As before these are quick summaries with red, amber, green denoting whether I want to take a closer look. No detailed financials or valuations yet. You can search the full list of FTSE 250 companies here.

This is not investment advice and all opinions are my own. Please do your own research and invest according to your financial circumstances.

🟢 HARWORTH (HWG)

Mkt cap: £531m | Revenue FY24: £182m | Net income FY24: £57m

Harworth is a new entrant to the FTSE 250 but is far from a new kid in town. The property development company, focused on regenerating industrial sites, has its roots in the UK coal industry. When the British Coal Corporation, successor to the National Coal Board, was privatised in 1994, its assets were purchased by RJB Mining, and rebranded as UK Coal plc. As coalfields were shut, the business went into decline, and was restructured in 2012, with mining operations split from the property portfolio. That portfolio became Harworth Estates, which listed in 2015. The UK’s Pension Protection Fund still owns 17% (a function of the PPF also having its roots in the British Coal Corporation), with London and Amsterdam Trust (a vehicle for hedge fund billionaire Nick Roditi), and Peel Group (another UK property company) also owning 26% each. That’s leaves little free float, with nagging concerns as a minority shareholder. But with the caveat on ownership, I like Harworth. It has a niche focus and lots of expertise. I’m also increasingly drawn to the idea that we’re in a hardware world. Factories, data centres, infrastructure, etc. With a portfolio of brownfield sites, Harworth could be well-positioned to benefit from any uptick in UK capital investment – something that’s lagged for years but is now supported by a favourable tax regime.

Last updated: 15 October 2025

🔴 HAYS (HAS)

Mkt cap: £919m | Revenue FY25: £6.61bn | Net income FY25: £-7.8m

Here’s a contrarian play if you want one. Recruiting. A highly cyclical sector, where you make hay (sorry…) when the sun shines, when the economy is booming, and when people feel confident moving jobs; and when you hunker down and cut costs when the economy isn’t booming, people feel hesitant to move jobs and companies don’t want to hire. Unfortunately, the UK economy has been closer to the second scenario in recent years, and recruitment company profitability has taken a direct hit. Hays has issued several profit warnings, and the share price is down ~70% since mid-2021. A great opportunity then, surely? Buy the dip, sell at the peak. Easy stuff, especially as it really looks to be in a dip. The challenge is that momentum can be a powerful force, and right now there’s zero positive sentiment in this sector. If you can buy, hold and stomach the ride there is likely upside, but even with a cyclical recovery I have concerns over what the recruiting sector looks like in an AI world.

Further reading:

• Sweet Stocks - Robert Half and the Recruiters (October 2024)

Last updated: 15 October 2025

🟡 Helios Towers (HTWS)

Mkt cap: £1.5bn | Revenue FY24: £792m | Net income FY24: £33.5m

Skipping through Helios quickly. Nothing against the company, just that it’s a telecoms infrastructure provider solely focused on Africa and the Middle East. Good for the UK market that it’s listed here but not for me.

Last updated: 15 October 2025

🟡 HICL Infrastructure (HICL)

Mkt cap: £2.3bn | Revenue FY24: £50m | Net income FY24: £45.9m

I’m breaking my rule again and venturing into investment trusts. The rationale is that this is a UK infrastructure-focused trust and if there is any rationale for owning investment trusts (also known as closed-end funds) it’s getting access to otherwise hard to own assets. I also started my career in infrastructure finance, at the tail end of the UK’s great experiment in Public Private Partnerships (PPP, aka the Private Finance Initiative in the UK) and spent two years raising money for infrastructure funds. HICL was a HSBC spin-out, which along with its then listed counterpart, John Laing, was one of the original infrastructure trusts. Fast forward twenty years, the trust is managed by InfraRed Capital Partners, and the portfolio comprises 57% PPP assets backed by long-term contracted revenues, and 43% other infrastructure, including UK water company, Affinity, and energy assets and toll roads. The portfolio has slowly morphed from UK PPP to more sensitive economic sectors, although the main driver of price remains interest rates. Hence the share price is ~30% down from its 2022 peak, at a ~20-25% discount to NAV (read more about discounts/premiums here). HICL recently sold £225m of UK PPP assets at a price in line with audited valuations, a sign that the discount to NAV could close. The concern is that the best assets get sold first, and that the real question around valuation is in what remains. I’m neutral, although personal background makes me want to dig into it more.

Last updated: 22 October 2025

🟢 Hill & Smith (HILS)

Mkt cap: £1.67bn | Revenue FY24: £855m | Net income FY24: £76m

The FTSE 250 does a good line in niche industrial firms, and Hill & Smith is another one. It specialises in highly engineered custom steel products for utilities and infrastructure markets; steel safety barriers for roads and construction zones; and steel galvanizing and coating services. It operates a decentralised model, with M&A used to hoover up smaller, complementary businesses that can immediately be value accretive. 58% of revenues come from the US, 38% from the UK, and 2% elsewhere. The US business has been the big success in recent years, benefitting from an increase in industrial investment triggered by the IRA and CHIPS Act, and now super charged by AI-related infrastructure spending, as well as industrial onshoring post tariff changes. The UK market has been more challenging, but as with Harworth, there could be catch-up potential here, with UK policy now more supportive of fixed investment and infrastructure spending. Hill & Smith has low debt, 15% operating margins, and steadily improving returns on capital. It seems a good company to take advantage of an industrial spending cycle – the obvious risk being a crash in the AI bubble that causes US capital investment to plunge.

• Wonder Stocks - Hill & Smith: Infrastructure Innovators (August 2025)

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This is not investment advice and all opinions are my own. Please do your own research and invest according to your financial circumstances.

Jump to: Grainger | Greencore | Greggs | Hammerson | Harbour Energy

🟢 GRAINGER (GRI)

Mkt cap: £1.41bn | Revenue FY24: £205m | Net income FY24: £31m

Grainger just converted to a REIT, which along with investment trusts, is a sector I’m normally skipping on this tour. Not because I don’t like REITs (although I don’t like investment trusts), but because I feel it’s a specialist area, more of an infrastructure or fixed income investment, versus let’s find an interesting UK company. But I think Grainger is worth looking at – it’s only very recently converted, and its business benefits from big structural tailwinds. Those tailwinds are the UK’s consistent failure to build enough houses to meet supply, politician’s consistent failure to countenance tax changes that could cause house prices to fall, and governments consistent action to make the UK rental sector more consolidated and professional. With roots in the North East of England, Grainger has transformed itself over the last nine years to focus on the build-to-rent sector – a small but fast-growing segment of the UK’s private rented sector (also known as multifamily housing). This sector is far more developed in the US than in the UK, and with sustained government backing its growth looks set to continue.

Last updated: 8 October 2025

🟢 GREENCORE (GNC)*

Mkt cap: £1.04bn | Revenue FY24: £1.8bn | Net income FY24: £46m

When anyone asks me what the UK is a world leader in, my first response is packaged sandwiches. Export potential may be limited, but no one can tell me there’s a better sandwich than an M&S prawn mayo? And the company that supplies most of those sandwiches is Greencore. It produces over 700 million a year, in a 24-hour continuous process, and they account for close to 50% of revenues. The rest of the firm’s business is made up of salads, ready meals, soups, quiches and other ready-to-go food. After falling into a bit of a rut around covid the company has delivered steady operational improvement in recent years. I like this sector of the food industry (which is more under the radar and less cutthroat competitive than UK supermarkets), and flagged Bakkavor, a similar-sized competitor, as one to watch last year. Greencore and Bakkavor announced plans to merge in April, and both stock prices are up since so investors seem to approve. However, the merger is currently being reviewed by the CMA and looks like a test of the UK’s new approach to merger control. I’d wait to see how this plays out but think the industry and the companies involved remain worth a detailed look.

Last updated: 9 October 2025

*As of writing Greencore was in a takeover situation

🟡 GREGGS (GRG)

Mkt cap: £1.71bn | Revenue FY24: £2.0bn | Net income FY24: £153m

You might argue that as well as being a world leader in packaged sandwiches, the UK is a world leader in sausage rolls, and if so, Greggs is undisputed national champion. The high street chain has been on a tear over the last ten years, expanding from around 1,500 stores to close to 3,000, funded largely by retained earnings. Investors took notice and from 2015 to end-2024 the share price close to quadrupled. Greggs is still opening new stores in the UK, although not at such a break neck speed. It’s a good business, and certainly captured the cultural zeitgeist in the last decade, but I’m a little worried we might be past peak-Greggs, and the big investment play here was ten years ago. The flip side of lower growth is that the stock is no longer priced for it. Valuations are less demanding, but I’d prefer to see how the next year plays out.

Further reading:

• The Berkshire Backstop (Sep 2025)

• Wonder Stocks (Apr 2025)

Last updated: 9 October 2025

🔴 HAMMERSON (HMSO)

Mkt cap: £1.51bn | Revenue FY24: £121m

Hammerson is another UK REIT, first admitted to the LSE in May 1945. With a portfolio of shopping and leisure centres, it’s a commercial real estate play that was hit hard by the double-whammy of covid shutdowns and rising interest rates. After a big rights issue in 2020, it’s rebuilt the balance sheet and stabilised the business, but as this is ultimately a play on UK commercial real estate, headwinds of higher interest rates, higher costs, and lower office occupancy rates remain. There may be cyclical value here, but I prefer the UK residential sector for long-term trends.

Last updated: 9 October 2025

🟡 HARBOUR ENERGY (HBR)

Mkt cap: £2.9bn | Revenue FY24: £1.8bn | Net income FY24: £46m

Until a few years ago Harbour Energy was a North Sea-focused oil and gas exploration and production company, churning out 159,000 barrels of oil equivalent per day, most of which came from UK waters. To put that in context, the world’s largest E&P company, Aramco, churns out ~12 million barrels per day. A $11.2 billion acquisition of Wintershall Dea’s non-Russian oil and gas assets later, and Harbour has more than tripled production, and gained geographic diversification across Norway, Argentina, Mexico, and beyond. This was a big acquisition for a FTSE 250 company that at the time had an enterprise value of only £2.8 billion, and to fund it, Harbour issued ~$4 billion of equity, with German chemical giant BASF (the previous owner of Wintershall) now a 47% shareholder, took on $4 billion of Wintershall’s debt, and used $2 billion of its own cash. The integration appears to be progressing well, and I like the intent of management to pursue it and diversify away from the UK. I’m all for cleaner energy sources but global demand for oil and gas isn’t disappearing any time soon. Harbour feels like a well-run, ambitious UK company taking advantage of that.

Last updated: 10 October 2025

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This is not investment advice and all opinions are my own.

Jump to: Gamma | Genuit | Genus | Goodwin | Grafton

🟢 GAMMA COMMUNICATIONS (GAMA)

Mkt cap: £907m | Revenue FY24: £579m| Net income FY24: £70m | Latest price

In some ways Gamma feels eerily like to Future. Sure, this a business that makes a lot of money from hosting telephone calls (around one third of all business calls transit the Gamma network in the UK), rather than owning a portfolio of magazines, but like Future, its business is rooted in the old economy, its share price went on a tear until 2021 as investors re-rated it as a new economy, cloud-driven, growth stock, and its shares then slumped as growth expectations failed to deliver and the P/E ratio came crashing back down to old economy levels. But like Future, it remains a highly cash generative business and is using this to fund modest M&A plus a healthy buyback programme. It also recently moved from AIM to the main UK market, which is a positive sign of management intent and stock liquidity. Technological obsolescence is a big risk here – is anyone going to talk to anyone on the phone in ten years’ time (especially if Gen Z don’t talk at all)? But any uptick in UK or German growth (where Gamma recently completed acquisitions) could trigger a re-rating over a shorter period. There also seems an ongoing growth opportunity, as companies migrate from fixed lines to cloud communications, with Gamma serving as the integrator/enabler of these different services (e.g. connecting Microsoft Teams to phone lines).

Other views: Margin of Value | Investing with Wes | Vinvest

Last updated: 18 September 2025

🟡 GENUIT (GEN)

Mkt cap: £842m | Revenue FY24: £561m| Net income FY24: £33.5m

Genuit, formerly known as Polypipe, is a manufacturer of plastic piping systems for water and ventilation systems, which now pitches itself as a provider of “sustainable building solutions”. The company has gone all-in on the sustainability pitch – and while this feels a little out of vogue today / not to be mentioned in the US, there’s no denying that climate change, and the need for civilisations to adapt to changing temperatures, remains a long-term investment theme. Okay, there is plenty of denying but let’s not get into that here. So, the question is really to what extent this business is geared to climate adaptation, or whether it’s all just a bit of marketing spiel. My quick take is that it’s less climate-geared, and more UK construction-geared, which is in turn UK-economy geared. Parking in neutral for now.

Last updated: 25 September 2025

🟢 GENUS (GNS)

Mkt cap: £1.54bn | Revenue FY25: £673m| Net income FY25: £19.3m

Did you know the UK was a world leader in pig semen? I didn’t, and I spent a lot of time a few years ago dwelling on UK sectoral strengths. Well, it turns out that Genus, a company that traces its roots to the Breeding & Production Division of the UK’s Milk Marketing Board, and an old British firm called the Pig Improvement Company (no messing around with names back in the day) is the global leader in porcine genetics with a 16% market share. This isn’t petri dish-style genetic modification but rather rearing, selecting and breeding “super” pigs at the very top of the pig breeding pyramid, which can then be sold on down. Genus makes money either from a direct sale of an animal or from future events such as a baby piglet coming along courtesy of Genus’ products. There is a lot of IP at the top of this pyramid, which insulates the business from competitive threats and makes it less exposed to production cycles. Porcine is where Genus has historically made its money, with the bovine (cow) segment of the business operating in a more fragmented market with more competition. Global leadership – even in the less than glamourous world of pig breeding – doesn’t come cheap. The P/E ratio is currently around 25 and has been close to 50 in the past, quite the leap from the sub 15 levels that dominate the FTSE 250. However, this is an interesting company with what appears to be niche IP and growth opportunities from further market consolidation.

Last update: 25 September 2025

🟢 GOODWIN (GDWN)

Mkt cap: £1.00bn | Revenue FY25: £200m| Net income FY24: £24.6m

Goodwin’s share price has more than doubled in the last six months so something must be going right. This British industrial founded in 1883 retains the motto “on fonde pour le monde” on its annual report, translated as “one founds (as in to found, meaning to cast molten metal into a mold) for the world”. It is based in Stoke-on-Trent and occupies market-leading positions across two operating divisions: mechanical engineering, which is the heart of the business accounting for 71% of revenues, and includes the steel castings unit that produces huge valves and other parts for the defence, nuclear and oil industries; and refractory engineering, which accounts for the remaining 29% of revenues, and focuses on “mineral-based products” including investment powders that are used to create molds for jewellery castings. The business is still 54% owned by the Goodwin family and doesn’t care much for such things as financial forecasts. However, the fundamentals of the business look solid, and I like how it combines niche engineering expertise with the structural themes of rearmament and nuclear revival. There is also a huge opportunity for Goodwin to capture market share in its Duvelco division, where it has developed a competitor to Dupont’s highly successful Vespel product, a “super-plastic” resin. The company has said it expects Duvelco to be its “largest and most profitable division in years to come”.

