CONSUMEEERRR HEALTH CHECK - Investors ...

 
CONSUMEEERRR HEALTH CHECK - Investors ...
STOCK SCREEN: HOW OUR CONTRARIAN PORTFOLIO IS BACK TO FULL STEAM AHEAD

                                             Ignore the US at your peril
                                             Copper-bottomed gold investments
                                             Why risk pays
                                             Investing for the grandchildren
 28 JULY - 3 AUGUST 2017 | £4.90

                             CONSUMEER
                           H
                           HEALTH
                            EALTH C
                                  CHECK
                                   HECK
                             Can British
                           households keep
                            on spending?

  vol 201/2555
investorschronicle.co.uk
CONSUMEEERRR HEALTH CHECK - Investors ...
CONSUMEEERRR HEALTH CHECK - Investors ...
CONTENTS
                             this week...
            Consumer h
            Consumer health
                      ea
                       alth ccheck
                              heck
                                 k
                   22 Harriet Russell
           examines the available
         data to take the pulse of the
          consumer and to work out
           how chang ging spending
            patternss will affect a
               range of retailers

FEATURES
                             Stock screen: How our                                       SEVEN DAYS 6
Ignore the US
at your peril                Contrarian portfolio is                                     The biggest business and investment stories

47 Don’t let high valua-     full steam ahead again                                      of the past seven days: plus what’s rising,
                                                                                         what’s falling, what’s making the head-
tions put you off the US      64 Algy Hall reveals the new picks for his Ken Fisher-      lines, and the key market statistics
market, says Kate Beioley.   inspired contrarian screen and reports on its 26 per
Instead stay focused on      cent total return against 16 per cent from the market       NEWS 9
the fantastic companies
based there and good
                             Copper-bottomed gold                                        9 Jimmy Choo shareholders handed
                                                                                            easy exit Michael Kors has made
fundamentals                 investments                                                    an £896m offer for the British shoe
                             66 Alex Newman explains why investors should                   company
                             pay heed to the strong backing being given to                  • Sage fully valued after weak organic
                             mining projects that involve copper as well as gold            growth
                             Investing for grandchildren                                 10 Capacity concerns weigh on airlines
                                                                                            • Tritax Big Box secures key site
                             34 A grandfather who wishes to give his grand-                 inside the M25
                             children a helping hand asks for advice on the                 • Recovery in sight for Revolution Bars
                             underlying investments                                      12 Payments sector ripe for M&A
                             Why risk pays                                                  Takeover offers for Worldpay and Paysafe
                                                                                            are unlikely to be the sector’s last
                             15, 30, James Norrington finds out how his Best of 350
                             portfolio stands up to a risk analysis while Chris Dillow
                                                                                          CONTENTS CONTINUED OVER PAGE
                             helps us to understand the best times to hold small caps

                                                                                                    28 JUL - 3 AUG 2017 INVESTORS CHRONICLE 3
CONSUMEEERRR HEALTH CHECK - Investors ...
28 JULY 2017
  INVESTORSCHRONICLE.CO.UK

  COMMENT 14                                                                                  FEATURES 22                                                                                          probe into DIY investment platforms
                                                                                                                                                                                                34 Portfolio Building a solid
  Our columnists offer in-depth analysis                                                       22 Consumer health check Harriet
                                                                                                                                                                                                   financial base
  and investment ideas:                                                                          Russell makes sense of retail data
  14 Chris Dillow When uncertainty                                                               to work out which retailers are
     doesn’t matter: The IMF is wrong to                                                         likely to benefit from changing
                                                                                                                                                                                                TIPS 40
     claim that policy uncertainty is a                                                          consumer spending patterns                                                                     40 Share tips
     threat to stock markets                                                                  28 Momentum marches on Momentum                                                                   44 Fund tip
  16 Simon Thompson Five small-cap                                                               investing still works, as the recent                                                           45 Tip updates
     plays: Simon Thompson highlights                                                            strong performance of our no-thought
     five small-cap shares offering decent                                                         holdings demonstrates.                                                                         FUNDS 46
     growth and upside potential                                                                 Chris Dillow reports                                                                           46 Fund news High-yielding trusts lead
  18 Mr Bearbull Satellite of hope: The                                                       30 Does fortune favour the bold?                                                                     asset growth among new launches
     Bearbull income fund finds a growth                                                          Risk specialist Covisum’s fat-tail risk                                                        47 Big theme Avoid US equities at
     opportunity – hopefully                                                                     model gives a nuanced picture as to                                                               your peril
  20 The Trader Rankings are based on                                                            whether our portfolio offers better
     international access, daily market                                                          reward for risk than the FTSE 350,                                                             SHARES 50
     turnover, store of value, and                                                               says James Norrington                                                                          50 Taking Stock Are you listening
     commercial usefulness                                                                                                                                                                         carefully? Reading between the
  21 Property Matters The NHS needs a dose                                                    MONEY 32                                                                                             prepared lines
     of medicine: The NHS needs more                                                          Financial planning, tax and                                                                       51 Results The lowdown on the latest
     primary healthcare centres, but                                                          investment wisdom:                                                                                   company results: Unilever, Nichols,
     progress is agonisingly slow                                                             32 Financial planning FCA launches                                                                   Moneysupermarket.com, Sports Direct,
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4 INVESTORS CHRONICLE 28 JUL - 3 AUG 2017
CONSUMEEERRR HEALTH CHECK - Investors ...
CONSUMEEERRR HEALTH CHECK - Investors ...
SEVEN DAYS
  THE EDITOR
                                                                                                                      it increasingly hard to operate in

                                                                              THE BIG                                 Tanzania. Despite strong produc-
                                                                                                                      tion, a ban on unrefined gold is

  Get your teeth                                                              STORIES                                 leading to big cash outflows and
                                                                                                                      could soon force the closure of

  into strategy
                                                                                                                      the Bulyanhulu mine. Since then,
                                                                                                                      matters have worsened. First, the
                                                                                                                      group was accused of taking a

