlines last summer when a missed buggy security update was rolled out, causing what some called the world’s biggest IT outage, with banks, hospitals, and airports going ‘dark’.

The share price damage proved short lived as it turned out.

This is because CrowdStrike offers a compelling continuous-monitoring cybersecurity proposition. A visit to the cinema is a decent analogy. While some firewall providers do what ushers do, check your ticket then let you pass, CrowdStrike continues to watch you inside the auditorium, and if malicious or odd behaviour is detected, the platform can act quickly and isolate the threat, so it doesn’t spread. Revenue and earnings are seen growing above 20% on average over the next three years, twice that of the overall cybersecurity market.

AN ALTERNATIVE WAY TO INVEST

Of course, buying individual stocks requires a lot of legwork, something that won’t suit may investors, which makes a cybersecurity themed ETF an attractive option. There are plenty of options, nine according to website JustETF operated by well-known providers like L&G, iShares, FirstTrust and Wisdomtree, plus others.

Backing the wider theme through a low-cost ETF makes sense for several reasons, and we believe the L&G Cyber Security ETF (ISPY) is probably the best of the bunch and ticks many of the right boxes for investors.

For a start, it’s the biggest, with more than £2.2 billion of assets managed, while it has also consistently been the among the best performing – it has returned 26.8% over the past year. Top holdings (35 in total) include all three of the above mentioned companies, while lesser known companies like cloud-based web security specialist Cloudflare (NET:NYSE), identity management tools firm CyberArk (CYBR:NASDAQ), plus sizable stakes in more generic plays on the sector angle, such as Broadcom (AVGO:NASDAQ), Cisco Systems (CSCO:NASDAQ), and UK listed reseller Softcat (SCT) by physically replicating the ISE Cyber Security UCITS index.

Companies in the broader investment universe are only eligible if they meet size requirements and have a three-month average daily traded value of at least $1 million. The underlying index applies a modified equal weight methodology where company weights are relative to the size of their respective sector and their liquidity versus peers within each sector.

Constituents are also screened against Legal & General Investment Management’s Future World Protection List, which flags companies that violate the United Nations Global Compact. The latter is a pact to encourage businesses around the world to adopt sustainable and socially responsible policies.

Disclaimer: Steven Frazer has a personal holding in Fundsmith Equity referenced in this article.

SMALL CAP FOCUS - PART 4

Global small cap funds

How to invest in smaller global companies through funds or trusts

In the fourth and final part of our series on small caps we look at smaller company funds with global horizons

In the fourth and final part of our series on small caps we look at smaller company funds with global horizons.

These can be a good way of investing in small caps in markets where buying individual stocks might be a challenge, either because you are restricted from investing or because it is difficult to get sufficient information to make an informed decision.

Some of these funds focus on smaller firms from across the globe and others specialise in specific regions or countries like North America, Europe and Japan.

WHY CONSIDER EXPOSURE TO GLOBAL SMALL CAPS?

The data suggests smaller companies offer investors scope for better returns versus their large cap counterparts at least judged on the performance of the MSCI World Small Cap index

versus the MSCI World. Just like domestic small caps this dynamic exists largely because these businesses have more room to grow.

The MSCI World Small Cap index has delivered annualised returns to investors over a three-, five- and 10-year period 20.1%, 21.9% and 18% respectively outperforming the MSCI World Large Cap index.

Over the same time periods three- five- and 10year periods, the MSCI World Large Cap index has returned a more modest 7.8%, 12.5% and 11%.

Nish Patel manager of The Global Smaller Companies Trust (GSCT) says: ‘If you look over

WHAT’S IN THE MSCI WORLD SMALL CAP AND MSCI WORLD LARGE CAP INDICES?

MSCI World Small Cap index captures 23 developed markets and has 3,979 constituents as of 31 December 2024.

MSCI World Large Cap index captures 23 developed markets and has 596 constituents as of 31 December 2024.

Top performing global small cap funds and trusts

long periods of time smaller companies have generally outperformed larger companies and the main reason for that is that the earnings growth of smaller companies seems to be greater than that of larger companies as they are starting off from a lower base.

‘Many of these companies are also not very well known and not widely followed by sell-side analysts. So, when they are discovered, the valuations of these businesses tend to expand.’

Over the past one, three and five years Patel’s charge has beaten the average for the Global Smaller Companies AIC (Association of Investment Companies) sector.