Other views: The Curious Compounder

Last updated: 26 September 2025

🟡 GRAFTON (GFTU)

Mkt cap: £1.72bn | Revenue FY24: £2.28bn| Net income FY24: £122m

Grafton is an Irish headquartered building materials distributor that has set itself on becoming one of Europe’s leading firms in this sector. Through a series of acquisitions, including the Spanish firm Salvador Escoda in 2024, the company has expanded its footprint across Europe, while retaining a strong balance sheet and returning lots of cash to shareholders in recent years. It feels to me like a quintessential FTSE 250 firm – not exciting but a critical cog in the economy, with some not exciting but solid financials to go alongside. The business is clearly cyclical so any uptick in European growth should support an uptick in top line performance. It’s all very solid, just not that interesting.

Last updated: 26 September 2025

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If you have thoughts on any of these companies - as a business, brand, or investment - I’d love to hear them in the comments below!

Jump to: Elementis | Energean | FirstGroup | Frasers | Future

🟢 ELEMENTIS (ELM)

Mkt cap: £938m | Revenue FY24: £738m | Net income FY24: £-47.8m | Latest price

Elementis is one of those industrial firms that can trace its origins back 150 years, but which has morphed into different shapes, sizes and names in the intervening period, transforming itself as a company every 20 to 30 years. Its focus now is specialty chemicals, split between two divisions – performance specialties and personal care – accounting for ~70% and ~30% of revenues respectively, with margins notably higher in personal care. Net income took a hit in 2024 from a large impairment charge related to a talc business, which was fully divested earlier in the year. Shareholders responded positively to the sale, along with a buyback programme. Elementis is a leaner, simpler business than it was a few years ago, with some ambitious financial targets to match, including targeting ROCE above 30%. One concern is that future momentum looks tied to operational improvement rather than top line growth, which has languished at about 1% per year over the last decade – and at some point, those operational improvements may reach their limits.

Last updated: 4 September 2025

🟡 ENERGEAN (ENOG)

Mkt cap: £1.71bn | Revenue FY24: $1.31m | Net income FY24: $188m | Latest price

Founded in 2007 as Aegean Energy SA, Energean is now the leading the gas exploration and production (E&P) company in the Eastern Mediterranean, with its Karish field comprising over 40% of Israel’s natural gas production. Since IPO in 2018 the company has continued to expand through a healthy dose of M&A, including acquiring the Karish and Tanin gas fields in 2019 and Edison’s oil and gas business that same year. I’m generally wary of the volatility of the E&P business, but Energean is interesting in that 80% of 2024 production came from its Israeli and Egyptian assets, backed by long-term off-take agreements. These contracts all contain price floor and take-or-pay provisions, meaning Energean is guaranteed to sell a set amount at a minimum price, limiting downside risk (absent any counterparty defaults). The contracted revenues support a steady dividend but also a debt pile of over $3 billion, built up to finance previous acquisitions. Net gearing of over 400% is punchy but manageable so long as current production and cash flow projections are met. I’m not sure you can call this a UK company, but it could be interesting if you’re looking for European energy exposure.

Last updated: 8 September 2025

🟡 FIRSTGROUP (FGP)

Mkt cap: £1.21bn | Adjusted revenue FY25: £5.01bn* | Net income FY25: £128m | Latest price

*Revenue excluding that element of DfT TOC revenue, and related intercompany eliminations, where the Group takes substantially no revenue risk

Across its First Bus and First Rail divisions, FirstGroup is one of the largest private sector operators of public transport in the UK, carrying almost 2 million passengers a day, meaning that almost 2 million people a day moan about it. Department of Transport Train Operating Contracts (TOCs) used to form the bulk of group revenues, but the big change in recent years has been the transfer of these contracts from private operators to the public sector (started under the Tories, continued under Labour). Hence FirstGroup’s remaining TOCs will soon cease with the group dependent on bus revenues (74% of adjusted revenues in FY 2025) and “open access rail”, in which private operating companies use Network Rail tracks but receive no direct subsidies from the taxpayer. A profits beat for 2025 plus the approval of new open access rail routes has given the stock good recent momentum – although it’s worth noting that the RMT does NOT like open access and the government has made mutterings about curbing its use. For now, I’m neutral, wondering if the stable business profile and recent performance offsets any future risks from policy change.

Last updated: 9 September 2025

🔴 FRASERS (FRAS)

Mkt cap: £3.2bn | Revenue FY25: £4.9bn | Net income FY25: £293m | Latest price

Frasers is the holding company for SportsDirect and all the other previously bankrupt retail businesses hoovered up by Mike Ashley, Britain’s favourite love-to-hate rags-to-riches entrepreneur. Despite Ashley stepping down as CEO in 2023, this remains a family affair, with his son-in-law leading day-to-day operations and the family still owning more than 70% of shares. A lack of comfort in its corporate governance has been one reason for a persistently low valuation, as well as an increasingly complex operating structure, which includes cross holdings in other companies. Credit to Ashley for building a multi-billion-pound business from scratch, but I’m just not sure I’m comfortable with the governance or have much appetite to look in detail at a discount retailer.

Last updated: 9 September 2025

🟢 FUTURE (FUTR)

Mkt cap: £746m | Revenue FY24: £788m| Net income FY24: £77m | Latest price

Being a Future shareholder from 2019 through August 2021 was one great ride, as this media company went on an acquisition tear, revenues quintupled, and investors bought into it deftly transitioning to a digital era. Being a Future shareholder since then has been gut wrenching to say the least – a series of profit warnings, growth failing to meet expectations, and investor capitulation. Things have stabilised a bit in the last year or two and Future is now a somewhat diversified business that owns a portfolio of established media brands (including Marie Claire, Country House, Golf Monthly, Horse & Hound, Yachting World and MoneyWeek) and makes its money roughly equally from: selling digital advertising on online platforms; selling print and digital subscriptions to magazines; and earning commissions on insurance purchases via the GoCompare price comparison websites. Unsurprisingly, the magazine subscription business is in decline, and it’s digital advertising and GoCompare where growth lies. Future has EBITDA margins of over 25%, is highly cash generative, and since 2022 has been distributing cash to shareholders rather than burning it on flashy M&A. One concern is that both advertising and magazines revenues are highly cyclical, and right now both the US and UK consumer look to be weakening. Still, if this is priced in, and if the stock is still suffering from a loss of trust, it could be an interesting opportunity. There’s a new CEO in post since March 2025 and an investor webinar (available to all) at the end of September that I’ll use to take a deeper dive.

Last updated: 9 September 2025

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It’s been five months since my last post. It wasn’t meant to be so long, but you lose the habit, take a few weeks off, figure the UK looks a little gloomy, make an excuse, and another week goes by. Still, the Substack algorithm kept whirring and 50+ people have subscribed since that last post – thank you and welcome! To the others who forgot I existed, I plan to start again with semi-regular thoughts on UK markets, economics and policy from a transatlantic view. I’m also going to pick up my A to Z tour through the FTSE 250. If you’re no longer interested, please do unsubscribe.

I’ve been thinking a lot over the last week about the notion of sovereignty, or as Google puts it, “the supreme authority within a territory… the power to govern, make laws, and manage internal affairs without external interference.”

Sovereignty was one of the rallying cries of Brexit, captured in the leave campaign slogan, “Take Back Control”. Those of us on the other side argued that the sovereignty Brexiteers sought was an illusion. As a medium sized, open economy (and I can’t tell you how many pieces of Ministerial advice I saw beginning with those six words…), the UK would forever be buffeted by forces beyond its control. Yes, in theory it would no longer be beholden to EU rules and regulations, but in practice, that wasn’t going to happen if UK companies wanted to continue trading with their biggest market.

Now I think a lot of the remainer arguments have borne out, certainly in terms of the need to align with EU regulations. But what I didn’t foresee – and I’d argue few did in 2016 – was how secondary Brexit feels to the notion of sovereignty right now, when the biggest infringement on this is coming from across the Atlantic, not the Channel.

Let’s take a few recent examples. Just last week the UK announced it was dropping a demand for Apple to provide a backdoor into encrypted data, which it had previously sought for domestic security purposes. Around the same time, and after much griping by Trump over the lower cost of drugs in other countries, Eli Lilly announced it was increasing the price of Mounjaro in the UK by 170%. Further US demands for ‘most favoured nation’ pricing on drugs could damage one of the biggest benefits of the NHS – its historic ability to negotiate lower drug prices as the only major buyer^[1]. And while the UK’s 2% Digital Services Tax survived the US-UK trade agreement, there seems little prospect of rates going higher, or indeed greater regulation of American technology companies in general, despite 7 in 10 Brits previously saying that social media companies aren’t regulated enough.

There’s a fair question here of whether Trump is different to any US administration before. Despite the Maga notion that America is being taken advantage of, the US has long thrown its weight around the world.

It wasn’t so long ago that Obama and Biden were pressuring the UK to ban the Chinese company, Huawei, from building out the country’s 5G network. And in 2021, the UK agreed to abandon its Digital Services Tax and instead move towards a US-led minimum global corporate tax after pressure from Biden (ditched under Trump).

In foreign policy a long dependence on US military technology was no minor part in the UK committing forces to the 2003 invasion of Iraq. In the opposite direction, go back to 1956 and you have Eisenhower telling the UK and France to get the hell out of Suez or see the US crash the pound.

What feels different today is the uncertainty of US actions and the tools on the table. Previously the US and EU might have gone tit-for-tat in a battle over Airbus and Boeing, but the existence of NATO wasn’t questioned as part of this. Now it’s always on the table, implicit or explicit, whether the issue is domestic policy or international security. Anything the US has any interest in, its security guarantee is fair game.

And so you have the EU pulling back on using any of its economic might and trade retaliation tools, meekly cutting a new deal (which may not be so bad in substance, but the optics didn’t look good) to keep Trump on side. You have UK domestic policy beholden to US views on technology and healthcare. You have European leaders desperately flying to Washington to keep Patriot missiles flowing to Ukraine. Sovereignty, be damned.

I like to think that the bully always gets their comeuppance. When the US needs allies in the future, we turn around and say no. Or we say yes, but here’s the price. But none of that works and nothing changes until the UK and Europe can manage their own security. That’s the only way to stop Trump – or whoever comes after – hanging a permanent noose around our necks.

“Take Back Control” hasn’t played out as Brexiters would have liked, but it’s not for the reasons Remainers might have thought. It is hard, military power, not what trading block we’re part of, that feels the key to sovereignty today. As a former Treasury official who was forever cynical of any “national security” argument for more money, it pains me to write those words, but it’s the world we live in now.

^[1] I know there are other problems with this system and all the drug companies are griping over it.

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At the end of January I wrote that US markets were priced to perfection – and yet:

…at the helm of all this is Trump. You can argue that the bark is worse than the bite, that they’ll be a lot of chest-thumping on tariffs and borders without a lot of action. It will be the NAFTA renegotiations all over again.

I’d argue that we just don’t know – and that that uncertainty is not fully reflected in valuations right now. Markets seem to be placing a lot more weight on actions that could be good for growth as opposed to ones that could be bad.

Well, sentiment shifts quickly. Fast forward six weeks and all talk of low regulation and lower taxes has been overwhelmed by concerns on how tariffs will impact the US economy, and how a slash-and-burn approach to government spending could crater consumer confidence, while removing a major source of stimulus over the last decade. And although Trump has bottled following through on the most punitive tariffs, and cuts to government spending remaining a rounding error on the total budget, the uncertainty of itself has had a chilling effect.

Consumer confidence is weakening quickly, and the stock market is tumbling, if not in free fall quite yet. Worldwide reciprocal tariffs are set to be imposed from April 2 and both Trump and the Treasury Secretary, Scott Bessent, have made comments around accepting some economic pain.

And it’s this final point in particular – the justification of economic damage for the sake of a greater good – that reminds me of the UK’s own recent experience of policy uncertainty and what this might mean for the US.

In June 2016 the UK voted to leave the European Union but without a clear plan for doing so. What ensued was several years of political upheaval in which various forms of trading relationship were floated. We all heard a lot about the impact of tariffs and regulatory barriers, but few of us fully understood the intricacies of customs unions or rules of origin. Certainly not me, or the politicians battling over it.

In the end it took three and a half years following the referendum vote for the UK to officially leave the EU in January 2020, and it was only a few months before then that the terms on which it would leave became clear.

Yet although the terms of the UK’s trading relationship with the EU didn’t materially change until January 2021 (after a transition period post withdrawal ended), the impact on business investment over the previous four years of uncertainty was stark. After plummeting during the financial crisis, UK business investment rebounded between 2010 and 2016. But after 2016 it went sideways, and today it is barely above 2016 levels (noting that Covid has a major impact, but this applied globally).

There was no actual change in the UK’s relationship with the EU until January 2020, but the referendum in 2016 – and the uncertainty over what that meant - had an immediate and real impact on business decisions. Time and again the refrain from UK business was, we can adjust to whatever the outcome, but we can’t plan and make decisions until we know what that outcome is.

And what I think we’re seeing in the US now has parallels with this Brexit experience in the UK. It’s not the economic policy in and of itself, it’s the uncertainty over what the end outcome might be, and the sense that economics will be subsumed to a wider political purpose. For true Brexiteers, any economic damage was a fair price to pay for the prize of leaving the EU. For the true tariff, and the true government is evil believers in the US today – and Trump seems one of them – economic damage is a fair price to pay for the prize of US self-reliance and a smaller federal government.

Now, before I get too carried away, the US is not the UK. It’s a $25 trillion economy in which trade accounted for 25% of GDP in 2023, versus a $2.7 trillion one in which trade accounted for 64% of GDP. As we prefaced many pieces of advice when I was at the Treasury, “the UK is a mid-sized open economy that can’t do XYZ and is more exposed to XYZ and so on…” The US is a mega-sized economy that has long benefitted from a massive domestic market, has the world’s reserve currency, and even pre-Trump could basically do what it wants.

It was only last week that TSMC said it was planning an additional $100 billion investment into the US. It was only a month ago that tech giants were announcing plans to spend over $300 billion in AI-driven capex investment this year. The US stock market has still unequivocally trounced other major global markets over the last decade.

But that stock market outperformance takes me nicely back to where I started this post. The US may have some exceptional qualities, but US asset prices have undoubtedly reflected this. The US has been priced for perfection – how much is it still true after the last few days?

Well, the S&P 500 has come back down to earth, and the forward P/E ratio now sits at just above 20. That’s less dizzying than the 25+ levels hit at the end of February but hardly cheap…

Meanwhile, credit spreads remain close to lows seen before the financial crisis…

And the ‘equity risk premium’ – comparing the earnings yield on the S&P 500 to the 10-year Treasury yield – is back above zero but hardly at historical averages…

The overall picture is that valuations don’t look too different to 12 months ago and don’t look that cheap. Yet confidence in the US, its economic policy, and its global credibility, has fundamentally changed. All of which is to say I think this correction could have further to run.

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As long-term readers may recall, in November I set out my thoughts on building a UK equity portfolio – first, answering the question of why bother picking stocks (short version, don’t bother unless you find it interesting) and second, some ideas on how to go about it (short version, define a universe, set some criteria, build a concentrated portfolio but with some diversification across sectors/structural themes).

