AJ Bell Shares magazine 14 March 2024

BIG MOMENTUM

WITH GLOBAL INDICES SETTING NEW HIGHS DISCOVER THE STOCKS WHICH CAN KEEP UP THE PACE

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Please remember, the value of shares and the income from them can go down as well as up and you may get back less than the amount invested.

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NEWS

06 Easyjet flies high with promotion to the FTSE 100 as miners and energy slip

07 Darktrace hits 18-month high as hack threats increase

08 UK financial regulator softens stance on digital currencies as Bitcoin surges to new high

09 Why convenience food giant Greencore has gained 12.3% year-to-date

09 Investors turn sour on Tate & Lyle

1 1 Could a special capital return be on Computacenter’s agenda?

1 2 Can Nike get back on the front foot?

1 3 Central banks expected to toe the line on interest rates this month

GREAT IDEAS

15 Why Kitwave can keep on delivering growth and income

17 HgCapital Trust can add growth and value to your portfolio

UPDATES

19 Cashed up Costain is up nearly 30% in six months

21 INVESTMENT TRUSTS

Why City of London is so popular with investors

FEATURES

26 COVER STORY

BIG Momentum

With global indices setting new highs discover the stocks which can keep up the pace

42 Why have renewable energy funds performed so poorly?

34 SECTOR REPORT

How to invest in mini marvel microchips

47 EDITOR’S VIEW

Currys batting off bid interest is something to be welcomed

50 FINANCE

Is the British ISA an investor’s friend or a flop?

53 DANIEL COATSWORTH

Taking British success stories overseas: can Greggs succeed?

57 ASK RACHEL

Can I take a 25% tax-free lump sum if I’ve started drawing on defined benefit pension scheme?

60 INDEX

Shares, funds, ETFs and investment trusts in this issue

42

34

57

25%

Photo: Adobe Stock

Three important things in this week’s magazine

1 2 3

Big momentum: picking stocks with strong price and earnings drivers

Shares explains how price and earnings momentum works and selects six stocks which the team believe have ‘the right stuff’.

Chips with everything

Taking you through the semiconductor sector and discussing ways to invest in this key technology.

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:

Why are alternative energy trusts out in the cold?

After three years in the wilderness, is it time for investors to take another look at this once-thriving sector?

Private equity group swoops on Mattioli Woods in all-cash deal

Mondi bids £5 billion for DS Smith to create packaging giant

US stocks slip from record levels as Crowdstrike and Target shine | Wall Street Week

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•

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Easyjet flies high with promotion to the FTSE 100 as miners and energy slip

Former market darling Tullow Oil is relegated to small-cap universe

For anyone who owns a FTSE 100, FTSE 250 or FTSE All-Share tracker fund or ETF, there are one or two changes next week as a result of the latest quarterly index review.

Investors in these securities don’t need to do anything themselves as the underlying indices –compiled by FTSE Russell, part of London Stock Exchange Group (LSEG) – will automatically implement the changes from the start of trading on 18 March.

There is only one change to the large-cap benchmark this quarter, with budget airline Easyjet (EZJ) replacing Endeavour Mining (EDV), which owns and operates gold mines in Ivory Coast and Senegal.

Easyjet shares have climbed 57% from lows of 350p last October to 550p today, giving the company a market cap of £4.1 billion, after it said it would resume dividend payments thanks to ‘record’ summer trading.

Endeavour on the other hand has seen its shares fall from over £18 in December to less than £15 today, giving it a market cap of £3.6 billion, following news at the start of the year that chief executive Sebastien de Montessus was stepping down immediately due to ‘alleged serious

misconduct’.

In the FTSE 250 index, as well as musical chairs between Easyjet and Endeavour there are four further changes.

Infrastructure, services and property firm Kier (KIE) is promoted to the mid-cap index after its market value topped £600 million thanks to a positive first-half trading update on the back of strong volumes in its construction business.

Somerset-based logistics firm Wincanton (WIN) also joins the FTSE 250 index due to a 90% rally in its shares year-to-date, which is the result of a bid battle between US giant GXO and Ceva, part of French shipping and logistics firm CMA CGM.

Given GXO appears to have won the battle, Wincanton’s stay in the mid-cap index is likely to be short-lived and there could be another change at the next quarterly review.

To make way for the new joiners, technology services firm FDM (FDM) and Irish-based oil and gas exploration company Tullow Oil (TLW) are demoted to the small-cap segment of the market.

For Tullow, which for many years was a stalwart of the FTSE 100, relegation from the FTSE 250 marks fresh indignity in its history as a public company. [IC]

Darktrace hits 18-month high as hack threats increase

UK cybersecurity firm rallies on surprisingly strong growth and margins

UK enterprise cybersecurity firm

Darktrace (DARK) is rediscovering its mojo after unveiling surprisingly strong growth and margin expansion in the six months to end December 2023.

Against a backcloth of intense geopolitical tension, governments and corporate clients are becoming increasingly wary of the threat of hacking attacks, while AI (artificial intelligence) tools are making it easier for hostile actors to carry out phishing attacks.

‘Against this backdrop and in the period ahead, we are preparing to roll out enhanced market and product positioning to better demonstrate how our unique AI can help organisations to address novel threats across their entire technology footprint,’ said Darktrace chief executive Poppy Gustafsson as the company reported half year results that had analysts upping expectations for the full year (to 30 June).

Darktrace said it expected revenue for the full year to increase by between 23.5% and 25%, up from a range of 23% and 24.5%. It forecast an adjusted core earnings margin of at least 21%, higher than the 18% to 20% previously guided.

Shares in Darktrace jumped more than 15% (8 March), hitting an 18-month high of 436p and pushing the FTSE 250 company’s market value beyond the £3 billion mark for the first time since September 2022.

Founded in Cambridge in 2013, Darktrace’s core cybersecurity solution is its Enterprise Immune System, a IT system-agnostic platform that uses behavioural analysis to detect the early signs of a cyberattack on a network. EIS creates a model of users, devices and network behaviours in normal conditions, and, through real-time analytics and AI pattern recognition, alerts IT teams on activities outside of the norm.

Darktrace’s rally came just days after US cybersecurity peer Crowdstrike (CRWD:NASDAQ) jumped more than 20% after it also posted forecast-beating earnings and a positive outlook.

In the fourth quarter to the end of January, the firm reported a 33% increase in revenue to $845 million and non-GAAP earnings per share of $0.95 against the $0.83 consensus. Earnings guidance for the first quarter to the end of April and the full year to next January also pleased the market.

‘CrowdStrike delivered an exceptionally strong and record fourth quarter,’ said chief executive George Kurtz. ‘CrowdStrike is cybersecurity’s consolidator of choice, innovator of choice, and platform of choice to stop breaches.’

‘There is no spending fatigue here,’ said Morgan Stanley analyst Hamza Fodderwala, referencing comments by the chief executive of fellow US firm Palo Alto Networks (PANW:NASDAQ), who last month blamed spending fatigue among customers for the firm’s lower revenue outlook sending its shares tumbling almost 30% in a single day. [SF]

UK financial regulator softens stance on digital currencies as Bitcoin surges to new high

The UK FCA (Financial Conduct Authority) is falling into line with other financial regulators and softening its stance on investing in digital currencies as bitcoin hits a record high.

From April 2024, issuers will be able to list exchange traded products linked to Bitcoin and Ethereum coins on the London Stock Exchange.

The FCA banned crypto-related derivatives in 2021 on concerns over the amount of leverage or borrowing available to consumers, with some providers offering as much as 100 times leverage.

The ban drew criticism from crypto industry representatives who argued the UK could not become a leading centre for digital assets if it did not allow retail investors regulated access to popular digital coins such as Bitcoin.

The US SEC (Securities and Exchange Commission) approved the first Bitcoin ETF (exchange traded fund) in January this year, which led to a huge influx of investors who see the decision as legitimising Bitcoin as a mainstream asset.

February, the second highest daily inflow for any ETF. Collectively the new spot Bitcoin has attracted $10 billion of inflows since launch.

US approval follows similar regulatory decisions in the EU, Australia, Canada and Hong Kong.

Increasing institutional demand has been a factor in the rising price of Bitcoin, which hit new all-time highs this week of over $72,000 taking its gains so far in 2024 to over 60%.

After crashing 75% from its November 2021 high, the cryptocurrency has surged more than four-fold in just 16 months.

The reduction in new bitcoin effectively creates a supply shock which has historically spurred significant price increases”

Reflecting this increased demand, BlackRock’s Bitcoin ETF reportedly took in $250 million on 27

Another factor driving the price has been a so-called ‘halving event’ which happens every four years and reduces the number new coins created by half.

The reduction in new Bitcoin effectively creates a supply shock which has historically spurred significant price increases, notes Nigel Green, chief executive of deVere Group.

The FCA believes increased insight and data stemming from a longer period of trading history allows professional investors to make a betterinformed decision on whether cryptocurrencies meet their risk appetite.

It is important to point out that the softening tone does not apply to retail investors where the ban on the sale of cryptocurrency derivatives remains in place.

This is because the regulator believes they are ‘ill-suited for retail consumers due to the harm they pose’.

The London Stock Exchange said listed cryptocurrency products could not be leveraged. In addition, they must be kept in an offline vault and held by custodians subject to anti-money laundering rules in the UK, EU, Jersey, the US or Switzerland. [MG]

Why convenience food giant Greencore has gained 12.3% year-to-date

Shares in the world’s largest sandwich maker have fattened up over 25% over the past year

Investors have regained an appetite for sandwich, salad and sushi-maker Greencore (GNC) with the shares up 12.3% to 106.7p year-to-date, extending their one-year rally to 28%.

Building on a profit upgrade delivered in October, the Dublinheadquartered soup-to-sauce supplier served up encouraging firstquarter results (25 January 2024) with outstanding customer service levels underpinning a 5.8% rise in like-for-like sales for the 13 weeks ended 29 December 2023 and

management calling out ‘improved profit conversion year on year’.

HIGHER Moving

Food-to-go like-for-likes at Greencore, which supplies all the major UK supermarkets as well as coffee shops, discounters and convenience retailers, fattened up 5.8% as the company lapped rail strike-impacted prior-year comparatives and benefited from price increases. Another first-quarter highlight was the 2% like-for-like uptick in chilled ready-meal volumes delivered in a declining market. With inflationary pressures subsiding, the pickles-tofrozen Yorkshire puddings seller is looking to rebuild profitability back to pre-

Investors turn sour on Tate & Lyle

Weaker demand has put pressure on pricing as the company faces forex headwinds

Food ingredients business Tate & Lyle’s (TATE) recent third-quarter update (21 February) saw an 11% decline in its Food & Beverage Solutions business as it was hit by a mixture of customer destocking and weaker consumer demand.

Foreign exchange headwinds are also having a negative impact, while contracts for 2024 have been more competitive due to softer demand.