A range of holdings make up Patel’s top 10 including a US producer of building materials Eagle Materials (EXP:NYSE) – whose shares have gained 9% over the past year, US barge operator

Kirby Corp (KEX:NYSE) and US manufacturer and services provider Curtiss-Wright Corp (CW:NYSE) –whose shares have gained 52% over the past year. With Patel’s fund he hopes to give investors access to the very best smaller company opportunities from developed and emerging markets.

‘We want to offer investors quality, fast-growth smaller companies with lower levels of risk and volatility,’ he says.

While its longer-term performance is mixed Edinburgh Worldwide Investment Trust (EWI) has done well over the past year, returning 33.7% to beat the sector average performance of 13.6%.

The Baillie Gifford Managed trust includes diverse holdings ranging from privately-owned Space Exploration Technologies, its largest holding at 12.3%, to online freelance jobs board Upwork

(UPWK:NASDAQ). The trust is currently subject to pressure from US activist hedge fund Saba, with an EGM requisitioned for 14 February.

Dan Whitestone, co-manager of the recently launched BlackRock Global Smaller Companies (BRTCR04) fund said: ‘Investing in global smaller companies can provide diversification benefits to client portfolios as the stocks may not move in lockstep with larger, more established companies, helping to reduce overall portfolio risk. Many investors are underweight small-cap exposure in their portfolios, despite small caps outperforming large caps over the long term by around 2.5% per annum.’

His co-manager Matt Betts adds: ‘Within this large universe, the companies we [look] to invest in are characterised by having strong management teams, defensible market positions, differentiated

MARKET CAP OF SMALLER COMPANIES

What is considered a small cap company varies vastly depending on what region you invest in. In the US for example the market cap of a small cap company could be anything from $250 million to $3-$4 billion – the latter market cap would qualify a listed company as a mid cap on the London market.

The rule of thumb for the market value of a small cap company in the UK by contrast ranges from a few million pounds up to around £400 million. This is logical when you consider the average market cap of the MSCI USA index is $87.6 billion which is a higher valuation than all but four names in the entire MSCI UK index.

or competitive product offerings, and are underpinned by structural growth drivers.’

The US domestic market may get a lift from Donald Trump’s policy agenda and a global small cap fund which has already been performing well is Artemis US Smaller Companies (BMMV576).

This fund is managed by Cormac Weldon and holds the likes of trucking company Saia (SAIA: NASDAQ), investment banking firm Jefferies Financial (JEF:NYSE) and global real estate company Jones Lang LaSalle (JLL:NYSE).

RISKS TO CONSIDER WHEN INVESTING IN GLOBAL SMALLER COMPANY FUNDS

There are risks you need to think about before investing in global smaller company funds. Some of these are the same as investing in small caps in general – because they are early stage and often less diversified these businesses are particularly vulnerable to setbacks and they likely have less access to capital than their larger peers.

For global smaller companies in particular, you also need to consider whether the corporate governance standards are different in the relevant country and, obviously the impact of currency movements and the impact this might have on the value of underlying holdings in fund portfolios.

By Sabuhi Gard Investment Writer

Fidelity Special Values PLC

An AJ Bell Select List Investment Trust

The recent strong relative performance of the UK equity market has gone largely unnoticed by investors, reinforcing its unloved status. Alex Wright, portfolio manager of Fidelity Special Values PLC, believes the value-oriented areas of the UK market represent a strong investment opportunity.

Turning insight into opportunity

Despite the UK being a value market, many of those who invest in the market don’t invest with a value bias. However, Alex looks to construct portfolios focused on unloved UK companies entering a period of positive change. The market is often slow to recognise change in out-of-favour stocks which creates opportunities to add value by identifying companies whose improving growth prospects are not yet recognised by other investors.

Our broad analyst coverage means that we are able to find ideas across the market cap spectrum, giving us many shots on goal. Our network of over 390 investment professionals around the world place significant emphasis on questioning management teams to fully understand their corporate strategy. They also take time to speak to clients and suppliers of companies in order to build

Past performance

Past performance

conviction in a stock. Our approach translates into a clear bias towards small and mid-cap value stocks, compared to most of our competitors who are often less differentiated.

It’s a consistent and disciplined approach that has worked well; the trust has significantly outperformed the FTSE All Share Index over the long term both since Alex took over in September 2012 and from launch over 30 years ago.

