GOLD SHINING: What next for the precious metal as it marks record highs?
05 EDITOR’S VIEW
What Sainsbury’s convenience price match ploy tells us about the supermarkets
07 Market rallies as Trump secures clear victory in US presidential election 08 ‘Magnificent Seven’ hand markets the good, the bad and the ugly 10 Is Berkshire Hathaway’s record cash pile telling investors to be cautious?
Why the investment trust consolidation trend is set to continue
AstraZeneca shares fall ahead of thirdquarter update
14 Has Home Depot defied the DIY slowdown?
15 Markets eye further rate cuts ahead of inflation and consumer price data
GREAT IDEAS
17 Tesco could generate substantial shareholder returns over the next five years
19 JD Wetherspoon shares are much too cheap given its growth prospects
22 Why you should hoover up shares in SharkNinja FEATURES
24 The pros and cons of investing in gold and where the price could go next
35 Can education media group Pearson win the AI battle? 40 DAN COATSWORTH
Why the UK stock market could get a new look in 2025
How to protect yourself from the capital gains
Three important things in this week’s magazine
AI goes nuclear
Why
The pros and cons of investing in gold
The precious metal is at all-time highs, why do people invest in
and what are the options available to do
Big Interview with Pearson
The publishing group has experienced big change in recent years. Shares sat down with CFO Sally Johnson to find out how it is dealing with the AI challenge.
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:
What Sainsbury’s convenience price match ploy tells us about the supermarkets
Customers and shareholders can both do well at the same time in the grocery space
Ican’t be the only person who walks down the aisle of a local convenience-style supermarket and finds their jaw dropping at some of the prices.
For anyone without a car and/or uncomfortable with buying online, and therefore reliant on these outlets for their weekly grocery shop rather than just picking up bits and pieces, the extra cost is significant. Consumer group Which? reckons you’re talking about an extra £800 per year compared with ordering from or shopping in a big supermarket.
So, for people in this situation, news Sainsbury’s (SBRY) is extending its Aldi Price Match scheme to its convenience estate is significant. It could also be significant for the sector. Particularly if it Sainsbury’s sees more people coming through the doors as a result.
In an industry known for cut-throat competition, initiatives which drive sales are often copied. Just look at Tesco’s (TSCO) use of discounted prices for Clubcard members to drive loyalty, most major supermarkets now do the same. The same could be true of offering lower prices in smaller stores.
This demonstrates how genuine competition in a sector can be really beneficial for the consumer. The German discounters Aldi and Lidl have kept the likes of Tesco and Sainsbury’s honest on price but also on quality. The level of choice available to shoppers in the UK when it comes to buying groceries is enviable and they play an important role in feeding the nation. This is not borne out of pure altruism and these companies are not perfect. However, they are a British success story. This is also a mutually beneficial relationship rather than a zero-sum game. The supermarkets may not generate huge margins but they can still create a lot of value for shareholders while offering decent value to customers. Turn to this week’s Great Ideas section to find out why we think Tesco, in particular, has the capacity to do so – both today and into the future.
The decision to offload its steelmaking coal assets in Australia is a first and meaningful step in Anglo American’s (AAL) streamlining strategy under CEO Duncan Wanblad. A response to the hostile takeover attempt from BHP (BHP) earlier this year, Wanblad is looking to sell off the company’s coal, nickel and platinum businesses as well as its De Beers diamond arm.
This would leave it with a focus on copper and iron ore. Despite recent suggestions the company has ‘moved on’, there remains speculation about BHP returning with a new bid after the six-month period mandated by UK takeover regulations elapses at the end of November.
The irony of Wanblad’s efforts to make Anglo a more viable standalone business is they also make it an easier to swallow acquisition and it’s not hard to imagine other suitors coming forward given the importance of copper to the energy transition. Watch this space.
Market rallies as Trump secures clear victory in US presidential election
Stunning comeback for former occupant of the White House sees dollar and Bitcoin surge
The polls had forecast a knife-edge election but as it turned out Donald Trump won a convincing victory in the US presidential election and has completed a stunning political comeback to return to the White House.
The clarity in itself was welcomed by financial markets who had feared a protracted affair with both parties potentially taking some time to concede defeat.
Trump’s vocal support for cryptocurrencies saw Bitcoin surge to new record highs while the dollar strengthened and 10-year treasury yields jumped to 4.406% on the assumption that Trump’s policies, including for sweeping tariffs on imports, will stoke inflation and require interest rates to stay at higher levels for longer.
That sustained a rally in US treasuries which has been in chain since the middle of September when they traded at 3.623%. The desire of a Trump administration to cut taxes and regulation could lend support to US shares. Certainly, that was the pattern in the initial phase of the first Trump administration. However, there may be disquiet after the dust settles on this result about the impact of stubbornly higher rates on businesses and the economy.
Multi-asset portfolio manager at Janus Henderson, Oliver Blackbourn, says: ‘Investors need to be careful that higher-for-longer doesn’t start to become a problem for the economy. A soft-landing feels broadly priced in, but there are cracks in some areas of the economy that may widen if interest rate cuts do not materialise to a large enough degree.’
Alongside the election winners, there were losers. Investors who had backed renewable stocks in the hope a Harris victory would deliver policies helpful to the sector quickly changed tack and shares in relevant companies were on the back foot.
While European equity markets traded higher there were hints of unease elsewhere. The euro dropped 1.5% to $1.0773 due to the potential for US tariffs, which could hit European corporates and result in more rapid interest rate cuts by the European Central Bank.
Asian stocks fell, with the Hang Seng index decreasing by 2.2%, amid heightened tariff threats on Chinese goods and the likelihood of worsening relations with the US under Trump.
Senior investment specialist at Mirabaud John Plassard offered some broader perspective: ‘Election results have little impact on long-term investment returns. Despite the alarmist rhetoric surrounding presidential campaigns, financial markets tend to perform well, regardless of which party is in power.’
Plassard notes that since 1950, the S&P 500 has generated a cumulative return of 359,416% (with dividends reinvested), covering 14 presidents, including seven Republicans and seven Democrats. In other words, a $1,000 investment in the S&P 500 in January 1950, with dividends reinvested, would be worth around $3,594,160 today.
‘This figure shows that investors should not base their strategies on election results, but rather take a long-term view,’ he concludes. [TS]
Calendar third quarter earnings from the so-called ‘Magnificent Seven’ revealed a stark divide this year, with the tech giants delivering mixed results that are reshaping stock performance expectations.
Of the six ‘Magnificent Seven’ stocks that have reported results already, the market didn’t like three; Apple (AAPL:NASDAQ), Microsoft (MSFT:NASDAQ), and Meta Platforms (META:NASDAQ), loved what Tesla (TSLA:NASDAQ) posted, and gave a thumbsup to both Alphabet (GOOG:NASDAQ) and Amazon (AMZN:NASDAQ).
Earnings demonstrate sustained momentum across cloud computing, digital advertising, and hardware. ‘Aside from Apple, which is likely no longer a growth company, the other Mag Seven companies are not only generating impressive top and bottom-line growth today, but the trend is expected to remain in place at least through next year, if not beyond,’ said Sheraz Mian, head of research at Zacks.
Microsoft’s earnings increased more than 10% on a 16% rise in revenues year-on-year, while Meta’s earnings jumped 35% on 19%
revenue growth. Both companies beat top and bottom-line consensus estimates.
‘If one was nitpicking the results from these two companies, then signs of deceleration in Microsoft’s cloud revenues and Meta’s advertising
revenues would be the only operating issues here,’ said Mian. Microsoft’s Azure cloud computing platform saw revenue growth of around 33%, robust but down on previous quarters.
Yet the real issue for investors is the enormous piles of cash Magnificent Seven companies are throwing at AI (artificial intelligence), something that the group remains committed to through 2025 and beyond. Meta, for example, expects to increase AI spending to as much as $40 billion, the company said.
An antidote to these concerns will be evidence of fatter profit margins, an area where Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas Equity Fund (BCLYMF3) sees substantial progress, particularly from Amazon and Alphabet in
latest earnings.
‘Despite the heavy AI investment programme, Amazon succeeded in increasing its operating margin, boosting net income by more than 50%, and doubling its free cash flow.’
Smit also thinks Alphabet’s latest results should put many sceptics’ minds to rest given operating margin increased from 28% to 32% even in the face of elevated AI capital expenditure.
‘Alphabet generated free cash flow of over $17 billion, more than a third in excess of the total capital expenditures. One wonders what else shareholders realistically could have wished for,’ said Smit.
AI chips firm Nvidia (NVDA:NASDAQ) is set to report earnings on 20 November 2024. [SF]
Earnings
share
Is Berkshire Hathaway’s record cash pile telling investors to be cautious?
Third quarter operating income fell 6% to $10.09 billion
It is generally thought that owning shares in conglomerate Berkshire Hathaway (BRKB:NYSE) is equivalent to holding a microcosm of the US economy, given the broad reach of its investments, from insurance to utilities and railroads.
That notion is becoming more nuanced following the revelation by chair Warren Buffett on 2 November that the Omaha Nebraska-based company sold $36 billion of its share portfolio in the third quarter, pushing its cash pile to a record $325.2 billion.
This means cash now represents just over a third of Berkshire’s market capitalisation. While it may provide a defensive buffer against market volatility, it is over 10-times the tactical cash position which Buffett has held historically.
Last quarter marks the eighth consecutive period of net stock sales including another 100 million of Apple (APPL:NASDAQ) shares, representing a cumulative 600 million Apple shares sold in 2024, with the remaining stake worth around $70 billion.
These actions might suggest Buffett is preparing for tough times ahead and following his own advice of ‘becoming fearful when others are being greedy’.
Adding weight to this view is the fact Berkshire has also halted share buybacks for the first time in 2024. Buffett believes it only makes sense to conduct share buybacks when the shares are trading at a discount to his estimate of intrinsic value.
Berkshire shares are up around 23% so far in 2024, outperforming the S&P 500 index and taking the market value of the company to over a trillion dollars for the first time.