                                                                             Goodbye                                  “militarised” approach to mine

  I was intrigued this week by news that meat substitute Quorn was sell-
    ing like hotcakes as health-conscious consumers reduce the amount
  of meat in their diets. Quorn’s latest owner, Philippine food group
                                                                             leaseholds
                                                                                                                      security by UK charity Rights and
                                                                                                                      Accountability in Development. A
                                                                                                                      day later, the Tanzanian govern-
  Monde Nissin, isn’t listed in London, but previous owners of the brand     Government proposes ban                  ment handed Acacia a $190bn tax
  have been, and the history offers a really interesting case study in how    Leaseholds on new-build houses           bill, for what authorities claimed
  companies create – or don’t as the case may be – value from innovation.    could become a thing of the past if      were undeclared sales, plus
      The last listed owner of Quorn was Premier Foods, which sold it        government proposals come to frui-       interest. Shares in the gold miner
  to a private equity firm for £205m in 2011. But the innovation behind       tion. Communities secretary Sajid        closed at 233p on half-year results
  the protein took place over 10 years in the agricultural labs of ICI       Javid said the plans – which will be     day, but had sunk a further 30
  in a joint venture with the conglomerate Rank Hovis McDougall,             subject to an eight-week consulta-       per cent when we went to press.
  whose bread business, Hovis, subsequently formed the spine of              tion – would affect future sales,
  Premier Foods. RHM eventually sold its share in the joint venture to
  AstraZeneca, which then offloaded it to private equity a decade later
                                                                             excluding very few exceptional
                                                                             circumstances such as houses             Emissions
  for £72m, who then sold it to Premier Foods for £172m.
      Think about that circle of transactions. Premier Foods spent share-
                                                                             that have shared services. Mr Javid
                                                                             said around 1.2m houses were             eradicated?
  holders’ cash on a business that in a way it had been instrumental         leasehold in England and were            End in sight
  in creating. To add further context, when Quorn was again sold the         rising rapidly, “exploiting home
  price tag had risen to £550m – a £345m gain for its second private         buyers with unfair practices”.           New diesel and petrol cars and
  equity owner and higher than Premier’s current market capitalisation       Plans to set ground rents, which         vans will be banned in the UK
  of £330m. We don’t know how much Quorn is worth now, but the               have increased significantly in           from 2040, under proposals by
  recent strength of its trading and the massive expansion of its ranges     recent years, to zero levels will also   environment secretary Michael
  and factories suggests it is likely to be much higher.                     be subject to public consultation.       Gove. The measure is part of the
      Premier’s long-suffering shareholders should be asking how suc-                                                  government’s air quality plan,
  cessive management teams have let so much value slip through their
  fingers. Indeed, while current complaints lie with the rejection of a       Acacia’s                                 which will make all new cars
                                                                                                                      fully electric within the next 25
  recent 65p a share bid, two-thirds higher than today’s share price, they
  should be more upset that instead of creating a steady accumulation        woes worsen                              years. Local authorities will also
                                                                                                                      be given funds for a range of
  of value for shareholders management has instead created a steady          Tax bill issued                          measures, including changing
  stream of cash for investment bankers and private equity groups.                                                    road layouts or encouraging
      This is not something I say with 20:20 hindsight, either – when        Acacia Mining (ACA) is finding            residents to use public transport.
  Premier sold the brand in 2011 I pondered on our now defunct

                                                                              THE NUMBERS
  Chronic Investor blog that it had perhaps sold off the wrong part of its
  product portfolio in its desperation to keep its bankers happy. Quorn
  was on the right side of a trend towards healthy eating, with difficult
  to replicate intellectual property and few noteworthy competitors
  – what Warren Buffett might call an economic moat. On the other
  hand, the kitchen staples that made up the rest of the portfolio were
                                                                               $1.20 0.3% $506m
                                                                               The amount                   UK GDP growth during      The amount Apple
  being squeezed on price by new entrants, own- and licensed brands            Antofagasta’s (ANTO)         the three months to       has been ordered to
  and aggressive supermarket buyers. A quoted Quorn-only business              net cash costs fell to per   the end of June. This     pay by a US judge
  could have been as exciting for investors as, say, Fever Tree Drinks,        pound of copper mined        was up from the 0.2       to the University of
  another premium niche product making a market its own.                       during the second            per cent reported         Wisconsin-Madison
      As investors we pay lots of attention to a company’s headline finan-      quarter. This should         during the first           over a patent dispute.
  cials and forecasts. But the case of Quorn shows that we need to dig         rise to no more than         quarter, but represents   The US tech giant
  deeper still to put them into context – into strategy and management’s       $1.30 for the full year,     a slower rate of year-    intends to appeal the
  ability to execute it, and the motivations for dealmaking. Numbers           the Chilean group said.      on-year growth.           decision.
  matter, but the businesses and trends behind them matter more.

6 INVESTORS CHRONICLE 28 JUL - 3 AUG 2017
CONSUMEEERRR HEALTH CHECK - Investors ...
BAD
                                                                                                            GOOD                     WEEK FOR
                                                                                                          WEEK FOR:                 PROVIDENT
                                                                                                          FEVERTREE                 FINANCIAL
                                                                                                          DRINKS P60                   P57

                                                                                                                     development for a solid-state

                                                                             Alphabet’s                              electrolyte battery, both smaller
                                                                                                                     and lighter than the lithium-

                                                                             numbers                                 ion varieties currently in
                                                                                                                     widespread use. The new
                                                                             Google still growing                    technology could be in electric
                                                                                                                     vehicles as early as 2020 with

      Trouble in Rio                                                         Reported numbers from
                                                                             Google’s parent company
                                                                             Alphabet (US:GOOGL) were
                                                                                                                     the potential to significantly
                                                                                                                     boost the total charge capacity
                                                                                                                     and extend the range of electric
      It was another bad news week for Rio Tinto (RIO). The Serious          knocked by the $2.7bn (£2.1bn)          vehicles. Engineering such a
      Fraud Office has launched an investigation into the Australian           fine imposed by the European            battery at a realistic price point
      mining giant regarding suspected historic corruption by the com-       Commission earlier this year.           has been a challenge for manu-
      pany, “its employees and others associated with it” in the Republic    Half-year pre-tax profit fell           facturers, so investors would
      of Guinea. Last year, Rio reported itself to the fraud agency after    28 per cent to $3.5bn, which            do well to monitor Toyota’s
      discovering emails dating back to 2011, which related “to con-         sent the shares down 3 per              progress.
      tractual payments totalling $10.5m (£8.1m) made to a consultant”       cent on the day of the results
      involved in the Simandou iron ore project. An internal investigation
      by the commodities giant also led to the resignation of Rio’s long-
                                                                             announcement. Ignore the fine
                                                                             though, and the world’s biggest         Buy-to-let up
      serving legal and regulatory group executive Debra Valentine and       company is still beating expec-         Credit demand growing
      the suspension of energy and minerals chief executive Alan Davies.     tations. Revenues were up by
                                                                             a fifth as both the Google              Despite market nerviness around
                                                                             search engine and YouTube               the buy-to-let market following
                “There is a school of                                        continue to attract a growing
                                                                             proportion of the global adver-
                                                                                                                     the increase in stamp duty last
                                                                                                                     April, credit demand seems to
                thought that speak king                                      tising market.                          be holding up for a challenger
                                                                                                                     bank Paragon (PAG). Buy-to-let
                to management, when                                          Toyota’s                                lending was up 2 per cent during
                                                                                                                     the first nine months of the
                making an investm  ment                                      2020 vision                             year, surpassing the £1bn mark.
                                                                                                                     The proportion of professional
                decision, can be ass                                         Any old ion                             landlords in the pipeline has
                                                                                                                     risen to 70 per cent of the buy-to-
                risky as it can be                                           Reports have emerged that
                                                                             Toyota is close to a major
                                                                                                                     let total during the third quarter,
                                                                                                                     up from 62 per cent at the start
                educational”                                                 breakthrough in electric car
                                                                             technology. The Japanese auto
                                                                                                                     of the year. Perhaps in a sign of
                                                                                                                     relief, investors sent the shares
                TAKING STOCK, PAGE 50
                                                                             giant has reached the “produc-          up 5 per cent on the day of the
                                                                             tion engineering” stage of              announcement.