Past performance is not a reliable indicator of future returns

Past performance is not a reliable indicator of future returns

Past performance is not a reliable indicator of future returns

Morningstar as at 31.12.2024, bid-bid, net income reinvested. ©2024 Morningstar Inc. All rights reserved. The FTSE All Share Index is a comparative index of the investment trust

Source: Morningstar as at 31.12.2023, bid-bid, net income reinvested. ©2024 Morningstar Inc. All rights reserved. The FTSE All Share Index is a comparative index of the investment trust

Source: Morningstar as at 31.12.2023, bid-bid, net income reinvested. ©2024 Morningstar Inc. All rights reserved. The FTSE All

Important information

a comparative index of the investment trust

The value of investments can go down as well as up and you may not get back the amount you invested. Overseas investments are subject to currency fluctuations. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The Trust can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. The trust invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies and the securities are often less liquid. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Investment professionals include both analysts and associates. Source: Fidelity International, 30 September 2024. Data is unaudited. The latest annual reports, key information documents (KID) and factsheets can be obtained from our website at www.fidelity.co.uk/its or by calling 0800 41 41 10. The full prospectus may also be obtained from Fidelity. The Alternative Investment Fund Manager (AIFM) of Fidelity Investment Trusts is FIL Investment Services (UK) Limited. Issued by FIL Investment Services (UK) Ltd, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0125/399908/SSO/0325

Discover how owning ‘defensive’ stocks can help your long-term returns

Successful investors beat the market during its ups and downs

You often hear the word ‘defensive’ applied to certain stocks and sectors, but what does it mean and can buying ‘defensive’ stocks really help your performance as an investor?

In a word, yes, because they dial down some of the risk which is inherent in markets because they tend not to be very volatile unlike most ‘cyclical’ or ‘growth’ stocks, but it’s how you use them which matters.

Defensive stocks might be of interest to investors right now who are concerned about increased volatility thanks to developments in AI and in the new US administration’s trade policy.

LOWER YOUR VOLATILITY

A fund manager friend of Shares once described his strategy as ‘making more on the straights and losing less on the curves’, by which he meant he tried to outperform the market not just on the way up but also on the way down by having a smaller drawdown, or losing less money, than the benchmark.

His approach was to hold a mixture of high-beta and low-beta stocks, so when market sentiment was positive his high-beta names would gain more than the index and when sentiment turned his lowbeta names would limit the downside.

In finance terms, beta is a measure of volatility where stocks with a beta of more than one move more than the index and those with a beta of below one move less – or are less volatile – than the index.

In extreme cases, stocks can have a negative beta which means they are totally uncorrelated – or even inversely correlated – with the market, although they are few and far between.

The advantage of owning low-beta stocks as well as high-beta stocks is that, while they don’t increase your chances of beating the market when it’s going up, they are less risky when the market comes down, with some even being seen as a ‘safe haven’ when volatility picks up.

Without getting too technical, beating the

market on the way down as well as the way up is measured by the Sortino Ratio.

Not many fund managers refer to this, but as you would expect old hand Terry Smith, the founder of Fundsmith and manager of Fundsmith Equity (B41YBW7), makes a point of citing it in his annual shareholder letters, including his 2024 review.

‘Since inception, the fund has returned 2.7% per annum more than the index and has done so with significantly less downside price volatility as shown by the Sortino Ratio of 0.87 versus 0.60 for the Index. This simply means that the fund has returned about 45%, ((0.87÷0.60)-1)x100, more than the index for each unit of price volatility.’

TYPES OF DEFENSIVE STOCKS

Defensive companies come in many shapes and forms, and can be ‘value’, ‘growth’, or even both at the same time.

Typically, defensive companies are those which aren’t tied to the economic cycle or an obvious business cycle – unlike energy and mining companies, for example, which move according to global commodity prices, which in turn are dictated by the economic cycle, making their earnings more cyclical and therefore their share prices more volatile.

In contrast, pharmaceutical firms or tobacco makers are less exposed to cycles and more to steady, long-term drivers of demand – in the case of pharmaceuticals, demand is generally increasing, especially for new products, while for tobacco companies demand for their products is generally decreasing, due to greater health awareness, although innovation can help stave off some of the decline.

Some examples of 'cyclical' or higher-volatility stocks

On that basis, British American Tobacco (BATS) could be seen as a classic defensive stock, and sure enough it has a beta of 0.76 according to Stockopedia, which means its shares are roughly 25% less volatile than the FTSE 100.