Long-time Berkshire shareholder and fund manager Tom Russo, principal at Gardner Russo
Berkshire Hathaway cash pile
Hathaway cash pile
billions)
and & Quinn commented: ‘Buffett wants to invest every penny he can in businesses that provide Berkshire an advantage. But at the same time, he’s willing to do nothing.
‘He’ll be there ready and loaded when other investors are despairing or capital-constrained,’ added Russo.
Buffett does not try to forecast the short-term direction of the stock market, but he has in the past referred to a long-term indicator he describes as ‘probably the best single measure of where valuations stand at any given moment’.
The calculation involves dividing the total market value of all publicly quoted stocks by GDP. This measure is equivalent to a price to sales ratio for a company.
The indicator, which is sometimes referred to as the Buffett Indicator has identified prior peaks such as the technology bubble of the late 1990s. The reading as of 30 August 2024 was a record 209% (the market value of all stocks is 2.1 times US GDP) suggesting US stocks are trading 68% above their long-term trend line. [MG]
Why the investment trust consolidation trend is set to continue
The sector’s latest deal is designed to create the ‘go-to’ Asia trust
Consolidation is a growing theme across the investment trust sector against a backdrop of stubbornly-wide NAV (net asset value) discounts and increasing pressure on sub-scale funds.
2024 is already a record year for M&A (mergers and acquisitions) in a sector which has just seen the eleventh such deal announced, the value-oriented Invesco Asia Trust (IAT) planning to combine with Asia Dragon Trust (DGN) to form Invesco Asia Dragon Trust.
With analysts highlighting that further sector consolidation is needed, this mergers trend, which Shares discussed in depth on 5 September, is only set to continue.
COME TOGETHER, RIGHT NOW
At the time of writing, nine investment trust mergers have already completed in 2024, the
standout deal being the mega-merger of Alliance Trust and Witan to create Alliance Witan (ALW), while JPMorgan Japan Small Cap Growth & Income has just combined with JPMorgan Japanese (JFJ) to create a larger, more liquid vehicle. That number will become 10 once Artemis Alpha Trust (ATS) folds into Aurora Investment Trust (ARR) later this year to form Aurora UK Alpha.
In short, sub-scale, underperforming funds are combining with larger rivals with similar remits to remedy wide discounts and create trusts large and liquid enough to attract wealth managers and retail investors.
And with activists nosing around, this major trend looks set to persist for a while yet, though negative consequences are that some good strategies will go to the wall in this process of creative destruction and choice for investors will be reduced.
THE WINTERFLOOD VIEW
In a note published last month, Winterflood analyst Elliott Hardy said: ‘Generally, we expect shareholders to benefit from a larger, more liquid vehicle with lower costs and the possibility of index inclusion, particularly in cases where the investment strategy has commonalities.’
‘For instance, FTSE 100 inclusion was a key driver behind the merger between Alliance Trust and Witan, previously two of the largest 30 trusts in the sector, demonstrating that even larger funds may be inclined towards consolidation.’
Hardy added: ‘In many of the conversations we have
THE ‘GO-TO’ ASIA TRUST
with clients, liquidity is widely regarded as an important issue within the sector. Many point towards an ever increasing minimum size threshold which makes a significant number of funds within the sector “uninvestable” on a liquidity and concentration basis.’
Accordingly, Winterflood recently updated its methodology to identify potentially sub-scale funds where it believes corporate action may be aligned with shareholder interests, increasing the methodology market cap threshold from £200 million to £300 million.
Below this threshold reside funds ranging from BlackRock
Invesco Asia Trust and Asia Dragon Trust plan to merge to form Invesco Asia Dragon Trust, with the former as the continuing company boasting net assets north of £800 million and the potential for FTSE 250 inclusion.
Invesco Asia’s board wants to make the enlarged company the ‘go-to’ Asian trust for investors ‘trading on a premium rating, growing organically and also through further combinations’.
On completion in Q1 of 2025, investors will have exposure to a contrarian total return strategy pursued by Fiona Yang and Ian Hargreaves, which seeks out mispriced, quality Asian and Australasian companies with strong balance sheets, as well as from greater economies of scale and liquidity and a more competitive management fee structure expected to reduce Invesco Asia’s ongoing charges ratio from the current 1.03% to less than 0.7%.
This is an unusual combination in that Invesco Asia, the smaller of the two, is acting as consolidator, but this reflects Invesco Asia’s superior track record following a strong run of performance for its value style between mid-2020 and late 2023.
Income & Growth (BRIG) and Baker Steel Resources (BSRT) to Shires Income (SHRS), Schroders Capital Global Innovation (INOV) and Fidelity Japan Trust (FJV)
‘That said, we note that a fund’s size is a rather blunt proxy for how it trades in the secondary market,’ stressed Hardy. ‘Other factors, such as the diversity of a shareholder register, whereby a register compiled across a diverse range of institutional and retail investors, each with different investment horizons and motivations for buying and selling at certain times, may result in a better liquidity profile.’
In contrast, Asia Dragon has disappointed for years and a full strategic review was ultimately triggered in May 2024 following an approach by the smaller Ashoka WhiteOak Emerging Markets (AWEM).
This potential merger was effectively kiboshed when Asia Dragon’s board stressed it was looking for ‘established fund management groups with experience of managing equity strategies similar to that currently pursued by the company’. [JC]
AstraZeneca shares fall ahead of third-quarter update
The firm has set a new target to achieve revenue of $80 billion by 2030
Shares in pharmaceutical firm AstraZeneca (AZN) have fallen by around 16% over the past two months after recording an all-time high at the end of August.
This reflects disappointing late-stage clinical trial results for the company’s antibody cancer treatment Dato-DXd, being developed with Daiichi Sankyo (4568:TYO), but the shares lost around 5% on 30 October after the company said the president of its Chinese operations Leon Wang was under investigation by the authorities.
Investors will therefore be looking for answers to these latest scientific and political developments when the company reports third-quarter earnings on 12 November.
China is a big deal for AstraZeneca, generating almost $6 billion of revenue in 2023, and the UK firm is the largest foreign drug company operating in the country.
In September, it was reported that police in Shenzhen had detained
some of AstraZeneca’s employees over possible infringement of data privacy laws and importing unlicensed medications.
Investors will be looking for an update on the company’s oral and injectable obesity drug candidates with early-stage clinical data being presented at Obesity Week in early November.
In the first half, the company reported revenue up 18% to $25.6 billion and a 5% increase in core EPS (earnings per share) to $4.03.
Management increased full-year guidance for revenue and core EPS to grow by a mid-teens percentage, up from a low double-digit to low-teens percentage previously. [MG]
Chart: Shares magazine • Source: LSEG
Has Home Depot defied the DIY slowdown?
On 12 November, the world’s largest home improvement retailer Home Depot (HD:NYSE) will report thirdquarter earnings. Year-to-date, shares in this US consumer bellwether have underperformed the S&P 500 with a rough 15% gain.
Shares believes Home Depot will need to at least meet the $39.2 billion in quarterly revenue and EPS (earnings per share) of $3.63 Wall Street which expects for upwards stock price momentum to resume following a recent pullback.
Investors will be eager to see if September’s jumbo rate cut by the Federal Reserve has begun to thaw out the US housing market and stimulate home improvement demand, or whether US election uncertainty has continued to weigh on big-ticket spending.
In August, Home Depot announced a disappointing 3.3% comparable sales decrease for the second quarter, with US
comparable sales down 3.6%.
The retail giant also warned fullyear comparable sales would fall 3% to 4% this year, a downgrade on previous expectations of a dip of around 1%.
The DIY giant explained that due to higher interest rates and greater macroeconomic uncertainty, consumers were increasingly reluctant to start big home improvement projects like kitchen or bathroom remodeling, although chief executive Ted Decker stressed ‘the underlying long-term fundamentals supporting home improvement demand are strong’.
When Home Depot reports, analysts will be keen for an update on the progress being made with SRS Distribution, a recently acquired building products supplier which has expanded the company’s reach among professional builders and contractors. [JC]
8 Nov: Constellation Software, Baxter, Paramount Global, Ricoh, Fluor, KT, Flower Foods, NexGen Energy, Alpha Bank, Global Partners, Docebo, Bloomin Brands, ANI Pharma, Sky Harbour, Koppers
12 Nov: Home Depot, Occidental, Live Nation Entertainment, Tyson Foods, Skyworks, Mosaic
13 Nov: Cisco, Copart
14 Nov: Walt Disney, Applied Materials, Palo Alto Networks, Ross Stores
Chart: Shares magazine • Source: LSEG
Markets eye further rate cuts ahead of inflation and consumer price data
US
The economic landscape is set to become quieter in the run-up to Thanksgiving in the US and Christmas. At the time of going to press, the odds of the Federal Reserve making a quarter of a percentage point cut to interest rates is nailed on according to the CME’s Fedwatch tool.
Likewise, the Bank of England is expected to make a quarter of a percentage point cut to 4.75% when it meets on 7 November. Investors will be keen to hear BoE governor Andrew Bailey’s views on the future path for interest rates and how they
may have been impacted by Labour’s Budget.
The OBR (Office for Budget Responsibility) believes UK inflation will be higher due to the policies announced and judging by the upward move to 10-year gilt yields since the budget, investors seem to be on the same page.
That said, longer-term bond yields have nudged up across Europe and the US over the past month, so it is difficult to untangle the wider market moves from the specific situation in the UK.
Investors and the Fed do not need to wait too long to see if US inflation expectations remain well-anchored with the closely watched University of Michigan inflation expectations survey for November out on 8 November.
The October reading was revised down to 2.7% from an earlier estimate of 2.9% according to the final figures. It matches the rate from the prior month and marks the lowest reading since December 2020. The five-year survey reading for October was confirmed at 3%, down from 3.1%.
The following week sees the release of US consumer price index data which could shed further light on the inflation headwinds facing the US consumer, which is the biggest driver of economic activity.