Chart of the week: Profit warnings reach 7-yr low                         UK main market companies issued
                                                                                                                      Risers and fallers (%)
                                                                         45 profit warnings during the second
                                                                         quarter of this year – the lowest level           TT Electronics             +15.76
                     70                                                  in seven years. This was down from 66             Renewi                     +10.43
                     65
                                                                         warnings put out by FTSE groups for the           Helical Reit                +7.71
Number of warnings

                                                                         same time during 2016 (see chart), ac-            RPC                         +6.94
                     60                                                  cording to research by EY.                        EI                          +6.30
                     55                                                      However, analysts at the professional
                                                                         services group caution: “Earnings fore-
                     50                                                                                                    Provident Financial             -7.56
                                                                         casts have dipped and the economy’s
                                                                                                                           Mitie                           -6.65
                     45                                                  relative outperformance has enabled
                                                                                                                           Johnston Press                  -5.66
                                                                         more companies to meet expectations.”
                     40                                                                                                    Premier Oil                     -5.60
                                       2011-2017                             FTSE general retailers issued seven
                                                                         profit warnings, the highest number of             Spectris                        -4.73
                          Source: EY
                                                                                                                       Week to 25 July 2017
                                                                         any sector during the period.
                                                                                                                       For more market data go to page 8

                                                                                                                     28 JUL - 3 AUG 2017 INVESTORS CHRONICLE 7
CONSUMEEERRR HEALTH CHECK - Investors ...
SEVEN DAYS MARKETS THIS WEEK

   UK stock market                                                                                                                                                  Commodities
                                       1-week    1-month     1-year                                                                             Dividend                                            25/07/17 Year high Year low
    Index                   25/07/17 change (%) change (%) change (%)                           Year high                Year low           PE yield (%)
                                                                                                                                                                    Dow Jones UBSComm. Index          328.93          347.28      302.10
    FTSE 100                7,434.82   +0.60      +0.14      +10.80                             7,547.63                 6,634.40          31.6    3.77
                                                                                                                                                                    BrentCrude $/barrel               50.03           57.06       42.09
    FTSE 250               19,641.28         +0.14          -0.22           +14.92             20,024.92                16,997.13          22.8            2.67
                                                                                                                                                                    Comex gold $/ounce                1,251           1,367       1,127
    FTSE All-Share          4,068.25         +0.54         +0.11            +11.80              4,130.15                 3,603.96          29.5            3.55
                                                                                                                                                                    LME three-month copper            6,225           6,225       4,607
    FTSE Aim                4,926.70         +2.85         +1.28            +38.52              4,969.33                 3,560.43          42.5            1.27     Cocoa £/mt                        1,569           2,455       1,390
                                                                                                                                                                    Coffee Brazil ¢/lb                131.45          170.90      115.39
   FTSE 100 rolling 30-day                                                           Share performance
    7550                                                                               Falls            Rises
    7500                                                                            100
                                                                                    90
                                                                                                                                                                    Currencies
    7450                                                                            80
                                                                                                                                                                                       Rate           1 year max.             1 year min.
                                                                                    70
                                                                                                                                                                    US$ vs £           1.30              1.34                    1.21
    7400                                                                            60
                                                                                    50                                                                              Euro vs £          1.12              1.20                    1.11
    7350                                                                            40
                                                                                                                                                                    Yen vs £          145.63            147.75                  126.09
                                                                                    30
    7300                                                                            20                                                                              SFr vs £           1.24              1.31                    1.19
                            Jun                           Jul                       10

           Source: Thomson Datastream                                                0
                                                                                                                                                                      MORE ONLINE
                                                                                          28/06/2017       05/07/2017      12/07/2017   19/07/2017     26/07/2017

                                                                                                                                                                      For more cross rates and a currency convertor, see
    IC ONLINE                                                                                                                                                         http://markets.investorschronicle.co.uk
    For more UK market data, see http://markets.investorschronicle.co.uk

   Other major markets                                                                                                                                              Official interest rates
                                             1-week    1-month                        1-year                                                    Dividend                                         Rate (%)                  Since
    Index                         25/07/17 change (%) change (%)                    change (%)          Year high         Year low         PE   yield (%)           UK Bank rate                  0.25                    4/8/16
    Eurofirst 300                 1,496.90    -0.40     -1.75                         +11.30            1,558.02          1,296.32        23.80   3.42              ECB Repo rate                 0                      16/3/16
    CAC 40                        5,161.08       -0.24          -1.99                +17.62             5,432.40          4,321.08        19.06            3.20     US Fed Funds             1.00–1.25                   14/6/17
    Dax 30                        12,264.31      -1.34          -3.68                +20.26            12,888.95 10,144.34 19.79                           2.73     Japan                     -0.1–0.1                   29/1/16
    Dow Jones                     21,613.43     +0.18           +1.02                +16.87            21,640.75 17,888.28 18.72                           2.30
    S&P 500                       2,477.13      +0.67           +1.59                +14.23             2,477.13           2,085.18       21.58            1.97
    Nasdaq Comp                   6,412.17      +1.07           +2.34                +25.79             6,412.17           5,046.37       34.24            1.10     Government bonds
    Nikkei 225                    19,955.20      -0.22          -0.88                +20.07            20,230.41 16,083.11 19.10                           1.72     Govt bond yields               %           Year high        Year low
                                                                                                                                                                    UK: 10-year gilts             1.32           1.51             0.61
    Hang Seng                     26,852.05     +1.23           +4.60                +22.09            26,852.05 21,574.76 14.48                           3.30
                                                                                                                                                                    US: 10-year Treasuries        2.33           2.61            1.46
    Australia ASX All Ords        5,775.30      +0.65           +0.36                  +2.99            5,976.40           5,238.30       20.43            4.08
                                                                                                                                                                    Germany: Bunds                0.50           0.57            -0.22
                                                                                                                                                                    Japan: JGBs                   0.07           0.11            -0.30
   Key emerging markets
                                      1-week    1-month     1-year                                                                              Dividend
    Index                  25/07/17 change (%) change (%) change (%)                            Year high                Year low          PE yield (%)                MORE ONLINE
    Brazil iBovespa        65,667.63  +0.50      +7.50      +15.46                             69,052.00                56,162.38         17.70    2.99                For more global bond data, see
                                                                                                                                                                       http://markets.investorschronicle.co.uk
    Russia RTS              1,010.06         -2.73         +2.14            +8.53               1,195.61                 903.04            7.00            5.35
    India CNX Nifty        10,328.47         +1.48         +4.43            +16.97             10,328.47                8,093.89          23.25            1.31
    China SE Comp           3,243.69         +1.76         +2.72            +7.56               3,288.97                2,953.39          17.45            1.95     Corporate bond indices
    Thailand SET            1,581.42         +0.63          -0.06           +4.55               1,591.00                1,406.18          16.19            3.10                         25/07/17 Yield (%) Year high Year low
    Turkey ISE 100         107,040.60        +1.25         +7.43            +44.31             107,417.50               72,519.81         11.38            2.49     Investment grade     97.23     1.14     99.75 96.42
    Argentina Burcap 60,173.45               +1.55         +2.99            +36.43             62,932.77                42,155.36            na            0.90     High yield             120.25        2.71          120.33 116.54