In the how to part, I set out a plan to go A to Z through the FTSE 250, something my husband said was really silly because it would take forever and I’d want to write about other stuff. He was right, but I still don’t regret it. I’ve got to the end of the Ds, roughly a quarter of the way through the index, and it seems a good time to take stock of performance and some key learnings along the way.

Let’s start with a review and then get into some numbers, and finally some lessons.

Where I’ve got to

As of 28 February 2025, I’d reviewed 40 companies, starting with 4imprint and ending with Diversified Energy Company, and assigned them all a positive, neutral or negative rating. The idea was a quick take on each business including a skim of the financials but little focus on detailed understanding or valuation. The purpose was to determine whether this was an industry and business model that appealed for a long-term buy-and-hold strategy – and for further research – not whether to make an investment today.

Of the 40 companies, I’ve rated 13 positive, 14 neutral, and 13 negative. Not intentionally, but I think there’s some innate bias that leads against too extreme positions in any one direction.

Looking at performance, there are some major caveats. For starters this isn’t a portfolio yet, it’s just a rating list of stocks. Still, I did want to see how the buckets were roughly performing and whether I’d made any major glaring errors to date.

To do this, I’ve kept things simple, and calculated the average change in share price between the date I assigned a rating (10 October 2024 to 24 February 2025) and 28 February 2025 for each bucket.

The good news is that the positive bucket is outperforming the neutral and negative buckets, as well as the iShares FTSE 250 ETF which can be used as a benchmark reference.

That’s reassuring although let’s not get carried away. Taking the average price change since the rating date means stocks reviewed first will have more bearing, simply because over a longer period the stock price will tend to move more in absolute terms. Most of the Ds were only included in February and the share prices have moved little since then.

You can see this in the chart below - which shows the stock-by-stock performance.

Drilling down a bit more, of the top 5 best performing stocks, three were rated positive, and two of those, Babcock and Chemring, were in defence, explicitly included because of increasing European defence spending being a major structural theme. I’m still not sure what company is the best way to play this, but for now, a rising tide is lifting all boats - even more so over the last few days.

The other top performers are Auction Technology Group, which was borderline positive on rating. It has a niche business consolidating online auction marketplaces but the concern was the strength of underlying growth. Since mid-November, ATG posted FY24 results that showed muted growth but a jump in operating margin. That bumped up the share price but it’s not enough to change the neutral view for now. Burberry is a turnaround story that’s always had the potential to jump up. Its spring collection was well-received, and a new CEO is making the right moves, but I’m happy to stay away.

Of the biggest losers, three had negative ratings. Aston Martin seems to perennially underperform and posted some ugly FY24 results. Ashmore is a mid-sized active manager with little to differentiate itself, and AO World operates in the tough world of consumer durable goods. B&M is neutral but borderline negative given competition in UK discount space. I’m not worried about any of them.

The one that does deserve a closer look is Bloomsbury. There’s been no news absent a two-sentence statement at the end of January announcing a new distribution deal with Amazon, and that “the Board reiterates confidence in consensus expectation”. What’s driving the stock price down is unclear, although it may be partly AI-related. The price turned down in mid-January after the DeepSeek release shook-up perspectives on how rapidly – and at what cost - AI could be utilised. Sticking with it for now but will keep a close look on the next results and take a serious look at AI impact in any future review.

What I’ve learned

More important than any short-term change in price is what I’ve learned along the way. Here’s five takeaways from A to D.

1. It takes time and I’m easily distracted

Let’s start with the obvious. I’m 40 companies in and it’s taken me four months, so at this rate I’ll be through the index in 16 months, by which stage half of it will be outdated. That’s partly because when you’re starting with few prior assumptions on a business even a quick review takes time. It’s also partly because I’m easily distracted and start writing about steel tariffs and the like. I don’t think my future lies in detailed research.

2. There are certain companies I’m drawn to

On the positive side, the process has helped clarify some of the attributes I like in a business. Steady growth, a somewhat boring business model, a track record of delivering for shareholders. Turnaround stories or value plays aren’t my thing. On growth, I like to distinguish between non-consumer and consumer sectors. For non-consumer I’m looking for global market leaders that can expand internationally; for consumer I’m looking to the opposite. UK market leaders with a judicious attitude to international expansion given how many firms have been burned by this in the past.

3. There’s dross in the FTSE 250 but good companies too

I started off thinking that UK equity indices needed a major shake-up, and I believe that more now. As well as shaking out closed-end funds, there’s a case for quality over quantity. As a mid-cap index, the FTSE 250 just feels too large, and the worry is that good firms get lost. Market caps are ~£500m at the lower end, which is firmly small cap territory. Indices are to some degree a marketing tool – professional investors can customise exposures as they wish - but they’re important for retail flows. I like the idea of a FTSE 50 and a FTSE 150. The MSCI UK Index, which covers the large and mid-cap segments, contains only 78 constituents.

4. You can sense the companies that care

One thing that’s really struck me is that you can sense the companies that care about getting their story told and selling their business to investors - a theme that came up in my previous post on the future of equity research. Rather than just throwing up the annual report and interim statements, the companies that care put up the recording and transcripts of earnings calls, host a capital markets day, make the recordings of these sessions accessible to all, put up a simple presentation on the investment case for the business. I think this evidence of a level of ambition for the firm.

5. Ownership is important

One of the things I like to look at is the current roster of shareholders. The FTSE 250 contains some small-cap names and the minimum free float for inclusion is only 10%, meaning 90% of outstanding shares don’t need to be traded and you can still make the cut. That’s low. It used to be 15% before 2012, was increased to 25% between 2012 and 2022, and in 2022 it was lowered to 10%. For comparison, inclusion in the S&P 500 index requires a free float of 50%; although the Russell based US indices require only 5%. Whatever the cut off is, it can mean some companies still have large founding ownership stakes e.g. Alpha Group, Bakkavor. That could be good or bad, but I like to know. Similarly, I like to see who’s on the institutional register. Is it your typical roster of UK asset managers or is the company attracting international attention (typically US). The latter is a good sign for me.

So, those are the big takeaways from A to D. I’ll do another update in a few months when I’m half way through. In the meantime, keep looking at the page for firm updates and add your own comments on the companies covered!

The UK Investor

A to Z of the FTSE 250

Welcome to a whistle-stop tour of the FTSE 250. I’m going alphabetically through the index. No financials or valuations, just a quick take on the business. What does it do? How does it make money? Does the business model make sense? The first part of a wider investment approach that you can read about…

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a year ago · 27 likes · 10 comments · Victoria Lonsdale

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[Me]: Right, equity research. I’m interested in this because as you know I write a Substack, and I see a lot of people on Substack doing stock research. Some are hobbyists, some are former analysts, some are current portfolio managers. I wanted to talk a little about how the equity research model has changed and what that means for investor relations and the companies you work with. And since people on Substack LOVE reading about Substack, something on whether social media can help fill the void left behind.

[Friend]: Yes, sure. To give some background I’ve worked in investor relations for US companies for over twenty years. When I started, it was a different world. A free-for-all, but in a good way. If you were a small cap company, you could get covered by sell side analysts.

This changed after the financial crisis, but it was MiFID II that had the biggest impact1. It was an EU directive that decoupled research from trading. It wasn’t implemented in the US but everyone did it here anyway.

This completely changed the research business and really affected small cap firms. Banks just don’t make the ROI on covering small cap names, they’ll always choose a large cap name because people will buy that research.

As a small company your only chance of getting covered by the sell side is to sign up to a banking relationship. It’s costly, you’re paying for it, but you may get an analyst. Or you get lucky and someone at a small boutique writes about you, but that’s few and far between.

The main challenge is that there just aren’t enough equity research analysts anymore.2

Same story in the UK. The government even got involved and launched a review on investment research, which proposed some form of centrally provided research platform. I instinctively recoiled at this, although not sure the idea has gone anywhere since. Getting back to MiFID II though, how did that change the world of investor relations?

You need to do a lot more work. All the marketing to the sell side and buy side now falls on the IR team, whether that’s an in-house team (which smaller companies can’t afford) or outsourced. Even if you can get sell side coverage, they’re not setting up meetings with investors anymore. It’s hard to even get into the sell side run industry conferences as a small cap. Companies are more and more on the hook for selling their story.

Do you think this has impacted the make-up of shareholders in the companies you work with? And the valuations of the companies?

It depends a little on the company, but in lesser-known sectors, yes. Good equity research provides a thoughtful breakdown of a business. There can be a void with certain firms and sectors where investors just don’t how to value them.

I see it across small cap space, where it’s harder for companies to be valued properly. That’s so different from when I started, when even if you had only three or four analysts there was a diversity of voice and depth of understanding.

In theory that brings opportunity, especially for smaller investors. Small caps that aren’t covered may be more likely to be mispriced. But to realise a return you need other people to understand why they’re mispriced too... Reminds me of a conversation I had with a friend who is a buyside analyst, who was telling me about a small Japanese company he’d invested in. It was this incredible company but the share price kept going sideways. And then one day it popped out of nowhere and it was all because someone had posted on social media. It turned out to be a great performer, but absent the social media post (which is a total crapshoot), the share price probably would have just kept going sideways.

Ha yes. The first thing we do when we see erratic trading in a company is look on social media. Go to Yahoo Finance messenger boards and X, and see if anyone has posted something, good or bad, work out how to respond. In the past we’ve seen people post false information on these platforms, and in some cases, we’ve responded directly. But you can’t always do that because of SEC rules around materiality and disclosure. That makes it difficult to control a message at a time when you’re on the hook for doing more and more to present your story.

Which takes us nicely on to social media in general... Sounds like you’re not sold on social media being a replacement for sell-side research?

We go back and forth on social media and whether and how to work with influencers. It’s difficult to manage and there are very different levels of understanding. It’s also very hard to find influencers – they need a certain level of followers to make it worthwhile engaging from the company side, but what gets the most followers on social media often comes with risk. You don’t want to do an interview with a CEO and have it end up as a meme 24 hours later.

I see some good stuff on Substack but also a lot of generic stuff, and at the end of the day it’s targeted at individual investors. Do companies even want a big retail following, or engage with a retail investor base?

That’s changed a lot in the last few years. During the pandemic people had money to spare, were sitting at home, and traded a lot of stocks. Because there was money flowing, companies wanted to engage directly with retail. It was a wild west but also very innovative. Companies would do a traditional earnings call for institutions, then another on Clubhouse for retail investors. Others were doing YouTube videos. But that’s all gone away. No one even mentions Clubhouse anymore. Does it still exist?

No idea. I was never “cool” enough to get an invite when it was “cool” to get one.3

I remember begging someone to get me access… Anyway, your question on whether companies even want a retail following, that varies. It can be very unpredictable when you have a lot of individual investors. There was a consumer company I worked with a few years back… a well-known name but the following was incredibly volatile and it wasn’t helpful.

I do think companies need to talk to individual investors regardless, via social media and other platforms. But the company needs to take charge of that more. What you have is a blurring of investor relations and communications and marketing, whereas before they were more separate. IR and comms teams really need to work hand in hand today.

One thing I’ve come across in the UK is company sponsored research. Edison is one of the biggest firms and FT Alphaville wrote about it recently, noting that if FTSE 100 listed British American Tobacco (BATS) needed to pay for coverage, things must be really bad on the sell side. Although they made a good point that the issuer paid model is standard in fixed income (e.g. Moody’s and S&P). I find these reports can be quite helpful in setting out the industry and the business model, although I’ve yet to encounter one with a sell recommendation…

Well quite. In the US, company sponsored research started to become a thing a few years ago, but it’s never fully taken off, which I think is because of the impartiality point – the company is paying for a good presentation of itself.

It’s also quite expensive. Sidoti and Telsey are two big firms, but you’re looking at $50k pa, possibly $100k pa, for one initiation report plus quarterly earnings updates, which can be material for smaller firms. It’s good for an initiation report but is normally very mediocre for earnings analysis.

Biopharma and biotech use it a lot because of the niche nature of that industry, but for the types of clients I work with, I’d normally advise them to put the money towards a banking relationship with a reputable firm.

Has the rise of index funds changed investor relationships?

Passive is tough. We typically call the largest shareholders off the back of any major announcements - M&A, strategy or personnel changes etc. Looking at lists today and we can end up with just three or four places to contact. We may reach out to the passive funds on proxy votes, but they mostly vote with ISS so often they’re not even interested then.4

It’s an interesting space though, in terms of how proactive passive funds should or shouldn’t be as shareholders. If you take Vanguard, it recently signed an agreement with the FDIC that reinforced its “passivity” on bank shareholdings i.e. it agreed that it wouldn’t vote against the status quo. The FDIC was worried that these firms had undue influence over a sector, given the scale of ownership. FERC is also looking at this in utilities.

So, final question. With the big change in research, and rise of passive, where do you see investor relations in five years? How can companies sell their story?

Well, Wall Street certainly isn’t going to start employing lots of equity analysts again. Substack - and other social media - can help fill the void, but they are a small part. Nothing can compensate entirely for the end of the sell side model. Rather, it’s down to companies to get their message out and explain their business. Be proactive in communicating with shareholders, put out a steady stream of content that can be accessed by all, be responsive and accessible, and have that much closer relationship between communications and investor relations teams.

That makes a lot of sense. I’m going through the FTSE 250 at the moment and even just looking at a firm’s website, you get a sense of which ones “care”. The good ones are telling their story, putting up an investment case, putting up recordings of a capital markets day. Others just throw up an annual report and some earnings releases. I totally agree that companies need to sell themselves more - especially so in the UK when it often doesn’t come easy to us!

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Research headcount has fallen from over 4,500 in 2014 to just over 3,000 today according to Bloomberg.

Trump’s decision to reimpose 25% tariffs on steel and aluminium imports from all countries already seems like old news. But when I started writing this article last week, it was before he’d sold-out Ukraine, and before JD Vance had taken a self-righteous hatchet to 80 years of US and European alliance. Steel tariffs were still in the news – and having worked on UK steel policy in the Treasury it seemed an apt time to write about it. It turns out I had more to write than I thought, so this is part one.

Steel tariffs and the UK: a recap

The story last week was that Trump was reimposing a 25% tariff on steel and aluminium imports from all countries, without exception. The tariffs were first imposed in 2018, under Trump 1.0, and were met then with a robust response from the EU (including Britain as it was still in the EU at the time, although distracted by trying to leave). The EU levied retaliatory tariffs, as permitted under WTO rules, on an assortment of US products, including motorcycles and bourbon. A deal was reached under Biden that exempted imports from more “friendly” nations, and the EU and UK (which had then left the EU) dropped the retaliatory tariffs.

Trump doesn’t like these exemptions, is planning to remove them, and the EU and Canada are readying for a fight. The UK initially seemed to be ducking that fight, but by Sunday had changed tune, with Jonathan Reynolds, business and trade secretary, warning that it could impose tariffs on US products if the UK was not exempted from the US steel ones. Douglas Alexander, the trade secretary, had previously warned that the tariffs on UK steel exports would be a “significant blow”.

Which is a bit surprising, because if you look at the numbers, steel and aluminium don’t matter that much. The UK steel industry accounted for £2.3 billion of GVA in 2021 or 0.1% of total UK output. Exports to the US amount to about 5% of total UK steel exports, and were worth £388m in 2023, compared to total UK exports of £844 billion. So that’s 0.1% of output and 0.05% of exports directly affected. It doesn’t feel like a major problem worthy of an urgent question in the House of Commons.