The index tracks price changes in a basket of consumer goods excluding volatile food and fuel. [MG]
Uranium-focused investment company:
Tesco could generate substantial shareholder returns over the next five years
The firm has been the cheapest full-line grocer since November 2022
Tesco (TSCO) 347.2p
Market cap: £23.75 billion
We believe leading food retailer Tesco (TSCO) is a great risk/return investment opportunity, comprising unappreciated defensive qualities at a time of increased economic uncertainty.
As we explain later in the article, Tesco has the potential to deliver substantial returns to shareholders based on its capital allocation policy of returning cash via share buybacks and dividends.
The UK’s leading grocer appears to have rediscovered its growth engine and looks set to outgrow the market by following its proven strategy of investing in price and analysing data to drive more customers to its stores.
The leveraged buyouts of UK competitors Morrisons and Asda means they are hampered by big debts and consequently have limited ability to invest in lower prices.
Meanwhile, Tesco has put a halt to the market share gains of German discounters Lidl and Aldi
through its effective price-match strategy. Restrictive planning permissions also suggest future growth for the discounters may be harder to achieve.
This all adds up to a very benign competitive landscape and leaves Tesco in a good position to reinforce its leadership position.
At the company’s half year results (3 October), the retailer reported a 0.62% increase in market share to 27.8%, its largest share since January 2021. The company has delivered 15 consecutive fourweek periods of market share gains.
Following a radical restructuring of the business and an accounting scandal a decade ago, the business today is a lot more focused. As a relatively mature business, Tesco generates lots of free cash flow.
Management has a clear policy to utilise free cash flow to drive shareholder returns through share buybacks and dividends. Since launching its first buyback in 2021, the company has so far returned £2.4 billion to shareholders.
In addition, Tesco has paid out £8.2 billion in dividends meaning total shareholder returns over the last three years equate to 42% of the current market capitalisation.
There is more to come. Following the agreed sale of its banking operations to Barclays (BARC) for £700 million in February, Tesco is set to return the
proceeds via an incremental share buyback.
After the current £1 billion programme is completed by April 2025.
The deal with Barclays includes an exclusive 10-year strategic partnership which provides an opportunity to develop new and innovative products with Barclays under the Tesco Bank brand.
Tesco anticipates an adjusted operating profit contribution from the retained banking operation of between £80 million and £100 million per year.
The retail business is expected to generate free cash flow in the medium term of between £1.4 billion and £1.8 billion per year.
At the start of the article, we mentioned Tesco’s defensive qualities as a key attraction of the investment case.
Fund manager and founder of Latitude Investment Management, Freddie Lait, who owns Tesco shares, offers a counter-intuitive perspective in the event of the UK economy souring.
‘Given the explosive demand in takeaway and food delivery, we expect a recession would also see a major return to supermarket shopping,’ explains Lait.
We believe this scenario adds some additional risk protection and margin of safety to the investment case.
MID-DOUBLE-DIGIT SHAREHOLDER RETURNS
In the long-run, share prices track EPS (earnings per share) growth, so what is the outlook for Tesco?
Lait believes the company can grow revenue ahead of the market at a clip of between 3% to 4% a year in a benign 2% inflation environment, although it could be more if inflation is higher or in
Given the explosive demand in takeaway and food delivery, we expect a recession would also see a major return to supermarket shopping ”
a recession scenario as explained earlier.
There is scope for some margin expansion, but Lait believes the company will instead invest in price to attract more customers.
This would imply profit growing at a rate of between 5% and 6% a year, which may appear unexciting at first sight, but we have to factor in share buybacks which are running around 4% a year, implying 10% growth in EPS.
Share buybacks reduce the number of shares outstanding, which provides a mechanical boost to EPS growth.
To arrive at total shareholder return we must add dividends. The yield on Tesco shares at the current price is roughly 4%. This equates to a shareholder return of just over 14% a year (1.1 x 1.04) in a base case scenario.
In a scenario where investors start to recognise the potential for Tesco shares, there is scope for the PE (price to earnings) ratio to expand. Lait notes that US retail giant Walmart (WMT:NYSE) trades on a PE ratio of 35 times, for example.
‘Obviously, the shares could easily re-rate up to circa 18 times. If this was to happen over the next five years that would add 40% to returns, or 7% per year implying a 20% annual total return to shareholders,’ concludes Lait. [MG]
JD Wetherspoon shares are much too cheap given its growth prospects
Long-term investors who can ride out market volatility should be loading up now
JD Wetherspoon (JDW) 602p
Market cap: £732 million
The market has a well-understood tendency to overshoot and undershoot, and in the case of pub group
JD Wetherspoon (JDW) we think it has pushed the shares much too low given the qualities of the business and the risks it faces.
Considering the company raised its earnings guidance last month and reinstated the dividend thanks to ‘robust’ like-for-like trading, the sell-off around the budget – when the hike in employer NI (national insurance) contributions and the national living wage had already been well telegraphed to the market – made little sense.
If the Stockopedia consensus estimate of 59p of EPS (earnings per share) for July 2026 is correct, the shares look very cheap on a multiple of just over 10 times – if, as we suspect, analysts are being too conservative, and earnings are notably higher in 18 months or so, the shares are an absolute steal.
VALUE FOR MONEY
For the year to this July, the group posted more than £2 billion of sales for the first time, 5.7%
JD Wetherspoon
Chart: Shares magazine • Source: LSEG
above the previous year, and with fewer pubs, meaning like-for-like sales were 7.6% higher yearon-year and 16% above pre-pandemic levels, leading analysts to raise their 2025 and 2026 forecasts cautiously.
Trading since July has been healthy, and the firm said it saw ‘a reasonable outcome for the current financial year’, even with the increase in labour and NI costs.
The investment case for ‘Spoons’, as it is affectionately known, is firstly it doesn’t need a strong UK economy to thrive – it does equally well when times are tough, as people still spend on experiences, they just trade down slightly in terms of price.
The firm’s relatively low price position, its well-located and well-invested venues, high levels of staff training, the use of technology to speed up ordering, its selection of real ales (a quarter of its pubs are listed in CAMRA’s 2024 Good Beer Guide), its ‘club’ nights (steak on a Tuesday, curry on a Thursday) and an award-winning children’s menu put it streets ahead of its rivals in terms of popularity.
Second, as well as healthy like-for-like trading, the company can grow sales by growing its estate once more after several years of shrinkage – it now talks of potential for around 1,000 pubs in the UK compared with 800 as of July 2024.
Third, the valuation at today’s price is the lowest in more than 30 years on a cyclically-adjusted PE basis, with consensus earnings of 59p in July 2026 entirely consistent with an EPS growth rate of 9% since the early 1990s (achieved without buybacks, note).
RISKS TO OUR BUY CASE
There is no such thing as a free lunch, however, and no investment comes without its risks.
Much has been written for example about young people no longer drinking as much and the potential demise of pubs, and in fairness the ‘on-trade’ only accounts for 40% of UK beer sales against 90% a few decades ago.
However, of the 60% bought ‘off-trade’ the vast majority is consumed at home, so young people may be consuming just as much as they did, just in a different environment, and it’s down to the pub operators to win them back.
That said, Wetherspoon’s pubs are no longer old-fashioned ‘boozers’ – today, the highest-selling draught product by far is cola, and even that is dwarfed by the volume of tea and coffee sold, which shows how much the business has matured in recent years.
There are concerns over the firm’s debt load, which historically has been quite high, relatively speaking, but even with the headwinds presented by the pandemic the level of borrowing has been cut significantly.
2024 results and consensus forecasts for next two years
Data correct as of 4 November 2024
Table: Shares magazine • Source: Stockopedia
In January 2020, debt excluding leases on the pubs where it doesn’t own freehold (about 30% of the estate) was over £800 million whereas by July 2024 that figure was down to £660 million.
As interest rates fall, so the cost of debt will decrease, which means more cash to pay down borrowings, but higher labour costs may mean progress is slower than investors would like.
The final risk for us is whether Tim Martin himself stays with the business.
Love him or loathe him, Martin embodies Wetherspoons and has been the driving force in raising the quality and level of service as well as finding new ways to get punters through the doors such as introducing breakfast menus.
Martin has also campaigned tirelessly for the pub sector to be treated fairly from a regulatory and tax perspective, arguing against new licensing laws and the preferential treatment of supermarkets who sell cheap booze with no VAT.
We’re not saying he’s about to hang up his boots, even though he sold a chunk of stock in June, just that if he did the firm would be poorer for it. [IC]
Why you should hoover up shares in SharkNinja
Correction at the fast-growing food preparation products-to-cleaning appliances play has created a compelling new entry point
SharkNinja (SN:NYSE) $89.10
Gain to date: 82%
Market cap: £1.5 billion
market overreacted to higher expenses designed to drive long-term sustainable growth and concerns over the Christmas quarter outlook.
We flagged SharkNinja’s (SN:NYSE) attractions at $49 in December 2023 and the cleaning and cooking appliance maker’s stock has since rocketed on the delivery of strong growth and upgrades. The share price recently peaked at $111 before a third quarter results-induced correction, though our ‘buy’ call remains 82% in the money. Risk-averse readers may be tempted to take profits, but we remain excited by the massive global market share opportunity ahead for the Shark and Ninja brands and note the company continues to deliver strong double-digit growth across its product portfolio.
WHAT HAS HAPPENED SINCE WE SAID BUY?
Results (31 October) for the third quarter ended 30 September were better than expected and SharkNinja bumped up full year guidance, but the
Third quarter sales of $1.43 billion were up 35% year-on-year, driven by international expansion and innovation-driven market share gains, while the air fryer, vacuum cleaner and hair dryer designer’s adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) jumped 26% yearon-year to $262.4 million and management now expects full year 2024 sales to grow between 27% and 28%, up from previous guidance of 22% to 24%. Adjusted EBITDA is expected to be in the $925 million to $945 million range, implying heady yearon-year growth of 29% to 31%.
WHAT SHOULD INVESTORS DO NOW?