   Economic indicators                                                                                                                                                MORE ONLINE
                                                                                                                                                                      For prices of popular corporate bonds and Pibs, see
   Indicator                                  UK                          US                             Germany                               Japan                  www.investorschronicle.co.uk/bonds.
   Inflation (IndexJan 87=100)             272.3 (Jun)                 245.0 (Jun)                        109.0 (Jun)                          99.8 (Jun)
   Change onyear                            +3.5%                       +1.6%                              +1.4%                               +0.1%

   Unemployment
   Change onyear
                                          0.81m (Jun)
                                            +4.6%
                                                                      6.98m (Jun)
                                                                        -10.5%
                                                                                                         2.55m (Jun)
                                                                                                            -5.5%
                                                                                                                                            2.05m (May)
                                                                                                                                               -3.3%
                                                                                                                                                                    UK yield curve
   Industrial production                  104.1 (May)                 105.2 (Jun)                        114.1 (May)                        100.1 (May)               2
   Change onyear                            -0.3%                       +2.0%                              +4.9%                              +4.7%’                                               12 months ago
   Average earnings                      £473.0 (May)                 $9.28 (Jun)                        111.2 (May)                        101.2 (May)             1.5
   Change onyear                           +2.2%                        +0.9%                              +2.7%                              +0.4%

   Retail salesvolume                     115.9 (Jun)               $479,358m (May)                      112.4 (May)                     ¥11,766bn (May)              1
   Change onyear                            +2.9%                       +4.4%                              +4.9%                             +2.1%                                      3 months ago
                                                                                                                                                                    0.5                                               26 July 2017
   Current account                      -£16.9bn (Q117)         -$116,781m (Q117)                      +€17.29bn (Jun)                  +¥1,400.90bn (May)
   Actual change on year                   +£8.83bn                   -2.0%                                -3.5%                              -8.6%

   Moneysupply– M1                       £82.4bn (Jun)              $3,497.7bn (Jun)               €2,813.3bn (May)                      ¥712,525bn (Jun)             0
   Change on year                           +6.3%                       +7.7%                           +5.0%                                +7.6%                        1M     3M   6M    2Y     3Y    5Y     10Y     15Y    20Y 30Y
                                                                                                                                                                                                    Maturity

8 INVESTORS CHRONICLE 28 JUL - 3 AUG 2017
CONSUMEEERRR HEALTH CHECK - Investors ...
NEWS
PERSONAL GOODS

Jimmy Choo shareholders                                                                            Sage fully valued after
                                                                                                   weaker organic growth
handed easy exit strategy                                                                          Sage (SGE) waited until after market-
                                                                                                   close to issue both a trading update and
Michael Kors has made an £896m offer for the British shoe company                                  the news that it will acquire Intacct – a
                                                                                                   provider of cloud financial management
                                                                                                   solutions in North America. The market
                                                                                                   did not react well, with Sage’s shares
HARRIET RUSSELL                                                                                    falling 5 per cent in early trading on

J  ust three months after its largest share-
   holder announced it was up for sale,
Jimmy Choo (CHOO) has found a buyer.
                                                                                                   Wednesday before partially recovering.
                                                                                                   This decline perhaps reflected the high
                                                                                                   price paid for Intacct, at $850m (£654m).
Michael Kors (US:KORS) – the US-listed                                                             Equally, investors might have balked at
behemoth which also takes its name from                                                            the weaker organic growth of 5.6 per cent
its founder and lead designer – has agreed                                                         reported for the third quarter, compared
to pay a 37 per cent premium to the share                                                          with 6.3 per cent during the second quar-
price the day prior to the sale announce-                                                          ter. That said, management reiterated its
ment. It has made a 230p all-cash offer          German investment group JAB – which owns          full-year guidance of 6 per cent organic
totalling £896m. The market reacted well,        70 per cent of Jimmy Choo – is backing the deal   growth, with an underlying operating
sending Jimmy Choo’s share price up                                                                margin of no less than 27 per cent.
17.5 per cent on the day of the news.            activity has also helped push individual              France was an area of weakness
    German investment group JAB – which          stock valuations upwards. Just three months       for Sage, with flat performance. The
owns 70 per cent of Jimmy Choo – is backing      ago, conglomerate LVMH (MC.) agreed to            software provider’s overall recur-
the deal, as is the company’s own chairman       shell out £10bn for the remaining stake           ring revenue growth rate for the nine
Peter Harf. Mr Harf said a combination with      it didn’t already own in Parisian couture         months to end of June was 9.3 per
Michael Kors would allow Jimmy Choo to           house Christian Dior, while US handbag-           cent, less than the 10.1 per cent growth
embark on its next phase of growth and           maker Coach (US:COH) has agreed a $2.4bn          during the same period a year earlier.
provide opportunities for the benefit of Jimmy   (£1.8bn) takeover of accessories brand Kate       North America helped to drive growth
Choo customers, employees, shareholders          Spade. By way of comparison, that last deal       and management sees the acquisition
and other stakeholders.                          constituted a 27.5 per cent premium to Kate       of Intacct as supportive of this. For
    But this is something the company has        Spade’s undisturbed share price.                  analysts at Numis, such an acquisition
struggled to accomplish during its three years                                                     might be transformational for Sage,
as a listed entity. Growing levels of competi-   • In our opinion, this is a very generous         which would have found it almost
tion and a shift in consumer tastes culmi-       offer, and a great outcome for Jimmy Choo         impossible to develop a solution like
nated in a 0.8 per cent dip in like-for-like     shareholders. Valuations across the luxury        Intacct’s on its own.
retail sales growth at Jimmy Choo during 2016    sector have looked very toppy this year, so           At 667p, Sage’s shares are trading on
which, along with declines in the wholesale      there’s a concern that if consolidation con-      a multiple of 23 times forecast earnings
business and costs associated with new open-     tinues, premiums could be thin. Not so in         for 2017. The integration of Intacct may
ings, dragged pre-tax profit down by a fifth.    this case. The acquisition implies an enter-      bring a different, growth-enhancing
    That said, the share price has benefited     prise value multiple of approximately 17.5        element to the overall group. However,
this year from improved sentiment for the        times 2016’s adjusted cash profits. What’s        with lower organic growth forecasts in
luxury sector, particularly as the weak          more, the offer price is actually a 59.6 per      mind, we think the shares look fairly
pound drives more tourists to London and         cent premium to Jimmy Choo’s six-month            valued. We move to hold.
helps deliver reported currency benefits for     volume weighted average share price of            Harriet Clarfelt
a number of global brands. A surge in M&A        144p (to 21 April 2017). At 228p, hold.

                                                                                                             28 JUL - 3 AUG 2017 INVESTORS CHRONICLE 9
CONSUMEEERRR HEALTH CHECK - Investors ...
NEWS

                                                                                                         REAL ESTATE INVESTMENT TRUSTS

                                                                                                         Tritax Big Box gets
                                                                                                         key site inside M25
                                                                                                         JONAS CROSLAND

                                                                                                         T    ritax Big Box Reit (BBOX) has exchanged
                                                                                                              conditional contracts for £65m to buy a
                                                                                                         development site at Littlebrook in Dartford. This
                                                                                                         is the former Littlebrook Power Station that
                                                                                                         was closed in 2015 and is a rare site inside the
                                                                                                         M25. It covers 124 acres and has the potential to
                                                                                                         provide around 1.7m of development space.
                                                                                                             Tritax will be working in conjunction with
                                                                                                         specialist logistics developer Bericote Properties
                                                                                                         to apply for planning consent to cover the 1.2m
                                                                                                         sq ft that currently does not have consent for
                                                                                                         use for storage and distribution. The site will be
  Budget airline easyJet is likely to encounter some turbulence                                          developed in phases, with site costs estimated
                                                                                                         at £25m, and construction will commence on a
   TRAVEL & LEISURE                                                                                      pre-let basis from autumn 2018.