BAT shares several other characteristics common to ‘defensive’ stocks – its earnings grow steadily, albeit not very quickly, it trades on a low PE (price to earnings) ratio, currently less than nine times 12-month forward forecast profits against 13.2

times for the index, and it has a relatively high yield of 7.5% compared to the average of 3.4% for the index.

In contrast, a much less obvious defensive stock would be scientific instrument maker Halma (HLMA), which grows its earnings much faster than BAT, is on a forward PE ratio of 30 times and has a dividend yield of less than 1% As well as increasing its top and bottom line on average by double digits each year over more than four decades, and enjoying an attractive ROCE (return on capital employed) of around 15%, the shares have a beta of 0.49 which means they are less than half as volatile as the FTSE 100, so in the event of a sell-off they are likely to fall less than the benchmark.

Disclaimer: The author owns shares in British American Tobacco, Fundsmith Equity and Halma.

By Ian Conway Deputy Editor

Short sellers are targeting UK stocks at risk from Rachel Reeves’ Budget decisions

Kingfisher, Domino’s Pizza and Pets at Home are among the names on the list

Professional short sellers are currently circling a small group of UK consumingfacing stocks with the goal of profiting from falls in their share prices, potentially caused by Rachel Reeves’ Budget decisions.

The UK outlook is getting worse by the day, with business and consumer sentiment weakening amid concerns the new government doesn’t have an effective plan to accelerate economic growth.

The outlook is further clouded by companies facing higher employment-related costs from April, as these are likely to passed onto the customer via price hikes, leading to higher inflation and reduced

HOW DOES SHORTING WORK?

The process involves borrowing shares from someone else, typically an institutional investor, and selling them on the open market. If the shares decline in value, the short seller buys more stock at the lower price to give back to the original lender and pockets the difference. In a nutshell, a short seller will profit if the share price falls.

WHY SHORT STOCKS?

There are multiple catalysts to pull down a share price, which is exactly what short sellers want to happen:

Short sellers might feel a stock’s valuation is too rich and investors’ appetite could weaken, something which can lead to a de-rating as investors are no longer prepared to pay as much as before to own the shares.

Market sentiment could weaken and weigh on a company’s share price or its sector.

Short sellers might believe earnings forecasts will be downgraded, negatively impacting the share price.

consumer spending which would spell disaster for many UK companies.

The statistics make for grim reading: GfK’s monthly consumer confidence index decreased in January, with steep falls in consumer views on the UK economy both looking back a year and 12 months ahead.

The British Chambers of Commerce in January found business confidence had slipped to its lowest level since the aftermath of the mini-Budget in Autumn 2022.

On 6 February, the Bank of England halved its 2025 UK economic growth forecast to 0.75% and predicted inflation would hit 3.7% this year.

Put all these things together and it’s a recipe for disaster if you’re a retailer or leisure operator dependent on consumer spending, so it’s no wonder short sellers are sharpening their knives and hoping to make a pretty penny.

Short selling is high risk and is not suitable for most investors as you can lose more than you initially bet.

FIVE CONSUMER-FACING STOCKS TARGETED BY SHORT SELLERS:

KINGFISHER (KGF)

The DIY sector is suffering from a post-Covid hangover. During the pandemic, many people were stuck at home and decided they wanted to do up their house or flat, so the RMI (repair, maintenance and improvement) market boomed creating a major earnings tailwind for B&Q-owner Kingfisher.

As the pandemic waned and people returned to the office, DIY appetite dwindled and so did the pace of work for tradesmen.

Kingfisher wasn’t doing particularly well ahead of the pandemic and it is still in turnaround mode now.

A warning from the company in November revealed that uncertainties around budgets from new governments in the UK and France had had a negative impact on demand for its products and services.

Layer on top of this the prospect of higher employment-related costs, an even more cautious consumer and fierce competition and it’s easy to see why traders and hedge funds might choose to short the stock.

The risk to the short trade is DIY and RMI activity holds up – just Kingfisher confirming that’s the case could be enough to trigger a relief rally.

It would also position Kingfisher for a ‘short squeeze’, which is when short sellers decide to cover their short positions or are forced to do so via margins calls.