Aluminium matters even less. The one remaining operational aluminium smelter in the UK is in Lochaber, which employs around 200 people and exists only due to an extremely dodgy deal negotiated by the SNP at a cost of £586m to taxpayers. I’ve never been to Lochaber, but I recall discussing the plant with a Scot who grew up there, knew the inner workings of the deal, and was appalled by it. That’s a story for another day. The point here is that with 200 workers, aluminium production is not critical to the Scottish economy, let alone the UK one.

Of course, this doesn’t mean that steel and aluminium aren’t important inputs into the UK economy. We need both – to build new houses, to build (some) infrastructure, to make (some) cars and produce (some) other manufactured goods. And if we don’t produce steel domestically, we either need to import the ingots, rods and bars to bash into other products or import the end-products that contain the steel (and aluminium, but I’m ignoring that from now on).

Importing vs domestic production

The extent to which a country like the UK should produce steel rather than import it is hotly contested, and somewhere over the course of 2021 and 2022, I lost months of my life in an endless argument between the Treasury and the UK’s business department over it.

At that time, the debate centred around whether the UK needed to maintain primary, also known as virgin, steelmaking capability, by which is meant the steel produced in blast furnaces by heating iron ore and coking coals to extreme temperatures.

The UK had only two remaining blast furnace sites left then – one in Port Talbot in South Wales, owned by Indian conglomerate Tata; and one in Scunthorpe close to the Humber Estuary in North Lincolnshire, owned by Chinese steelmaker Jingye. The last blast furnace at Port Talbot was shut down in September following a deal between Tata and the UK government to build a new electric arc furnace on the site. This leaves the UK with only one primary steelmaking facility in operation today.

Ed Conway did a good breakdown of the issues in a post last year, but the key arguments for supporting primary steel production in the UK came down to maintaining jobs, national security and security of supply.

The key arguments against were the ongoing costs required to subsidise an uncompetitive industry (because steel plants in the UK were old, aging, underinvested and built in the wrong places); different views of national security (because from the military perspective, in any type of war that required production of steel at scale, the UK would need to rely on its allies for a whole lot more than steel); and a different view of what security of supply meant (because even if you kept the blast furnaces, you still need to import the raw materials to make virgin steel).

Where I personally ended up is that the UK needed to shut down the blast furnaces, but that the government should help invest in modern electric arc furnaces. That seems to be roughly where policy is today, although we still need a new consultation to work out exactly what that policy is.

Excess capacity, excessive subsidies

Wherever you end up on the imports versus domestic production debate, as it stands today, the UK doesn’t produce much steel and isn’t likely to anytime soon. Wikipedia tells me the UK was the 35^th largest producer of steel in the world in 2024.

And from a global perspective, and assuming trade flows don’t completely break down, that’s fine, because there is plenty of steelmaking capacity elsewhere. In fact, the defining feature of the global steel industry is excess capacity. There is vastly more capacity to produce steel then there is demand for it.

This isn’t a recent problem. In 2016, the Global Forum on Steel Excess Capacity (GFSEC) was established by G20 leaders to facilitate global cooperation to address steel overcapacity after it reached peak levels in 2015. The problem hasn’t got much better today.

Why is there so much excess capacity? The answer you get from European and US steel producers is that it’s all because of China. The reality is slightly more nuanced.

China’s role in the global steel glut

The China story goes something like this. Starting in the early 2000s, China began to rapidly expand its domestic steel production. This was no surprise since it had been long observed that the intensity of steel use in an economy follows an inverted U shape as a country becomes richer. As China built its infrastructure and factories, demand for steel boomed, and it made sense that a domestic steelmaking industry grew to meet those needs.

But the development of this domestic industry was supported by state subsidies, which enabled Chinese steel companies to operate at a lower cost than they otherwise would, distorted demand and supply, and encouraged over investment in steelmaking. The result was China’s steel production rapidly outgrew domestic demand, and to get rid of excess capacity, Chinese companies exported the steel, driving down the price globally. This became a more acute problem from 2015 on as China’s domestic economy slowed; and it’s become more acute in the past few years for the same reason.

Everyone else’s role in the global steel glut

The slightly more nuanced version of the story is that excess capacity in steel production isn’t just a China problem, even if it’s the largest culprit.

According to the GFSEC, India, Indonesia, Malaysia and Vietnam have all experienced significant growth in steelmaking capacity in recent years. With the exception of India,

trends observed in these economies include significant over-investment in the steel industry, growing gaps between capacity and steel demand, and strong growth in steel exports due to insufficient local demand.

There is a similar story in the Middle East which has seen a large ramp-up in production, particularly in Iran.

As with China, this is aided by extensive subsidisation of steel industries, likely driven by variants of the same arguments over jobs and security we had in the UK.

Mature economies are guilty too. The EU has its own excess capacity problem, a function of older plants that were built for a level of domestic demand that has steadily declined, a higher cost base relative to new plants built elsewhere in the world, and a political desire to retain existing plants for the sake of employment and sovereign capability. The steel industries in Germany, Italy, Spain, France and Austria have capacity utilisation rates between 56% and 76%, well below the 85% level considered sustainable.

The global ripple effect

As much as all regions are guilty to some degree, there’s clearly an interaction between excess capacity in China and excess capacity elsewhere. China accounts for 47% of global steel production, and if it produces lower cost steel due to state subsidies, it’s going to cause excess capacity in markets like the EU and US, as it will mean producers in these countries are less competitive.

Where the exact truth lies in how much is a China problem, and how much is a true competitiveness problem isn’t entirely clear to me. But as China accounts for 47% of global steel production and its subsidies are estimated by the OECD to be more than five times higher than other non-OECD economies and more than 10 times higher than OECD countries there does seem to be some major distortion going on.

Tariffs, anti-dumping and safeguards

Dealing with this distortion is where Trump’s tariff policy comes in, and although there are clear downsides – it increases the costs for US consumers of steel – if the primary goal is to protect US steel production, it’s not a crazy solution. Nor is it without precedent.

Canada imposed a 25% tariff on steel imports from China in October last year; Turkey imposed anti-dumping duties (tariffs) on steel from China, Russia, India and Japan; Indonesia imposed them on steel from China, India, Russia and others. The EU has a safeguarding system that puts tariffs on import levels over set quota amounts, to try and prevent “dumping” of excessive quantities, although it should be noted that this was partly triggered by Trump’s original steel tariffs in 2018. The UK carried over these safeguards when it left the EU (not without drama, which I’ll turn to in the next post).

What is odd, both in 2018 and now, is that Trump is putting tariffs on imports from all countries, not just China. One argument for this is that Chinese excess capacity depresses prices globally, impacting US producers wherever the steel comes from, and there’s probably some truth to this. But this is the same for the EU, Canada, Japan, South Korea, and any steel producing nation that isn’t China. US producers aren’t at a competitive disadvantage relative to steel producers in those countries – all face the same challenge.

The lack of rationale and the failure to target the root cause of global excess capacity must be part of the reason why the EU responded so forcefully to the US tariffs in 2018 and is threatening to do the same today. That, and the fact that steel is politically sensitive, and the largest EU economies still have large steelmaking industries.

After the US put tariffs on €6.4 billion worth of EU steel and aluminium exports in 2018, the EU applied retaliatory tariffs on €2.8 billion worth of US goods. A similar response is likely again, meaning that what is an issue about excess steel production globally could again turn into a more general trade war between the US and the EU.

Where should the UK stand?

Back in 2018 the UK didn’t have a choice in following the EU reaction, because it was still part of the EU. But we’ve been told since then that one of the great benefits of Brexit is being able to chart our own course on trade.

The UK doesn’t produce much steel, and little of what it does produce goes to the US. Keeping heads low and deferring action on any retaliation seems sensible. Desperate as I am to stand up to Trump, if the UK starts down the path of retaliatory tariffs, it simply doesn’t have many sticks to throw. Target US bourbon or Levis jeans, and the US can whack a new tariff on Scotch whisky. Cue a political shitstorm overnight.

And so, I interpret the comments from the UK business secretary on Sunday with some caution. Perhaps a week of meetings with steel industry leaders has worn him down; perhaps the business department is using the potential for escalation as a tool to extract more money (or defend current commitments) for the steel industry in a tight spending environment; perhaps there is real panic that this will be the end of what’s left of the UK steel industry. Whatever the reason I’d be surprised if the UK decided to escalate.

But while this course of action may make sense for the UK in a vacuum today, if Trump keeps going, at some point some industry that is of more economic value, and exports more to the US, will be in the crosshairs. At that stage the UK may want the EU on its side, and the price for that may be taking a stand on things that it cares little about.

More widely this is yet another example of US actions that undermine European unity, with little regard for consequence. Trade wars create winners and losers - and when they cut across nation states, as is the case with the EU, maintaining a unified front can require setting aside national interests. At a time when the US is siding with Russia on all things Ukraine, the last thing Europe needs is to expend energy on a trade war that could pit its industries in one country against the industries in another. The US bears responsibility for starting that trade war, and the UK will be affected by it, even if it decides to avoid the fight today.

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If you’ve been following the UK investment industry, you’ll have seen the headlines around Saba Capital’s attempt to take control of seven UK investment trusts. The US hedge fund lost the opening round of its figastht l week, after shareholders in Herald Investment Trust voted resoundingly against Saba’s plans. Further votes will take place this week, but if Herald is anything to go by - 99.78% of non-Saba shareholders voted against – then the UK trust industry will be patting itself on the back for successfully fending off the American attack.

Having come from a US-based investment background – working for US firms, marketing US funds – I’m still learning about some of the quirks of the UK investment world. And instinctively, I’ve never liked investment trusts, or what Americans call closed-end funds. I can’t understand why they’re included in the FTSE 100 and FTSE 250, and I don’t understand the value of holding listed equities in a closed-end structure. Why not just buy a mutual fund? Or an ETF? There’s a good case for using these funds to invest in illiquid assets but my cynical self says this is also just an opportunity for mediocre managers to charge high fees.

So, I’ve been digging into this world of investment trusts to understand what’s been going on, and whether my instincts to side with the Americans are correct. This is a long one and I want to start with some history. If you feel confident in your understanding of discounts to NAV, jump ahead to views on Saba.

History of UK investment trusts

The first UK investment trust, Foreign & Colonial Investment Trust, was launched in 1868. It still exists today, although the British empire does not, and hence it goes by the name F&C. F&C is a FTSE 100 listed company with assets of over £6 billion. It’s benchmarked to the FTSE All World Index and holds shares in over 350 companies in 35 countries with ongoing charges of 0.49% per year. It’s a broad, global equity portfolio then, the likes of which you could buy as a passive ETF at half the cost.

But 156 years ago, that option wasn’t available. Neither were mutual funds (or open-ended investment companies or unit trusts, as the equivalent structures are often called in the UK). Investment trusts offered the chance to invest in a diversified portfolio – initially of government bonds, then American railroads and the like, finally an array of global assets.

Today, investment trusts are dwarfed in size by mutual funds, but perhaps because they originated in the UK, were the only game in town for many years, and because UK mutual funds were littered with expensive fees for a long time, investment trusts in the UK still play an outsized role in the industry relative to other countries. As of December 2024, there was £268bn invested in UK listed trusts versus £1,529bn in UK funds, meaning investment trusts held 15% of total UK-domiciled assets. In comparison, closed-end funds in the US (the closest equivalent) held only 3% of total fund assets.1

How investment trusts work

That’s a lot of talk about trusts and mutual funds, and open-end and closed-end. What does it all mean?

The key structural feature of an investment trust (closed-end fund) is that they are listed companies that trade on an exchange like any other stock, and whose price goes up and down throughout the course of the trading day, just like any other stock.

The difference between a trust and any other stock is that the trust operates only to manage the funds it has raised, and its assets are the investments it makes (which could be in equities, bonds, private equity, infrastructure etc.).

The difference between a trust and a mutual fund (open-ended funds) is that a trust raises money by issuing a fixed number of shares, and investors then buy and sell the shares through the stock exchange. The trust does not need to manage inflows and outflows; it just invests the money it raises at the start and gets on with it.

In contrast, a mutual fund issues new shares every time an investor buys in and redeems shares when they sell out. The mutual fund manages these inflows and outflows by buying and selling underlying assets.

This structural difference gives rise to three main features of investment trusts aka closed-end funds:

• They can use borrowing (aka gearing), because they are legally structured as companies, and because they have a stable capital base.

• They can invest in illiquid assets, because if you don’t have to worry about managing inflows and outflows, you don’t have to worry about holding assets that are hard to buy and sell.

• They can trade at a different price to the underlying Net Asset Value (NAV) of the investments they hold, because they have a fixed number of shares and the share price will reflect demand and supply for the trust, as well as the underlying value of the assets it invests in.

That final feature – the difference between the NAV and the share price – is what brings us back to the Saba Capital battle today, because Saba’s main criticism is that UK investment trusts have allowed large discounts to NAV to persist. And that the boards of the investment trusts have been negligent in their duty to shareholders to try and close the discounts.

Persistent discounts to NAV: A fair criticism?

Discounts to NAV are an evergreen feature of investment trusts, averaging about 5% between 2014 and 2021 based on this chart from the Association of Investment Companies.

Going back even further (in blurry form courtesy of an old Schroders article via EQI via Google…) there’s been a few periods of exuberant demand for investment trusts. Trusts traded close to NAV in the early 2000s (which ended in a big scandal around split trusts2), in the immediate years before the GFC (because property prices only go up!), and in the 2010s zero interest rate policy era (because the leverage in trusts could enhance yields). But there’s also been plenty of other periods when trusts traded at large discounts: in the early 1990s, in the mid-2000s, and in the years after the GFC.

In a textbook view of the world, assuming no transaction costs, perfect information, etc., etc., there would be no difference between the NAV and the share price of the trust. If the share price trades below NAV, a trader could buy the fund, while selling short the underlying assets, to lock in a risk-free profit. Seeing a risk-free trade, capital will flow to the opportunity, and increasing demand for the fund will push up the share price. Arbitrageurs will close the discount.

Now nothing ever works like it does in the textbook, and there’s plenty of reasons for discounts to persist:

1. The NAV isn’t accurate: If the funds invest in publicly listed equities, then pricing the underlying assets isn’t hard, you just use the closing price of the shares and disclose it daily. But if they invest in private assets, as many increasingly do, there is no daily price. Instead, there is normally a quarterly valuation process – not quite finger in the air, but full of assumptions and uncertainty. If public markets tank and the trust has an NAV based off valuations done three months ago, then the discount will substantially widen as investors quite rightly say, we don’t believe that NAV anymore.

2. Transaction costs are not zero: In the arbitrage example above you need to construct a portfolio that shorts the underlying assets. With large cap liquid stocks, professional traders can do this, but with private and small cap names it’s going to get tricky quickly. A simpler way to make the same trade for the benefit of existing shareholders is for the board to wind up the fund - sell all the assets, return the cash. Or a third party could buy the whole fund, which is what the British Coal Pension Fund did in 1990 when they succeeded with a hostile takeover of Globe Investment Trust, at the time the largest in the UK. A less extreme option for boards is to buy back shares, which is equivalent to selling selling (the underlying assets) high and buying (the shares) low.