  Capacity concerns                                                                                      • This is a big addition to the portfolio,
                                                                                                         and given the location it’s unlikely there

  weigh on airlines
                                                                                                         will be any trouble finding tenants.
                                                                                                         Tritax is running an unexpired lease
                                                                                                         length of around 15 years, and pays an
                                                                                                         attractive and fully covered dividend. At
  Increasing capacity could weigh on yields for easyJet and Ryanair                                      147p, the shares remain a buy.

                                                                                                         TRAVEL & LEISURE
                                                         of 93.1 per cent, an improvement of 1.1
                                                                                                         Recovery in sight
  JULIA FAURSCHOU

  B    udget airline easyJet (EZJ) may soon
       encounter some turbulence. Outgoing
  chief executive Carolyn McCall has warned
                                                         percentage points. Revenue per seat was up
                                                         2.2 per cent at constant currency and total
                                                         revenue increased 16 per cent to £1.4bn,        for Revolution Bars
  that increased capacity could soon put                 although this was largely aided by Easter
  pressure on yields during the group’s latest           falling during the third period of this year.   JULIA FAURSCHOU
  quarterly update. This excess capacity is an
  issue across the wider industry, as airlines
  tend to increase the number of seats they
                                                         • At 1,271p, shares in easyJet are
                                                         creeping towards the top end of their
                                                                                                         R    evolution Bars (RBG) appears to be on
                                                                                                              the mend after its profit warning in May
                                                                                                         sent its shares down more than 40 per cent.
  offer when lower fuel prices makes it                  historical valuation, at 15 times forward       The company announced that total sales in the
  cheaper to operate flights.                            earnings. This looks expensive given            year to July were up 9 per cent to £130m, while
      Jozsef Varadi, chief executive of                  the warning on yields, and analysts             like-for-like sales were up 1.5 per cent. Terrorist
  fellow low-cost airline Wizz Air (WIZZ),               expect that leverage and free cash flow         attacks in Manchester and London impacted
  expressed similar sentiment to Ms McCall               could take a hit at the expense of higher       sales in the final quarter, but growth in the
  earlier this week when he warned that                  capex. This could pose a threat to the          past six weeks has recovered to 2.7 per cent.
  airlines tend to compete away the benefit              dividend. The fact the company has                  Costs were one of the main issues in May’s
  of lower fuel prices with extra capacity.              secured its future operations in Europe         profit warning. The living wage, the double
  As a result he is “cautious on the prevail-            with an Air Operator Certificate in             increase to the minimum wage, the appren-
  ing yield environment” during the second               Austria is positive. However, at this lofty     ticeship levy, and above-inflation increases
  half of the year. Management at Ryanair                valuation – especially compared with            to business rates ended up being more of a
  (RYA) also stated in May that average                  peers Ryanair (RYA) and Wizz Air (WIZZ)         headwind than previously expected.
  fares during the year to March 2018 could              – we’re going to shift to hold for now.
  fall by between 5 and 7 per cent, due to a             Ryanair appears to be in a similar situa-       • A new chief financial officer was
  combination of weak sterling and continu-              tion as easyJet where increasing capac-         appointed last month, after Revolution Bars
  ing excess capacity in Europe.                         ity could eventually weigh on yield, so         had gone through three in two years. The
      easyJet has continued to increase                  also a hold. However, we believe Wizz           share price rally suggests a correction may
  capacity this year. It was up by 9.5 per cent          Air is well positioned to exploit the           be on the horizon, after the dramatic slide
  during the third quarter to 24m seats. The             long-term prospects for central and             in May. At nine times Bloomberg consensus
  number of passengers carried increased                 eastern European air travel, keeping us         earnings, we think the shares represent
  by 10.8 per cent to 22.3m with a load factor           bullish on that budget airline.                 good value for a growing business. Buy.

10 INVESTORS CHRONICLE 28 JUL - 3 AUG 2017
NEWS SPOTLIGHT
  Payments sector
  ripe for M&A
  Takeover offers for Worldpay and Paysafe are unlikely
  to be the sector’s last

                              HARRIET CLARFELT

                              P    ayments. It might not sound like the most exciting of
                                   industries. But something about the sector has got
                              major businesses – including Vantiv, Blackstone and CVC
                              Capital Partners, among others – hot under the acquisi-
                              tive collar. As we noted earlier in July, following Vantiv’s
                              successful bid for payments giant Worldpay (WPG), the
                              payments sector is being propelled forward by the global
                              shift towards e-commerce. And, as consumers around
                              the world continue to use cash less frequently, payments
                              processors will only become more integral to everyday          Vantiv’s bid for Worldpay shows it expects more growth to come
                              life. We appear to be witnessing consolidation across the
                                                       payments industry – begging the       offered its support for a potential deal, other sharehold-
                               ‘We appear to           questions, which company will         ers may not find the terms so attractive. Each share-
                               be witnessing           be targeted next as a potential       holder would receive 590p in cash per share, equating to
                               consolidation           acquisition? And why would one        a premium of 34 per cent to Paysafe’s average share
                               across the pay-         want  to acquire such a company?      price during the six months to the end of June 2017.
                                                       It seems fair to assume that the      However, Paysafe’s shares have enjoyed a bullish run in
                               ments industry          bidders for both Worldpay and,        recent months, rising 46 per cent since the start of the
                               – begging the           more recently, Paysafe (PAYS)         year. The shares closed at around 540p on the day prior
                               question, which anticipate further growth for the             to the offer announcement – just a 9 per cent discount to
                               company will be businesses going forward.                     the takeover price.
                                                           Payment processors have fast          Could Paysafe be better off on its own? The bidding
                               targeted next           become the acquisition du jour.       consortium would want to sell off Paysafe’s non-
                               as a potential          Over the past month, we not           core Asia Gateway business to help finance the acquisi-
                               acquisition?’           only witnessed Vantiv’s bid for       tion. For Mr Khan, based on a valuation of eight times
                                                       Worldpay, but also the pur-           earnings, Asia Gateway could be worth 55p a share.
                                                       chase of Digital River Payments       If Paysafe was to sell this business itself, Mr Khan
                              by Worldline, Ingenico’s takeover of Bambora, and              believes management could drive the group’s share price
                              Permira taking a 10 per cent stake in Swedish payments         up as high as 650p as a standalone entity, making the
                              processor Klarna. By the time Paysafe announced it had         590p offer price look relatively cheap.
                              received a possible takeover offer from a private equity           There is no certainty about whether a deal will go
                              consortium comprising funds managed by Blackstone              ahead. However, Paysafe is operating against a dog-
                              and CVC last week, the market had spent several days           eat-dog backdrop of consolidation, demonstrated by its
                              acclimatising to a developing trend. Shares in Paysafe         own acquisition of MCPS for $470m (£362m). This should
                              rose 8 per cent on the news, a reaction subdued                enable it to save money in the US while generating higher
                              perhaps by prior M&A activity in the payment process-          returns and enhancing its presence there.
                              ing sector. The market response was also obscured by
                              Paysafe’s announcement of its own acquisition: Texas-          • Based on UBS’s forecast EPS of 51¢ for the 12
                              based Merchants’ Choice Payments Solutions (MCPS).             months to December 2017 prior to the bid, the offer
                                  For Canaccord Genuity analyst Daud Khan, the offer         price equates to 15 times forwards earnings. This is
                              for Paysafe is motivated by the heightened acceleration        well below the value attached to Worldpay (WPG) by
                              of consolidation in the sector. Mr Khan does not believe       its bidders, at 30 times forward earnings. Admittedly,
                              this will be the private equity duo’s only acquisition         the latter has a market capitalisation more than three
                              in the payments area – rather, Paysafe may form the            times that of Paysafe. However, this is by no means
                              cornerstone of consolidation, with two or three more           a done deal and other bidders may come forward.
                              acquisitions to follow.                                        Considering this trend towards consolidation, it is
                                  An important question is whether the terms of the          worth watching other players in the market – such
                              offer will satisfy enough shareholders for the deal to         as Paypoint (PAY) or small-cap Monitise (MONI).
                              complete. While Old Mutual – Paysafe’s largest share-          For Paysafe, the shares look fairly priced at 583p.
                              holder, with a stake of around 10 per cent – has already        Hold