Buy on weakness, since SharkNinja continues to ‘exhibit broad product strength driven by its innovation flywheel within new and existing categories’ according to Jefferies, which applauded management for ‘reinvesting in a business experiencing robust growth with a growing international opportunity’. As for SharkNinja’s CEO Mark Barrocas, he remains ‘confident in our ability to deliver sustainable long-term profitable growth as we capture increasing share in our large and growing addressable market.’ [JC]
The pros and cons of investing in gold and where the price could go next
Gold has had a great year. Spot prices hit another all-time high (30 October) of $2,781 per ounce, based on Bloomberg data, chalking up 35% gains so far in 2024, having broken through the $2,600 level in September for the very first time.
That trumps global equities, based on the FTSE World Index’s 18% returns, and even high-flying tech firms have struggled to keep pace, based on the 27% year-to-date gains of the Nasdaq Composite.
How you react to this news is arguably indicative of your psychological type, say analysts at investment trust research house Kepler. Some will see this year’s gold price rally as outlier returns destined to regress to the mean. As AJ Bell’s Dan Coatsworth noted in Shares
‘Many analysts have attributed this year’s Economic uncertainty, geopolitical tensions and strong demand have seen precious metal hit all-time highs
in August, the price of gold has a reputation for going through spurts. ‘Over the past five years it has jumped, then pulled back, and then jumped again, on repeat.’
Others will be wondering if there remains more to come from gold.
‘We would expect most people to be more of this persuasion, and inclined to jump on what is going up,’ says Kepler analyst Thomas McMahan. It is, after all, a basic human instinct to seek security in numbers and ‘averaging’ can be a powerful factor in decision making, as economics Nobel Prize winning psychologist Mark Kahneman noted in his book, Thinking, Fast and Slow.
‘It is genuinely difficult to put sentiment and emotions away when deciding how to handle assets that are on a tear,’ says Kepler’s McMahan. This is perhaps a key reason why so few active fund managers have been overweight Nvidia (NVDA:NASDAQ), the analyst posits. ‘This has been a fundamentally wrong decision since at least January 2022, when Nvidia was trading at $15 a share.’ If investing is about making money, then underweighting Nvidia, now at $139, ‘after it had doubled, and after it had quadrupled, was wrong, wrong, wrong,’ he says.
So, are investors also wrong to avoid gold after its 40% rally over the past 12 months?
WHAT’S BEEN DRIVING THE GOLD PRICE?
This year’s gains for the precious metal are largely credited to ongoing economic uncertainty, geopolitical tensions, an unpredictable race for the White House and, strong demand from central banks around the world.
10 years of central bank gold purchases
gold rally to central bank gold-buying activity,’ says Nitesh Shah, head of commodities and macroeconomic research at ETFs provider WisdomTree. He points to data from the World Gold Council that shows gold buying in the first half of 2024 was the highest on record, when central banks bought 483 tonnes of gold.
That said, IMF (International Monetary Fund) data indicates that net gold purchases slowed to just eight tonnes in August, the lowest since March, while China, the world’s largest gold buyer last year, has reported zero new purchases for the past five months, according to Reuters, as Chinese authorities signalled another round of monetary and fiscal stimulus, boosting equity markets.
Despite this, gold had still rallied, chalking up new records in August, September and now October. Which makes Wisdomtree’s observation that ordinary households have started buying gold again. ‘Investors have come back into gold ETCs (exchange-traded commodities) after close to two years of selling between the May 2022 and May 2024,’ says Shah.
‘Since May 2024, there have been approximately three million troy ounces of flows into ETCs (a 3.7% increase), worth $7.8 billion. In 2022, gold was competing with a bond market that was getting
increasingly cheaper with yields rising. At the time many investors were ignoring the strength in gold prices and opted for the bond market for antifragile/defensive exposures.
‘Now that we are back to a rate cutting environment, bonds yields have fallen, and investors are ready to buy gold again.’
WHY DO PEOPLE BUY GOLD?
Gold can act as a haven asset, a financial teddy bear investors cling to in times of crisis. When the world seems uncertain, its timeless and immutable nature has greater appeal. That’s because gold has a special status as an important hedge against inflation, a historic store of value and an ‘independent’ currency that cannot be debased.
Paper currencies lose their value over time as more money is created. Yet the supply of gold and other precious metals is strictly limited, and expensive investment is necessary to discover and extract more. They can therefore act as a diversifier for those with broad portfolios who want to add something different that isn’t necessarily correlated to the prices of other assets.
But while gold is seen as a form of protection for investors, it still competes with other investment assets. ‘When interest rates are high and rising, many investors sell gold – which
Chart: Shares magazine • Source: World Gold Council. Tonnes.
pays no interest – and buy assets that do,’ says Rob Morgan, chief market analyst at broker Charles Stanley.
‘During such times, higher yields available in bonds, property or shares might represent more appealing options, as do higher interest rates on cash. However, as investors anticipate interest rate falls there tends to be a better environment for bullion.’
There are also concerns of a more inflationary environment, especially if Donald Trump wins the US election. His policies of reshoring and tariffs could stoke price rises in the world’s most important economy, and this has driven some investors to increasingly prize monetary safe havens.
10-year gold price chart
THE LAST SAFE HAVEN STANDING
If trends continue, analysts see a bright 2025 for gold. ‘Gold looks to be the last “safe haven” asset standing, incentivising traders, including central banks to increase exposure,’ says Bank of America’s commodity strategist Michael Widmer.
‘The Committee for a Responsible Federal Budget notes that the national debt is projected to reach a new record high as a share of the economy only three years from now, well within the next presidential term, pushing up interest rate payments as a share of GDP (gross domestic product). In turn, this makes gold an attractive asset, so we reaffirm our $3,000 per ounce target,’ says Widmer.
That tallies with the World Gold Council, Commonwealth Bank, Citi and Macquarie estimates, while Goldman Sachs recently raised its 2025 gold price target from $2,700 to $2,900. HSBC is less bullish, with a range spread from $2,950 all the way down to $2,350.
OPTIONS FOR GOLD INVESTORS
And there are other gold price sceptics. According to Kepler’s McMahon, Duncan McInnes and Jasmine Yeo, managers of Ruffer Investment Company (RICA) sold their physical gold holdings this year, although they reallocated some of the cash in gold miners instead.
They argue that the miners are cheap in relation to the gold price and offer exposure to some of the same trends as the metal but with less downside, given their valuations. ‘This move has paid off in recent months, as gold miners have finally started
to do well,’ says McMahon.
Rob Crayfourd, one of the managers of investment trust Golden Prospect Precious Metals (GPM), agrees that gold miners may be a better bet that the precious metal itself next year due to operating leverage, a concept he explained on an episode of the AJ Bell Money & Markets podcast.
‘We should see higher revenues translating into better margins and better free cash flow generation,’ he said. ‘Ultimately, that is what drives the miners. They are driven by earnings, not just the headline gold price.’
For example, Barrick Gold (GOLD:NYSE), one of the world’s biggest gold producers, has enjoyed a 40% share price rally since February 2024. Yet its stock still trades on a multi-year low price to earnings valuation metric of 11.4, according to Stockopedia.
That’s a huge discount to the 40 times earnings level of 2016 as the gold mining industry’s grapple with soaring increases in the cost of things like energy, steel, acid, and labour wash through.
Maybe, mining stock picking is not for you, perhaps you are one of those gold investors who
prefer to buy coins or bars, but this is unlikely to be a viable option for most people due to storage and insurance requirements. Fortunately, there are convenient ways to add gold to a portfolio through exchange traded products or ETCs.
These include iShares Physical Gold (IGLN), Invesco Physical Gold (SGLD) and Amundi Physical Gold (GLDD), which are among some of the largest and cheapest ETCs available.
Or there’s the £4.47 billion Xtrackers IE Physical Gold (XGDU) pitched by Shares as one of our investment Great Ideas back in April at $35.61. It comes with a market leading 0.11% ongoing charge and has risen 20% to $42.88 since our story.
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Steven Frazer) and the editor (Tom Sieber) own shares in AJ Bell.
By Steven Frazer News Editor
AI GOES NUCLEAR Why the energy source is in big demand
TBy Ian Conway Deputy Editor
here was a certain degree of investor bemusement last month when shares in US electricity generation company Constellation Energy (CEG:NASDAQ) soared on news technology giant Microsoft (MSFT:NASDAQ) had signed a 20-year power purchase agreement.
This was no ordinary deal, however, as it paves the way for the restart of Three Mile Island 1 – not the reactor which famously melted down in 1979, but another 835 MW nuclear plant on the same Pennsylvania site which had operated at industry-leading levels of safety and reliability before being shut down in 2019.
Under the agreement, Microsoft will buy carbon-free, nuclear-powered energy from Constellation to power some of its AI (artificial intelligence) data centres with the software
giant calling the deal ‘a major milestone’ in its effort to decarbonise its business.
As Deutsche Bank’s research team observed, it looks as if the first industry AI will disrupt isn’t technology, but energy. Constellation
A NEW ‘SPACE RACE’
Ever since AI (artificial intelligence) became mainstream with the unveiling of ChatGPT, two things have become apparent.
First, the data centres needed to process AI tasks will have to be much bigger and will be much more expensive than those which have been built to date (the term being used to describe them is ‘hyperscale’).
Second, they are going to use much more energy, not just because they are bigger but because AI queries need a lot more power to process the vast amounts of data being managed – some estimates put the energy ‘draw’ at up to 300 times the amount needed for a simple web search.
The companies at the heart of the AI revolution – cloud service providers like Amazon (AMZN:NASDAQ), Alphabet (GOOG:NASDAQ), Meta Platforms (META:NASDAQ) and Microsoft – already own more than half the world’s AIready data centre capacity, but, because of supply constraints, they are having to partner with colocation providers.
According to McKinsey, the prices charged by co-location providers (or ‘colos’) for available data centre capacity in the US fell between 2014 and 2020 but then rose by an average of 35% from 2020 to 2023.