They effectively buy stock as it rises, which in turn can push the price even higher. It’s worth noting that recent trading updates from fellow DIY retailer Wickes (WIX) and tile specialist Topps Tiles [TPT] were both remarkably upbeat.

AKO Capital is among the investors shorting Kingfisher. It favours high quality companies, so when it shorts something one can only presume it doesn’t have much faith in the resilience of the business.

DOMINO’S PIZZA (DOM)

The amount of stock on loan at Domino’s Pizza hit its highest level since 2021 last month, with six different professional investors betting the fastfood company’s shares are going to fall.

The London-listed firm owns the UK and Ireland Domino’s master franchise and has been through a difficult period after it got into a dispute with

Domino's

franchisees over profit-sharing and expansion plans.

Last December, the company announced a new five-year framework deal with franchise partners, which looks to have helped repair relationships but raises costs for the listed entity.

The franchisees themselves are facing higher wage costs associated with the Budget, while consumers’ appetite and ability to afford a £10 to £20 pizza is also under question if the economy remains sluggish.

Domino’s products are a tasty treat, but opting for a cheap supermarket version is an easy decision to make if money is tight.

There has already been a big push by Domino’s on value deals as consumers watch their spending, so continuing down that road implies further pressure on profit margins for franchisees.

Domino’s Pizza takes a fee from franchisees based on revenue rather than profit, which essentially means franchisees’ extra costs are not its problem, although it’s not in Domino’s interest for franchisees to struggle.

Among the institutions shorting Domino’s is hedge fund Marshall Wace, which is betting against a raft of consumer-facing companies including

Sainsbury’s (SBRY), Marks & Spencer (MKS), Primark-owner Associated British Foods (ABF), Next (NXT) and EasyJet (EZJ). These are big names which rely on the general public to keep their tills ringing. If times get harder for such big brands, it won’t simply be bad for the share price, it will also represent a big setback for the UK’s economic growth story.

VISTRY (VTY)

A company delivering bad news is naturally a target for short-sellers and Vistry certainly ticks the boxes.

In December, the housebuilder issued its third profit warning in as many months, taking the shares to a two-year low, due to development delays and understated costs, suggesting management took their eye off the ball.

The fact short positions in the stock subsequently increased after three profit warnings imply some investors think more bad news is coming.

The Bank of England’s interest rate cut on 6 February should make mortgages cheaper, and it gave a small boost to Vistry’s share price on the day.

However, an expected increase in job cuts by businesses across the UK linked to higher employment costs could worsen consumer confidence, and many people looking to move home might think they’re better off sitting tight for now, particularly if they are worried about job security.

US hedge fund Citadel Advisors – the investment vehicle for Wall Street billionaire Ken Griffin – is among the investors shorting the stock.

PETS AT HOME

Pets at Home

Shares magazine • Source: LSEG

Pets at Home was heavily shorted in the two years preceding the Covid pandemic, but its shares then rallied (and short interest dwindled) as the nation filled their homes with furry friends to keep them company.

Lockdowns led to a surge in dog ownership in particular, benefiting Pets at Home’s retail and veterinary earnings.

Like many Covid winners, demand has since eased and 2024 was filled with negative news flow from Pets at Home including warnings about higher costs and a subdued retail pet market.

A probe by the competition watchdog into the UK vet services market also weighed on investor sentiment.

Furthermore, competition has become a worry as private equity-backed Jollyes is eating everyone else’s lunch by cutting prices and opening new stores as it tries to boost its market share.

Short interest in Pets at Home has been rising slowly since 2023 and continues to do so this year as sellers bet that Pets at Home will struggle in a tough retail market and that the idea pet owners will do anything for their furry friends is no longer true.

18 FEBRUARY 2025

NOVOTEL TOWER BRIDGE

LONDON EC3N 2NR

Registration and coffee: 17.15

Presentations: 18.00

During the event and afterwards over drinks, investors will have the chance to:

• Discover new investment opportunities

• Get to know the companies better

• Talk with the company directors and other investors

COMPANIES PRESENTING

COHORT

The parent company of six innovative, agile and responsive defence technology businesses providing a wide range of services and products for UK and international customers.

ENSILICA

A leading fabless chipmaker focused on custom ASIC for OEMs and system houses, as well as IC design services for companies with their own design teams.

PRISTINE CAPITAL

The company create value for shareholders through active management. They are looking to make a significant and opportunistic acquisition in the Real Estate Sector.