12 INVESTORS CHRONICLE 28 JUL - 3 AUG 2017
ECONOMIC OUTLOOK
Inflation to fall
                                                                                 since fallen by a percentage point.
                                                                                     This might not be due simply to difficulties in measur-
                                                                                 ing ‘equilibrium’ unemployment but rather to a changed
                                                                                 relationship between spare capacity and inflation.
Chris Dillow says inflation will probably                                            This introduces a new element of uncertainty. Not only
fall from now on                                                                 do we have ordinary environmental uncertainty – about
                                                                                 the likely influences upon inflation such as sterling,
                                                                                 consumer spending. productivity and so on – but we
                                                                                 also have model uncertainty: what is it, precisely, that
                                                                                 determines inflation?
                                                                                     Our best guess might be that inflation will fall towards

                T    he threat of sustained above-target inflation has
                     passed. The Bank of England is likely to say in next
                week’s Inflation Report that it expects CPI inflation to fall
                                                                                 its target. But there are risks around this.

                next year to below its 2 per cent target.                        Next week’s economics…
                    There are two fundamental reasons for this.                  The economy is growing slowly, which means there’s little
                    One is that wage inflation has fallen, from 2.8 per cent     chance of an interest rate rise soon, next week’s news
                in November to just 1.8 per cent in the latest numbers. This     might tell us.
                is a big surprise: most economists had expected higher               Purchasing managers’ surveys are expected to show
                price inflation and lower unemployment to raise wage             only moderate growth. In manufacturing, growth might
                growth. This means there is now little danger of a wage-         dip to a 12-month low, and in services to an 11-month one.
                price spiral.                                                    The construction sector might also be weak.
                    The other is that global inflation is low. Commodity             Bank of England data on lending isn’t likely to show a
                prices have fallen by 8 per cent since January. Thanks to        much cheerier picture. The good news is that these could
                this, UK producer input prices have dropped almost 2 per         show that lending to companies has increased recently.
                cent since then.                                                 Such a welcome development is, however, mitigated by
                    These disinflationary forces should mean that CPI            the fact that corporate cash holdings are also rising a lot.
                inflation will fall soon simply because rises in import prices       In the household sector, we could see another drop in
                caused by last year’s fall in the pound will drop out of the     mortgage approvals, confirming a slowdown in the housing
                annual data. It now looks as if those rises will cause only      market. But we should also see that consumer credit is
                a one-off jump in the level of consumer prices, rather than      rising at a steady 10 per cent-plus annual rate. Some see
                sustained inflation.                                             this as evidence of irrational profligacy among consumers,
                    This doesn’t, however, mean inflation will slump. One        but it might instead be a hopeful sign, that people are look-
                problem is that labour productivity is stagnant. If this         ing through the current squeeze on real incomes towards
                continues, it means that even modest wage rises won’t be         better times, and are borrowing in anticipation of them.
                offset by efficiency gains. Two per cent wage growth would           On Thursday, the Bank of England publishes its
                then mean a 2 per cent rise in unit wage costs, which in         Inflation Report. This is likely to predict a drop in infla-
                turn would mean 2 per cent inflation unless raw materials        tion next year. The recent fall in CPI inflation and surpris-
                or import prices fall or unless profit margins get squeezed.     ing weakness of wage inflation has reinforced hopes that
                    Also, a recent Bank of England survey found that house-      inflation will fall next year as the rise in import prices
                holds plan to continue to increase their nominal spending        passes out of the numbers. With the Bank also likely to
                next year. This is an environment in which retailers might       highlight the weakness of real growth, this will point to
                try to edge up prices.                                           interest rates staying low.
                    Nor does it mean that interest rates won’t rise. There’s         This doesn’t, though, mean rises are off the table. If
                a case for trying to return rates to a more normal level         the Chancellor’s Autumn Statement retreats from auster-
                – or at least to remove last year’s insurance cut. Unless        ity, looser fiscal policy might trigger a rate rise next year.
                growth is very weak, some MPC members will continue to               Overseas, we should see good growth, at least outside
                make this case.                                                  of China (where purchasing managers might report only
                    It’s also possible that the chancellor will interpret the    a sluggish expansion). In the eurozone, purchasing
                general election result as a vote against austerity and so       managers should confirm that although growth slowed
                use the Autumn Statement to relax fiscal policy. Less tight      last month it remains near a six-year high, while official
                fiscal policy should lead to less loose monetary policy.         figures should show a drop in unemployment. And in the
                    There is, though, a big and under-appreciated uncer-         US, the ISM survey should show strong growth in manu-
                tainty here. It’s that the dominant traditional theory of        facturing while Friday’s numbers should show a 200,000+
                what causes inflation is now in question. Economists used        rise in net new jobs.
                to think inflation depended in large part upon the amount            This growth is not, however, causing significant
                of spare capacity in the economy. The fact that wage infla-      inflation. In the eurozone, Monday’s figures should show
                tion has fallen, despite low unemployment, brings this into      core consumer price inflation running at around 1.2 per
                question. Back in November, the Bank estimated that the          cent – only a slight rise in recent months and well below
                “unemployment rate is currently close to its medium-term         target. And in the US, wage growth is likely to be stuck
                equilibrium rate — that consistent with neither upward nor       around 2.5 per cent despite unemployment falling to a
                downward pressure on wage growth”. But wage growth has           16-year low.