Berenberg analyst Samantha Derbyshire observes: ‘Tate has selectively given back some extra margin to customers where it has a strong collaboration relationship and visibility on volume growth, in order to secure volumes with them for 2024. This has likely added to extra pricing pressure.’ [TS]

Covid levels, while debt reduction, share buybacks and purchases by directors have helped improve sentiment towards the stock. Chief executive Dalton Philips insists his charge is ‘committed to continuing to drive profitability through commercial discipline’ and is ‘investing in several initiatives to develop a robust platform for future growth’. [JC]

Left: Alexandra, Head of Client Services Right: Adam, Business Development Manager

UK

UPDATES OVER T HE NEXT 7 DAYS

FULL-YEAR RESULTS

18 March:

Marshalls, Team Internet

19 March:

Pebble Group, Diversified Energy, Trustpilot, Atalaya Mining, Essentra, Midwich, Fintel, Zotefoams

20 March:

Anpario, Ceres Power Holdings, Prudential, Kenmare Resources, Computacenter, Eurocell

21 March:

Dowlais, Energean, Next, Hostelword, M&G, Tribal, Judges Scientific, Direct Line

FIRST-HALF RESULTS

15 March: Volution

19 March: DFS

Furniture, Close Brothers, Eagle Eye Solutions

TRADING ANNOUNCEMENTS

15 March: Berkeley

Could a special capital return be on Computacenter's agenda?

IT reseller looks set to report record annual profits

The IT reseller industry has enjoyed a strong bounce back from the world’s Covid reopening as customers line up to put in place digital strategies and adopt the latest technologies, and AI (artificial intelligence) levers are being pulled left, right and centre.

International player Computacenter (CCC) said in September 2023 that it sees another record year for profits and analysts have been quick to point out ‘exceptional’ cash flow from the business, which raises the possibility of a special capital return being unveiled when the company reports on 20 March.

This would be typical

Computacenter, which regularly pays out surplus cash to shareholders, either as a special dividend or via a tender offer for shares.

It’s not guaranteed, however. Computacenter has been investing in its overseas operations, the US most interestingly, and management may feel that is a better use of its surplus cash as it looks to scale up its foothold. Either way, shareholders will still get a decent payout, with the company typically paying out something like 40% to 45% of earnings as normal dividends, implying a full

Can Nike get back on the front foot?

The sportswear giant is taking a scythe to costs as sales growth and rivals eat into its market share

Investors in endured an unusually tough period of late with shares in the Oregon-based sportswear giant down 15% over one year amid slowing growth and weaker consumer spending.

Fierce competition from fastgrowing trainer brands and some self-inflicted wounds have also knocked Nike off track: the brand has lost a number of athlete relationships in recent years including footballers Harry Kane and Jack Grealish and tennis and golf legends Roger Federer and Tiger Woods to name a few.

The sneakers-to-soccer ball behemoth is forecast to deliver a sequential decline in revenue and earnings when it posts third-quarter results on 21 March.

Investors will be looking for evidence of improving profitability

outlook’ flagged by chief financial officer Matthew Friend in a downbeat second-quarter update in December, where Nike lowered its revenue view on weaker demand, in particular from China and Europe, and outlined plans for a $2 billion cost-cutting programme.

The company’s ‘save to invest’ plan is aimed at streamlining the business, creating a simplified range of products and boosting its use of automation. [JC]

QUARTERLY RESULTS

15 March: Buckle, GigaCloud Technology, Groupon

19 March: Tencent Music Entertainment, Core Main, Orla Mining

20 March: Micron, General Mills, Five Below, Chewy, H B Fuller, Guess, Winnebago Industries, Signet Jewelers, KB Home, Steelcase

21 March: Accenture, Nike, FedEx, Carnival Corp, FactSet Research

Picture: Adobe Stock

Central banks expected to toe the line on interest rates this month

Despite evidence the US is slowing, the Fed will hold off from cutting

Last week’s ECB (European Central Bank) meeting passed pretty much as predicted with no change in any of its three benchmark interest rates despite mounting evidence of an economic slowdown and falling inflation in continental Europe.

The news was well received in the bond market, which doesn’t like surprises, and expectations for a cut have been pushed out to June.

Beyond that, however, the ECB will likely have to take its lead from the US Federal Reserve, which according to Fidelity global macro economist

Anna Stupnystka ‘might have to push back the start of its own cutting cycle to later in the year given continued resilience of the US economy and evidence of inflation persistence’.

The US, like the UK, is experiencing stubborn service-sector inflation driven by wages and hiring, while industrial production and factory orders stagnates.

The Beige Book, which is the Fed’s monthly look at economic conditions across 12 regions mixed picture across regions, suggests growth is slowing, especially on the consumer front, with spending on retail goods dropping as shoppers trade down and shun discretionary goods, while spending on hospitality is also down due to high prices.

Yet still the Fed is concerned about cutting rates too early and allowing the inflation genie out of the bottle again.

Speaking last week, Minneapolis Fed leader Neel Kashkari suggested there was no rush to cut interest rates given how well the US economy seems to be doing, and actually hinted rates may need to rise further, which the markets haven’t priced in.

‘Undertightening will not get us back to 2% in a reasonable time,’ said Kashkari. Adding inflation is ‘ticking up again, that’s what I’m worried about’.

Therefore, we wouldn’t expect any change in US interest rates next week, nor do we expect the Bank of England to move much before the summer, especially as house prices are rising once again suggesting a revival of animal spirits in the property market. [IC]

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Get connected to a universe of software and services businesses

For the third year in a row, HgT tops a list of investment companies that would have made investors more than £1 million, according to research from The Association of Investment Companies (AIC).

Investing the full ISA allowance annually from 1999 to 2023, a total of £306,560, and reinvesting the dividends in HgT shares would have generated a tax-free pot of over £2.2 million by 31 January 2024.*

Note: All figures are as at 31 December 2023 and refer to performance on a total return basis, assuming all historic dividends have been reinvested. Source: Hg

Past performance is not a reliable indicator of future results. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations and investors may not get back the amount they originally invested.

*Full press release: hgcapitaltrust.com/news-insights/news/

hgcapitaltrust.com

Why Kitwave can keep on delivering growth and income

The cash-generative wholesaler’s shares offer cracking value considering the market share opportunity ahead

Kitwave (KITW:AIM) 329p

Market cap: £233.45 million

Among the London stock market’s successful small cap IPO’s (initial public offering) of recent years, Kitwave’s (KITW:AIM) stock has more than doubled since Shares highlighted the independent wholesaler’s attractions in October 2021, but the company has the capacity to deliver plenty of growth and income for investors in the years ahead.

We believe the £233.5 million cap can sustain its positive trading momentum and serve up further earnings upgrades given its competitive advantages, and a robust pipeline of acquisitions, in what remains a highly fragmented UK grocery and foodservice wholesale market. Cash generative and robust of balance sheet, Kitwave speaks for just 5% of an addressable market worth £11 billion, so an exciting market consolidation opportunity lies ahead.

DRIVING GROWTH

Kitwave is an independent UK wholesale business selling everything from confectionery, soft drinks and snacks to beers, wines, groceries, frozen and chilled food and tobacco. It distributes products to reassuringly diversified base of around 42,000 customers including convenience stores, pubs, vending machine operators and foodservice providers.

Floated on AIM at 150p in May 2021, Kitwave is growing organically whilst executing on its successful

buy-and-build strategy, having integrated two earnings enhancing acquisitions and a small bolt-on deal since IPO.

The North Shields-based outfit’s competitive advantages include long-standing supplier and customer relationships, its exceptionally high service standards and a 30-strong depot network giving the company nationwide coverage. In addition Kitwave has the firepower for further acquisitions.

The company is also well placed to drive lower risk organic growth over the short-to-medium term by gaining new customers, expanding its product range and capturing a greater

Great Ideas: Investments to make today

share of customers’ wallets. Continued progress is being made to increase online ordering, which is boosting average order values and the company has opportunities to expand its geographic footprint to under-penetrated areas whilst lifting brand awareness.

Results (27 February) for the year to October 2023 met the market’s significantly upgraded expectations, showing a 20% surge in revenues to £602.2 million including organic growth of 13% and a 45% rise in adjusted pre-tax profits to £27.5 million. Shareholders were treated to a 20%-plus hike in the total dividend to 11.2p and while yearend net bank debt was £25.7 million, up from £14.8 million in October 2022, this mainly reflected the late 2022 acquisition of WestCountry, a successful deal which expanded Kitwave’s offering into fresh produce throughout the South West of England and complements the acquisition of M.J. Baker in the region.

Kitwave also delivered a 97-basis point increase in adjusted EBITDA margin to 6.8%, demonstrating its ability to manage wage and distribution cost inflation. Encouragingly, the construction of a new South West distribution centre, which will fully integrate the company’s operations in the region and drive margin benefits, is progressing to plan and budget.

CRACKING VALUE

Bear points to consider include Kitwave’s singledigit operating margins, a significant second half weighting to profits and the presence of some meaty competitors in the marketplace. The presence of institutions like Liontrust, BlackRock

Delivering resilient growth

Financial year 2023 sales split by division

and Harwood Capital on the shareholder register provides some reassurance.

For the year to October 2024, Canaccord Genuity forecasts pre-tax profits of £28.5 million rising to £29.8 million and £30.5 million in the 2025 and 2026 financial years respectively. Based on current year earnings per share and dividend per share estimates of 29.3p and 12.7p respectively, Kitwave trades on an undemanding prospective PE (price to earnings ratio) of 11.2 and investors are being paid an attractive 3.9% dividend yield while they wait for a re-rating.

The broker sees net debt reducing from £25.7 million to £17.7 million this year as copious cash generation continues, although that estimate is before any further acquisitions. [JC]

Table:

HgCapital Trust can add growth and value to your portfolio

Private equity investor has a proven track record over the last decade

HgCapital Trust (HGT) 458.8p

Market cap: £2.1 billion

While it may not be as well known as FTSE 100 private equity firm 3i (III), specialist software and services investment trust HgCapital (HGT) has an equally impressive track record.

Total share-price returns over the last decade are 18.8% per year, slightly ahead of the FTSE 100 giant which has posted 18% compound annual growth, while 2023 saw it generate a 26.2% return.

Whereas the bulk of 3i’s performance comes from a single holding, which makes up over half the value of its portfolio, 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 managers pick businesses with strong fundamentals and predictable cash flows, as demonstrated by the top 20 companies growing their sales and EBITDA (earnings before interest, tax, depreciation and amortisation) by 25% and 30% respectively last year.

In terms of numbers, the same top 20 holdings generated revenue of £10.6 billion and EBITDA of £3.3 billion in 2023, representing a 31% EBITDA margin.

Investee businesses 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 racy as AI or the metaverse but it is absolutely crucial to the day-to-day running of modern businesses.

2023 was very much ‘a year of two halves, with the challenging market conditions of 2022 in evidence through the first half’, says chairman Jim Strang.

The situation improved in the second half, once it

became clear interest rate rises had run their course, which allowed markets to stabilise and financing conditions to become more supportive for deals, ‘especially for the kinds of high-quality assets with attractive market positions and growth profiles that constitute our portfolio,’ adds Strang.

NAV (net asset value) per share rose 11% to 500.5p while the strong share price performance meant the discount to NAV narrowed from 23% to 13% at year-end.

Despite a slow first half the team completed £74 million of new investment, with a further £148 million of deals signed pending completion this year, while realisations came to £324 million with an average uplift of 25% to their December 2022 carrying value and there were a further £191 million of sales signed due to complete this year.

The trust carries a relatively high ongoing charge of 1.69%, which is slightly more than the dividend yield, but we believe it is justified by the trust’s ability to continue delivering double-digit shareholder returns even in tough markets. [IC]

Cashed up Costain is up nearly 30% in six months

Infrastructure outfit looks in great shape and remains worth buying

We flagged infrastructure and engineering specialist Costain (COST) in late August 2023 at around 55p on the basis a lowly valuation, strong balance sheet and the prospect of a return to the dividend list would eventually be seized on by the market.

WHAT HAS HAPPENED SINCE WE SAID TO BUY?