Meanwhile, new capacity due to come online in the next two to three years has already been leased out, and in Northern Virginia – dubbed the ‘data capital of the world’ due to the high number of data centres located there – the vacancy rate was less than 1% at the start of this year.
On Oracle’s (ORCL:NYSE) conference call last month, chief executive Larry Ellison gave some idea of the costs involved just for his firm to be a part of the data centre revolution.
‘The entry price is around $100 billion. Let me
repeat that, around $100 billion. That’s over the next four, five years, for anyone who wants to play in that game. That’s a lot of money, and it doesn’t get easier.’
A NEW (NUCLEAR) ARMS RACE
As well as space, cloud providers are involved in a race to secure as much power as they can as quickly as possible, with as small a carbon footprint as possible.
Given nuclear power is more reliable than solar or wind generation and less polluting than fossil fuels, it has become the energy source of choice.
All data centres are power-hungry, but AI-ready ones are especially demanding because of the energy consumption of servers in the racks.
McKinsey estimates average power densities have more than doubled in just two years from eight kW (kilowatts) to 17 kW per rack and are expected to rise to as high as 30 kW by 2027 as AI workloads increase.
Training models like ChatGPT can consume more than 80 kW per rack, while Nvidia’s latest
chip, the GB200, combined with its servers, may require rack densities of up to 120 kW.
Oracle is already building an 800 mW (megawatt) centre with ‘acres’ of Nvidia GPU clusters to train its largest Generative AI model, and it has plans for a site which will need over one gW (gigawatt) of power.
Late last month, Amazon signed an agreement to invest in advanced nuclear technology to meet its growing energy demand, including the construction of several new Small Modular Reactors or SMRs, an advanced kind of reactor with a smaller footprint which can be built in factories and assembled on site close to the electricity grid.
In Washington state, the company has agreed to develop four SMRs which will be built, owned and operated by Energy Northwest, a consortium of public utilities, to generate 320 mW of capacity in the first phase of the project, with the option to increase to 960 mW in total.
The firm also took a direct stake in X-energy, the private developer of SMRs whose designs will be used in the Energy Northwest project.
In Virginia, Amazon signed a deal with electricity supplier Dominion Energy (D:NYSE) to explore the possibility of building an SMR to bring at least 300 mW of capacity to an area where power demand is forecast to rise by 85% in the next decade and a half.
Not to be outdone, Google has ordered six to seven SMRs from privately-owned Kairos power with a total of 500 mW of capacity, with the first plant expected to come online by 2030 and the rest by 2035.
‘We feel nuclear can play an important role in helping us meet our demand cleanly and round the clock,’ said Google’s senior director of energy and climate Michael Terrell.
ARE SMRs THE FUTURE?
Small modular reactors typically have a capacity of up to 300 mW against over 700 mW for a traditional nuclear power plant but being smaller and modular they are easier to build and many of the components can be built and assembled in a factory and then the whole unit can be transported to where it is needed.
Being smaller also means there are more potential locations for them, including in rural areas where there is limited coverage by the grid or there are no clean-energy alternatives like wind or solar, and economies of scale in their manufacture means they are affordable even to companies, so as power demand rises more units can be built and installed where they are needed.
SMRs are considered safer than traditional nuclear plants as their design includes ‘passive safety features which rely on the natural laws of physics to shut down and cool the reactor during abnormal conditions, which significantly lowers the risk of unsafe releases of radioactivity’, according to analysts at Berenberg.
Given all these advantages, surprisingly there
Global demand for data centre power in GW now vs 2030
are only three SMRs operating globally at the moment although almost 100 are at various stages awaiting build approval.
That doesn’t mean they will appear overnight, however – the best guess at present is global deployment will happen at some point between 2030 and 2035.
COULD FUSION BECOME A REALITY?
The other big development in nuclear technology is fusion. All current nuclear power plants work on fission technology, which is the splitting of atomic nuclei to generate energy.
Fusion, on the other hand, is the process by which two light atomic nuclei combine to form a single heavier one while releasing massive amounts of energy – essentially the process which powers the sun.
The International Atomic Energy Agency explains: ‘To fuse in the sun, nuclei need to collide with each other at extremely high temperatures, around ten million degrees Celsius.
‘The high temperature provides them with enough energy so that once the nuclei come within a very close range of each other, the
attractive nuclear force between them will outweigh the electrical repulsion and allow them to fuse.
‘For this to happen, the nuclei must be confined within a small space to increase the chances of collision. In the sun, the extreme pressure produced by its immense gravity creates the conditions for fusion.’
Ever since the theory of fusion began to spread in the 1930s, scientists have dreamed of recreating the same reaction here on Earth to produce unlimited, safe, on-demand, clean energy.
It is estimated fusion could generate four times more energy per kilo of fuel than fission and nearly four million times more energy than burning coal or gas, but the physics required to recreate this process is so difficult the standing joke in the industry is fusion is ‘always 30 years away’.
Now, however, US start-up company Helion Energy, whose backers include tech billionaires
Sam Altman, the founder and chief executive of OpenAI, LinkedIn co-founder Reid Hoffman and Facebook co-founder Dustin Moskowitz, claims it will have a commercial-scale nuclear fusion power plant up and running by 2028.
As power transmission becomes constrained in primary markets, leading players are moving to secondary and emerging markets.
Three tiers of US energy markets
Exhibit <4> of <4>
Source: McKinsey
Not only that, but Microsoft has signed up as the first user of the electricity, which will be sold and distributed by Constellation Energy with the long-term goal of being to deliver power at one cent per kWh or half the price of the cheapest onshore wind generation anywhere in the world.
HOW CAN YOU INVEST IN NUCLEAR POWER?
Unfortunately for UK investors, nuclear isn’t a big theme here or in Europe – with the exception of France’s national energy company EDF, no European utilities are planning to build a new nuclear reactor within the next decade and investment is limited to extending the useful life of existing reactors.
UK utility Centrica (CNA) has a 20% stake in EDF’s UK nuclear plants, but most of them are set to close, except for Sizewell B, which will contribute to earnings although not materially.
In the US, we have already mentioned Constellation Energy, whose shares are up 130% year-to-date, but we should also flag Texas-based Vistra (VST:NYSE), which is the best-performing stock in the S&P 500 this year, up 232%, beating even Nvidia (NVDA:NASDAQ).
For those wanting to play the nuclear theme through the utilities sector, there are a couple of ETFs (exchange-traded funds) such as the iShares S&P 500 Utilities ETF (IUSU), which has an ongoing charge of 0.15%, and the XTrackers MSCI
Vistra Corp
World Utilities ETF (XWUS), which has a 0.25% annual charge.
In terms of nuclear technology, Santa Clara, California-based Oklo (OKLO:NYSE) – which boasts Open AI’s Sam Altman as chairman – has seen its shares soar 115% this year, yet it is still a development-stage company with no revenue and is running losses.
Oregon-based NuScale Power (SMR:NYSE), which designs and builds SMRs, has seen its shares rocket 580% this year but is also running losses and is tiny by US standards, while Nano Nuclear (NNE:NASDAQ) – whose shares are up 300% this year – is even smaller.
In fairness, UK firm Rolls-Royce (RR.) co-owns a business which designs advanced SMRs, but for now it remains a small part of the group.
For an ongoing charge of 0.55% VanEck Uranium and Nuclear Technologies UCITS ETF (NUCL) tracks a basket of firms with nuclear technology expertise as well as the feedstock of nuclear power plants: uranium.
GETTING DIRECT EXPOSURE TO URANIUM
It may not enjoy a great reputation with the public, but given there are few direct ways to play the nuclear renaissance in Europe uranium is the obvious route for those wanting exposure to the theme.
By way of background, the world’s top producer is Kazakhstan, which accounts for more than 40% of global supply, followed by Australia, Namibia, and Canada at 13%, 11%, and 8%, respectively.
The uranium market was disrupted in 2022 by
Chart: LSEG • Source: Shares magazine
Russia’s invasion of Ukraine: Kyiv, which has 15 nuclear power reactors, depended heavily on Russian uranium so it rushed to sign a 12-year supply agreement with Canada, which sent prices surging to over $100 per pound at the start of 2023.
Prices have fallen back, but due to the lack of investment in new supply and low inventories the market is in deficit meaning there is already competition to buy uranium to meet existing power demand.
According to the World Nuclear Association, demand for uranium in nuclear reactors is expected to nearly double by 2040 as governments ramp up nuclear power capacity to meet zero-carbon targets.
Add to that the potential demand from hundreds of new SMRs to power AI-ready data centres and uranium prices are going to keep rising over the next five years unless new mines
PRICE: 45P
are started.
Investors in the US have already twigged this, with shares in Canadian producer Cameco (CCJ:NYSE) rising 30% this year, although that is still modest compared to the gains in the electric power and nuclear engineering stocks.
There are two UK stocks which are worth looking at, Yellow Cake (YCA), which buys and holds physical uranium, and Geiger Counter (GCL), an investment trust which buys stakes in companies exploring, developing and producing uranium [see box below].
Yellow Cake buys most of its uranium from Kazatomprom, the world’s largest producer, and holds it in storage in North America, making it a straight play on the commodity price.
There are also passive products which track the uranium mining industry including Global X Uranium UCITS ETF (URNU) which has an ongoing charge of 0.65%.
GEIGER COUNTER LIMITED (GCL)
MARKET CAP: £64 MILLION DISCOUNT TO NAV: 20%
Launched almost two decades ago, this trust is a prime way to gain access to companies involved in extracting, processing and developing uranium.
Co-manager Keith Watson, who is vastly experienced in analysing raw materials companies, believes sentiment towards uranium has improved ‘considerably’ since Microsoft announced its deal with Constellation Energy.
The trust’s NAV (net asset value) jumped 9.5% in September, beating the rise in the uranium price, as its holdings performed well after recent lacklustre interest.
Rather than just replicate the make-up of the uranium pure-play indices, Watson looks for the stocks with the most upside in terms of discount to fair value.