                                                                                                         28 JUL - 3 AUG 2017 INVESTORS CHRONICLE 13
COMMENT
   CHRIS DILLOW
                                                                                                But this isn’t the case. Since January 1997 the cor-
                                                                                            relation between the CBOE’s Vix index and subsequent
                                                                                            annual changes in MSCI’s world index has been just 0.04
                                                                                            – essentially zero. Volatility, then, tells us nothing about
                                                                                            future returns. This is consistent with low volatility being
                                                                                            a sign of disagreement rather than of complacency.
                                                                                                But what about the combination of low volatility,

  When uncertainty                                                                          policy uncertainty and “rich valuations”?
                                                                                                One obvious sign of “rich valuations” is the cycli-
                                                                                            cally-adjusted price-earnings ratio (or caper) on the S&P

  doesn’t matter
                                                                                            500, complied by Yale University’s Robert Shiller. It is
                                                                                            now just over 30, which is almost twice its average since
                                                                                            1871. This is “rich”.

  The IMF is wrong to claim that policy                                                      Global economic policy uncertainty index
  uncertainty is a threat to stock markets                                                   300

                                                                                             250

                                                                                             200

                              I
                                    n its latest economic forecast, the IMF says             150
                                    something odd. It’s this: “Rich market valuations
                                                                                             100
                                    and very low volatility in an environment of high
                                    policy uncertainty raise the likelihood of a market       50
                              correction.”
                                  There are several problems with this.                         0
                                                                                                97    99      01     03     05   07   09   11   13   15   17
                                  One is that high policy uncertainty should already            Source: policyuncertainty.com
                              be reflected in share prices. In fact, if policy uncertainty
                              increases downside risk it should be a source of a risk
                              premium in equities – something that generates high               So, how do this, the Vix and policy uncertainty taken
                              returns for the investor brave enough to take it on.          altogether predict returns? We can answer this simply by
                                  History shows that this is the case. We have an index     a regression equation linking annual changes in MSCI’s
                              of global economic policy uncertainty compiled by             world index since 1997 to these three variables.
                              Stanford University’s Nick Bloom and colleagues. Since            Such an equation tells us that the caper is indeed
                              January 1997 (when their data begins) the correlation         associated with lower subsequent returns. But policy
                              between this index and subsequent annual changes              uncertainty and the Vix have no statistically significant
                              in the MSCI world index has been slightly positive, at        association with subsequent returns. Valuations tell us
                              0.2. (That between policy uncertainty and subsequent          something, but volatility and policy uncertainty don’t.
                              changes in the All-Share index has also been slightly             This regression points to global equities rising
                              positive, at 0.17.) This means that above-average policy      slightly over the next 12 months, albeit with a significant
                              uncertainty has been associated with equities being           chance of a fall – around a one-in-five chance of a drop
                              slightly more likely than not to do better than average       of 10 per cent or more. Maybe this corroborates the IMF’s
                              in the following 12 months. Which is consistent with          warning of a heightened chance of a correction. But if
                              uncertainty being priced into markets and generating          it does, all the work is being done by valuations: policy
                              a risk premium. For example, uncertainty peaked in            uncertainty and volatility are irrelevant.
                              January of this year and since then global equities have          Does this mean the IMF is wrong to warn of the risk
                              risen almost 7 per cent.                                      of a correction?
                                  There’s another problem. Low volatility is not a              Not at all. There is such a chance simply because
                              sign that investors are complacent. It’s a sign that they     there always is.
                              disagree: share prices are stable and volatility is low           I suspect that what the IMF is doing here is trying to
                              when sellers can easily find buyers and vice versa.            find a rational basis for what is in fact a hunch or gut
                              Disagreement, however, should have no predictive              feeling. Frankly, I share that hunch: in fact, I reduced my
                              power in itself for share prices.                             equity exposure in May. But it’s hard to fully justify such
                                  We can test this. If the IMF is right, we’d expect to     a hunch. And it might even be impossible: if there were
                              see a significant positive correlation between volatility      obvious warnings of market falls, investors would sell as
                              and subsequent changes in global equities – so that low       these warnings became clear and so there wouldn’t be a
                              volatility leads to poor returns.                             subsequent fall at all.

14 INVESTORS CHRONICLE 28 JUL - 3 AUG 2017
Not all hunches, however, reasonable, can be wholly       market does well. Controlling for the other things which
rationalised. Not all useful economic statements are          we’ll come to, a 10 percentage point above-average
entirely scientific.                                           annual return on the All-Share index is associated with
                                                              small caps outperforming large ones by 2.7 percentage
                                                              points.
When to buy small caps                                            Valuations also matter. Dividend yields on small
Should investors hold lots of smaller stocks? It depends      caps and the FTSE 100 also predict subsequent annual
upon your time horizon and attitude to risk.                  returns.
   In the long run, it doesn’t matter much, because small         Short-term interest rates also matter. High and/or
caps do about as well as larger ones. Since 1990, total       rising rates are bad for small caps.
returns on the FTSE small cap index have been much the            Another determinant is the 10-year gilt yield. When
same as those on the FTSE 100.                                this rises, small caps do well. Taken with the adverse
   Yes, small caps did outperform before the 1980s. But       effect of rising short rates, this implies that a flattening or
investors wised up to that fact in the 1980s and bought       inversion of the yield curve is bad for small caps, while
smaller stocks so much as to raise their prices and so bid    a steepening is good. This is consistent with small caps
away their previous underpricing. Markets do sometimes        being cyclical. Flattenings of the yield curve often point
learn.                                                        to slower growth, and this is worse for small caps than
   In fact, there’s a good reason to expect similar long-     for big ones.
term returns on small and large stocks. It’s Gibrat’s law,        Two other things confirm that small caps are cyclical.
the idea that growth is independent of size. If smaller       One is that they tend to outperform the FTSE 100 when
companies grew faster than big ones, we’d eventually          manufacturing grows well, but underperform when it
end up with a market in which all stocks were the same        falls. Small caps did badly, for example, in the recessions
size. And if big ones grew faster, we’d end up with a giant   of 1991 and 2008-09.
monopoly. Neither outcome has happened over three                 The other is that small caps outperform when sterling
hundred years of capitalism, which is reason to suspect it    rises. One reason for this is that FTSE 100 stocks get most
won’t happen (although not, of course, proof.)                of their earnings from overseas, and a stronger pound
   Over shorter periods, however, small caps can be           reduces the sterling value of such earnings. Another
very attractive. For example, in the last five years they’ve   reason is that a stronger pound is often a sign of rising
returned 133 per cent, 75 percentage points more than the     confidence in the UK economy, and this benefits small
FTSE 100.                                                     caps more than big ones. When sterling fell after the vote
                                                              to leave the EU (because investors anticipated slower
 Annual changes in small caps relative to                     growth), small caps fell relative to the FTSE 100.
                                                                  We could use these factors to predict relative returns.
 FTSE 100                                                     I reckon that on consensus assumptions, they point to
  50
                                                              small caps outperforming the FTSE 100 slightly over the
  40
                             Actual
                                                              next 12 months. This is because they should benefit from
  30
                                                    Fitted    small rises in the All-Share index and in output more
  20                                                          than they suffer from a small rise in interest rates, and
  10                                                          valuations aren’t sending a strong message either way.
   0                                                              I’d rather, though, use all this as a guide to risk.
 -10                                                              The big risk here is not so much that small caps would
 -20                                                          be hurt by rising interest rates. If rates do rise signifi-
                                                              cantly, it will probably be because economic growth
 -30
                                                              justifies a normalisation of rates – in which case what
   87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17
                                                              small caps lose from rising rates they should gain from
       Source: Thomson Datastream & Investors Chronicle
                                                              rising output.
                                                                  Instead, the big risk is of recession. Falls in output,
   Which poses the question: what determines shorter-         sterling and gilt yields – all of which would probably
term fluctuations in small caps relative to big ones?          happen in a recession (or if investors fear recession) – are
   One problem we face in answering this is that returns      bad for small caps.
on the FTSE small cap index relative to the FTSE 100 are          In the near term, the threat of recession is probably
very volatile. It’s common for returns on small caps to       small. In fact, there’s hope for small caps; they would
deviate by more than 20 percentage points from FTSE           benefit (in relative terms at least) if, as I suspect is pos-
100 returns over a 12-month period. Anything that’s so        sible, sterling rises.
volatile will be hard to explain. Because of this, raw            In the longer-term, though, a recession is inevitable.
correlations between annual relative returns and factors      Any gains you make on small caps are probably just a
you’d expect to explain such returns are quite low.           reward for taking on this risk.
   If we take such factors together, however, a pattern
does emerge. There are a few things that help explain          MORE ONLINE
relative returns.                                             E-mail chris.dillow@ft.com. See more articles by Chris at:
   One of these is the All-Share index. Small caps on         www.investorschronicle.co.uk/comment/chris-dillow
average outperform the FTSE 100 when the general