We are gradually being proved right. The company declared a dividend for the first time since the pandemic alongside first-half results in September 2023, and followed that up in short order with the award of some key contracts in the water utilities space.

It’s full-year results on 12 March painted a picture of a business very much on the up as margin progress helped drive profit higher.

The operating margin was up 40 basis points to 3% supporting adjusted operating profit up 10.5% to £40.1 million, while statutory profit was lower thanks to the costs of a continuing shakeup at the company. The longer-term ambition is to grow margins to 5%. Revenue was down 6.3% but this was thanks to the timing of projects in the transportation sector.

The strong financial performance underpinned a 0.8p final dividend, and the company noted it had more than 80% of expected revenue secured for 2024 with forward work in the pipeline standing at around three times 2023 revenue.

WHAT SHOULD INVESTORS DO NOW?

The company is still sitting on an enviable balance sheet, with adjusted free cash flow of £72 million helping drive net cash to £164.4 million – for context this is 86% of the current market valuation.

This gives it considerable flexibility, including scope for M&A to augment growth, and its focus on areas of strategic priority for the UK should mitigate the risks posed by economic uncertainty and strained public finances.

Financial strength and robust demand should also enable further generosity to shareholders through dividends and potentially share buybacks. These attractions are not reflected in a price-toearnings ratio of just 6.4 times. [TS]

Why City of London is so popular with investors

The diversified trust has an enviable dividend growth record but overall performance has fallen behind over the last decade

One of the most popular investment trusts with AJ Bell’s ISA millionaires, City of London (CTY) is a favourite with investors seeking long-term income and capital growth and a gateway to large international companies.

However, while the long-run performance record is strong, Curtis’ cautious approach means the fund can underperform in some market conditions. On a 10-year share price total return basis, the trust has lagged AIC UK Equity Income sector peers such

as Law Debenture (LWDB), Finsbury Growth & Income (FGT) and Merchants Trust (MRCH) by some distance.

On the positive side of the ledger, City of London offers a higher yield than the sector average and is the sector’s largest trust by assets; this scale is a key reason why it carries the sector’s lowest charges.

City of London is also one of the AIC (Association of Investment Companies) ‘Dividend Heroes’, having raised the payout every year since 1966, the last time England won the football World Cup.

Much of this track record can be attributed to Janus Henderson Investors’ Job Curtis, who has managed the trust for almost 33 years and was formally joined by David Smith as deputy fund manager in 2021. Curtis’ conservative investment philosophy and experience has been pivotal to City of London’s success, as has the investment trust structure which allows the board to tuck away surplus cash and smooth income payouts to shareholders as a result.

The board took advantage of the previous low interest rate environment by arranging long-term, low-cost debt. At 7%, City of London’s gearing

remains below the AIC UK Equity Income average and chimes with Curtis’ cautious long-term approach.

City of London currently trades on a modest 2.2% discount to NAV (net asset value) versus an average five-year premium of 1.2%

DIFFERENTIATED PROPOSITION

What does Curtis believe makes his FTSE 250 vehicle stand out from peers? ‘First of all, we’ve got the longest track record of dividend growth going back to 1966,’ says the value-orientated money manager. ‘That’s 57 consecutive years and we’ve expressed confidence we’re going to do it again this year.’ City of London’s dividend growth record

Top 10 holdings (as of 31 January 2024)

Top 10 holdings (as of 31 January 2024)

Top 10 holdings (as of 31 January 2024)

is partly down to running a portfolio of consistent companies, ‘but we also use the investment trust structure with the revenue reserves’, stresses Curtis. ‘In 2020, we wouldn’t have been able to do it (increase the dividend) without that.’

‘And the second thing is we’ve beaten the FTSE All-Share over the long run. I became manager in 1991 and since then, we’re comfortably well ahead. Over the 32 years (to 31 December 2023), City of London’s NAV total return performance is 1,345% and the market’s is 1,031%.’

In terms of being left behind over the last decade, Curtis comments: ‘We don’t do it in every market as it is a conservative approach. We tend to have our best relative performance in more tricky markets and that’s actually part of the appeal.’

Curtis highlights City of London’s good relative performance in 2022, the year in which the war in Ukraine started and there was a lot of market turbulence to contend with.

Looking at the past five years, relative returns were negatively impacted by an underweight exposure to growth stocks in the year to June 2021 and in 2023, City of London underperformed because of an underweight to banks and energy.

But as Kepler Trust Intelligence analyst William Heathcoat Amory explains, ‘it is impossible to get it right every year, but with Job attempting to spread risks across the portfolio at all times, over the long term the benefit of his stock picking should come through, and hopefully deliver longterm outperformance. It is this that has allowed

UK equity income sector compared

UK equity income sector compared

UK equity income sector compared

Job to successfully navigate market cycles over his long tenure’.

WHAT’S IN THE BOOK OF JOB?

City of London’s significant heft, with NAV growth and new share issuance increasing its size over the years, is a huge advantage that underpins a third point of differentiation, its competitive charges.

‘The fee is the lowest in the UK Equity Income sector, one of the lowest of any investment trust and lower than any OEIC (open-ended investment company) would be,’ says Curtis.

At the interim results in February, the board announced a management fee reduction from 0.325% to 0.3%, effective 1 January 2024. As Kepler’s Heathcoat Amory explains: ‘Low charges are one of the contributors to the virtuous circle that City of London finds itself in, enabling it to continue to issue shares and grow its asset base.’

Curtis, whose favoured valuation metrics include dividend yield, scours the market for resilient companies with strong balance sheets and the sustainable cash generation which will support dividends and capital expenditure for future growth. In terms of current positioning, he believes the banks are in ‘quite a good place at the moment’ and sees re-rating potential in this part of the UK market. ‘We’ve had a very good reporting season from the banks. We’ve got about 10% in banks, the first time we’ve been as heavy in banks as that for a very long

time, but they are benefiting from higher interest rates and a relatively soft landing for the economy as well as their stronger capital ratios.’

The exodus of names from the London stock market may be a troubling trend for the long term, yet City of London’s returns have been boosted by the ‘fair amount of takeover activity going on’, says Curtis. In the second half of last year, portfolio holding Round Hill Music Royalty Fund was taken over and this year, Wincanton (WIN) has backed a £762 million offer from US group GXO Logistics (GXO:NYSE), while insurer Direct Line (DLG) has rejected a £3.1 billion takeover offer from a Belgian rival. ‘I think the UK is very cheap at the moment and M&A is a theme that is going to continue,’ says Curtis.

RUN YOUR WINNERS

Among City of London’s winners is defence contractor BAE Systems (BA.), the biggest holding as of 31 January 2024. ‘BAE is executing really well, but the key thing is the environment has changed hugely,’ says Curtis. ‘We’re no longer in the postCold War peace dividend environment. This is an environment where countries want to rearm for obvious reasons.’

City of London may have a yield bias, but the portfolio also contains lower-yielding growth stocks such as RELX (RELX), the informationbased analytics and decision tools provider that has successfully pivoted from print to digital. ‘Exhibitions has come roaring back from Covid,’ explains Curtis, ‘and RELX is seen within the UK market as one of the likely beneficiaries of artificial intelligence. It’s not a cheap stock, but RELX has been an incredible compounder and it has a really high-quality risk business and a hugely commanding position in scientific publishing as well.’

Other names in the portfolio include diversified engineering group Smiths (SMIN) as well as DS Smith (SMDS), which recently received an approach from packaging industry peer Mondi (MNDI). ‘UK stocks are quite cheaply rated and in general there is scope for the market to re-rate upwards,’ notes Curtis, who initiated a position in British luxury brand Burberry (BRBY) in the half to December 2023.

‘Luxury is having a difficult time and within luxury, the Europeans look down a bit on Burberry, but it is our one British luxury company on the stock market, an iconic brand and profitable. Burberry

Geographical focus (as of 31 January 2024)

US (2.7%)

Switzerland (3.3%)

Netherlands (3.9%)

Other (6.2%)

United Kingdom (83.9%)

is also trying to reposition itself a bit in a difficult environment. I’ve only bought half a position at the moment, but I do sense it is quite interesting. Luxury will recover and I think Burberry will recover with it, but I admit the sector has some headwinds at the moment.’

An interesting addition in the mid cap space is meat and fish packing firm Hilton Food (HFG)

City of London is allowed to hold up to 20% of its assets in overseas listed stocks, which provides Curtis with a bit more choice and has ‘added value over time. But if you look at the whole portfolio, a bit like the UK market, two thirds of the sales come from overseas’, he explains.

Addressing performance, Curtis concedes ‘we are slightly behind the index over one year, but not far behind, but we’re ahead over three, five and 10 years’.

In terms of portfolio detractors, wealth manager St James’s Place (STJ) has been ‘very disappointing, one I’ve clearly got completely wrong, but I think we’ve found a base now. And some of the more defensive sectors like food producers did less well. Our holding in Nestle (NESN:SWX) has done very well in the long run but has had a more difficult year.’ Not being particularly big in technology and missing out on the rise in Rolls-Royce (RR.) have also dragged on performance.

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Tom Sieber) own shares in AJ Bell.

BIG MOMENTUM

WITH GLOBAL INDICES SETTING NEW HIGHS DISCOVER THE STOCKS WHICH CAN KEEP UP THE PACE

By Martin Gamble Education Editor

Stock markets have been making new alltime highs in the US, Europe and Japan and investors are asking whether they are witnessing a new global bull market for stocks which began in November 2023.

Momentum is a powerful factor in stock markets. Prices tend to trend in the same direction which mean buying winners and selling losers can be a profitable strategy.

It is not only about price but also earnings momentum. Persistent upward revisions to consensus earnings estimates are a key driver of stock performance.

Later in the article we screen for companies with strong price and earnings momentum to find potential winners from across the UK, European and US markets.

Before that, it is worth trying to understand if the current momentum in markets is as strong as it

looks. It may seem like an odd question to pose but strength at the index level is more sustainable if lots of individual stocks are participating.

In the US the rise of the Magnificent Seven is having a distorting effect on indices, causing narrow market leadership which could portend future weakness.

That does not necessarily mean the rally can’t eventually broaden out, although it is telling the small cap Russell 2000 index sits around 15% below its all-time high and has yet to join the party.

Technical analysts have created statistical measures of market breadth to help understand the strength and sustainability of a trend.

HOW STRONG IS THE US MARKET?

The McClellan Volume Oscillator is a market breadth indicator that is based on the smoothed difference between the volume of advancing and

UK stocks with the strongest momentum

UK stocks with the strongest momentum

UK stocks with the strongest momentum

EPS

declining shares.

Since the start of 2024 this indicator has flashed more selling than buying volumes which implies the market is rising with less conviction than earlier in the year.

The indicator plots the daily difference between the number of stocks making new 52-week highs and those making new lows. A high reading indicates more stocks are making highs.

The reading has been falling from a high in recent weeks suggesting momentum is falling.

The Dow Theory was created by Charles Dow more than 120 years ago. The logic behind the indicator is, if US consumers are doing well and spending freely, transportation stocks should also do well because they are tasked with moving these goods around.

The idea is a new high in the Dow industrials

US stocks with the strongest momentum

US stocks with the strongest momentum

US stocks with the strongest momentum

EPS

index should ideally be ‘confirmed’ by a high in the Dow transportation index. Non-confirmation can be a sign of trouble ahead.

The Dow transportation index is trading around 11% below its all-time high and has not yet confirmed the new high in the Industrials index.