3. Incentives aren’t always aligned: To buy back shares or wind up the fund you need board approval, and often there isn’t much incentive for the board to provide this. Large buybacks mean selling assets, which lowers the assets under management (AUM). Fees are typically charged as a percentage of AUM so a vote for buybacks is a vote for lower fees (at least in the short term). Boards should of course be independent of the management company and not concerned by fees, but in practice it’s never quite so black and white. And a vote to wind-up a trust is a vote to wind-up a nice non-executive position. Turkeys voting for Christmas and all that. Because of this, criticism of investment trust boards has been longstanding, way before Saba got involved. In fact, in 2023 there was a big bust up at Scottish Mortgage Trust.

Why have discounts widened since 2021?

Well, if you believe the former Pensions Minister, it’s the fault of the EU!

“The leftover EU rules were definitely part of the reason Saba was able to swoop in and take advantage of the excessive discounts that resulted, at least in part, from misleading charge figures forced on trusts by misapplied regulations,” Altmann told the Mail.

Leaving aside the fact that the fee disclosure rules came in in 2018, and the UK fully left the EU in 2019, I tend to think something more important happened between 2021 and 2023.

Interest rates started rising, rapidly. The UK 10-year gilt went from 0.85% in January 2020 to 3.5% at the end of 2023.

At the same time, the investment trust world had become increasingly exposed to private assets, in the form of private equity, property and infrastructure, all of which have significant interest rate risk.

Private equity utilises a lot of borrowing and has experienced well publicised issues with realising investments in recent years. Infrastructure has been sold as a long-term stream of income, much like a bond. And if yields go up, bond prices go down. Failing to acknowledge this - or just hoping that rates will fall, and you can wait out lower valuations - has I imagine been widespread.

The industry will say there are a lot of factors at play, but the widening in discounts that started in 2021 seems to me a pretty clear-cut case of the market saying, no, we don’t believe your valuations.

And in some cases, the market has been proved correct. Digital 9 has been the poster child of poor governance and poor asset management. The infrastructure trust launched in 2021, but the board voted to wind it up in 2024 following funding problems in 2023 (yes, higher interest rates).

After starting the process of selling assets, it became clear they couldn’t get anywhere close to book value. In September 2024 Digital 9 estimated a ~40% cut in valuations from those reported at the end of 2023 and it’s got worse since:

“The 80 per cent discounts that Digital 9 has previously traded at suggest that the market got this about right,” added Quoteddata analyst Matthew Read.

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A closer look at Saba’s plans

Now not all investment trusts are alike, and while the above explains the discounts on illiquid investment strategies, and the failures of boards to act to close them (because the assets aren’t actually undervalued), it doesn’t make sense for those that invest in liquid securities (because we know daily what the price of those are).

That’s where we get into more “woolly” explanations for persistent discounts, along the lines of there’s not enough demand because the EU rules on fees are putting investors off, or because public investment strategies have been tarred with the same brush as private ones, or because performance has been poor and its putting buyers off. And sure, those all explain why there may be a discount, but they don’t explain why boards aren’t doing more to close it, because again, if the trust invests in listed securities and has confidence in what the NAV is, then there is value to shareholders from buying back shares or winding up the fund. Simply put, demand for investment trust shares has fallen, supply should too.

It's no surprise then that the seven trusts Saba has targeted invest mainly in liquid securities. Let’s look at these in more detail.

Baillie Gifford managed trusts

Saba argues that these funds have underperformed their benchmarks over the last three years, with persistent discounts to NAV that only closed due to Saba buying shares. Looking at the figures this seems a fair criticism – although how bad it is versus other trusts I don’t know. There does however seem to be a clear case for consolidation, given the similarity in strategy between USA and EWI, and the small size of KPC (which was looking at winding-up even before Saba’s approach).

Because of its small size, KPC’s ongoing charges are high, and the board cited this as an argument against buybacks i.e. by reducing the share count, it increases charges for remaining shareholders. Except I don’t think that’s an argument against buybacks, but rather an admission that the fund is sub-scale and needs to be wound-up.

So, while Saba hasn’t given much detail on its plans, some sort of consolidation feels eminently sensible. Merge funds, sell assets, market the hell out of giving retail investors the chance to own some of Space X (which as much as I hate Musk, still sounds exciting).

Janus Henderson managed trusts

The Janus Henderson funds are similar to Baillie Gifford in there being one fund that looks subscale, too expensive, and underperforming (HOT). The other fund (ESCT) is unique among Saba’s targets in outperforming the benchmark over the last three years, not that that’s helped its NAV discount. The bigger issue for me with ESCT is the presence of a performance fee that isn’t easy to dig out the details on (again, go to the annual report), and which will materially eat into total returns e.g., in 2023 the performance fee was twice the level of the management fee.

Herald and CQS/Manulife managed trusts

The final basket of funds includes Herald (HRI), the only trust to have held a vote on Saba’s proposals, whose shareholders overwhelmingly rejected them, and CQS Natural Resources (CYN), which is a relic of the commodity super-cycle of the early 2000s. HRI is the largest target on the hitlist and despite performance being okay-ish, Saba argues that it has failed to take actions to remedy the discount to NAV. CQS has had both poor performance and a large discount; and with a 1.9% fee is the priciest strategy on this list.

The short summary is I wouldn’t invest in any of these funds but that’s true of many actively managed one, whether open or closed-end.

The British backlash

For an industry often described as “cosy” and “sleepy”, it’s been an impressive rearguard action, helped along by the British tabloid press. Platforms have been pressured into ensuring shareholders can easily vote (a good thing in general), and the narrative has leaned heavily on the American vulture fund versus the dogged resistance of individual investors

The more specific arguments against Saba fall into the following buckets:

• Saba will destroy value in the long-term, which leans heavily on the performance of Saba’s ETFs in the US and evidence from the US that activist investors have not improved the discounts on funds over the long-term. Research from the Investment Company Institute does support this – but then no one is being forced to stick around for the long-term.

• Saba is only in it for short-term gain, which is similar to the first point. Saba has been honest that it will make significantly more by closing the discount to NAV and taking the gain on its shareholding, rather than benefitting from management fees in the long-term. But I don’t see how this is to the detriment of other shareholders who will also benefit from that gain – and who are being offered the chance to cash out at close to NAV.

• Saba could radically alter the investment mandates and deprive investors of exposure to the current strategies, which is perfectly possible but not an argument to vote against. If there’s demand for these types of products, others will take their place.

• Saba’s actions will deprive UK companies of capital, which is nonsense, because most of these funds invest primarily in overseas companies (and c.45% of total assets in the investment trust industry is invested overseas), and the one UK-only strategy (HOT) has assets of £102m, which is utterly piddly in the great scheme of capital availability.

Siding with the Americans

Boaz Weinstein has come in for a lot of heat but the interesting thing for me is we’ve been here before:

“Scorched earth with a cynical twist couched in a litany of highly selective statistics"

That’s how the Chairman of Perpetual Income and Growth Trust described Securities Trust of Scotland, as it rejected its takeover bid in 2005. This was at a time when:

Shares in the sector have been constantly trading at a discount to the net asset value of their underlying portfolios, while the recent trauma of split capital trusts^[1] has dented the sector's reputation, which hitherto enjoyed an untarnished record for generations.

The battle for STS is the latest sign of a growing appetite for action among the more forward-thinking trust boards rather than the sector's traditional supine attitude to change.

At the end of the day, if shareholders want to stick with these trusts, that is their right. Saba is proposing to replace the entire boards, replace the investment managers, and change the investment mandates. So this is a wind-up of the trusts in their current form. In return for voting for this, shareholders can take up the option of a “liquidity event” (tenders and buybacks) to sell their shares at close to NAV, although the exact details of this have not been provided.

Given the PR campaign, and the sense of being attacked by a New York hedge fund, I’d be surprised if Saba wins the votes. Individuals will also have their own circumstances to consider, based on the levels they bought in and tax liabilities, etc. And it feels like a step into the unknown if your goal was to just buy a trust and let it be.

But if history is to go by, the investment trust world needs a periodic shake up, and Saba deserves credit for initiating it this time round. These trusts aren’t helpless victims of an attack. The boards - and the management companies - were asleep at the wheel and left themselves vulnerable to it.

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I don’t want to dwell too much on Trump as this is a newsletter focused on the UK. But what America does influences us all so there’s only so much you can avoid it. I recently wrote about how the level of government spending has been an underappreciated aspect of US growth over the last decade. I thought I’d focus now on what I feel is an underappreciated aspect of markets today – how expensive US markets are.

This isn’t a big secret – they’ve looked expensive for years while continuing to roar ahead. And US stocks should trade at higher valuations than other markets given US companies have historically delivered higher earnings growth and been more profitable than other regions. Some premium, a quite large one, is justified even in normal times. Add to that an AI-induced earnings boom, and the concentration of big tech companies in the US, and it’s not difficult to justify where we are today.

Yet I follow things reasonably closely (without working in the industry day-to-day) and I still did a double take when I looked at the latest P/E ratio for the S&P 500.

And I did another when I looked at the longer-term Cape Shiller P/E ratio. People will endlessly debate whether this has any predictive value – and I personally remain somewhat scarred by making arguments against US equities c.2013 because the Shiller P/E was so high. Still, we’re at pre-1929 and pre-2007 levels today and that doesn’t feel comfortable.

Then the FT had this chart of the equity risk premium, which compares the expected earnings yield on the S&P 500 to the 10-year Treasury yield. Again, we can endlessly debate what it means, but again, it doesn’t feel good.

Finally, my husband said forget about stocks – they can go to the moon, and you can “kind of” justify high valuations based on future earnings growth. Instead, look at credit spreads.

Currently the spread for US high yield borrowers (difference between lending to a risky corporate and lending risk-free) is ~2.5%, which is at levels close to before the financial crisis and before the blow-up of Long Term Capital Management in 1998. This is the tightest they’ve been in close to two decades, and unlike stocks, the price of bonds can only go so high (as you can only get par back). So credit spreads give a purer reflection of how much optimism is currently priced in (a lot).

It’s not just valuations that concern me though. As Keynes famously said, “markets can remain irrational longer than you can remain solvent”. Its valuations plus the sense of hubris in the air.

From an FT article on Davos:

Hours after Trump unveiled a blitz of executive orders, the same banker proclaimed that “everyone is all-in on America”. Summing up the prevailing mood, he said the next four years would be characterised by a “bonfire of regulations, ‘drill baby drill’, and the end of [environmental, social and governance] standards”.

From a different article on animal spirits:

The re-inauguration of Donald Trump as US president has ushered in a new period of “animal spirits” among business executives, as veteran investor Stan Druckenmiller put it this week. Chief executives are “somewhere between relieved and giddy” at the election result, he told CNBC. Meanwhile, US banks are in “go-mode”, a senior JPMorgan executive told the Davos crowd, while crypto is on the cusp of entering the “banana zone”, according to its boosters.

I don’t quite know how this ends, but it’s not hard to map out a few scenarios.

In one, a major tech company undershoots on earnings. AI’s transformative effect takes longer to emerge than imagined. The tech sell-off causes a rerating across the whole market, animal spirits are dampened, sentiment sours.

In another, inflation is still lurking, prices start ticking up more than expected, not helped by overzealous tariff and immigration policies. The Fed starts raising rates, Trump goes ballistic, Trump fires Powell, markets lose confidence in the Fed, rates rise further, Trump goes even more ballistic.

The first one may be a minor blip; the second could have wider ranging effects, as companies that shook off the first wave of interest rate rises following the pandemic – or simply postponed the pain – are now forced to realise losses. Defaults accelerate and credit begins to contract, as the US economy does too.

I’m not saying either of those – or some combination – are guaranteed to occur. But with US valuations where they are, there is little room for error. US markets looked priced for perfection.

And yet at the helm of all this is Trump. You can argue that the bark is worse than the bite, that they’ll be a lot of chest-thumping on tariffs and borders without a lot of action. It will be the NAFTA renegotiations all over again.

I’d argue that we just don’t know – and that that uncertainty is not fully reflected in valuations right now. Markets seem to be placing a lot more weight on actions that could be good for growth as opposed to ones that could be bad.

Sell the US, buy Europe and the UK then?

Unfortunately, not quite so simple. As Joachim Klement argued recently, a crash in the US won’t help European investors. But it doesn’t feel like going all in on the US is a good strategy right now either.

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A lot has been written about the strength of the US economy and the comparative weakness of Europe. In the UK there’s no denying that growth has been pitiful and that there is a general sense of doom and gloom. It’s a lack of entrepreneurial spirit; a tax system that favours property over income, the old over the young; an inability to build houses let alone infrastructure; an increasingly sick and inactive workforce.

While much of this is true, there’s one factor I hear a lot less about – and that’s just how much money the US government has been pumping into the economy relative to other nations.

This is clear from the IMF analysis below. Since 2000 the US fiscal deficit (the difference between government revenues and spending) has consistently been two to three times higher than the median level of other advanced economies.

This isn’t just bigger stimulus following an economic downturn (although that did happen following the GFC and the pandemic). It’s bigger stimulus all the time. And it must have played at least some role in this picture of relative GDP growth.

Economists and investors widely acknowledge this. In an article last year PIMCO noted:

“The US social contract - large, deficit fuelled growth - has spurred a productivity and technology boom to the benefit of U.S. companies and stock investors”.

But many other commentators – and the public at large - tend not to. Large fiscal deficits represent government inefficiency and excessive spending. The size of the US debt is a drag on growth.

My hunch is we hear less about this because it doesn’t fit the narrative of American endeavour relative to European malaise. It’s a less chest-pumping story in which growth isn’t just about having a risk-taking attitude borne of the pioneer spirit. It’s about having the world’s reserve currency, the world’s safe-haven asset, and a greater capacity to borrow and spend beyond your tax base than any other country.

That’s still an exceptional position, and don’t get me wrong, the US has made the most of it. Productivity growth has accompanied high spending. Inflation has only been a factor in recent years. It’s just not always the story that you hear.

And it’s certainly not the story told by Trump, Elon and co., despite Tesla benefitting handsomely from such fiscal largesse. Sure, it had some good battery technology, and a maniacally driven CEO/salesman-in-chief. It also benefitted from over $2.5 billion in federal and state loans and subsidies, plus another $2.5 billion of indirect subsidies courtesy of California’s green energy policies.

What this means for the UK is double-edged. We can take solace in the fact that higher US economic growth doesn’t solely reflect British deficiencies. But we also can’t replicate that growth model, having neither the world’s reserve currency nor the world’s safe-haven asset.

When we did have the opportunity to borrow freely, we blew it.

The UK Investor

Austerity in Hindsight

It’s a week until the new government’s first budget and Rachel Reeves, the UK Chancellor, looks set to confirm a major revision to the country’s fiscal rules (there have been seven sets since 2011…) to allow more borrowing for public investment. This is generally considered a positive thing by the great and good of t…

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2 years ago · 4 likes · 5 comments · Victoria Lonsdale

Which unfortunately means more need for change, and more painful decisions.

America’s great privilege is being able to avoid them.

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Taking a break from UK macro this week, I thought I’d return to the topic of investment returns given a recent report from Abrdn which found that UK adults hold the smallest percentage of their wealth in equities or mutual funds of any G7 country (8%) and that almost half of UK adults think property is a better long-term investment than pensions.