For that reason, top holding Nexgen Energy (NXE:NYSE) is preferred to index heavyweight Cameco – not only have Nexgen shares risen just 10% year-to-date against Cameco’s 30%, but the company has the lowest global cost of production and the most to gain from higher uranium prices.
As Watson points out, Cameco trades at a premium to NAV despite the fact it has forward sold all its production for the next five years at $80 per pound, so there is no upside once prices exceed that level.
With the market already in deficit, and nuclear plants needing two years’ worth of supply –because it takes up to two years to turn the raw material into fuel rods – the entry of the US tech ‘hyperscalers’ means there will be a scramble to secure enough uranium to meet everyone’s power needs for the next five years and beyond. Ongoing charges are high at 2.36% reflecting the trust’s modest scale and specialist nature.
Geiger counter
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Can education media group Pearson win the AI battle?
Read our exclusive interview with Pearson’s CFO Sally Johnson
Publisher Pearson (PSON) has gone through many incarnations during its 180-year history from starting out as a civil engineering business to the owner of The Financial Times to its current focus on education.
The company is going through change once again with the appointment of new CEO Omar Abbosh in January this year and the early signs are good with the company recently announcing a positive set of third-quarter results. Abbosh’s previous employee was US tech giant Microsoft (MSFT:NASDAQ) and the company is hoping to accelerate its ‘digital first’ strategy set out first by Abbosh’s predecessor Andy Bird in 2020.
Abbosh is expected to ramp up Pearson’s efforts to embrace generative artificial intelligence by bringing his 30 years’ worth of experience in the field of enterprise technology. All this makes it an excellent time to sit down with Pearson’s finance chief Sally Johnson.
REVIVAL OF FORTUNES
Can management succeed in lifting the prospects of the education media group? Over the past 12 years Pearson has issued 10 profit warnings but the company has seen an improvement since the start of the pandemic. Pearson’s share price has more than doubled due to the uptake in digital learning and assessments.
Pearson announced earlier in 2024 a 6% hike in full year dividend to 22.7p and an extension to its £300 million share buyback programme. Abbosh told shareholders on 29 July that the company was once ‘a holding company with a set of loosely
Chart: Shares magazine • Source: LSEG
held assets’ but now it has ‘moved in and out of different markets’.
He added that the company is now ‘a unified operating company with very clear, higher growth addressable markets with a capital allocation approached focused on assessments and verification, early careers, and enterprise skills. The analogue publishing business is a very small part of our current and future business.’
CURATING AND CREATING CONTENT
‘Pearson makes money by creating and curating content, distributing this digitally and assessing and verifying peoples’ skills across five key segments,’ says CFO Johnson.
The company’s customers range from employers, employees, teachers, students (K-12) and institutions.
The company’s segments include assessment &
PEARSON TIMELINE
Pearson buys Les Echos, France’s leading business daily and Recoletos, a Spanish media group.
The Financial
is established as a competitor to the Financial Mining News. The two newspapers merge in 1946.
publisher
Pearson buys math and science publiser AddisonWesley.
qualifications – which encompasses professional certifications – Pearson Vue and clinical assessment, assessments on cognitive ability, for example, dyslexia, K12 (primary and secondary education, comprising both US school assessments and UK GCSE and A Levels).
Also under the Pearson umbrella is virtual learning through virtual schools, higher education (which is a predominantly digital product supporting students at college in the US), English language learning – which helps people learn and become certified in English through their institutional business and direct to consumers through their language learning app Mondly and workforce skills (which offers vocational
Pearson buys HarperCollins Education Publishing merging into AddistonWesley Longman.
1. Pearson buys the Simon & Schuster education, reference and business and professional divisions from Viacom for $4.6 billion.
2. Pearson Education is created from the merger of the Simon and Schuster assets and AddisonWesley Longman.
3. Pearson sells its theme park division, including Madame Tussauds and Alton Towers.
qualifications, for example, BTECs).
In the first half of 2024, underlying growth for assessment & qualifications division rose 2% with growth across Pearson Vue and UK & international qualifications. English language learning was up 11% to £188 million due to strong growth in institutional as well as growth in Mondly and workforce skills was up 6% to £143 million with strong performances in vocational qualifications, GED (general educational development) –academic and subject tests in the US and Canada – and digital credential network Credly.
Underlying growth for virtual learning fell 8% in the first half of 2024 to £254 million and virtual schools’ sales fell 1%. This division was particularly
S Pearson and Son, a small building company in Yorkshire, is founded by Samuel Pearson.
Times
Weetman Pearson moves the business to London. His projects including building docks in Britain and Canada, railways in Spain and China and energy.
The Financial Times is printed on pink paper.
Pearson sells its stake in FT Deutschland.
Pearson sells stake in Interactive Data from $2 billion.
Pearson sells its 50% stake in FTSE International for £450 million.
Pearson sells the Mergermarket Group.
Pearson sells FT and The Economist
Rebranding as Pearson PLC with education focus
Pearson enters the media business.
Pearson buys the FT. A deal that includes a 50% stake in the Economist.
Pearson buys
Longman.
Pearson buys Penguin.
Pearson floats on the the London Stock Exchange.
Source: Shares, FT
SUBSCRIPTION COSTS FOR PEARSON PRODUCTS
HOW MUCH DOES EACH SUBSCRIPTION COST?
• Job match (internship and job recommendations, work insights) free.
• Channels (video platform with curated study videos and practice quizzes) from $7.99 per month, payable monthly of upfront quarterly or annually
• E-textbook (access to the digital version of the textbook, with search, highlight, note capabilities and audio) – $10.99 per month for a four-month term, payable monthly or upfront.
strong during the Covid pandemic. Pearson’s online learning sales rose 25% in the first three months of 2021.
For the 2023/2024 academic year, Pearson+ – the company’s college learning app – launched on 30 July 2021 – had five million registered users as of June 2024 an increase of 300,000 compared to the 2022/2023 academic year (4.7 million registered users).
Pearson+ had 1.1 million cumulative paid subscriptions for the 2023/2024 academic year compared to 938,000 in the 2022/2023 academic year.
INTEGRATION OF AI
Johnson says the company’s future strategy involves the integration of AI across all business segments.
‘Pearson is the global market leader in digital learning and market assessments are the company’s secret sauce. We have invested in an AI tutor which helps children with their homework, and we have developed an assessment tool for teachers to help them with lesson plans,’ says Johnson.
At the end of July this year, the company confirmed that 70,000 students have already started using Pearson’s AI study tools.
Pearson are also adding three new AI tools to Pearson+ and its video platform Channels.
WHAT IS THE COMPANY’S STRATEGY
Johnson says the FTSE 100 company reset its strategy in the first half of 2024.
‘It was an evolution not a revolution,’ says Johnson. ‘We recognised two key trends [which we hope to make part of Pearson’s strategy going forward]: demographics. So, what is happening to baby boomers who are leaving the workforce? [As they leave] this leaves a skills gap. There is a real need for this skills gap to be filled. So, there is a reskilling and upskilling requirement and [that is where] AI [can be harnessed].’
The company hopes to achieve mid-single digit revenue growth in the medium-term and free cash flow of between 90-100%.
‘Students will now be able to upload their syllabus and generate personalised learning experiences. There is also a new AI instructor tool which will help teachers build assignments which will be added to 25 business, maths, science, and nursing titles in the US,’ says Johnson.
Johnson views AI as a help rather than a hindrance to the company, a sentiment echoed by analysts at Shore Capital: ‘Focusing on AI, we note that management has identified scope to improve customer service, content generation, product design processes and data tools.
‘As part of this process, we see a particularly interesting opportunity for generative tech to help add value to end users by simplifying and personalising the way in which they interact with the proprietary learning content.’
Pearson
WHAT ANALYSTS ARE SAYING
US investment bank Goldman Sachs (GS:NYSE) views the education publisher as being in a ‘solid’ position citing ‘reiterated full year 2024-2025 guidance and a new medium-term outlook from 2026 (as part of its strategy update) to deliver mid-single digit organic growth and an average of plus 40 bps (basis points) year-on-year margin expansion while maintaining FCF (free cash flow) conversion of 90-100%.
‘Pearson highlighted it is well-positioned to capitalise on an $80 billion addressable market opportunity which is growing at a 5% CAGR (compound annualised growth rate) and will look to unlock revenue synergies across the group (for example, through product bundling/development) as well as several tech-enabled cost efficiencies. We continue to view the risk/reward as attractive given the improved growth and margin profile.’
Shore Capital analysts believe the education media group is ‘modestly valued’ relative to its financial outlook and ‘fundamental attractions’ and sees ‘good scope for a continuation of positive share price performance.’
In March 2022, the company rejected an offer of 884p (equivalent to £7 billion) from US private equity firm Apollo (APO:NYSE) saying that it ‘significantly undervalued the company.’
Prior to this Apollo had made an all-cash offer of 800p in November 2021.
AHEAD OF THE COMPETITION
Johnson believes that Pearson doesn’t have an exact like-for-like competitor, however ‘we do have competitors in each segment we operate in. For example, in the field of GCSEs and A Levels and the
PEARSON THIRD QUARTER TRADING UPDATE (29 OCTOBER) - A SNAPSHOT
• Total underlying sales growth of 5%.
• Virtual Learning sales up due to 4% growth in Virtual Schools.
• Higher Education on track to grow for the full year.
• Workforce Skills sales up 6% for the third quarter.
• English Language Learning sales up 2%.
• Group underlying sales growth, adjusted operating profit, interest and tax outlook for 2024 remain in line with market expectations.
‘Pearson is delivering on the three priorities for 2024 that I identified at the start of the year. First, our focus on operational and financial performance has driven growth across all divisions this quarter and we are on track to meet full-year expectations.
‘Second, we are accelerating our AI capabilities across the business and starting to see the commercial benefit. Third, expanded enterprise relationships with companies such as ServiceNow demonstrate progress on our intention to expand in workforce learning,’ said Omar Abbosh, Pearson’s chief executive.
professional certifications space’.
‘There are traditional competitors like US publisher of educational content, software and services McGraw Hill Education owned by Apollo. But no one has the diversity within the educational assets that we have which is great from a commercial point of view.