Transportation stocks are seen as a leading economic indicator. Two major components of the index, Fedex (FDX:NYSE) and UPS (UPS:NYSE) have both given tepid outlooks in their earnings reports suggesting uncertainty is creeping into the resilient economy narrative.

There is no time window on a confirmation signal and the Dow transports may yet make a new all-time high, so it is worth monitoring over coming weeks.

European stocks with the strongest momentum

European stocks with the strongest momentum

European stocks with the strongest momentum

Six

All in all, the evidence from market breadth data throws up some red flags which are worth considering when assessing the sustainability of current momentum.

US EARNINGS ARE TURNING UP/RATES DOWN

As mentioned earlier, earnings momentum is also an important part of overall picture, so how does it look? There are signs US earnings are starting to see increasing momentum after troughing in the spring of 2023.

US consensus earnings forecasts call for doubledigit growth in 2024 according to FactSet data which should be supportive for share prices

Interest rates are expected to fall as inflation continues to drop back towards target. One of the

Fed’s preferred inflation measures, the core PCE (personal consumption index) is now below 3% on an annual basis.

This should give stocks an added boost and support higher PE (price to earnings) multiples. We provide a caveat to this later in the article.

While it is well understood market and economic cycles do not move in lockstep (stock markets anticipate trends in the economy), it may be worth considering where we are in the current cycle given the confusion created by the pandemic.

Put simply, most economists believe the current economic cycle is long-in-the-tooth. If a new upcycle has started it would imply the central banks have engineered a soft landing.

It would also imply the long and variable lags of monetary tightening have fed through the system already which seems improbable given corporates and consumers are still benefiting from low-cost refinancing and government handouts during Covid.

Lastly, it is worth asking what the chances are a new bull market can begin on sky-high valuations. The Shiller PE (price to earnings) ratio is sitting at its third highest ever reading at 35 times. The sequencing seems to be all out of sync. The Shiller PE is a cyclically adjusted PE created by the economist Robert Shiller.

Historically bull markets are born when stock valuations have been bashed down by a recession.

In conclusion, the fact stock markets are making new highs is a positive but there are specific caveats we have identified which suggest cautious optimism is more appropriate than full blown excitement.

SCREENING FOR MOMENTUM

Using software from Stockopedia we have screened UK, US, and European markets for stocks showing strong momentum and identified our best picks from the lists generated.

The screen combines price strength and earnings growth. Studies have shown stocks with the strongest price gains over six months tend to continue to outperform. Likewise, those with the best earnings revisions tend to outperform.

Qualifying stocks have outperformed their local benchmark index by 15% or more over the last six months. In addition, they rank in the top 20% of all stocks in each region based on the percentage increase in earnings estimates over the last month.

The Shares team have used their collective knowledge and wisdom to select the best stocks from the qualifying stocks.

Founded in 1852, the age of sail, today Clarkson (CKN) is the world’s biggest provider of shipping services, from broking to port services, research and financial advice, with offices in 24 countries across six continents.

The firm reported record profit for 2023, allowing it to increase its dividend for the 21st year running and sending its shares to a new 12-month high.

The company has an

MOMENTUM PICKS

immensely strong balance sheet with £175 million of free cash and its secured order book for 2024 was a record $217 million in December.

Seaborne trade continues to grow, but for the past few years lack of supply means rates have kept rising along with demand for Clarkson’s services.

Added to this, the ‘green transition’ is fueling demand for new vessels, both in terms of low-emissions and for the

offshore wind industry, and we expect the company to continue growing faster than analysts anticipate. [IC]

The Edinburgh headquartered software solutions supplier helps US hospitals and other healthcare providers discover, convert and optimise assets to improve clinical outcomes and financial performance. US healthcare is savagely competitive so gaining any value-based care edge could be the difference, leaving Craneware (CRW:AIM) well positioned.

The AIM-quoted company is widely perceived to have

best-in-class tools, capable of accessing, extracting and aggregating data in ways peers cannot, allowing relevant, meaningful insights to be drawn and patient outcomes to be optimised.

After collapsing during Covid, operating margins have substantial room to improve and presuming end-market dynamics continue to stabilise, onboarding new healthcare clients to its cloud-based Trisus platform could provide

Based in Bunnick, on the outskirts of Utrecht, Koninklijke BAM (BAMNB:AMS) is one of the Netherlands’ biggest construction groups, specialising in sustainable homes and infrastructure for public and private customers.

While construction is a lowmargin business, the firm is improving its profitability as shown by its 2023 results which have led analysts to upgrade their 2024 and 2025 forecasts by

around 40%.

BAM has a strong balance sheet and an order book of almost €10 billion, giving it the confidence to raise the dividend by a third and launch a €30 million share buyback.

As part of its new three-year strategy the company will pay out between 30% and 50% of earnings as dividends and will continue with share buybacks.

For investors keen on green credentials, the firm has

a double-benefit for the share price. Having traded above £30 pre-Covid on half last year’s $174 million sales, we see scope for material gains over the next two to three years. [SF]

ambitious decarbonisation targets and has already reduced its Scope 1 and 2 CO2 intensity by more than 50% since 2015 with further reductions planned. [IC]

In January 2024, Meta Platforms (META:NASDAQ) blasted back past the trillion-

dollar market capitalisation mark after chalking up one of the greatest stock market comebacks ever in 2023. Last year, shares in the Facebook, Instagram and Whatsappowner surged 195% thanks to reinvigorating sales growth in its advertising business and taking the knife to costs.

February’s fourth quarter smashed forecasts, saw a massive $50 billion share buyback plan put in place and declared a dividend for the first time. Its market cap gain

of nearly $200 billion was the biggest one-day rally for an individual stock on record.

The widely held opinion among analysts is that investors can expect more to come from the shares. Bank of America analysts reckon Meta will benefit from a further improvement in digital advertising and its Reels short videos, among other areas. Trading on a threeyear average PE of 21.4, we think the upside potential is potentially significant. [SF]

Over the past six months shares in London-based digital marketing and consulting firm Next 15 (NFG:AIM) have gone up around 50%.

Berenberg analyst Ciarán Donnelly says: ‘The convergence of advertising and technology is extending marketing budgets to technology-enabled areas of corporate spending, leading to

a growing set of opportunities for tech/data-enabled media companies.’ Donnelly notes Next 15 focuses on building out a consortium of digital consultant and data analytics brands, alongside its wellestablished content and branding businesses, leaving it well positioned against the structural backdrop.

A combination of smart

bolt-on deals and new business wins are helping to drive share price and earnings momentum. Next 15 has managed to tap into high growth areas like data analytics and artificial intelligence (AI) by buying five businesses from these specialist areas. In November 2023 the company outlined plans to double revenue within the next five years. [SG]

NEXT 15 (NFG:AIM) 939P MARKET CAP: £924.9 MILLION

SHAKE SHACK (SHAK:NYSE) $100.96

CAP: $4.42 BILLION

Growth-hungry investors have chased Shake Shack (SHAK:NYSE) shares almost 40% higher year-to-date, with the burger chain’s well-received fourth quarter results (15 February) and a strong 2024 outlook providing further fuel for the rally. Shares believes the

American restaurant chain can sustain its positive momentum as consumers continue to chow down on its tasty hot dogs, Angus beef burgers, crinkle-cut fries and namesake milkshakes and price increases and Shake Shack’s increased scale drive higher-than-expected margins.

The modern day ‘roadside’ burger stand remains at the foothills of its global growth opportunity and is seeing positive traffic in its restaurants and through digital channels.

For 2024, Shake Shack expects to grow total revenue by 11% to 15% to between

$1.21 billion and $1.25 billion opening 80 new restaurants. This would bring the total, including company-

operated and licensed ‘Shacks’, to almost 600 locations, more than double the footprint from five years ago. [JC]

SHARKNINJA

SharkNinja’s (SN:NYSE) shares have surged more than 60% over the past six months, propelled by the household appliance innovator’s positive earnings momentum.

The fast-growing company behind the Shark and Ninja brands designs appliances ranging from smart vacuum cleaners and air fryers to hairdryers. It has a massive global market opportunity to attack and is benefiting from

robust, higher margin direct-toconsumer sales.

Shares believes the stock has scope to swim higher as new product launches drive market share gains and upwards earnings revisions.

Cash-rich SharkNinja’s sales rose 16.5% to almost $1.38 billion in the fourth quarter to December 2023 including Christmas, while adjusted EBITDA shot up 71% to over $219 billion, demonstrating

the operational gearing in the business. 2024 guidance points to adjusted EBITDA of between $800 million and $830 million, implying growth of 11% to 15% and CEO Mark Barrocas says SharkNinja’s brands have ‘strong momentum’ heading into 2024 as the Massachusetts-headquartered firm continues ‘to introduce new products, enter new categories, and grow our international footprint’. [JC]

MARKET

Car maker Stellantis (STLAM:BIT), formerly known as Fiat Chrysler has seen its shares run-up 50% over the last six months while consensus earnings forecasts have been revised up around 15% over the last 12-months.

In addition to strong price and earnings momentum, the shares sit firmly in the ‘value’ category with a PE (price to

earnings) ration of 5.5 times expected 2024 earnings.

Stellantis should continue to benefit from both value and momentum factors which are both powerful drivers of stock returns.

The business is showing good momentum and continues to throw off lots of cash. Commenting on full year results (15 February) analysts

at JPMorgan said, ‘All in all, a very strong year confirming the strong industrial execution on a global basis.’

After returning €6.6 billion to shareholders via dividends and buybacks in 2023, the world’s third largest car maker by revenue launched a further €3 billion share buyback and raised the dividend by 16% to €1.55 per share. [MG]

Ride-hailing and food delivery company Uber Technologies (UBER:NASDAQ) has been on a tear with its shares rising 70% over the last six months compared with a gain of 16.6% gain in the Nasdaq Composite index.

Strong price momentum has been supported by upward earnings revisions with analysts doubling their 2024 EPS

(earnings per share) estimates over the last year according to Refinitiv data.

Shares believes the company has reached an inflection point where it can now sustainably generate profits and free cash flow.

With the business operating at global scale operational efficiencies should act as a positive tailwind for margins

going forward.

Uber’s surprise inaugural $7 billion share buyback (14 February) demonstrates management’s increasing confidence in the business.

Over the next three years Uber expects gross bookings growth in the mid-to-high teens percentage and adjusted core operating profit in the high 30% to 40% range. [MG]

How to invest in mini marvel microchips

Semiconductors are the bedrock of the digital economy, core enablers of the data revolution and at the forefront of technological innovation. The semiconductor industry could be set for exponential growth driven by the mega forces of AI (artificial intelligence) and digitalisation, as well as those of geopolitics and economic competition.

Investors looking to gain semiconductor exposure have the option of investing in multiple chips stocks directly, such as the sector’s superstar Nvidia (NVDA:NASDAQ), Broadcom (AVGO:NASDAQ), or UK chip architecture champion ARM (ARM:NASDAQ), all listed in the US but easily bought on a decent investment platform. Alternatively, there are several ETFs that target the entire semiconductor value chain, including companies focused on the design, fabrication, and assembly of semiconductors.

There are also a small number of UK companies with exposure to elements of the semiconductor industry which can be found in the table opposite.

CHIP SECTOR BACKCLOTH

After experiencing an oversupply in 2023, as the world’s economy reopened after Covid, the semiconductor sector is primed for a recovery this year as demand for AI chips continues to accelerate.