I haven’t dug into these numbers - and from my past life I know that finding good data on stock ownership in the UK is difficult – but the picture of low equity ownership among UK individuals is consistent with what I’ve seen and written about before. Brits don’t really like the stock market, preferring the safety of cash and the perceived safety of housing.

The UK Investor

Why do Brits Hate the Stock Market?

I spent half my twenties living in the US, and one thing that struck me was the difference in investing attitudes among my peers. University graduates living in New York and London with high cost of living and high house prices. Yet while my New York peers were content to “max out their 401K” and comfortable and well…

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2 years ago · 3 likes · 4 comments · Victoria Lonsdale

What I want to focus on today is less about why that is, but about whether it makes financial sense. Has UK housing been a better investment than UK shares?

As with any question on investment returns, you’d think it would be simple to answer, but in practice it’s not.

Houses vs. Stocks: Price returns

The Bank of England’s A Millennium of Macroeconomic Data project1 provides UK house price and share price indexes going back to 1845. As they’re price only, they do not include dividends from shares, rent from housing, or the costs of ownership. Those are big omissions, and I’ll come to them later, but for now let’s look at prices because those drive the headlines anyway.

The chart below shows annualised returns over trailing ten-year periods. I’m using ten years to start because that seems a reasonable timeframe for non-retirement savings. The way to interpret the chart is that each year shows the average annualised returns for house prices and share prices over the previous 10-year period i.e. 2024 shows what your return would be if you’d bought in 2014 and sold in 2024. Areas of grey show periods in which share prices outperformed house prices; areas of pink show periods in which house prices outperformed share prices, both looking back over the previous 10 years.

What comes across is choppy performance. Shares prices outperformed during the nineteenth century, but from then on it tends to alternate. From 2012 on (i.e. for those buying houses and shares from 2002) there isn’t much difference in historic ten-year returns, although house prices have staged a comeback over the last decade.

Ten years isn’t a particularly long timeframe though if we’re looking at a working life or a typical mortgage term. To account for that, let’s look at 30-year average returns.

As expected, the longer time horizon smooths out the choppiness in relative performance, and we see three distinct periods. Share price outperformance in the 19^th century, house price outperformance in the 20^th, a more mixed picture in the 21^st.

A few other things jump out:

• First, neither house prices nor share prices always go up, even over long time periods (although most of the time they do, and since 1945 they pretty much always have, but remember this doesn’t account for inflation).

• Second, the performance of both assets has moved together, with trailing 30-year returns rising steadily during the post war period. This coincides with a period of sustained economic growth and growing housing demand as baby boomers entered the workforce. The high nominal returns also reflect higher inflation than in the pre-WWII period.

• Third, since 2000-ish, 30-year returns for houses and shares have been quite similar, which may reflect the role of falling interest rates in driving all asset prices since the early 1980s. The recent divergence is part outperformance of housing in the 2010s, part the UK housing market being in the doldrums 30-years ago, making it an excellent time to buy.

Now there are a boat load of caveats to the above. If you owned a house in London, you would have done much better than average through most of the period. But if you owned a flat in London with cladding issues, you probably did worse than average over the last decade. If you’d switched UK shares for a global equity portfolio you would have done better in shares too.

Caveats in mind, the bigger picture is that the long-term outperformance of house prices over stock prices in the UK, which held for nearly 70 years, looks to have turned somewhere around the millennium.

That was just a few years before I left university and the narrative then was still very much shaped by the experience of those previous 70 years – save for a deposit, buy a flat, get on the housing ladder, build equity, get enough for a bigger deposit, buy a bigger house. Looking at the prices returns – which is often what draws the attention – it makes sense why.

Houses vs. Stocks: Total returns

Prices may dictate the public conscience but when looking at investments we really need to talk about total return. For equities that’s the capital gains plus dividends minus all transaction fees, holding costs, and taxes; for housing that’s capital gains plus rental income minus all transaction fees, maintenance and depreciation costs, and taxes. For equities that’s not so hard, but for housing it’s more complicated, given it’s almost impossible to know accurate price changes, rental income and holding costs for all individual properties – and properties vary a lot.

Because of this, getting total returns for “UK housing” normally requires combining different average estimates of prices, rental incomes and costs. Several studies have done this for the UK and found net annual real rates of return for UK residential property ranging from 5% to 8% depending on the period. That’s pretty good given long term real returns on equities of around 5.5%.

The last study in the table adds some confusion to the mix though. Instead of looking at top-down data, Chambers et al. examined the real estate portfolios of four large Oxbridge colleges over the period 1901 to 1983. They were able to map incomes, costs and price changes at an individual property level, and found that residential housing delivered a net real total return of only 2.3%. Although the data only goes up to 1983, they find that income yields, and capital gains were much lower for the portfolios in question than those assumed in the previous macro level studies over the same period.

The conclusion of all of this? Well, it’s just not that simple to say whether UK housing or UK stocks have been a better investment. Housing was a pretty good one over the twentieth century; but so too were stocks. And what you actually earned on a housing portfolio could have been very different from the aggregate estimates.

The power of leverage and the distortions of tax

What can make housing a truly great investment is the power of leverage i.e. the ability to buy a house using borrowed money. You just can’t do the same with a stock portfolio – and as any finance class will teach you, and as private equity knows all too well, using borrowed money increases potential returns. It increases potential losses too, but if prices rise - and if, as is the case with a mortgage, you don’t have to put in any more money if prices temporarily fall - you’ll be okay.

Every year or so, for some slightly different reason, I end up putting together a very basic example of how borrowing amplifies returns. Here’s this year’s version, which assumes that house prices double over a 10-year holding period. To keep it easy I’ve assumed the mortgage is interest only and that rental income is fixed. The return on equity is simply cash inflows over the period divided by the cash outflows. See that leverage at work!

Added to leverage have been the tax advantages of home ownership and housing investment. Mortgage interest payments on primary residences in the UK could be deducted from income until 2000; landlords continued to be allowed to deduct them until 2017. Primary residences remain exempt from capital gains taxes, although second homes and investment properties are now liable. The exact tax situation ebbs and flows, but apart from stamp duty, which is considerably higher on housing than on equities, the tax system has often favoured housing over equity investment.

Questioning the property ladder

I think the interesting part of all this is to consider where we are today and what may have changed. Two big things here are that interest rates are no longer in secular decline, and the tax system is less favourable to housing as an investment for individuals. Both have been noted, and since 2015 the buy-to-let market has grown at a slower pace than during its heyday in the 2000s. I’ve also seen a lot more commentary questioning the myth of the property ladder. But buy-to-let hasn’t collapsed - and it hasn’t led to UK individuals putting more money into equities.

Much of the value in housing as an investment comes from the power of leverage and the ability to borrow a small amount to fund the purchase of a large asset; something that most of us simply can’t do with stocks. But leverage is a two-way street. If house prices continue to rise – and renters are able to cover higher interest costs - then borrowing will amplify housing returns. If house prices fall, and there are many examples internationally of where this has happened, then leverage works the other way and equity will be swiftly wiped out (I’ll follow up in a separate post on when and where this has happened in the past).

To return to the original question of housing versus stocks, I end up at the rather bland view that diversification is really what’s key. Housing is not a slam dunk investment, its performance relative to equities has ebbed and flowed, and the performance of a property portfolio may vary from what headline numbers suggest.

But in the long-term house prices have gone up, and taking advantage of borrowing can significantly enhance returns relative to investing in equities. Just don’t ask for any liquidity and be sure to have enough cash to cover any income shortfalls. For most people, owning the home they live in, while putting any excess savings into equities, is a strategy that will work best.

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When I started this Substack in May I wrote a post making a bull case for the UK, noting how unnatural it is for most Brits to do this, while starting with what I felt was a rallying cry of “the reality is that the UK was, and remains, among a small group of rich nations in which you’d be more than happy to be born”. The post has since been viewed 88 times, so I like to think I really moved the needle there.

But I bring it up because there’s precious little positive sentiment on the UK right now, and it’s worth reflecting on how much of this is justified. Headlines this week have exclaimed that 30-year gilt yields are at their highest since 2008, that GDP growth is barely positive, and that inflation remains rampant.

The government is boxed into a corner, borrowing costs are rising, and stagflation – that ugly relic of the 1970s describing a period of high inflation and unemployment alongside low growth – is lurking on the horizon. The UK is in the eye of the global bond market storm. The Chancellor must cancel her trip to China to get through this gilt market catastrophe!

It's not a pretty picture, but the media can be easily prone to hyperbole, especially since the Liz Truss, lettuce, LDI, market meltdown of September 2022. So, let’s try and move away from that, and look at why was I positive in May and what’s changed since.

The positive case for UK growth

My case back then rested on four pillars: first, that falling interest rates would provide relief to consumers, with the Bank of England tolerating a moderate level of inflation, enabling real wages to rise; second, that corporate and consumer balance sheets were strong, and a more stable political and economic backdrop would unleash spending and investment; third, that the government could manage its fiscal challenges through some sensible tax raising measures and a bit more borrowing; and fourth, that planning reforms, closer alignment with the EU, and ultimately higher public and private investment, could reap long-term growth benefits.

Looking back, I don’t think it was a bad argument, but the world is messy, and the best-laid plans get blown off course. There were two big things I missed: one outside the UK’s control, the other within it.

Out of the UK’s control: The Trump factor

The first was the election of Donald Trump and its impact on global yields. If you look at a chart of UK and US government borrowing costs, they tend to move in lockstep. The last 1, 3, 6 or 12 months are no different to the pattern of the last 20 years. (For more on the relationship between yields and just all things bonds, this is a great article).

What’s happened since September 2024 to move global yields higher is a change in expectations about the path of interest rates in the US, which influences the path of interest rates elsewhere. Markets expect fewer cuts from the Federal Reserve today than they did last summer because they think inflation will stay higher. Why? Because Trump started going all Trumptastic on raising tariffs and deporting millions of workers, the consequences of which are likely higher prices and wages. Couple that with strong underlying economic data and you have a reset in US interest rate expectations that the UK is merely a supplicant to.

Gilt yields though aren’t the whole story of this week’s market moves. The pound has also fallen and it’s this combination of higher yields and a weaker pound that implies more UK-specific concerns bubbling around (because typically higher gilt yields would attract buyers into UK assets, leading the exchange rate to rise).

According to the FX team at Deutsche Bank (via FT Alphaville), the UK’s major problem is its external deficit i.e. its reliance on foreign investors to purchase gilts. This makes it more vulnerable to US yield rises and the only way out is for the currency to weaken (emphasis mine):

From the perspective of external flows, the UK is one of the most vulnerable in the G10: it has a big current account deficit and capital flow deficit (chart 2). By extension, the marginal price setter of the value of gilts is not domestic policy but global yields (ie US Treasuries). When US Treasuries sell off, gilts should sell off more than other bond markets. Given this predicament, how does the UK get out of a vicious circle of higher yields, lesser fiscal space and lower growth. In a world of floating exchange rates the answer is simple: a weaker currency. A weaker pound does three things. First, it helps improve the country’s negative net international investment position by a mechanical revaluation of UK-owned foreign assets. Two, it cheapens up UK assets (= gilts) so eventually they become attractive to buy again for a foreigner. Third, it helps the current account deficit adjust, reducing the reliance on foreign funding.

The sell-off in the pound is the flipside of the rise in gilt yields, and the rise in gilts yields is driven by what’s happening in the US. To blame all of this on Labour’s economic management (as some commentators seem want to do) is ludicrous.

Self-inflicted wound: Falling consumer and business confidence

But there’s no denying that the UK is more vulnerable to international currents because of its underlying economic position, and this position looks weaker than in May.

Economic data over the last few months has been consistently poor: GDP growth in Q3 was zero; consumer confidence cratered in September and has barely recovered since; manufacturing has contracted for three months in a row; and even the buoyant services sector has begun to slowdown.

There has been no unleashing of consumer or business investment. Instead, there is growing evidence that the decisions made in the October budget, particularly the rise in National Insurance (NI) contributions for employers – a tax paid by business on workers – are partly to blame.

Full disclosure here, I got the impact of this wrong.

Not that I thought piling an unexpected tax rise on business was the best option, but after ruling out raising VAT, income tax, or employee NI, there weren’t many options left. And since the prior Conservative government had made two cuts to employee NI at the end of the last parliament that simply weren’t affordable (which they well knew), the increases announced in October were merely putting the tax burden back to where it was two years ago.

Perhaps this would have been fine in a less fragile, more certain world, but that’s not where we are today. The rise in NI came as a big shock to companies – looking at announcements since then has made that clear – and will be passed through in the form of lower profits or higher prices. In retrospect it was both bad economics and bad politics.

Getting out of the hole

External events and some poor decisions have knocked the UK off course, but this doesn’t mean it has no room to manoeuvre. The economy isn’t doomed to a downward spiral.

In terms of the immediate problems in the bond market, the UK’s fate remains largely tied to the US. At the margin, the Bank of England could cut interest rates more than currently expected, running the economy “a little hot” while accepting a higher level of inflation than its 2% target.

But this won’t be cost free – any major divergence in rates from the Federal Reserve will place further pressure on the pound. To get out of the rising yields, weaker pound scenario, evidence of underlying economic improvement, or a change in the fiscal position, may be required.

Of those two, the fiscal position is most under the government’s control, they just need to show a lot more courage and creativity than they’ve done to date.

A more nimble politician than either Reeves or Starmer would have avoided boxing themselves into a corner over tax rises, and either reversed the Conservative tax cuts to NI, or expanded the base of income tax. That may be where we end up.

A more courageous politician would have initiated a fundamental reset of tax and spend, levelling up capital gains and income taxes, removing tax breaks on the self-employed, making pensioners pay national insurance, raising property taxes relative to income, removing the triple lock for pensioners, looking at the welfare bill. Not pretty options, not popular options, but options no less – and ones that don’t require massive cuts to health, education or defence.

If I’m honest though, I have a lot less confidence that the government can and will make these changes than I did in May. And I have a growing worry that after being criticised for missing inflation on the way up, the Bank of England will be too cautious in cutting interest rates on the way down. I’m not throwing in the towel completely on an improving outlook for the UK, but I think it requires a greater leap of faith, and will take longer, than I did before.

Let’s be clear though, we’re not talking about economic collapse, we’re talking about continued low growth. There is a price for everything and there will continue to be opportunities to invest in good UK businesses at attractive prices, or risk-free gilts at the highest yields in decades. I plan to keep looking for those!

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It’s a truth universally acknowledged in the world of investing that stocks outperform bonds over long periods of time. In any given year, the return on the stock market, let alone an individual share, can be extremely volatile; but over time, ups outweigh downs, and the total return is better than could be achieved by holding a less volatile asset.

The ballpark annualised returns to expect? 6-8% for equities, 3-4% for bonds, giving an excess return of equities over bonds (aka the equity risk premium) of 2-4%. The implications of this? Investors with long time horizons, such as those saving for retirement, should heavily weight portfolios towards equities. The basis for these numbers? Heavy reliance on performance of the US equity and bond markets post-1929.

Evidence from the US

To be fair, these return estimates, which were presented as an industry rule of thumb when I was first learning about these things, were supported by data over a longer time horizon. In 1994, Jeremy Siegel first published Stocks for the Long Run, in which he pieced together US equity and bond data going back to 1802. In the latest edition he found that US stocks had delivered a real average annualised return (i.e. after inflation) of 7% since 1800, delivering a 3.4% average annualised premium over bonds. International evidence also supported the outperformance of stocks over bonds.