SHIRES INCOME

The Company’s investment objective is to provide shareholders with a high level of income, together with the potential for growth of both income and capital.

TEMPLE BAR INVESTMENT TRUST

Temple Bar Investment Trust (TMPL) The strategy employed by Temple Bar is known as value investing.

Ways of protecting your portfolio from a tech market crash

Looking at means of broadening your exposure beyond the Magnificent Seven

Is there going to be a tech market crash? If so, you definitely didn’t hear it here first. Bearish commentators have been forecasting a correction in technology stock prices for almost as long as the current bull run has galloped onwards, and upwards. The bears certainly have reasons to be wary. The valuations of the Magnificent Seven are high, and so missing elevated growth expectations can see the stock price punished, as Microsoft (MSFT:NASDAQ) and Alphabet (GOOG:NASDAQ) investors found out in the last few weeks.

DEEPSEEK DISRUPTION

Meanwhile these companies are pouring huge amounts of money into artificial intelligence, with uncertain results. The arrival on the scene of the Chinese large language model DeepSeek underlines the risk of disruption to the big, incumbent tech titans. So far the market has largely taken DeepSeek in its stride, albeit with an initial bout of panic which saw over half a trillion dollars wiped of the value of Nvidia (NVDA:NASDAQ). DeepSeek’s model may even ultimately prove positive for the US tech

sector. But with a technology as emergent as AI, it would be a surprise if there were no more surprises in store.

High valuations and roiling disruption are not new to the technology sector. But the heightened tech exposure held by investors perhaps makes these characteristics of greater concern.

An S&P 500 tracker fund now has a third of its portfolio invested in the Magnificent Seven. A typical global tracker fund has around three quarters of its portfolio invested in the US, and

consequently just under a quarter of its portfolio invested in the Magnificent Seven. This has no doubt served investors incredibly well in the last decade, and the Magnificent Seven may well continue to leave the rest of the market chomping at their heels. But the recent wobble in stock prices precipitated by DeepSeek should at least serve as a timely nudge for investors to check in on their exposure, and make sure they’re still happy with it.

DIALLING DOWN EXPOSURE

Those who do wish to dial down exposure to the Magnificent Seven have options. Probably the simplest strategy is to diversify away from the US and into other regions such as the UK, Europe, Japan, or emerging markets. This can be achieved by choosing active funds in these regions, or passively through trackers.

While this strategy can be executed passively, it is still active at an asset allocation level if investors are moving away from a global tracker fund (which passively allocates money depending on stock size), towards a regional split decided by each investor. In other words, through an active allocation of capital. For investors who want to shift away from the Magnificent Seven but still want to retain exposure to the wider US stock market, they might consider an active fund which has a lower technology weighting. This may be achieved by investing in

value managers, potentially including income funds like JP Morgan US Equity Income (B3FJQ59). Another option would be to invest in US smaller companies through a vehicle such as Artemis US Smaller Companies (BMMV576). Investors looking to perform a similar shimmy away from the Magnificent Seven within their global fund allocation might consider funds like Schroder Global Equity Income (BDD2CM9)

EQUAL-WEIGHT OPTION

Another option would be to seek out an equally weighted S&P 500 tracker such as the iShares S&P 500 Equal Weight ETF (EWSP), which allocates money to each of the stocks in the US index equally. While this strategy is passive in that it follows an automatic rules-based investment policy, it’s not passive in the sense that it doesn’t allocate money based on the size of a company, which is the more usual, if not universal, passive methodology. The result is the fund invests the same amount in the smaller stocks in the index as it does in the biggest, for better or worse.

Some investors might decide the recent jitters in the highly valued US stock market are cause for a reduction in equity risk altogether. They might therefore consider upping exposure to more cautious multi-asset funds like Personal Assets Trust (PNL), a bond fund or money market funds, or indeed individual gilts which confer certain tax advantages for those investing outside a SIPP or ISA.

A MORE NUANCED APPROACH

If investors are adjusting their portfolios, there’s no need to throw the baby out with the bathwater. Managing a portfolio needn’t be an all-or-nothing endeavour, and investors can tilt their portfolio towards or away from any given region or sector without executing a wholesale switch. Given the importance of the Magnificent Seven to the global stock market, it would be unwise to ditch all exposure to these companies. But the potential for upheaval as the AI race progresses might favour a more thoughtful, nuanced approach to investing in these companies.