It is on exciting growth potential that many chip stocks have rallied hard. Taiwan Semiconductor Manufacturing Company (TSM:NYSE), usually simply called TSMC, is the world’s largest foundry business and its share price hit a recent record high of $149.20 for its New York-listed stock.

Advanced Micro Devices’ (AMD:NASDAQ) next-

UK companies exposed to semiconductor industry

Last reported FY revenue (£m)

generation Ryzen 8000G chips power over 90% of AI PCs, according to company chief executive officer (CEO) Lisa Su. ARM has raised its full-year revenue guidance due its exposure to AI. The CEO of Dutch chip equipment supplier ASML (ASML:AMS) Peter Wennink believes the AI boom will fade without the Dutch company’s involvement.

At Cisco Live in Amsterdam earlier this year, the enterprise networking technology giant Cisco Systems (CSCO:NASDAQ) announced a series of hardware and software products in partnership with Nvidia. The focus of the collaboration will

be on making it easier to deploy and manage AI systems using standard ethernet connections.

The majority of AI deployments use a highperformance computing alternative – Infiniband – which Nvidia acquired as part of its $6.9 billion buyout of Mellanox in 2020. However, ethernet is starting to make inroads into the AI connectivity market.

‘Companies everywhere are racing to transform their businesses with generative AI,’ says Nvidia’s boss Jensen Huang. ‘We’re making it easier than ever for enterprises to obtain the infrastructure they need to benefit from AI, the most powerful technology force of our lifetime.’

Thanks to soaring interest in ChatGPT and other large language models (LLMs) being developed by the likes of Alphabet (GOOG:NASDAQ), Microsoft (MSFT:NASDAQ), and many others, generative AI is helping to breathe new life into a stagnating semiconductor sector, which had swung from a supply shortage during the pandemic to an oversupply in some sections of the market last year.

Generative AI and LLMs require massive amounts of computing power and that is underpinned by microchips. According to the World Semiconductor Trade Statistics’ market forecast last November, a ‘robust recovery’ in demand for semiconductors is on the cards in 2024, with an expected annual growth rate of 13.1%, compared to a 9.4% decline in 2023. IDC is even more optimistic, with its projection of 20% growth this year. Recent releases from the industry have followed a pattern of companies focused on chips with more traditional applications falling behind those with an emphasis on AI.

ASTONISHING NVIDIA RETURNS

While Nvidia grabs most of the AI headlines, its share price is up 80% already this year after 2023’s 240% gains, other semiconductor stocks are generating plenty of AI excitement.

For example, AMD is targeting AI PCs, rolling out the MI300X chip in December 2023, its rival to Nvidia’s H100 graphics processing unit (GPU). The chipmaker is also betting on AI PCs, with president Victor Peng telling CNBC recently that the market is expanding and that the company is expecting the adoption of AI PCs to pick up in the second half of the year.

In January, AMD announced its next-generation Ryzen 8000G series desktop processors, which promise to deliver ‘immense power and dominant performance for intensive workloads including gaming and content creation’.

Speaking on the fourth quarter 2023 earnings call (30 January) AMD CEO Lisa Su said that ‘Ryzen CPUs (central processing units) power more than 90% of AI-enabled PCs currently in the market’. AMD’s stock has also enjoyed a strong run that stretches back to early last year and is up around 50% in 2024 to date.

Elsewhere, shares in ARM soared close on 50% over a few days after a February announcement that the British firm anticipates capturing significant growth from red-hot demand for all things AI. ARM-based processor chips are used to

DIFFERENT TYPES OF CHIP FIRM

Some businesses in the sector like Taiwan Semiconductor Manufacturing Company and Samsung (005930:KRX) own and operate semiconductor fabrication plants or foundries which make the physical chips themselves. Samsung and Intel also design microchips making them integrated device manufacturers. Many companies, Nvidia included, outsource manufacturing and simply design the microchips. This means they avoid the high capital costs involved in building a foundry. Beyond chip design and manufacturing, the likes of ASML and US-based Lam Research (LRCX:NASDAQ) provide crucial equipment to the industry.

Taiwan and TSMC dominates the chip foundry industry

Taiwan – 68.5%

Taiwan and TSMC dominates the chip foundry industry

South Korea – 13.2%

China – 8.2%

U.S. – 6.6%

Israel – 1.3%

Other – 2.2%

Table:

World's biggest chip companies by market cap, start 2024 ($bn)

Sector Report: Semiconductors

Marvell Technology (MRVL:NASDAQ) is another aptly named chipmaker that has been elevated by AI. In Q3 2024, its data centre segment, which includes its custom AI chip business, beat revenue guidance, despite data centre storage demand remaining ‘depressed’ and industry hopes for a recovery being pushed out.

Data centre revenue grew 20% sequentially in the three months to the end of September, and the company is expecting it ‘to grow in the mid30% range’ sequentially in Q4 2024, said president and CEO Matt Murphy in November 2023. The company’s Q4 2023 earnings report revealed largely flat growth year-on-year of $1.43 billion, yet the shares remain on the front foot this year, up 30%, as investors bet on a growth return in 2024.

ALTERNATIVE WAYS TO INVEST IN CHIPS

There are relatively inexpensive semiconductor themed ETFs for investors to consider. The £701 million iShares MSCI Global Semiconductor (SEMI) ETF has Broadcom, ASML and Nvidia as its largest three holdings, making up roughly 25% of the portfolio combined. Intel (INTC:NASDAQ) and Texas Instruments (TXN:NASDAQ) are perhaps less sexy but still important chip stocks in the portfolio.

Similarly, the VanEck Semiconductor (SMGB) has more than 11% of its £1.4 billion assets invested in Nvidia, it’s largest single stake, while also owning significant holdings of chip kit suppliers Lam Research and Applied Materials (AMAT:NASDAQ).

train LLMs, including Nvidia’s GH200 Grace Hopper Superchip.

The firm’s performance and power-efficient CPU platform is used by more and more software developers, making it easier for OEMs (original equipment manufacturers) to adopt ARM technology, which generates further demand for ARM-based chips, the company explained.

The expectation is that growing demand for energy-efficient AI applications will drive ARM’s long-term growth prospects. In the short term, the company has raised its full-year revenue guidance from a range of $2.96 billion to $3.08 billion to between $3.16 billion to $3.21 billion.

The smaller £292 million Amundi MSCI Semiconductor ESG Screened (SEMG) ETF has 75 sector holdings, but nearly 30% of assets in Nvidia, with another 9.7% in TSMC and 10.2% in Broadcom, making it a sector option more skewed to the success of a small number of companies.

Finally, the HSBC Nasdaq Global Semiconductor (HNSS) ETF was only launched in January 2022, which helps explain its relatively small scale, with just £27 million of assets. That’s likely to change over time if investors select its’ 80-stock portfolio for chip exposure with a more evenly dispersed portfolio.

All of these ETF options are available on a 0.35% ongoing charge.

By Steven Frazer News Editor

Schroder UK Mid Cap Fund plc: UK equities – what’s the catalyst?

After several years of disappointing relative performance, it is now widely acknowledged that the UK represents one of the cheapest regional equity markets in the world, with mid cap stocks looking especially attractive. This ought to bode well for future long-term returns, but the roots of the UK’s under-performance can be traced back to before Brexit, so when can we expect things to change? Here, we examine whether there is anything on the horizon that has the potential to change the UK stock market’s relative fortunes, and

find several reasons for positivity, particularly for UK mid caps.

According to data from Morgan Stanley, UK equities currently trade at a near 40% discount to their global peers, which is close to the steepest valuation gap observed since the mid-1970s. Meanwhile, within the UK stock market, mid cap stocks look remarkably undervalued, with the FTSE 250 now trading at a small but persistent discount to the FTSE 100, as well as to most other small and mid cap markets around the world.

Source: BofA Merrill Lynch Global Fund Manager Survey, January 2024. Past

is not a guide to future performance and may not be repeated.

Despite the extent of this under-valuation, UK equities remain unloved. As the chart above demonstrates, global fund managers have been consistently underweight UK equities since July 2021, and indeed, they have tended to be significantly underweight the domestic market for most of the last decade. This has coincided with a period of underperformance from the UK stock market, particularly in the years from 2014 to 2020, as illustrated by the dark blue line.

INFLATION BENEFIT

Fortunately, there are reasons to believe that this may now be in the process of changing, particularly as far as UK small and mid-sized companies are concerned. Global equity markets performed well in the fourth quarter of 2023, with domestically-focused UK midcaps outperforming. This is a part of the market that is particularly sensitive to inflation and interest rates, so it seems likely that the growing belief in markets that UK and US interest rates have now peaked, has played a role in the recent resurgence of interest in UK mid cap stocks. Jean Roche, portfolio manager of the Schroder UK Mid Cap Fund plc, explains:

“UK mid caps are an inflation-sensitive part of the market, so the recent decline in consumer price inflation data both here in the UK and in the US, is seen as a positive for our sector. Most economists now expect interest rates to fall, with the average forecast

now for a 1% rate cut this year, followed by another 1% in 2025. This appears to have prompted renewed interest in UK mid caps in recent weeks but, given the extent of undervaluation that we see, this could be the start of a much longer-term trend.”

BID PREMIUM

Jean also points to the prospect of continued merger & acquisition (M&A) activity as a reason for optimism. M&A activity has been elevated in recent years, as foreign buyers and private equity have been keen to take advantage of the UK’s depressed valuations. Indeed, in 2023, UK M&A transactions carried an average price premium of 51%, which reflects how under-valued UK equities have become.

Due to their size, small and mid-sized companies are much more likely to become acquisition targets than large companies. Despite this, the number of bids being received by UK mid cap companies was surprisingly low last year. This may signal pent-up demand, which could point to greater M&A activity among UK mid caps over the next couple of years.

SHRINKING MARKET

UK businesses are also showing tremendous capital discipline in buying back their own shares to take advantage of their current undervaluation. Jean is positive on share buybacks, as long as they are done at the right price.

performance

“Of all the uses of cash flow, share buybacks are among the most attractive if they are conducted when a company’s share price is depressed. We are delighted to see more share buybacks among selected UK mid caps because it demonstrates sensible capital allocation decision-making in the current environment.

Within the Schroder UK Mid Cap portfolio, financial holdings Man Group and Paragon have both been actively buying back their shares recently and generating high returns from doing so. Meanwhile, industrial business Bodycote was intending to acquire another company but has subsequently decided to buy back its own shares instead, because the return it can generate from doing so is even greater. This demonstrates excellent capital discipline, which we believe is reflected across much of the portfolio.”

Nearly a quarter of UK mid cap stocks bought back at least 1% of their outstanding shares in 2023, which is significantly higher than the historical average. In its own right this could be a catalyst for improved share price performance because share buybacks mean more demand for UK equities, along with a diminishing supply. In simple economic terms, increased demand and lower supply tends to be reflected in higher prices. Share buybacks in aggregate could, therefore, represent a very significant buyer of UK equities, which the chart above suggests has been absent for many years.

BEYOND THE CATALYST

Investors often wish to see the presence of a catalyst before taking advantage of an evident valuation opportunity, but this can mean missing out on the early gains. Catalysts are, by their very nature, shortterm market factors, but it pays to take a long-term view when it comes to equity investing. Ultimately, financial markets have an uncanny habit of becoming more rational in the end, and the presence of shorter-term valuation anomalies will always present opportunities for disciplined active investors to try to capture.

In the meantime, Jean is keen to point out that shareholders in Schroder UK Mid Cap Fund are being well-rewarded for their patience.