It was only earlier this year that I came across the idea that Stocks in the Long Run might not be quite as clear cut as thought, even in the US. By piecing together an array of sources, Edward McQuarrie expanded the data set used by Siegel for the 1800s and discovered that performance in that century was more mixed. Up until 1941, there was a back-and-forth between stock and bond performance; it was only after 1941 that stock outperformance was clear cut. And since 1982 it’s been what he terms a “fluctuating advantage” to stocks.1 McQuarrie’s view was that there was:

No consistent relationship between asset outperformance and length of holding period can be extracted from [Table 1]. The results are better interpreted as showing changes in regime. Prior to 1942, a regime of parity performance held sway: Sometimes stocks outperformed, sometimes bonds. After World War II, a new regime of extreme stock outperformance took hold.

As is normally the case with financial data and reporting, the headlines were all about the US – and McQuarrie’s work only shared the top line international findings. This got me wondering what the UK data looked like relative to the US – and while starting to work this out, I discovered a paper published last month, by people eminently more qualified than me. Hooray!

US vs UK long-run equity returns

With thanks then to Chambers et al., who reviewed a range of studies on long run asset returns, below is a comparison of UK and US stock and bond returns since 1800.2.

What can we take from the above?

• First, stocks have delivered positive real returns in all three time periods – and over the full 223-year horizon, a real average annualised return of 6.6% in the US and 5.4% in the UK is pretty decent. However, the premium over bonds has fluctuated; in the US and the UK in the 1800s it was very small, and using McQuarrie’s data for the US only it was negative.

• Second, 1900-1999 stands out for the level of nominal returns, at more than 10% in both countries, but real returns are not too different to the 1800s (prices fell during the 1800s whereas there was sustained inflation in the 1900s).

• Third, US exceptionalism, in terms of equity market outperformance, is no new phenomenon. Except for bonds in the 1900s, US assets outperformed UK assets across all time periods. The levels might not look that different on an annual basis, but such is the power of compounding, over 100 years the difference in total return stacks up, as the chart below demonstrates (note that these returns are in local currency – in 1800, £1 was worth ~$4.44, whereas today’s it’s ~$1.28. A US investor in UK assets would have done much worse, whereas a UK investor in US assets would have done much better than the returns shown below).

• Fourth and finally, UK equity market performance since 2000 has been absolutely dire, underperforming the US by 2.7% on average in real terms, significantly worse than the 200 years before. The obvious explanation for this is the extent to which value in the past two decades has been created in the technology sector, and how this has been dominated by US companies (partly via innovation, partly via aggressive acquisition strategies). It also surely reflects the wider malaise in the UK economy since the financial crisis.

What does it mean today?

Looking back over 200 years is all very well but what does it mean today? I think there’s three big questions to takeaway from the above.

1. If stocks barely outperformed bonds in the 1800s in both the UK and US, why invest in stocks? While certainly no guarantee that stocks will outperform, 200+ years of history seems to say that the worst case is somewhat equivalent performance to bonds, while the best case is big outperformance. So, you have limited downside from investing in stocks in the long run, but a lot of upside (it should be noted that returns over 20 to 30 years are far more volatile, and I’ll explore that in a future post). There is also the wider point about having different asset classes to benefit from diversification across a portfolio.

2. If McQuarrie is right and stock outperformance depends on “the regime” in place, how do I know which regime we’re in today? The unfortunate answer is you probably don’t. There are so many variables at play that could determine “the regime”, including the macroeconomic climate and the structure of the investment industry. Often changes are gradual and only in retrospect does it become clear there has been a large structural shift. Rather than trying to predict regimes it may be better to simply accept that sometimes bonds outperform, sometimes stocks do, and maintain diversification across both.

3. If US stocks outperform UK stocks over the long run, why invest in the UK at all? Historically there was an easy answer to this as it was either extremely difficult to invest overseas (because of capital controls), or very costly to do so. But today that doesn’t hold – it can be cheaper to buy US shares than UK ones because of the stamp duty on the latter. Another argument might be because you expect long-term appreciation in the pound relative to the dollar, or because you expect some cataclysmic event, such as a devastating war, to affect the US more than the UK. Right now, both seem tough arguments to make. Instead, I think the reason for investing in the UK is because long run return numbers are just that. Returns fluctuate a lot over shorter time frames, and right now the UK looks relatively cheap while the US looks relatively expensive. That supports maintaining some diversification across both markets.

You can go deeply into the weeds on any of these above, but what really emerges is another universal truth of investing, which is the value of holding a diversified portfolio. Whether that’s across equities and bonds, or domestic and international securities, we should be humble in our ability to know what asset classes will outperform, even over the very long term.

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Looking ahead…

I’ll be taking a break over Christmas and New Year, although I plan to continue with regular updates to the FTSE 250 A to Z. I’m really enjoying writing this Substack and thank you all for continuing to read it! In future posts I plan to look more at UK equity returns over shorter time periods, including comparing them to the nation’s favourite investment, housing.

Branding has been in the news lately with the re-launch of Jaguar, the British car manufacturer, taking a fair amount of flak. For reasons explained below, I’m keeping an open mind, if only because they had to do something. Still, it prompted me to think of other British branding disasters in my living memory.

Before getting into those though, I want to start with some positives. The UK is good at advertising, just as it’s good at a lot of creative industries. So much so, that creative industries are one of the priority sectors highlighted in the UK’s new industrial strategy.

Advertising (which I’m lumping together with market research because that’s how it’s categorised in the national accounts) was worth ~£23 billion of Gross Value Added in 2023, representing 1% of UK economic output.1 It has consistently outpaced the growth of the wider economy since 1990 as the chart below shows.

The UK is also a net exporter of advertising services. Total exports topped £15 billion in 2021 having doubled since 2016. To put that in context the sector generates about three times the value of Scotch whisky exports, the subject of last week’s post. As I've written before, services trade has been much less affected by the UK’s decision to leave the EU, and the advertising stats are evidence of this.

Value of UK advertising exports

I like to think this success is because of the natural creativity and wit of the British people, although as with other service sectors, I’m sure the English language and a favourable time zone have something to do with it too.

On objective measures though the UK does appear to have some real strengths. It consistently ranks in the top three countries for the BestAds Rankings (hats off to Australia, which smashes it on a per capita basis) and in 2024 retained the second place ranking for awards received at Cannes Lion, the Oscars of advertising, so I’m told. FTSE 100 listed WPP is also one of the largest advertising agency groups in the world.

However, all this creative flair can sometimes come unstuck, and particularly so when companies try to thread the needle between traditional and British, and modern and global. This is where Jaguar sits now and it’s where others have got in trouble before. Below are a few shockers over the years.

Aberdeen

In 2017 UK asset manager, Aberdeen, and insurance company, Standard Life, merged to create Standard Life Aberdeen. The merger was fraught from the start but in April 2021 the company hoped to turn a new corner, changing its name to Abrdn (ABDN.LN) as “part of a modern, agile, digitally-enabled brand”. To this day I don’t know how the name has survived.

British Airways

A personal favourite, if only because it became an airport pastime to identify the most awful design, was British Airways (IAG.LN) ill-advised world images foray. Seeking to present itself as a leading global airline, in 1997 BA replaced its coat of arms with a series of images designed by artists from around the world. Cultural appropriation wasn’t quite such a term back then but the design still felt, well wrong, especially when juxtaposed against the British branding at the front of the plane. Needless to say it was a disaster, roundly criticised by the public, the media and Margaret Thatcher. £60 million later and BA started replacing all the images with the wavy British flag.

Burberry

Burberry (BRBY.LN) is an interesting one because it is as likely to appear in lists of best rebrands, as it is in a list of the worst. The historic maker of trench coat’s brand took a nose-dive down the class spectrum in the 2000s, when it became symbolic of “chavs”, aka white working-class youth in the UK. It hit a low with the Daniella Westbrook baby-clad in Burberry picture, a far cry from Prince Charles looking dapper in mid-80s trench coat glory.

The brand then staged a remarkable comeback, first by reigning in the fakes and licensed products that had proliferated in the chavtastic era, and then leaning into a modern Brit vibe with campaigns featuring British actors and models. In recent years though it lost its way again, trying to move up the luxury ladder into the lucrative world of handbags. This has been a costly failure and Burberry is once again “returning to its roots” with a focus on classic British weatherproof wear of the expensive but at a stretch affordable kind.

Along the way Burberry changed its branding – dropping the knight in armour in favour of a generic flat font, before returning to the knight to emphasise its heritage and roots. I’m no luxury expert but this back and forth seems to symbolise wider strategy woes of a brand always caught between the traditional and the modern. Some parallels for Jaguar, no doubt. As to whether Burberry’s a good buy today, you can read more here.

Department for Business Stuff

Betraying my civil service past while continuing the theme of how branding mishaps reflect wider strategic confusion, the endless rebranding of the UK’s “department for business stuff” is a good one. Over the last fifty years – but mainly over the last twenty - we’ve had energy policy in and out, trade policy in and out, industrial strategy added now and then. There was also a one-week period in 2005 where it was called the Department for Productivity, Energy and Industry, but this was widely ridiculed as “dippy” and swiftly abandoned.

In no small part this reflects the UK government’s approach to business, which since the 1970s has eschewed longer-term industrial strategy style planning, leaving the “department for business stuff” with a limited remit and budget. It’s also a function of how Whitehall works, with the Treasury taking the lead on a lot of business and economic policy questions; and a function of how changing a name is easy, while changing what gets done is hard. The current iteration is the Department for Business and Trade, although I’d personally support leaning back into the brand’s heritage with a return to the Department of Trade and Industry.

Jaguar

You say Jaguar, I say… Margaret Thatcher in an 80s saloon car, John Prescott in two of them ten years later. Despite all the stick that Jaguar’s new purple-hued theme has got, I’m not convinced this is a total dud. Jaguar is the J in Jaguar Land Rover, which is the largest car manufacturer in the UK, and the only major one that you can argue is a British company (it’s owned by Indian group Tata, but it’s headquarters, bulk of manufacturing and expertise are all firmly rooted in the UK).

Jaguar has long been the problem child of the group, failing to sell enough cars to compete with Audi and BMW in the volume luxury segment, and losing money on every vehicle sold. A new strategy to go all electric was announced in 2021 and this rebrand is the first phase of that launch, with a car to follow next year. Jaguar clearly had to do something but there’s worrying parallels with BA and Burberry here in veering too far from its heritage. Jury’s out.

Royal Mail

“Consignia: Nine letters that spell fiasco” is the headline that stood out when reading about this one. In 2001 the Post Office Group in the UK rebranded as Consignia to reflect the wider range of services offered and as a foundation for overseas expansion. The underlying brand names of Royal Mail (delivering letters), Post Office (running branches) and Parcelforce (delivering parcels) were retained - the idea in part to clear up confusion between what Post Office and Royal Mail did. But this was messing with brands that the whole UK population had known since birth, and so everyone absolutely hated it. The company was forced to retreat a year later.

Despite the backlash and the swift reversal, I think this one has held up better with time. Both Facebook and Google have funky group names that function as umbrella terms for different operating activities. And in 2022 Royal Mail changed its group name to reflect a more diversified and global business, now trading as International Distribution Services (IDS.LN). Perhaps the mistake was not to change the group name, but to make a big deal out of it.

The UK Passport

Going further down the political wormhole, the worst rebrand of the last decade may well be the British passport. Older generations had long lamented the loss of the black British passport for a burgundy EU number. Younger generations couldn’t care less. But we got Brexit and in turn we got a rebranded passport. Only this one isn’t quite as useful because it doesn’t allow us to live and work in 27 EU countries plus Switzerland. We are where we are.

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Welcome to a whistle-stop tour of the FTSE 250. I’m going alphabetically through the index. No financials or valuations, just a quick take on the business. What does it do? How does it make money? Does the business model make sense? The first part of a wider investment approach that you can read about here. Bookmark this page as I’ll be updating it regularly and will link to other write-ups I see.

🟢 Positive 🔴 Negative 🟡 Neutral

Jump to: A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

This is not investment advice. It is my opinion only and is not a recommendation to buy or sell any stock. You should do your own research and invest according to your own financial circumstances.

🟢 4IMPRINT

Mkt cap: £1.4bn | Revenue FY23: £1,327m | Net income FY23: £106m | Latest price

4imprint is a leading direct marketer of promotional products, which means they sell the corporate swag that companies give out at conferences, away days and team building events (branded water bottles, t-shirts, stress balls and the like). They have a huge catalogue of products and act as middleman, with products shipped direct to customers from suppliers, and end-manufacturer, owning a large distribution centre in Wisconsin that adds custom logos to apparel. The stock has been one of the best performers in the FTSE and the strategy as set out – consolidating a fragmented market in the US and Canada, where they make 98% of revenues – looks to have a long way to run. Key risks are a general economic downturn in which marketing and swag budgets quickly get cut. Also intrigued as to why private equity hasn’t been knocking at the door.

4imprint – contrarian compounder (Sweet Stocks, February 2024)

4imprint group – UK small cap play (Investing with Wes, January 2025)

Last updated: 24 November 2024 | Back to Top

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🟡 ABERDEEN

Mkt cap: £3.2bn | Revenue FY24: £1.37bn | Net income FY24: £248m | Latest price

Finally, common sense prevailed. Formed from the 2017 merger of UK asset manager, Aberdeen Investments, and insurance company, Standard Life, Aberdeen lost its way along with its vowels, when it rebranded as Abrdn in 2021. Widespread derision ensued and its share price steadily drifted down, not helped by years of cost cutting, CEO changes, and persistent outflows. Recent results - and bringing back its vowels - are positive signs but Aberdeen remains a mid-sized manager focused on active strategies in public markets, in a world where passive management and private markets still reign supreme. UK asset managers of this kind, stuck between global mega managers and specialist boutiques, are still a difficult buy right now. The good results and the reversion to common sense on the name have bumped this up to neutral for me but concerns on long-term growth remain.

Last updated: 11 March 2024 (Negative to Neutral) | Back to Top

🟡 AJ BELL

Mkt cap: £1.9bn | Revenue FY23: £218m | Net income FY22: £68m | Latest price

One of the largest UK investment platforms (brokers) with just over £80bn in assets and 500,000 customers, AJ Bell serves both advisors and retail investors. It doesn’t have the brand recognition of Hargreaves Lansdown among UK retail investors, but it’s cheaper for basic shares and funds trading, and people are noticing, with customer numbers steadily growing in recent years. AJ Bell makes money from dealing fees and account/platform fees – the latter being a fixed annual charge on assets. The tailwind from interest earnings on cash deposits, which bolstered profits in 2023, has abated, but continued growth is expected in the UK investment platform market, albeit with more competition as more upstart trading apps enter it. Platform fees, a feature of the UK market that doesn’t exist in the US, could be vulnerable. Private equity is kicking around, with AJ Bell’s big competitor, Hargreaves Lansdown, in the middle of a £5.4bn public to private takeover by a consortium of CVC, Nordic Capital and Abu Dhabi Investment Authority.