By Laith Khalaf AJ Bell Head of Investment Analysis

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Do I really face a 90% effective tax rate thanks to pension IHT changes?

Helping with a question around recent changes to a retirement pot’s status as part of an estate

I have been interested to read recent commentary on the proposals to extend IHT (inheritance tax) to pensions.

One point caught my attention which was the reference to a 90% effective tax rate. I’m pretty certain my estate would fall in that category, but could you explain the 90% calculation, please?

My situation is I have no direct descendants, only a nephew, niece and great-nephew and I am single.

My nephew’s and niece’s parents died young. So, I have only the £325,000 nil rate allowance (I think that remains intact regardless of estate size). I already paid something like £250,000 excess LTA tax charges which under the current regime would be nil. And now the pension part of my estate may be subject to a further tax charge up to 90%. I’d like to understand it better.

The big announcement for pension savers in last Autumn’s Budget was the Treasury’s proposals to extend inheritance tax to pension savings. Since October, there has been intense media interest regarding the proposals. One element it has focused on is ‘double taxation’.

These IHT proposals do not change the current income tax rules for pensions: if you were to die before the age of 75, then any income taken from your pension benefits by your beneficiaries would be free of income tax. Any lump sum they take will also usually be income tax free, as long as it doesn’t exceed something called your lump sum and death benefit allowance (LSDBA), which is the total amount of tax-free lump sums paid out in your life and on death. This allowance is usually set at £1,073,100.

If you were to die over the age of 75, then income tax would be due on any pension income or lump sum taken by your beneficiaries.

The combination of applying IHT then income tax – ‘double taxation’ – means your beneficiaries could face a tax charge of 52% if the benefits are subject to basic tax rate, 64% if subject to higher tax rate, and 67% if subject to the additional tax rate.

The calculation gets more complicated when you factor in nil rate bands. No IHT is applied to assets under an estate’s ‘nil rate band’ of £325,000. People’s estates may also be able to benefit from the ‘residence nil rate band’ (RNRB). This is £175,000 and applies to a property left to a direct descendant. If both these allowances are passed between a married couple their estates could leave a combined total of £1 million tax free.

A SIMPLIFIED EXAMPLE

If we use a simplified example and assume we have £100 above the nil rate band in a pension, once IHT is applied that is reduced to £60. If the person died over the age of 75 and income tax of 45% is then

Mike

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

Ask Rachel: Your retirement questions answered

applied that is reduced even further to £33, an effective tax rate of 67%.

However, if the estate exceeds £2 million then entitlement to the RNRB is reduced by £1 for every £2 over that threshold and therefore disappears completely for any estates over £2,350,000. It’s easy to see that for some people the addition of a pension fund could push some estates over that threshold. For example, if someone had an estate of £2 million and a pension fund of £400,000 then they would lose all their RNRB.

In fact, when one does the maths for that particular case, after IHT and income tax has been paid the value of the total estate would fall from £2.4 million to £1.452 million. But if there was no pension fund, and therefore no reduction in the RNRB, then the nil rate bands would be £500,000 and the estate after IHT would be worth £1.4 million. So, a £400,000 pension fund has

only increased the estate by about £52,000 – which works out at an effective tax rate of more than 90% on the pension. If the beneficiary was in Scotland and a 48% tax rate was applied the effective tax rate on the pension would be even higher.

STILL JUST PROPOSALS FOR NOW

These are extreme cases, but it shows that the calculation for IHT due is complicated, especially when we consider the interaction between the estate, the pension and the nil rate bands estates can claim.

Wait for HMRC to publish more details before thinking about if you want to change your financial strategy”

However, one last thought. These are proposals at the moment, and we don’t yet know what the final position will be. So, you may be better to wait for HMRC to publish more details before thinking about if you want to change your financial strategy and how to accommodate these changes.

EDITOR: Tom Sieber @SharesMagTom

DEPUTY EDITOR: Ian Conway @SharesMagIan

NEWS EDITOR: Steven Frazer @SharesMagSteve

FUNDS AND INVESTMENT

TRUSTS EDITOR: James Crux @SharesMagJames

EDUCATION EDITOR: Martin Gamble @Chilligg

INVESTMENT WRITER: Sabuhi Gard @sharesmagsabuhi

CONTRIBUTORS:

Dan Coatsworth

Danni Hewson

Laith Khalaf

Laura Suter

Rachel Vahey

Russ Mould

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