“The fund aims to deliver an attractive total return to shareholders, and we’re confident that it is wellpositioned to do that. An important element of that total return comes from the income that flows from the companies in the portfolio. The current yield is 3.5% and the level of dividend growth has been exceptional too. We’ve delivered 13% annualised growth in the dividend since 2004.

This means shareholders are being paid to wait for UK equities to enjoy their moment in the sun again. We believe this will happen in the end, but the timing is, as ever, uncertain. Longer-term, if we continue to focus on identifying high quality, financially robust, well-managed businesses with solid growth prospects, we believe the market

will ultimately value them more appropriately. Investors have historically been well-rewarded by this approach, despite the UK being increasingly unloved over the last ten years. This leaves us feeling very optimistic about what we can deliver in the years

SCHRODER UK MID CAP FUND PLC RISK CONSIDERATIONS:

The trust Invests in smaller companies that may be less liquid than larger companies and price swings may therefore be greater than investment trusts that invest in larger companies.

The trust will invest solely in the companies of one country or region. This can carry more risk than investments spread over a number of countries or regions. As a result of the fees and finance costs being charged partially to capital, the distributable income of the trust may be higher but there is the potential that performance or capital value may be eroded.

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ahead, with a more favourable valuation tailwind behind us.”

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Why have renewable energy funds performed so poorly?

We look at the reasons and assess the implications for investors

Rewind to 2020, five years on from the landmark Paris Agreement to combat climate change, and aside from the pandemic the big stories in markets were the ‘climate emergency’ and the ‘energy transition’.

Although the Glasgow COP26 conference had to be postponed until 2021 due to Covid, there was no shortage of high-profile events from Manchester’s virtual four-day Green Summit to the WEF (World Economic Forum) Green Horizon Summit and the UN (United Nations) Climate Ambition Summit in London.

Speaker after speaker set out how their country was contributing to the global ‘pathway’ towards a greener planet, and it was a banner year for renewable stocks with the MSCI Global Alternative Energy index more than doubling.

Since then, the same index has lost roughly half its value and many funds and investment trusts have suffered even bigger drawdowns.

Shares went looking for answers as to why alternative energy and energy efficiency have been such poor investments.

WHY THE UNDERPERFORMANCE?

Alternative energy stocks have had a poor run over the last three years, particularly relative to the MSCI World index, only some of which can be put down to the extraordinary performance of the Magnificent Seven which now make up a significant part of the global benchmark.

By comparison, three quarters of the MSCI Alternative Energy index is made up of utility and industrial stocks, while it is overweight smallcaps and heavily underweight the factors which have driven global markets to new highs, namely momentum, low volatility and quality (as measured by balance-sheet strength).

For renewable energy infrastructure and energy efficiency funds in general, another major headwind has been the sharp increase in interest rates over the past couple of years which has had the twin

effect of raising the cost of capital while reducing the attractiveness of their yields.

This has led to an exodus of investors into fixedincome securities including, ironically, ‘green bonds’, which for many tick the ‘responsible’ box without the hassle of owning green assets.

Compounding matters, the rebound from the pandemic in 2021 followed by the invasion of Ukraine in February 2022 sent oil and gas prices soaring, meaning the world’s focus turned from the ‘energy transition’ to ‘energy security’ with countries scrambling to secure supplies of fossil fuels.

As a result, sustained high energy prices have gifted mainstream oil and gas companies bumper profits, and although their share prices have risen they still look cheap on conventional metrics such as free cash flow yield, price-to-earnings and dividend yield.

In contrast, many renewable energy companies have struggled to grow their earnings over the same period, assuming they were profitable to begin with.

Therefore, investors looking to diversify their portfolios don’t have to stray too far from the shore

Gross returns in $ from Jan 2009 to Jan 2024

MSCI Alternative Energy index has lagged MSCI World for more than a decade

Not a bit of it, sadly, even with over a million acres of the Texas Panhandle, home to 85% of the state’s cattle, and parts of Oklahoma currently being consumed by a fire so large it can be seen from space.

While the Biden administration has done a remarkable job of pushing environmental awareness to the forefront with $200 billion of projects under the 2022 IRA (Inflation Reduction Act), which is aimed at reducing carbon emissions and investing heavily in renewable power, few voters today would put climate change near the top of their list.

As one environmentalist wryly put it to Bloomberg, ‘The climate movement doesn’t have a persuasion problem as much as it has a turnout problem.’

In other words, while everyone knows there’s a need to limit our emissions and fight climate change, on the list of day-to-day needs it hardly ranks up there with food, heating or keeping a roof over our heads.

More concerning, there has been a fierce political backlash against ‘green’ and environmentally responsible strategies in the US led by the Republican party and traditional energy companies.

if they want to find ‘value’, and big oil and gas companies have another key advantage in terms of the liquidity of their shares.

CLIMATE CHANGE NO LONGER A HOT-BUTTON ISSUE

Considering the US goes to the polls this year, and the country faced at least 28 natural disasters each costing $1 billion or more in 2023, the hottest year in its history, you might think the environment would be high on the list of voters’ and candidates’ priorities.

Bloomberg reports that, at the state level, there have been more than 160 proposals largely attributable to Republican lawmakers seeking to ban investors and companies from considering ESG factors when making financial decisions.

No doubt cognisant of the risk of politicallymotivated attacks if they continue to take climaterelated investment decisions, last month three of the largest US wealth managers – JPMorgan Asst Management, State Street Global Advisors and Pacific Investment Management – withdrew from CA100+, the world’s biggest investor coalition on climate change.

‘Each asset manager gave its own, delicately

phrased account for its actions, but the subtext was plain,’ said Bloomberg. ‘The Republican and fossil-fuel industry war on environmental, social and governance investing strategy makes taking climate action harder for investors.’

WHAT HAS THIS MEANT FOR INVESTORS?

Taking the AIC’s (Association of Investment Companies) Renewable Energy Infrastructure sector, which is made up of more than 20 trusts

with combined assets of over £20 billion sector, as our base, it is clear that not only have asset values suffered as a result of the tide turning against alternative energy but share prices have suffered even more.

The average discount to NAV (net asset value) on an unweighted basis across the 21 funds in our table is 32%, while adjusting for size of funds the discount is still somewhere in the high 20% range.

For the billion-pound-plus companies the future

Table: Shares magazine

Source: Association of Investment Companies, data correct as of 5 March 2024

SOME KEY DATES FOR INVESTORS IN RENEWABLE ENERGY TRUSTS:

25 March - Octopus Renewables full-year results

April - Greencoat UK Wind continuation vote

May - US Solar continuation vote

June - Foresight Solar continuation vote

August - NextEnergy Solar continuation vote

September - JLEN continuation vote

looks reasonably secure as they have access to funding, but for many smaller trusts the odds on them continuing in their current form appear slim.

In December, Triple Point Energy Transition (TENT) bit the bullet and proposed a managed winddown to maximise shareholder value, with investors set to vote on selling off the assets ‘in an orderly manner’ at a general meeting on 22 March.

Last week, Harmony Energy Income Trust (HEIT) revealed it was considering how best to deliver value to shareholders over the short term, including selling some assets to ‘demonstrate to the market the true value of the portfolio and the continuing disconnect with the share price’.

While this is a nice idea, if commercial property companies are any guide even selling assets at a premium to their last published NAV does little to influence share prices in the short term.

However, as we have seen with other areas of the investment trust universe, including commercial property, mergers may be a way out for investors.

In February, Aquila European Renewables (AERI) – whose shares are down 22% over the last year – revealed it was in talks with ‘multiple interested parties’ over a merger and was beginning the due diligence process.

One of the interested parties is Octopus Renewables Infrastructure (ORIT), whose

shares are down a slightly less painful 14% over the past year, although the trust cautioned talks were at an early stage.

Analysts at Stifel suggest that as well as Aquila’s underperformance the decision to seek a combination with a rival may have been driven by its forthcoming continuation vote.

Continuation votes are usually triggered if the average discount to NAV exceeds 10% in a financial year, and the team at Stifel have identified five renewable trusts which they believe are likely to have to hold a vote this year.

‘Most shareholders will not want to put the funds into wind-up in the months ahead, given pricing for portfolio disposals is unlikely to be optimal and many investors own the funds for long-term dividend income,' surmise the analysts.

‘However,’ they add, ‘given wide discounts, we do think a number of shareholders may suggest boards provide some sweeteners in order to gain their support in these votes. This may include fee reductions and proposals to return cash to investors, possibly when assets are realised from portfolios.’

By Ian Conway Deputy Editor

Fidelity European Trust PLC

Chosen by AJ Bell for its Select List

Fidelity European Trust PLC aims to be the cornerstone long-term investment of choice for those seeking European exposure across market cycles.

Aiming to capture the diversity of Europe across a range of countries and sectors, this Trust looks beyond the noise of market sentiment and concentrates on the real-life progress of European businesses. It researches and selects stocks that can grow their dividends consistently, irrespective of the economic environment.

Holding a steady course throughout market cycles

It is an uncertain time for the world and particularly for Europe. It is however vitally important for investors not to be blown off course. Good companies are still good companies and finding them remains the ‘secret sauce’ of any effective investment strategy.

We will remain focused on the companies in which we have invested and, in particular, on their ability to continue to grow their dividends. As always, we will ask ourselves if that rate of dividend growth is already discounted in the share price.

Performance over five years

We continue to seek new opportunities to add to the portfolio at the right price and remain confident in those names we currently hold. This approach has historically served the portfolio well - including through the recent volatility of the last few months - and we see no reason to change course.

To find out more visit www.fidelity.co.uk/europe

Past performance is not a reliable indicator of future returns.

Source: Morningstar as at 31.01.2024, bid-bid, net income reinvested. ©2024 Morningstar Inc. All rights reserved. The FTSE World Europe ex-UK Total Return Index is a comparative index of the investment trust.

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of an investment in overseas markets. This trust can use financial derivative instruments for investment purposes, which may expose them to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. 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.

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Currys batting off bid interest is something to be welcomed

Electronics retailer rejected two approaches from private equity outfit before it walked away

This column signed off last week by bemoaning telecoms testing specialist Spirent Communication’s (SPT) surrender to a £1 billion from US rival Viavi.

As we observed, the 61% premium was not anywhere near as generous as it looked when you consider the takeout price of 172.5p was 100p less than the shares were trading for in early 2023.

In the same spirit it is only right to welcome Currys’ (CURY) refusal to give in to what looked like a pair of opportunistic bids from private equity firm Elliott Advisors.

Elliott had initially proposed an offer that valued the electricals chain at £700 million (62p), and then raised it to £757 million (67p), but after Currys rebuffed it for a second time it decided to walk away.

While these bids were pitched at a premium, they were a long way below the levels Currys traded at just a couple of years ago.

There may still be interest from Chinese e-commerce firm JD.com, which revealed it was mulling a bid in February, and the managers of Currys’ holder JOHCM UK Equity Income Fund (B8FCHK5) James Lowen and Clive Beagles observed recently: ‘For Curry’s, our current view based on known information is an acceptable offer would be in the range of 80-100p. This compares to an undisturbed share price of 47p, which would be close to a 100% premium. At 90p, the market cap would be around £1 billion.’

Investors can read an in-depth interview with Currys in our bumper Christmas issue. Management will be under extra pressure to deliver if the company is not taken over but there are reasons to believe any disappointment over the collapse of the deal in the short term may be eased in the long term if Currys can deliver on its strategy.

