Business World

BAILLE GIFFORD JAPAN: A trust that aims to grow savers’ money over the long term

By

City & Finance Reporter for the Daily Mail

Published:
16:50 EST, 18 January 2019

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Updated:
16:50 EST, 18 January 2019

The Japan Trust from Scottish fund manager Baillie Gifford aims to grow savers’ money over the long term

What does it do? The Japan Trust from Scottish fund manager Baillie Gifford aims to grow savers’ money over the long term, rather than focusing on giving them an income. 

It primarily buys shares in small and medium Japanese firms, which are thought to have above-average growth prospects.

What does the manager invest in? Japanese investment giant Softbank is the trust’s largest holding, while electricals firm Sony also appears in the top ten.

What do the experts like? Juliet Schooling Latter, of Fundcalibre, says: ‘The trust has always been reasonably priced relative to peers, but from January 1 this year the fees have been further reduced.’ 

Low fees aren’t the only draw. Japanese companies have historically offered ‘exceptional growth opportunities with sustainable business models and strong competitive advantages’.

Any downsides? The focus on smaller companies can cause some volatility in the fund’s performance, Schooling Latter says, and its use of debt to help it buy more shares means that gains are amplified, but so is bad performance. 

The trust is at the higher end of the risk spectrum, so won’t be suitable for all investors.

 

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Investors don’t like the UK at the moment, but that means there could be some bargains for the brave amid the Brexit storms.

The UK stock market is trading on a cheaper valuation than its international rivals and some decent prospects have been hit by the overall uncertainty, believes Simon McGarry, senior equity analyst of Canaccord Genuity Wealth Management. 

Last year was a particularly tough for Britain’s stock pickers, owing to a number of factors including the US and China trade war weighing on global sentiment and, of course, Brexit uncertainty at home.

Simon McGarry, of Canaccord Genuity Wealth Management ,tips ITV, home of Love Island to outperform in 2019

The UK and Europe underperformed, with the FTSE All-Share Index and the E300 Index (of Europe’s 300 largest stocks) down 9 per cent.

Just three months ago, it looked likely that 2018 would be another good year for US shares, but after a 20 per cent correction between October and December, the S&P 500 ended up just 1 per cent for the full year.  

Some of the headwinds that buffeted stock markets last year still persist, creating an uncertain outlook for shares in the New Year. 

But there is some good news for investors.

Worries have dragged down the price of good quality companies as well as bad and many now look cheap on a variety of valuation metrics.

Nowhere is this truer than the UK, which currently trades on just 12 times earnings compared to an average of 15.1 times in 2017 and 17.2 tims in 2016, says McGarry.

But what are the best value shares with the best prospects? We asked McGarry to list seven he tips to outperform in 2019. Here’s what he said. 

Ashtead 

Ashtead is one of the world’s largest equipment rental companies, with 83 per cent of earnings coming from Sunbelt (its US business) and the rest from the UK. 

Although the majority of Ashtead’s fleet is general construction tools, it has a large speciality business providing a growing source of diversification. 

The US division is expected to deliver robust growth as it benefits from a number of structural growth drivers (for example, US States starting to recognise the benefits of rental; the challenges to owning increasingly complex equipment; and a buoyant US economy driving demand.) 

Ashtead remains highly cash generative and expects to generate £3.5billion of surplus capital by March 2021.

This will be allocated to organic growth buybacks and acquisitions. 

The balance sheet is robust, with net debt/EBITDA (short for earnings before interest, tax, depreciation and amortization) of just 1.8x at the end of October.

Despite all this, the shares are trading on just 9.0x 12-month forward earnings, which we see as an excellent opportunity.  

Burford Capital

Burford Capital is a global finance and investment management company for the legal sector. 

Its main line of business is providing capital to fund the pursuit of legal claims, in return receiving a portion of settlements paid by defendants or their insurers. 

The global legal market is estimated to be worth more than $620billion and Burford estimates that litigation finance currently accounts for less than 2 per cent of it, with Burford’s share under 1 per cent. 

However, this market is growing rapidly. Following an already strong 2017, Burford’s 2018 first-half performance was particularly impressive – year-on-year investment income was up 21 per cent $195illion and total revenue up 17 per cent to $205million.

However, despite this strong first-half performance, the shares have not been immune to global equity market weakness, with the share price down by 30 per cent since the end of August. 

Diageo 

Diageo is the world’s largest spirits company, including well-known brands such as Smirnoff, Johnnie Walker and Captain Morgan.