‘The revolution for Pearson was the shift from analogue to digital that is the same for the print media and consumer publishing. AI is a tool within the technology environment which can be used to enhance personalisation. Of course, we have competitors who are trying to do the same, however we focus our products on being the very best that they can be.’
By Sabuhi Gard Investment Writer
Why the UK stock market could get a new look in 2025
Recent changes to the UK’s listing rules should lead to a host of new names joining the FTSE 100 and FTSE 250 indices in the new year, generating more interest in the UK stock market and putting more companies on the radar of investors.
This matters to investors whether they own UK stocks directly, have exposure via actively-managed funds or simply track certain parts of the market through an exchange-traded fund or index fund.
You won’t have to wait too long before the changes start feeding through: four companies which previously didn’t qualify for index inclusion have already laid the groundwork to change their listing category, Coca-Cola Europacific Partners (CCEP), Deliveroo (ROO), Oxford Nanopore Technologies (ONT) and THG (THG).
By doing so they should join the top tiers of the UK market, which could be the trigger for more ‘ineligible’ companies to follow suit and find a way into the FTSE.
Bottling company CocaCola Europacific Partners is big enough to join the FTSE 100, while Deliveroo, Oxford Nanopore and THG would comfortably slot into the FTSE 250.
of these new names could also slot into the FTSE 100 or FTSE 250 indices.
This would provide a much-needed boost to the UK stock market, which has lost countless companies to takeovers in recent years and has not replenished the pot with enough flotations.
A lot of companies will have been waiting for political stability in the UK before proceeding with a stock market flotation, as the past eight years has brought with it a lot of twists and turns, particularly the short-lived Liz Truss era.
With the general election now done and dusted, a big uncertainty has been removed in the eyes of company bosses and this should lead to more stock market flotations. Advisers and lawyers imply there is pent-up appetite for IPOs, but preparations to list a company can take months which is why a surge in stock market listings is more a story for 2025 than this year.
PADDINGTON TO THE RESCUE?
The first fruits could emerge before Christmas. The simplified listing regime was designed to attract more companies to the UK stock market and this action, together with a more stable political backdrop, could see one of the biggest UK IPOs in years.
There are multiple benefits to being part of either index: consumers are likely to see more media commentary on these companies, which raises brand awareness; tracker funds mirroring the performance of the FTSE 100 or FTSE 250 will buy the shares; being a member means companies ‘have arrived’; and liquidity in the shares should improve, making these businesses more visible to investors.
GET READY FOR MORE NEW FLOATS
The simplified listing regime should also result in more companies filing to IPO in London, and some
Pay TV service-to-film production group Canal+ is expected to float on the London Stock Exchange on 16 December as part of a demerger from French parent Vivendi (VIV:EPA).
It is expected to be worth around £6.7 billion at listing, which is big enough for the FTSE 100, but there is a technicality which prevents it from inclusion in the UK’s blue-chip index.
In its IPO prospectus the company states it will not adhere to the UK Takeover Code, which means it doesn’t qualify for FTSE indices.
The Bollore family is expected to own 31.04% of Canal+ when its shares start trading in London,
and the Takeover Code requires any party owning more than 29.9% to bid for the whole group, but Canal+ says neither the UK, nor the French, or any other equivalent takeover regime will apply to the company.
That means the Bollore family won’t have to bid, but the price is giving up inclusion in FTSE indices, which is a shame because Canal+ could be a big hit with investors if the valuation is attractive and it communicates a compelling strategy on how it intends to grow on a standalone basis, freed from the shackles of being owned by a media conglomerate.
Nevertheless, investors will still be able to buy the shares if they wish, even though it won’t qualify for the FTSE.
The IPO is timed to happen just after the release of the latest Paddington film, a hugely successful franchise produced by Canal+’s StudioCanal arm.
If Paddington in Peru cleans up at the box office, there might be a queue of investors eager to put a slice of the producer in their ISA or pension.
The London Stock Exchange has featured quite a few prominent TV and film-related companies over the years, including film and TV producer Entertainment One, the owner of ‘beloved preschool brands’ such as Peppa Pig, which was bought by Hasbro (HAS:NASDAQ) in 2019; broadcaster-to-studio production business ITV (ITV); film studio owner Pinewood; production vehicle provider Facilities by ADF (ADF:AIM); and Zoo Digital (ZOO:AIM), which provides subtitles for big film and TV studios.
WHAT ARE THE NEW RULES FOR FTSE INCLUSION?
Historically, London-listed companies needed a premium category listing to qualify for FTSE indices whereas now they need to be ESCC (Equity Shares Commercial Companies), a new category created in July which combines the premium and standard listing categories.
All companies which previously had a premium listing were automatically switched to ESCC, while companies with a standard listing were transferred to a new ‘Transition’ category and have to apply to switch to ESCC.
To qualify for the ESCC category, companies must be worth at least £30 million; they must comply with the UK Corporate Governance Code;
or explain why they don’t comply in their annual report; and they must offer pre-emption rights to shareholders, among other factors.
Deliveroo has already completed the move to the ESCC category, while Oxford Nanopore is targeting transfer on 6 November, Coca-Cola Europacific Partners should make the switch on 15 November and THG hopes to transfer by March 2025.
All of those changes, apart from Deliveroo, will take place too late for the next quarterly FTSE reshuffle as the cut-off date for qualification is 31 October 2024.
That means we’re looking at the March 2025 review to start reflecting changes to the listing regime. The indicative change list is normally published in mid-February.
It’s also worth noting Applied Nutrition (APN) recently floated on the London market. It has an ESCC listing and its £358 million market value might be enough to see it scrape into the FTSE 250 at the next reshuffle, although it is right on the cusp between this index and the FTSE Small-Cap so a lot will depend on market movements up until the cutoff point of 22 November as to where it ends up.
Quite a few companies in the Transition category have not publicly commented on whether they will move to the ESCC, including money transfer group Wise (WISE) which is big enough for the FTSE 100.
The Transition category is expected to be an interim status and there is the potential for the FCA to scrap it down the line.
Disclaimer: The editor of this article (Ian Conway) owns shares in Applied Nutrition.
Navigating a significant capital allocation shift in the UK
Anyone who follows the UK investment trust industry will be familiar with the concept of the share buyback as a mechanism for managing the discount between a trust’s share price and its net asset value (NAV). They are a commonly used tool, increasingly so in the current environment in which, discounts have notably widened.
Not everyone is a fan of them, but the economic argument in favour of the buyback is simple and strong. From the perspective of demand, a buyback programme introduces an additional buyer of the trust’s shares which can put upward pressure on the share price. As a secondary impact, the presence of the buyback can also signal confidence in the trust’s underlying assets and strategy, which may attract more investor interest over time, further increasing demand.
Meanwhile, from the perspective of supply, a share buyback reduces the number of shares in circulation for the trust in question, thereby enhancing earnings and dividends on a per share basis. Remaining shareholders are therefore rewarded by owning a larger proportion of the trust as a whole. Furthermore, buybacks only make sense when a trust’s shares are trading at a discount – by definition, this means the investment trust is effectively buying itself back at the price implied by its share price, which is lower than its NAV. This also has a beneficial impact for shareholders, because NAV per share is enhanced. The greater the level of discount, the more value that accrues to shareholders.
On a daily basis, most investment trust buybacks are modest in scale, but if conducted consistently and with discipline, they can have a very material impact for shareholders over time. Taking the maths to an extreme, if an investment trust retires half of its equity over a period, all other things being equal, its earnings and dividends will double on a per share basis. All other things never are equal, of course, but it is difficult to argue against this powerful logic.
A POTENTIAL STRATEGY FOR ANY COMPANY
Investment trusts are listed businesses and undertake share buybacks within the framework of UK company
law, specifically the Companies Act 2006. This permits companies to repurchase their shares, provided they have the necessary shareholder approval and can meet solvency requirements. The same legal principles apply to all UK listed businesses, and while companies operating in industries outside of the investment trust sector may not need to worry about managing their discount to NAV, management teams are often highly sensitive to their market rating and can utilise buybacks to return surplus capital, improve financial metrics and signal market confidence.
In an environment where most market commentators acknowledge the significant undervaluation of the UK stock market, both in the context of history and when compared to other regions, we should not be surprised to see share buybacks becoming more popular with UK company management teams.
Across its recently completed financial year, some 29 (more than 60%) of the portfolio holdings in Schroder Income Growth Fund plc I have had the privilege of managing since 2011 – conducted share buybacks. This compares with 17 (38%) of the fund’s holdings in the prior year. This is a significant increase, which
encompasses a broader range of companies across a wide range of sectors and all sizes.
I believe this is a very positive development – for shareholders in trust and for the UK stock market more broadly – for three key reasons. Firstly, we have a strong preference for businesses with healthy cash flows and solid balance sheets – these types of businesses have the resources to deploy towards share buybacks when the time is right1. Secondly, this is a clear indication that the management teams responsible for the companies in which we have invested have the inclination to reward their shareholders. And thirdly, the increasing prevalence of share buybacks in the UK is a sign that businesses recognise that their shares are undervalued and are increasingly looking to do something about it. As is the case for investment trusts, the more undervalued a company’s shares are, the more value can be created by retiring equity.
CLEARING THE HURDLE
Indeed, it could be argued that management teams should view the returns they can achieve on a share buyback as a “hurdle”, which any other potential use of surplus capital must clear in order to proceed. If the projected returns on, for example, an investment in new facilities or a potential acquisition, are not as attractive as the hurdle rate of return delivered by a buyback, then that particular use of capital should perhaps not be pursued. This would demonstrate good capital discipline.