True, the firm has been hit by a slowdown coming out of the pandemic as spending on electronic goods was pulled forward before easing off, and it has made a bit of a mess of things in the Nordics, which had historically been a dependable contributor to group earnings.

However, Currys is the only big specialist electronics retailer in the UK with a significant footprint of physical stores. You can see a role for the broad-based support Currys can provide to shoppers who might feel out of their depth making decisions on domestic tech.

In our view it would be welcome if UK management teams steeled themselves to ward off interest brought about by the cheap valuations afforded their shares, both in the long-term interests of their own shareholders and the market as a whole.

INVEST IN THE COMPANIES SHAPING OUR FUTURE

A market-leading range of funds, built around the structural trends that are re-defining our world

Our funds offer investors unbeatable access to the cutting-edge megatrends shaping our future

INVESTMENT PROCESS

Designed in partnership with leading impact research and data providers, impact is at the heart of the methodology underpinning our funds.

Robust impact analysis ensures that only the highestrated companies are selected for our funds.

CIRCA5000 is a thematic investment specialist.

We believe the world’s biggest challenges are also the biggest return opportunities. From renewable energy to vertical farming and access to housing and healthcare, these trends are rapidly transforming the global economy. Through our in-depth research we offer investors unrivaled access to these future trends in their purest form.

We have built CIRCA5000 for investors that demand full transparency, clear data to support every claim and active engagement with the companies within our funds.

STEP 1

Initial Screening

We screen the global equity universe for companies that are aligned to each theme. Additional filters are applied to weed out any businesses involved in controversial activities.

STEP 2

Impact Analysis

The remaining companies in each theme are then meticulously analysed to identify those companies with the most direct exposure to the given area. Any company not deemed to have a materially positive impact is removed.

STEP 3

Final Fund

Only companies with measurable direct links to the theme remain in the universe. The final fund is weighted using a combination of market capitalisation and scoring from our research.

Our investment process produces 5 market-leading funds built around the structural trends that are redefining our world.

C5KW

Clean Water & Waste

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Green Energy & Technology

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CIRCA5000 has been a certified B Corp since 2019. In both 2021 and 2022 CIRCA5000 was recognised by B Lab as ‘Best For The World: Customers’, scoring in the top 5% of B Corps globally for services to our customers. In 2023, we were awarded ‘Best For Sustainable Investors’ by Boring Money and ‘New ETF Issuer Of The Year’ by ETF Stream.

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Disclaimer : Issued by CIRCA5000 UK Ltd. Registered in England and Wales, company no. 13214839. Registered office: 86-90 Paul Street, London, United Kingdom, EC2A 4NE. CIRCA5000 UK Ltd is an appointed representative (FCA reg no. 950019) of CIRCA5000 Ltd, who is authorised and regulated by the Financial Conduct Authority (FCA reg no. 846067). Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by CIRCA5000. The CIRCA5000 ICAV is an open ended Irish collective asset management vehicle which is constituted as an umbrella fund with variable capital and segregated liability between its sub funds and registered in Ireland with registration number C -491100 and authorised by the Central Bank of Ireland as a UCITS. The manager of the ICAV is Carne Global Fund Managers (Ireland) Limited, who is authorised and regulated by the Central Bank of Ireland, reference number C 46640. The ICAV is a recognised scheme under section 272 of the Financial Services Market Act 2000 and so the prospectus may be distributed to investors in the UK . Thematic Risk: The Fund may be subject to the risks associated with, but not limited to, investing in companies with a material exposure to the climate transition. These risks include the obsolescence of intellectual property as technology evolves and changes in regulation or government subsidies that may affect the revenue or profitability of a company Derivative Risk: The Fund may invest in Financial Derivative Instruments (FDIs) to hedge against risk , to increase return and/or for efficient portfolio management. There is no guarantee that the Fund’s use of derivatives for any purpose will be successful. Derivatives are subject to counterparty risk (including potential loss of instruments) and are highly sensitive to underlying price movements, interest rates and market volatility and therefore come with a greater risk . Sustainability Risk: The Manager, acting in respect of the Fund, through the Investment Manager as its delegate, integrates sustainability risks into the investment decisions made in respect of the Fund. Given the investment strategy of the Fund and its risk profile, the likely impact of sustainability risks on the Fund’s returns is expected to be low. Currency Risk: Some of the Fund’s investments may be denominated in currencies other than the Fund’s base currency (USD) therefore investors may be affected by adverse movements of the denominated currency and the base currency. Market Risk: The risk that the market will go down in value, with the possibility that such changes will be sharp and unpredictable. Operational Risk: The Fund and its assets may experience material losses as a result of technology/system failures, human error, policy breaches, and/or incorrect valuation of units. Capital at risk . The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. All features described in this fact sheet are those current at the time of publication and may be changed in the future. Nothing in this fact sheet should be construed as advice and it is therefore not a recommendation to buy or sell investments. If in doubt about the suitability of this product, you should seek professional advice. No investment decisions should be made without first reviewing the key investor information document of the Fund (“KIID”) which can be obtained from www.circa5000.com This marketing material is only directed at investors resident in jurisdictions where this fund is registered for sale. It is not an offer or invitation to persons outside of those jurisdictions. We reserve the right to reject any applications from outside of such jurisdictions.

Is the British ISA an investor’s friend or a flop?

Looking at the issues surrounding the newly launched tax wrapper

The introduction of a new British ISA was announced in the Budget, in a bid to revive the UK’s flagging stock market.

The BRISA, as it has already been dubbed, will only allow money to be invested in UK stocks and bonds. The Government hopes to boost the performance of UK shares by restricting investment in this way and stop companies sloping off to the US stock exchange. It’s a laudable aim, but almost certainly misguided.

WHAT’S THE GOOD NEWS

First, the good news. The British ISA means investors will have an extra £5,000 ISA allowance to invest in UK stocks, on top of the £20,000 they can invest elsewhere. A bigger ISA allowance is definitely welcome, as the maximum allowance has been frozen since 2017. But it would have been much better if the government had simply raised the standard Stocks & Shares ISA allowance rather than introducing a brand-new account. The British ISA will be the sixth type of ISA available on the market, so it’s an added layer of complexity investors don’t need.

It also sets a worrying precedent of the state

dictating where investors can put their money if they want to protect it from tax. They are trying to do this with workplace pension schemes too. What happens when a government wants to encourage more investment in private equity, renewable energy, or defence companies? Do we get new ISAs for those too? That’s a lot of ISA clutter.

More concerning is the prospect that instead of increasing the ISA allowance, which costs the Exchequer money, they start encroaching on the existing ISA allowance with restrictions on where it could be invested. This was mooted in the run-up to the Budget.

INVESTORS SHOULD HAVE FLEXIBILITY TO INVEST AS THEY CHOOSE

The bottom line is investors should be able to invest where they want, based on their risk profile and where they see the best opportunities. Attaching investment restrictions to ISAs encourages people to let the tax tail wag the investment dog. In other words, choosing investments based on saving tax rather than because of conviction in the market.

The BRISA adds complexity to running a portfolio because it’s another limiting factor to consider.

Fast forward five years and an investor might want to dial down their UK exposure, but the BRISA restrictions could leave them the choice of moving investments out of the tax shelter to invest them as they see fit or abandoning their investment plans in the interests of tax efficiency. No-one wants the headache of deciding whether a global fund held outside an ISA will return more after tax than a UK fund held within the tax shelter.

YOU CAN ALREADY INVEST IN THE UK WITHIN AN ISA

In practice, it’s of course already possible to invest in UK stocks within the existing Stocks & Shares ISA framework. Indeed, many people already do. Looking at AJ Bell’s ISA customers, half the ISA money they invest goes into UK assets. While performance of the UK stock market hasn’t been great recently, it’s still an attractive source of dividends. Smaller and medium-sized companies have also shone brightly over the long term. And while the UK is currently unloved, its low valuation provides some protection from falls, and some upside should sentiment shift in a more positive direction. There are good reasons to invest in the UK, it’s just past performance isn’t one of them. But as we know, that’s not a reliable guide to the future.

The high weighting ISA investors already have in UK assets suggests the BRISA won’t be successful in creating a seismic shift towards UK shares. ISA savers would have invested in them anyway. The BRISA will also likely only come into play for investors who have maxed out their £20,000 standard Stocks and Shares ISA allowance. There’s about a million of them at the last count. On the heroic assumptions all of them invest £5,000 into a BRISA, and don’t simply replace money they would have invested in the UK anyway, that’s an extra £5 billion or so going into UK stocks each year. Sounds like a lot, but the value of the FTSE All Share is currently £2.3 trillion. The BRISA won’t touch the sides.

WHEN WILL IT BE INTRODUCED

In terms of timing, the BRISA isn’t going to be introduced this April. There’s a consultation on how to implement it, as there are plenty of design

The BRISA, as it has already been dubbed, will only allow money to be invested in UK stocks and bonds

challenges to overcome. The consultation closes in June and given the proximity of a general election and the fact the Labour party is committed to ISA simplification; the BRISA may never hit the shelves. The best-case scenario? The £5,000 extra is just added to the standard ISA allowance.

One thing which definitely is happening in April is tax bands will be frozen once again, and the dividend allowance and capital gains tax allowance will be cut back, to £500 and £3,000 respectively. There’s still a generous ISA allowance out there which protects your investments from tax, and you can put as much as you like in UK stocks, 5 April is the deadline for contributions in this tax year.

By

Laith

Khalaf AJ Bell Head of Investment Analysis

Taking British success stories overseas: can Greggs succeed?

History is littered with UK companies that could not make it work in a foreign land

Full-year results from Greggs (GRG) on 5 March painted a picture of a company doing so well in its domestic territory that one has to ask when it might export the successful business model abroad.

Greggs’ profits and market share are growing, it is investing in manufacturing and distribution expansion, and shareholders are getting a special dividend. While the company is confident it can add at least another 500 stores in the UK, it will not take long to roll out these extra sites if you consider it is targeting 140 to 160 net openings in 2024 alone. So, what next?

The company’s operations are like a welloiled machine so it makes perfect sense to spread its wings further afield. There is talk that Greggs has a small team looking at overseas locations which might suit its proposition but details have been thin.

While this sounds exciting, UK companies have a mixed history of succeeding overseas, including Greggs which has previously tried and failed to crack the Belgian market. It was a much smaller business at the time and renewed foreign expansion now would come with greater knowledge and a honed skillset.

WHAT HAPPENED LAST TIME?

Greggs previously spent five years seeing if its proposition would be successful enough in Belgium to be a springboard into other European locations such as a France and Germany. The acquisition of a small chain of five cafes in Brussels during 2007 took its store count to 11 sites, but a year later it decided to abandon the strategy and stick to the UK.

The company originally announced in 2003 that it was ‘taking buns to Belgium’ which is a bit like a foreign retailer setting up shop in Newcastle to sell sausage rolls. Locals will always prefer their homegrown offering and even the simple task of creating a sweet bun was going to be an uphill struggle for Greggs in a foreign land.

Will it be different this time? It depends on the location, competition and whether the local culture is a match for Greggs. The idea of quick service, affordable prices and convenience should have global appeal but success is not a given.

Here are four reasons why UK retailers have struggled with foreign expansion, together with examples of companies that have cracked it.

FOUR REASONS WHY UK RETAILERS STRUGGLE OVERSEAS

1. Failing to understand what the customer wants UK retail companies dream of making it big overseas, particularly if they think their business model can work in a foreign country. One thing they often underestimate is whether the market needs another entrant as competition might already be plentiful.