                                                                                                                       28 JUL - 3 AUG 2017 INVESTORS CHRONICLE 15
COMMENT

                                                                                             update from Lombard Risk Management (LRM:10.5p),

   COLUMN
   SIMON THOMPSON
           TITLE                                                                             a provider of collateral management and regulatory
                                                                                             reporting software products to clients including 30 of
                                                                                             the top 50 global banks, hedge funds and asset manag-
                                                                                             ers. The shares were marked down 16 per cent to 11p, so
                                                                                             retracing more than half the gains made after I advised
                                                                                             buying at 9p (‘Banking on regulation’, 13 March 2017)
                                                                                             and have dropped well below the 13.75p level at which I

  Five small-cap plays                                                                       maintained a positive stance at the full-year results (‘Five
                                                                                             growth opportunities’, 30 May 2017).
                                                                                                 I think this is a massive overreaction and one that was
  Simon Thompson highlights five                                                             partly driven by news that “revenues will be weighted to
                                                                                             the second half of this year”. However, this has always
  small-cap shares offering decent                                                           been the case: in the past three financial years, the
                                                                                             revenue split has been 45:55 between the first and second
  growth and upside potential                                                                half. More important is confirmation that the landscape
                                                                                             for the company’s products remains “positive and largely
                                                                                             unchanged since the full-year results in May”. Although
                                                                                             not mentioned in the update, I can confirm that the

                              A
                                                                                             directors are optimistic of hitting the unchanged fore-
                                         im-traded stockbroker and financial services        casts of analysts Paul Hill and Hannah Crowe at Equity
                                         outsourcer Jarvis Securities (JIM:458p) has         Development. These suggest the company will grow
                                         reported another record set of results, following   revenue from £34.3m to £40m in the 12 months to the
                                         a bullish trading update in May that prompted       end of March 2018, hitting cash profit break-even after
                              analyst Nick Spoliar at house broker WH Ireland to             research and development costs, and achieving cash-flow
                              upgrade his forecasts by 16 per cent at the time (‘Five        break-even to maintain net funds at £6.8m.
                              small-cap opportunities’, 23 May 2017). I first spotted the        I also feel that investors are losing sight of the fact
                              investment potential last autumn when they the shares          that “the board is encouraged by the pipeline of new
                              were languishing at 305p (‘High-yielding income play           business being pursued by the company through its
                              with capital upside’, 15 November 2016).                       direct sales force and channel partners”, and the back-
                                  My positive stance was based on the likelihood of an       drop remains favourable given the need for financial ser-
                              improved performance from both of Jarvis’s business            vices clients to make cost savings while fully complying
                              units: a corporate division, which provides outsourced         with existing and a raft of new legislation. Lombard is
                              and partnered financial administration services to a           hardly being overvalued, either, as its current enterprise
                              number of third-party organisations and has cash under         value of £35.2m equates to just 0.9 times forecast annual
                              administration in excess of £150m, all of which is placed      sales, a 75 per cent discount to the sector average.
                              on short-term deposit with triple-A-rated banks; and               Admittedly, Equity Development has “prudently”
                              a broking operation that has more than 100,000 retail          reined back its target price to 20p, bringing it back in
                              clients who use its ShareDeal-Active and X-O low-cost          line with mine. However, this is still almost double the
   Simon Thompson’s           online share trading services.                                 current share price and I would certainly use the current
   book Stock Picking             The company has certainly delivered, by posting a          weakness as a buying opportunity.
   for Profit can be           38 per cent increase in first-half pre-tax profit to £2.35m
   purchased online           on 22 per cent higher revenue of £4.8m, buoyed by buoy-        Accrol hits guidance
   at www.ypdbooks.           ant trading volumes despite political uncertainty this         Aim-traded Accrol (ACRL:151p), the Blackburn-based
   com, or by telephon-       year, and cash under administration hitting an all-time        maker of toilet rolls, kitchen rolls and facial tissues, has
   ing YPD Books on           high. This means that well over half of WH Ireland’s           delivered a 14 per cent rise in revenue to £135m in the
   01904 431 213 and is       full-year pre-tax profit estimate of £4.4m has been            year to the end of April 2017, buoyed by a slew of contract
   being sold through         booked, thus derisking the investment case and opening         wins in the discount sector, including one worth more
   no other source. It        up the possibility of more upgrades if the momentum is         than £10m a year with Lidl. In turn, this produced the
   is priced at £14.99,       maintained. That’s good news for the dividend, as is the       58 per cent rise in underlying pre-tax profit to £13m and
   plus £2.95 postage         50 per cent-plus rise in net cash reserves to £4.6m, a sum     better-than-expected adjusted EPS of 12.4p. The board
   and packaging. Si-         worth 40p a share, after taking into account £12.7m of         declared a full-year payout of 6p a share, in line with
   mon has published          cash set aside for the settlement of market transactions.      guidance I was given when I initiated coverage around
   an article outlining       WH Ireland predicts a 25 per cent rise in the payout per       the 100p level when Accrol floated its shares on Aim last
   the content, ‘Secrets      share to 22p covered 1.45 times by EPS estimates of 31.8p.     summer (‘Clean up with Accrol’, 6 June 2016).
   to successful                  Trading on 13 times earnings net of cash, underpinned          However, analyst Mike Allen at joint house broker
   stockpicking’, which       by a healthy dividend yield of 4.8 per cent, and offering      Zeus Capital reduced his current year-full diluted EPS
   can be read on the         15 per cent upside to my 525p target price, the shares are     forecast by 4.5 per cent to 12.8p, reflecting a more
   Investors Chronicle        worth buying.                                                  prudent gross margin assumption to reflect delays in
   website.                                                                                  pushing through retail price increases in key brands,
                              Lombard buying opportunity                                     and the impact of US dollar appreciation on input costs
                              Investors have reacted negatively to the latest trading        following the EU referendum. Private-label shelf prices

16 INVESTORS CHRONICLE 28 JUL - 3 AUG 2017
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