Ultimately, businesses that have shown such capital discipline in the past have been rewarded for it. One that we have held in the past in the Schroder Income Growth Fund portfolio is the retailer Next. Its management team has consistently demonstrated capital discipline in recent years by using surplus cash flow for a combination of share buybacks (when the shares have been lowly valued) or special dividends (when the shares have been more fairly valued). Between 2000 and 2023, overall group sales growth was relatively modest (5.7% per annum). However, over the same period EPS and DPS grew annually
by 12.5% and 10.4% respectively. Good control of costs played a role here too, as did a degree of operating leverage, but a significant part of this per share growth stemmed from the consistent deployment of share buybacks. Share price performance was even more impressive (+15.3% annualised total return), with the valuation of the shares rising as the market increasingly came to appreciate the company’s impressive capital discipline2
Next isn’t currently held in the Schroder Income Growth Fund portfolio, but we are confident that the successes of the past can be emulated by the many undervalued UK companies that are currently demonstrating a similar degree of capital discipline.
Among them is Shell. As well as delivering a dividend yield of 5.5% to shareholders annually, Shell is currently implementing a $3.5bn buyback programme, having already returned £13.5bn through buybacks over the last 12 months3. Shares outstanding have already reduced by 20% since 2019, which is already making a material difference to the company’s per share financial metrics.
Another example is the mid-cap construction business, Balfour Beatty. Among its many attractive characteristics is management’s consistent capital allocation policy which has delivered £755m in shareholder returns over the last four years through dividends and share buybacks. This represents almost a third of its current market capitalisation. It has retired more than a quarter of its shares in issue during this period and, notably, its share price has more than doubled4
Other examples of portfolio companies that are currently buying back shares include Unilever, NatWest, Qinetiq, Cranswick, and Lloyds. Indeed, with well over half of the current portfolio’s constituents having bought back shares in the last 12 months, this represents a profound shift in capital allocation decision-making that spans a wide range of sectors and all parts of the market cap spectrum. All, however, are united by their management team’s belief that buying back shares is a disciplined and valueenhancing use of surplus cash flow.
1 It is important to note that, as active and engaged shareholders, we would not be supportive of a share buyback unless the company in question possessed this financial strength. Without it, or in situations where a company is contemplating borrowing money to retire equity, a buyback can introduce more financial risk to the investment case, which generally speaking is not a good idea. Typically, a buyback should only be considered as a use for surplus cash flow (the clue is in the name).
2 Source: Bloomberg from 1 January 2000 to 31 December 2023. Past performance is not a guide to future performance and may not be repeated.
3 Source: Company records, as at 1 August 2024.
4 Source: Company records / Bloomberg to 30 September 2024. Past performance is not a guide to future performance and may not be repeated.
GAME CHANGER
To conclude, it certainly doesn’t surprise me to see so many buybacks in the UK currently. It is well observed that the UK stock market is currently undervalued. Indeed, it may represent one of the cheapest asset classes available to investors anywhere in the world. This is not new news, however, and readers may be becoming bored of being told it. What is new is that the current trend towards share buybacks5 is potentially powerful enough to ultimately make a difference to this undervaluation. As we have seen from the case study of Next – and many other businesses around the world that have consistently bought back their shares to the benefit of their remaining shareholders – eventually, the market responds.
Perhaps it is already happening. It is interesting to note that the share prices of all the portfolio holdings mentioned above as examples of businesses that are buying back shares are, at the time of writing, up by more than 25% year-to-date6 Company management teams aren’t the only marginal buyers of UK equities, however. Overseas corporates are also responding to the undervaluation of UK plc by stepping in and bidding for domestic companies at a record rate. Although this is
immediately positive for the shareholders of the companies that are being acquired, it does raise broader longer-term issues about the health of the UK stock market and the broader financial ecosystem. Hence, we are seeing more public discussions around structural reforms which could revitalise prospects for the UK equity market. These have concerned potential changes to listing rules to create a more attractive environment to be a UK plc. There is also focus on whether more UK pension fund capital could be allocated to UK assets. If implemented effectively both of these policy initiatives could also be positive for UK equities.
Some of this improving narrative may be behind the moderation of UK equity outflows and the improved performance of UK equities over the last 12 months. We are hopeful that this will continue and would point to the increasing prevalence of share buybacks, the continued interest of overseas corporates and the prospect of more supportive policies initiatives as reasons to be increasingly positive about the outlook.
Sue Noffke, Head of UK Equities, Schroders Portfolio Manager, Schroder Income Growth Fund plc
5 a buyback can introduce more financial risk to the investment case, which generally speaking is not a good idea. Typically, a buyback should only be considered as a use for surplus cash flow (the clue is in the name).
6 Source: Bloomberg to 16 October 2024 in capital return terms. Past performance is not a guide to future performance and may not be repeated.
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How to protect yourself from the capital gains tax raid
The tools at your disposal to help you avoid an unwelcome tax bill
Chancellor Rachel Reeves announced an astonishing £40 billion of tax rises in her maiden budget, and yet, despite that, there will be relief in some quarters that things didn’t turn out worse.
Capital gains tax is one of the areas where the Reeves’ raid was not as bad as feared, as there had been speculation she would bring capital gains tax rates into line with income tax, with the top rate rising to 45%.
As it stands, she left gains on residential properties untouched, increased the basic rate of capital gains tax from 10% to 18%, and the higher rate from 20% to 24%. These changes came in immediately, so any assets sold from now on are subject to the higher rates.
In and of themselves these changes might not have caused too much distress, were it not for the fact that the annual tax-free CGT allowance has
WHAT ARE THE NEW RATES OF CGT?
Basic rate: Up from 10% to 18%
Higher rate: Up from 20% to 24%
been dramatically scaled back in recent years, from £12,300 to just £3,000.
This leaves investors with annual gains above this amount potentially liable to capital gains tax, unless they take action to protect their profits. There are a number of ways of doing this, but the most obvious is to use tax shelters.
ISAS AND PENSIONS
Investments in both ISAs and pensions can grow free from capital gains tax, and so these tax shelters should be the first port of call for investors hoping
for some chunky growth in their portfolio.
Dividends also grow free from income tax within these wrappers. Those who hold unwrapped investments can perform a manoeuvre called a ‘Bed and ISA’ or ‘Bed and SIPP’ to move them inside the protective walls of these tax shelters. This does involve selling assets so there is potentially a capital gains tax liability at this point, though investors can mitigate this by judicious use of their annual £3,000 CGT allowance.
Those who think they might breach the £3,000 allowance using this approach could consider pairing the sale of a profitable investment with a loss-making one.
Losses can be used to offset gains, thereby reducing the capital gains tax liability, then either or both investments can be repurchased within the ISA or pension.
BUDDY UP ON TAX
Assets can also be transferred to a spouse or civil partner free of capital gains tax, and by doing so investors can utilise two lots of the annual £3,000 CGT allowance on profitable share sales.
By doing a ‘Bed and Spouse and ISA’, it’s also possible to then use two lots of the annual ISA allowance of £20,000 to shelter those assets from future capital gains.
For higher-rate taxpayers, there may also be some merit in transferring assets to a spouse even where the gain exceeds the annual CGT allowance of £3,000 if they are a basic-rate taxpayer.
By increasing the rate of capital gains tax for basic-rate taxpayers more than higher rate taxpayers, the chancellor has narrowed the value of this ploy, but it might still mean paying capital gains tax at 18% rather than 24%.
In this scenario, capital gains are added to your income and can push basic-rate taxpayers into the higher band, so it pays to exercise due care and attention when working out how much to transfer.
VCTs, EIS AND SEIS
Wealthy, adventurous investors who have filled their pension and ISA allowances and still have money to invest might consider much more risky tax shelters such as VCTs, EIS and SEIS, which come with attractive tax perks.
Among these, capital gains on investments held within both VCTs and EIS are free from tax, and in
addition EIS and SEIS schemes allow deferral of, or partial exemption from, the tax made on capital gains made elsewhere.
However, investors should ensure they don’t let the tail wag the investment dog by taking more risk than they’re comfortable with simply to save tax.
VCTs and EIS invest in small, early stage companies which might fail and have low levels of liquidity, so investors must have plenty of other funds to fall back on, as well as a high tolerance for losses.
SWITCHING SOLUTIONS
Capital gains tax doesn’t just cause a problem for those who are calling it quits on their investments and cashing them all in.
Investors who are rebalancing their portfolios, taking profits or moving between investment ideas also face capital gains tax when they sell to reinvest elsewhere.
Again, it’s important not to let the tax tail wag the investment dog, but there are steps you can take to mitigate this, if you wish.
Rather than running stock portfolios themselves, investors could invest in funds and investment trusts.
Capital gains tax on these is due when the investors sells the fund or trust, however the manager can make changes to portfolio companies within the fund or trust without paying capital gains tax.
Personal Finance: Capital gains
Even fund investors may want to sell out from time to time, again for rebalancing purposes, or because a fund manager has left or is underperforming.
Capital gains tax is unfortunately blind to these fairly routine reasons for selling holdings, so investors might also consider turning to multi-asset funds, which include a mixture of shares, bonds, cash, property and other assets.
They come in a variety of risk profiles, so investors can pick one which suits them for the long term.
Changes between different asset classes, funds and shares are again made within the multi-asset fund free from CGT, which is only payable by investors when they sell the multi-asset fund itself.
Many people like running their own portfolios,
so this isn’t for everyone, but if you’re happy taking a hands-off approach, multi-asset funds might be worth a look.
By Laith Khalaf AJ Bell Head of Investment Analysis
THE BIOTECH GROWTH TRUST
The Biotech Growth Trust seeks capital appreciation through investment in the worldwide biotechnology industry. The investment manager (OrbiMed) takes a bottom-up approachto stock selection based on intensive proprietary research. Stock selection isbased on rigorous financial analysis, exhaustive scientific review, frequent meetings with company management and consultations with physicians and other industry experts.
THE PATRIA PRIVATE EQUITY TRUST
The Patria Private Equity Trust provides investors with exposure to leading private equity funds and private companies, mainly in Europe. It invests in private equity funds by making primary commitments and secondary purchases, and it makes “direct” investments into private companies via co-investments and single-asset secondaries.
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:
Dan Coatsworth
Danni Hewson
Laith Khalaf
Laura Suter
Rachel Vahey
Russ Mould
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