Tesco (TSCO) found out the hard way when it planted flags in the US via the Fresh & Easy brand in 2007. It was hard going to compete with the likes of Walmart and Trader Joe’s, and Tesco also misunderstood how US consumers liked to shop. At the time, they preferred to buy in bulk rather than the small pack size offered by the UK entrant. Selfservice tills were a mistake by Tesco as US shoppers did not like them. It exited the business in 2013.

2. The economics do not stack up

In the UK, retailers often take a cautious approach to expansion and only sign leases on new buildings if they can get a good deal. This careful strategy sometimes goes out of the window if the management team are overly excited about

EXAMPLES OF BRITISH COMPANIES THAT HAVE THRIVED OVERSEAS

JD Sports (JD.). Founded in the early 1980s, JD has gone from a single shop in Bury to now running more than 3,000 stores across the UK, Europe, Asia Pacific and the US.

It has capitalised on demand for trainers and athleisure, while augmenting growth through various acquisitions including US retailer Finish Line in 2018 which gave it a position in North America.

overseas expansion. There is a danger they pay too much for a shop, for example, and cannot generate the returns needed to make it profitable.

For example, critics attribute HMV’s failure in the US to poor real estate decisions which meant stores were uneconomical to run.

3. Failure to differentiate

There is no point setting up in a different country if your product is identical to something already on the market. It is much better to spot a gap in the market than go head-to-head with an established player.

Pret a Manger is a good example of a British company that has embraced such an opportunity. While coffee shops are on every street corner in the

WH Smith (SMWH). It is a case of second-time lucky for WH Smith with overseas interests. Twenty-odd years ago, the company sold its 155 stores in 23 North American airports and retreated from Asia. Things were not going very well and the company had to rethink its approach.

JD is one of the few retailers to still have a vibrant bricks and mortar operation in addition to a successful online channel. Key to its success has been product and marketing relationships with big brands, meaning it has been able to get the right stock at the right time.

Today, it has a presence in over 30 countries including stores in large airports as well as in hospitals and train stations in places such as Europe, Australia, UAE and India.

Its purchase of Marshall Retail Group in 2019 gave it another chance to go big in the US and now the travel-related operations are the key growth engine for the group. The travel stores benefit from having a captive audience –people have limited choice and little time to shop around, so they buy what is available and these items tend to have a higher-than-normal price.

Daniel Coatsworth: UK firms expanding overseas

US, there is a gap in the market for something that combines hot drinks with superior quality packaged sandwiches.

Traditionally, a US consumer would go to a deli and buy a decent sandwich which is made to order. Less common is the ‘food on the go’-type product from Pret, one that is already made and where the customer can be in and out of the shop in a matter of minutes. The bulk of Pret’s US stores are located in New York, but it has struck a deal with franchise partner Dallas International to go further afield in the country.

4.Being inefficient with logistics and warehousing Retailers ASOS (ASC) and Dr Martens (DOCS) have both experienced problems with their US warehouse and distribution operations in recent years, causing a knock-on effect that hurt their efforts to be bigger companies in the country.

ASOS underestimated demand as it expanded into the US, and its warehouse saw orders pile up and cause delays to shipping. That meant it had to freeze advertising and marketing campaigns while it sorted out the problem.

Dr Martens made ‘people and process’ errors by shipping too much stock too quickly in the US, causing bottlenecks at a distribution centre and in turn experiencing problems getting products to wholesale customers. It then saw wholesalers become reluctant to hold large volumes of its footwear amid signs of US consumer weakness.

By Daniel Coatsworth AJ Bell Editor in Chief and Investment Analyst

to fees, taxation and charges within the Trust and the investor will receive less than the gross yield. Investors should read and note the risk warnings in the Company’s Key Information Document (KID). Copies of the KID and Report & Accounts are available on Lazard Asset Management’s website or on request. The tax treatment of each client will vary and you should seek professional tax advice. The Trust is listed on the London Stock Exchange and is not authorized or regulated by the Financial Conduct Authority. This information has been issued and approved by Lazard Asset Management Limited and does not in any way constitute investment advice. The company currently conducts its affairs so that the ordinary and subscription shares in issue can be recommended by financial advisers to ordinary retail investors in accordance with the Financial Conduct Authority’s (“FAC’s”) rules in relation to non-mainstream investment products and intends to do so for the foreseeable future.

Can I take a 25% tax-free lump sum if I’ve started drawing on defined benefit pension scheme?

Explaining the complicated set of rules governing the relief available on your retirement pot

I took my pension from my defined benefit scheme in 2017. At the time I chose not to take any cash lump sum.

I also have a SIPP which I have not yet touched. So, my question is – can I take a quarter of my SIPP as tax-free cash?

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

A few weeks ago, I explained the lifetime allowance is being abolished from April this year and replaced with two new allowances – the lump sum allowance and the lump sum and death benefits allowance which limit the amount of tax-free lump sums pension savers and their beneficiaries can receive.

Those who have already taken some of their pension before 6 April 2024 but also want to take some more pension afterwards are subject to special rules. A calculation is needed to help these people work out how much of these two allowances they have left (given they have already taken some of their pension benefits).

The standard calculation assumes everyone took 25% of their benefits as tax-free cash. But that isn’t always the case. Sometimes people take less than that: because that’s the way the pension scheme rules worked, or perhaps because they chose not to take any cash or chose to take a lower amount.

These people would be unfairly treated under the standard calculation so HMRC is going to let them apply for a certificate that would put them in the correct tax position.

Instead of applying a straight 25%, the certificate shows the exact amount of tax-free lump sums a

25%

pension saver has already received. If they give the certificate to a pension scheme when they first take pension benefits after 6 April 2024, the pension scheme will work out their correct lump sum allowance.

HOW IT WOULD WORK IN PRACTICE

The easiest way to explain this is through an example.

If a pension saver had already taken a pension from their scheme but no cash, and in doing so used up 70% of their lifetime allowance, then the standard calculation would work out their remaining lump sum allowance as:

£268,275 – (25% x 70% x £1,073,100) = £80,483

That is unfair. It reduces their lump sum allowance when they have not taken any tax-free cash.

If they apply for a transitional certificate from their pension scheme then this would show they

Ask Rachel: Your retirement questions answered

have not taken any tax-free cash at all. They would then be entitled to their full lump sum allowance of £268,275.

This may sound a perfect solution, but I strongly urge all readers to proceed very carefully if they think this may be right for them. Once they have applied for a certificate, there is no going back, they cannot cancel it or ignore it.

Once they have applied for a certificate, there is no going back, they cannot cancel it or ignore it”

In some cases, savers may find they get back more tax-free lump sum allowance by relying on a certificate. In other cases, they may find their allowance is lower by using the certificate. But by that point it is too late.

Pension savers must think very hard before applying and ask a regulated financial adviser for help if they need it.

NEED FOR ‘COMPLETE EVIDENCE’

If they do want to apply for a certificate, they will need ‘complete evidence’ of all the tax-free

lump sums they have already taken from their pension scheme. This may mean going back to the scheme and asking for confirmation from them on some details.

A certificate can only increase a pension saver’s lump sum allowance. They will still be restricted to taking a quarter of any untouched pension pot as tax-free cash and will need enough untouched pension funds to take advantage of any higher limit.

Pension savers can apply for a certificate from any scheme they are a member of – including the scheme they originally took their pension benefits from before April 2024, or the scheme they want to take pension benefits from for the first time from this April.

Finally, they need to apply for a certificate before they take a lump sum from their pension scheme after 6 April 2024. Once they have taken a lump sum the window to apply for a certificate is closed.

Nearly four decades of bottom-up fundamental investing.

“VALUABLE, UNIQUE AND USEFUL” VT ARGONAUT ABSOLUTE RETURN FUND

Before buying a fund an investor should ask: What’s the fund trying to achieve? What’s the evidence it can achieve this? Why is the fund useful? Are the risks tolerable? And does the fund constitute good value for money?

The VT Argonaut Absolute Return Fund is a long/ short[1] equity fund aiming to achieve double-digit annual returns in a risk profile which is uncorrelated to the stock market. Our ability to achieve this consistently makes our returns valuable, unique, and useful.

Since 2019 we have witnessed both rising and falling markets, whilst managers with different investment styles have gone in and out of fashion. Ours is the only fund in the UK industry – containing over four thousand regulated funds – to have achieved doubledigit annual returns in each of the last five calendar years.[2]

VT Argonaut Absolute Return Fund

also means the Fund has done less well in rising markets. Nevertheless, it has beaten a 5-year bull market without any correlation tailwind, instead by delivering when the going got tough.[5]

Cumulative performance in negative months only

1/c performance rebased to 100

MSCI Europe € VT Argonaut Absolute Return £

The main contributing factor has been our ability to spot risk: identifying overrated companies that will fall in price; managing portfolio risk through appropriate position sizing and diversification; and having an evolving bigger picture view, which has helped us avoid the elephant traps.

The Fund has performed particularly well in difficult markets. Since 2019, there have been 24 months when the market[3] delivered negative returns, cumulatively -59%, during which the Fund delivered an average positive return of +3.2%, cumulatively +109%.[4] This

[2]

[3]

[4]

We agree that the only “free lunch” in investing is “diversification”. For this reason, we advocate investors hold the Fund alongside other assets. Good diversification reduces risk but not at the cost of lower returns.

Actively managed funds will always have higher production costs than passive. But all fees are always accounted for in the Fund price and performance, so what constitutes good value is easily assessed.

Whilst we all want to pay as little as possible, this is different from value-for money. I know that if I fly Ryanair from Stansted at 6 am the flight will be cheap, but I am less sure it would constitute good value.

For further information please visit www.argonautcapital.co.uk

The value of the Fund is not guaranteed and may fall as well as rise. As your capital is at risk you may get back less than you originally invested. Past performance is not a reliable indicator of future performance.

[5] GBP (GBP FX hedged) I Acc Share Class. Source: Lipper, Argonaut. Since 2019 to 29 February 2024 the Fund has beaten UK, European and Global stock market indices with a negative correlation.

Important Information

Retail investors should seek further advice before investing. Valu-Trac Investment Management Limited is the Authorised Corporate Director (ACD) of VT Argonaut Funds and is authorised and regulated by the Financial Conduct Authority. Registered office: Level 13, Broadgate Tower, 20 Primrose Street, London, EC2A 2EW. Investors should refer to the Key Investor Information Document (KIID) and Supplementary Information Document (SID) before investing. For a copy, please telephone Valu-Trac Investment Management Limited on 01343 880 217 or visit www.argonautcapital.co.uk.

This communication is for general information purposes only and does not constitute professional advice. Argonaut Capital Partners accepts no responsibility for any loss arising from reliance on the information it contains. The value of shares and any income from them can fall as well as rise and is not guaranteed.

Issued by Argonaut Capital Partners LLP. Registered in Scotland No. S0300614. Registered office: 4th Floor, 115 George Street, Edinburgh, EH2 4JN. Argonaut Capital Partners LLP is authorised and regulated by the Financial Conduct Authority.

WHO WE ARE

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:

Daniel Coatsworth Danni Hewson Laith Khalaf

Laura Suter

Rachel Vahey Russ Mould

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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Shares publishes information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters. Comments published in Shares must not be relied upon by readers when they make their investment decisions. Investors who require advice should consult a properly qualified independent adviser. Shares, its staff and AJ Bell Media Limited do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions.

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NextEnergy Solar Fund is driven by a mission to lead the transition to clean energy.