It also owns Guinness and 34 per cent of premium champagne and cognac maker Moët Hennessy. In 2017, it acquired Casamigos, the fastest-growing premium tequila brand in the US, for $1billion. 

Since he became CEO in 2013, Ivan Menezes has focused on improving operations through expanding Diageo’s high-margin premium and reserve brands, as well as investing in markets where it has a leadership position in beer. 

Admittedly, the shares aren’t cheap, as they are trading on 22.3x 2019 consensus forecast earnings – but then high-quality companies rarely are.

In July 2018, Diageo reported strong first-half results with organic net sales growth of 5 per cent versus a consensus forecast of 4.3 per cent over the period. 

When combined with its dividend yield of 2.5 per cent, this presents a tasty return for investors in search of a premium blend of both quality and income. 

DS Smith 

DS Smith is Europe’s leading provider of corrugated packaging, and a specialist in plastic packaging worldwide. 

The company has recently shifted from low-margin paper and cardboard into higher value- added packaging and recycling solutions.

DSS continues to grow its European market share (currently 15 per cent) both organically, having taken corrugated market share in every quarter since 2012, and via acquisitions.

European packaging continues to grow at a faster rate than economic growth due to factors such as Europeans spending 50 per cent and 40 per cent as much online as their US and UK compatriots respectively. 

With the shares trading on 7.7x current year earnings compared to a 10-year average of 12.4x, this is a great opportunity to buy an out-of-favour stock which continues to deliver strong growth while improving margins.  

Product placements deals such as Costa and the Co-op to appear on the set of Coronation Street has strengthened ITV’s financial position according to McGarry

ITV

ITV is an integrated producer broadcaster operating the UK’s largest family of commercial channels.

In January 2018, Carolyn McCall became CEO after five years as CEO of easyJet. On top of an increased focus on digital and production, she plans to build out other non-broadcast revenues.

Recent examples include landmark product-placement deals for Costa and the Co-op to appear on the set of Coronation Street and for Love Island contestants to wear Missguided clothing. 

The market seems to be fixated on the view that this is a linear TV company and is facing a risk as TV moves online. 

We think this misses the point and much of the supposed decline in TV viewing by younger viewers has more to do with measurement systems not capturing viewing statistics on devices such as PCs and tablets. 

If we see a return to advertising growth in 2019, ITV’s shares could re-rate sharply higher, considering that they currently trade on just 8.9x 12-month forward earnings compared to 11.6x six months ago. 

Prudential 

Prudential provides life assurance, retirement and asset management products. 

The majority of its earnings relate to the US (39 per cent) and Asia (35 per cent), with the balance coming from the UK. 

Its management has a track record of efficient capital allocation. Through a mix of superior scale, technology and customer service the company continues to deliver profitable growth. 

With 700 million people joining the Asian middle class by 2023, Prudential’s Asian business also provides exposure to structural growth markets. 

Although the UK accounted for a quarter of 2017 earnings, it is becoming a much smaller part of the overall group. 

However, the dynamics of the wider UK market remain favourable, due to an ageing population with a savings shortfall and badly in need of income.

On 9.5x 2019 expected earnings, Prudential trades at a discount of over40 per cent to AIA Group, its closest listed peer. 

With profits having doubled from 2011 to 2016 and expected to grow by more than 10 per cent over the next three years, we see this as an attractive entry point for investors seeking a mix of value and growth but with only moderate UK exposure.  

TUI posted annual earnings growth of over 10 per cent for the fourth consecutive year post-merger in December

TUI 

TUI is one of the world’s leading tourism businesses, with 1,600 travel agencies, 150 aircraft, over 300 hotels and 20 cruise liners.

Since merging with Thomson in 2014, management has pivoted towards a more vertically- integrated business model with control over all aspects of the customer holiday experience. 

As more than 90 per cent  of TUI’s fleet is leased, it can quickly rationalise it in a downturn. Between September 2016 and September 2019 it expects to open 14 new hotels annually and add three ships to the fleet. 

Package holidays continue to be affected by the relentless expansion of budget airlines. While we don’t expect this to reverse any time soon, there are still good growth opportunities for TUI.

In December, it published full year results to September 2018, with annual earnings growth of over 10 per cent for the fourth consecutive year post-merger. 

This strong performance in a tough environment (where Thomas Cook has issued a profit warning) demonstrates TUI’s successful transformation into an integrated holiday provider. 

Despite this, shares are trading on just 9.2x 2019 expected earnings, a deep discount to its historical price earnings ratio (P/E).