Last updated: 25 November 2024 | Back to Top

🟢 ALFA FINANCIAL SOFTWARE

Mkt cap: £644m | Revenue FY23: £102m | Net income FY22: £24m | Latest price

This London headquartered firm is a provider of software to auto and equipment finance companies (i.e. firms that either lease or issue loans to customers to purchase cars and other equipment). Its Alfa Systems 6 software is an end-to-end product designed specifically for asset finance that manages all sales, origination, contract and asset management processes for the likes of CarMax and Toyota Financial Services in the US, as well as the asset finance arms of various banking groups. The software takes between six to 18 months to set up – so it’s a long sales cycle and high barrier for a firm to adopt it, but once set up it is deeply integrated into the firm’s operations. In line with industry trends, Alfa has switched from charging a large up-front fee to license and install its software, to hosting the software on cloud infrastructure and charging a recurring subscription fee for access. The product and growth trajectory look solid, and the company attracted private equity interest last year - EQT pulled out of a bid, while Alfa pulled out of discussions with Thomas Lee. It’s a rare UK tech company, albeit in a niche market. Interested in the strength of its offer versus competitors, why the PE bids failed, and what the numbers look like.

Last updated: 25 November 2024 | Back to Top

🟢 ALPHA GROUP

Mkt cap: £961m | Revenue FY23: £110m | Net income FY22: £89m | Latest price

Pitched as part fintech, part consultancy, Alpha Group was founded in 2010 to help companies manage foreign exchange risk. The FX risk management business accounts for roughly two thirds of sales and makes money by developing and then executing hedging strategies for clients. It operates a “matched-principal brokerage model” – clients enter a contract with Alpha Group to buy or sell currency (via spot, forward or option contracts), and Alpha Group immediately enters a matching trade with a bank. The group earns money from the difference in pricing (margins) on these matched contracts. Since 2020, the FX business has been supplemented by an alternative banking business that offers banking solutions to fund managers (e.g. private equity firms).

Alpha Group listed on London’s junior AIM market in 2017, and in April 2024 transferred to the main market of the LSE to improve visibility and liquidity – a successful story amidst much negativity on UK capital markets! Alpha Group looks like more of a traditional FX brokerage than its fintech and consultancy branding suggests, but London has always been a global centre for this, and the company appears to have a good foundation to scale after investing in platform development and back-office infrastructure in recent years. Risk management is paramount in this industry – whether in managing client data or managing margin calls on its FX derivatives exposures with banks.

Alpha Group (Undercovered and Undervalued, July 2024)

Last updated: 25 November 2024 | Back to Top

🔴 AO WORLD

Mkt cap: £614m | Revenue FY24: £1.04bn | Net income FY22: £25m | Latest price

AO used to stand for Appliances Online, which sums up what the company does. It’s one of the UK’s largest electrical retailers with a 16% market share in major domestic appliances (fridges, freezers, washing machines) and 30% share online. Listed in 2014 the proceeds from the IPO were used to fund an expansion into continental Europe that didn’t go quite to plan. AO shut down its German business in June 2022 and is now solely focused on the UK. Its previous go-for-growth strategy has also been replaced by one focused on profitability and cashflow following a cash crunch in 2022 that necessitated a £40 million equity raise. I’ve bought a fridge, washing machine and dryer from AO and they provided great stock and a great service – delivered quickly, fully installed, old appliance removed. The trade-off I got hounded for a year after by their sales department trying to sell me appliance insurance. AO earns a commission on these sales, which in 2022 accounted for 14% of revenues. Other services added another 10%, with the rest coming from actual product sales. The business seems to have weathered some troubles and emerged with a tighter, more focused strategy. But this is a tough industry with competition from Amazon, John Lewis and the like. While AO’s brand presence has risen a lot, gaining and sustaining market share likely doesn’t come cheap.

Last updated: 7 November 2024 | Back to Top

🔴 ASHMORE GROUP

Mkt cap: £1.2bn | Revenue FY24: £205m | Net income FY22: £94m | Latest price

Another mid-sized UK asset manager albeit with a clearer niche in emerging markets and an Antipodean heritage. Ashmore manages around $50 billion in assets, down from a peak of over $90bn in 2019. Most of this is in emerging market debt strategies, with only 13% in equities. It’s an active manager, and as with Abrdn, active management in public markets is not where the action is, although this is perhaps less stark on the fixed income side. Yet even here emerging market assets are a tough sell in a fragmenting world with multiple wars, a strong dollar and a fragile Chinese economy. Outflows have slowed in recent quarters, but this isn’t a buy and hold prospect given its exposure to emerging market trends, lack of scale, and average long-term performance. If I want emerging markets, I think I’ll just an ETF.

Last updated: 25 November 2024 | Back to Top

🔴 ASTON MARTIN LAGONDA

Mkt cap: £872m | Revenue FY23: £1.63bn | Net income FY23: £-228m | Latest price

A storied British brand. An iconic design. An IPO disaster. Aston Martin Lagonda has been a shocking investment since it listed in 2018 and a turnaround that never seems to happen. The story at IPO was that Aston Martin would expand its line-up by launching an SUV à la Lamborghini; and lean into its brand à la Ferrari. But the IPO itself served mainly to cash out private equity investors and the turnaround leading up to it was built on a dodgy foundation. In 2020 Canadian billionaire Lawrence Stroll took a controlling stake in what seemed a good fit. Stroll’s background is in re-building two tired but iconic brands, Tommy Hilfiger and Michael Kors, and he has a personal passion for cars, including a son who is an F1 driver for the Aston Martin team (the F1 team is only sponsored by not owned by the publicly listed group). Still, a rights issue followed in 2022, albeit with support from some deep-pocketed investors, including Saudi Arabia’s Public Investment Fund. Mercedes-Benz AG and the Chinese automaker Geely also own large stakes. Aston Martin does now seem to have the pieces in place – a range of updated models, new showrooms, better brand awareness – but a profit warning off the back of supply chain issues and weakness in China recently sent the shares tumbling again. As a quality pick it doesn’t make the cut. As a take a punt on a continued brand revival it could be worth a look.

Deep:Dive Aston Martin Lagonda (ShowMeTheValue, December 2024)

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Deep Dive: Aston Martin Lagonda

Aston Martin is a highly regarded prestigious British sports car manufacturer, but one with a chequered financial past. Having had a difficult time of late, and now hovering close to 52-week lows (arguably close to all-time lows), is there an opportunity here, or has the market priced AML effectively…

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Last updated: 25 November 2024 | Back to Top

🟡 AUCTION TECHNOLOGY GROUP

Mkt cap: £548m | Revenue FY23: £135m | Net income FY23: £17m | Latest price

Here’s a niche, technology for running auctions online. And no, not ebay; instead, those dinky auction houses scattered across UK market towns, occasionally seen on daytime TV. ATG originally stood for Antiques Trade Gazette, a print publication that became a bible of sorts for UK antique dealing, before finding its footing in the first dotcom era with the launch of the-saleroom.com. A management buy-out, private equity ownership and some M&A later, and ATG emerged at IPO in 2021 as an online auction marketplace and services provider. The company now runs eight separate digital marketplaces connected to 3,900 auction houses globally, across two main business segments: arts and antiques; and industrial & commercial (e.g. consumer surplus & retail returns). It also offers a “white label” technology platform that auction houses use to offer live and timed bidding auctions on their own web sites; and is moving into “value-add” services like shipping and payments. ATG earns revenue from commissions on sales via marketplaces, auction fee payments, and value-add services. The story is one of consolidating a fragmented market that is behind the curve on digital selling, but the stock has disappointed since IPO after failing to meet growth expectations – rather than clipping along at a high single digit growth rate, total transaction value declined in 2023. TA Associates, the private equity firm that took it public, sold down a 5% holding earlier this year, but retains a 12% stake along with Blackrock and Capital Group. Call me a cynic, but I’d guess it was floated on puffed-up numbers. It’s come down to earth in price, and while questions on industry growth remain, I’m not ruling it out entirely.

Small/Mid Caps with Paul Scott

Wed 27 Nov 2024 - Paul Scott's Small/Mid Cap Value Report

Alun Morris…

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a year ago · 77 likes · 31 comments · Small/Mid Caps with Paul Scott

Last updated: 25 November 2024 | Back to Top

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🟡 B&M EUROPEAN VALUE RETAIL

Mkt cap: £3.66bn | Revenue FY24: £5.48bn | Net income: £367m | Latest price

B&M is a recent fallen angel from the FTSE 100 after falling somewhat out of favour with investors. It’s a big-box discount retailer with 86% of revenues coming from over 700 stores in edge of town locations and retail parks across the UK, supplemented by a smaller French business and UK food retailer. The company’s motto is “everyday low price”, with prices consistently 15-20% below the major supermarkets; it does this by offering a limited range of products sourced direct from manufacturers (aka, buying cheap stuff from Chinese factories), frequently changing the products it sells, and operating no-frills, and what can feel like no-staff, stores. A deep-discount retailer should do well in the current economic climate, but B&M hasn’t been able to meet the inflated expectations set after an early pandemic sales boom. Like-for-like sales in its UK stores were down close to 4% at the latest update in November, and as the company rents all its stores, lower sales plus fixed lease payments are not a pretty picture. Although store openings continue apace, I’m not convinced – or know enough – about the long-term growth prospects here.

Last updated: 7 January 2025 | Back to Top

🟢 BABCOCK INTERNATIONAL GROUP

Mkt cap: £2.67bn | Revenue FY24: £4.39bn | Net income: £165m | Latest price

One of the major UK defence contractors, Babcock hit some rough times a few years back but has been shoring up its balance sheet since, while benefitting from a global rise in defence spending. The company’s focus is on support services, providing technical, engineering and training support, including to the UK’s nuclear submarine fleet, and military communications network. UK defence accounts for ~60% of group revenue – and Babcock is the second largest supplier to the UK MOD, behind BAE Systems. Its international business includes providing military fighter pilot training in France, and a frigate programme for the Polish Navy. Past mistakes seem to centre on veering too far away from its defence core, with a venture into helicopter transportation to and from oil rigs proving costly. It also got caught up in an attack from an activist investor called Boatman Capital, although they seem to have gone quiet since 2019. I like the industry for the simple reason that I can only see defence spending rising. But I don’t know if this is the best option among UK defence picks, especially as it appears a perennial value trap. To be explored further.

Last updated: 25 November 2024 | Back to Top

🟢 BAKKAVOR

Mkt cap: £840m | Revenue FY23: £2.20bn | Net income FY23: £54m | Latest price

I’d never heard of Bakkavor until I started living in north-west London and found myself cutting through the semi-industrial hinterlands of Old Oak Common. There lies Bakkavor’s London distribution centre, from which it churns out ready-made meals, pizzas, salads and desserts, that sit on the shelves of all major grocery retailers. The company is originally Icelandic but now generates ~85% of revenues in the UK, with the remainder split between the US and China. The founders still own half the shares, alongside US fund manager LongRange Capital, which in early 2024 bought a 20% stake previously held by Baupost (of Seth Klarman, my book sells for $2,500 fame). This is a high revenue, low margin business, as may be expected for one of the major suppliers to the fiercely competitive UK supermarket sector, and as the market leader in the UK its growth prospects here look limited. The company was also hit hard by rising inflation which ate into profit margins, although by closing two production sites it has reduced its cost base. As a leader in its field, Bakkavor feels worth a closer look. A key question is how it manages its international operations, which have big potential, but have so far not delivered.

Last updated: 5 December 2024 | Back to Top

🟡 BALFOUR BEATTY

Mkt cap: £2.4bn | Revenue FY23: £7.99bn | Net income FY23: £197m | Latest price

Talking about high revenue, low margin businesses, Balfour Beatty is the UK’s largest listed construction company but is still a minnow by global standards (France’s Vinci has a market cap of $60 billion). Profits tanked in 2020 due to Covid, and recovery was held back by poor performance on private residential developments in London, where fixed-price contracts met high-cost inflation. The company has said it will no longer bid on fixed-price contracts and as of end 2023 they represented only 18% of the order book, down from 50% in 2018. Group revenue is split roughly 50/50 between the US and UK, with the UK business skewed more towards government. 78% of UK revenues in 2023 came from the UK government, and 91% of the UK construction order book is from public sector and regulated industry clients; in the US, 51% of 2023 revenues came from the US government. Medium-term growth hangs on a new UK government wanting to invest more in infrastructure, and Balfour being a key player in building that. Greater visibility on projects, a resurrected private finance initiative, and the government accepting higher margins for contractors (not prioritising cost above all else) could all be opportunities. Keeping an eye on as UK infrastructure spending plans develop.

Last updated: 5 December 2024 | Back to Top

🟡 BALTIC CLASSIFIEDS GROUP

Mkt cap: £1.7bn | Revenue FY24: €72m | Net income FY24: €32m | Latest price

Enough of high revenues and low margins, this business is the polar opposite, with the P/E ratio to prove it. Baltic Classifieds listed in 2021 and operates classified ad portals across Lithuania, Estonia and Latvia for cars and homes (think Rightmove and AutoTrader equivalents). It’s unglamorous but outrageously profitable, generating a 78% EBITDA margin. These margins and growth rates come at a high price, so the key is whether expectations continue to be met. It’s neutral for me because the company is headquartered in the Baltics and makes 100% of revenues there. Hard as I try, I can’t find a British connection – and as this is The UK Investor I am looking for “somewhat” British companies.

Last updated: 6 December 2024 | Back to Top

🔴 BANK OF GEORGIA

Mkt cap: £2.4bn | Net income FY23: £1.39bn | Latest price

Its headquarters look like they inspired one of Dubai’s newest hotels, but as a London listed business this feels like a relic of another era. An IPO from 2007, back when London was the venue of choice for dodgy emerging enterprises out of the former Soviet Union. I’m not looking at this closer because however well-run it may be, or however cheap, in the current geopolitical climate I want nothing to do with a bank whose operations are in Georgia and Armenia.

Last updated: 5 December 2024 | Back to Top

🟡 A.G. BARR

Mkt cap: £698m | Revenue FY24: £400m | Net income FY24: £39m | Latest price

A.G. Barr is best known as the manufacturer of Irn-Bru, Scotland’s other national drink, a fizzy bright-orange alternative to Coke. Unfortunately, there’s only 5 million Scots so Coca-Cola it is not. But it is a solid domestically focused UK business with over 140 years of operating history. Soft drinks (including Irn-Bru) accounted for 87% of sales in 2023 with cocktails (25%), and other, which is mainly MOMA oat milk (3%) making up the rest. Irn-Bru is the company’s beating heart, with diversification into other brands (Rubicon, Rio, BOOST) coming from acquisitions. Acquisitions seem have been funded by cash, leaving a strong balance sheet. The company issued a huge profit warning in 2019 following problems at Rockstar energy drinks (it was the UK distributor, but the contract was terminated in 2020) and the impact of the UK’s sugar tax. Cost inflation then also hit hard, although this now seems to be behind it. It’s not an exciting business but it should offer fairly stable long-term exposure to the UK consumer. Question is whether there are better options offering the same thing.

Last updated: 6 December 2024 | Back to Top

🔴 BELLWAY

Mkt cap: £2.92bn | Revenue FY24: £2.38bn | Net income FY24: £131m | Latest price

If you’re into UK housebuilders, there are a lot of listed ones to choose from. Bellway is somewhere between the third or fourth largest, and in 2024 completed 7,654 units (which puts into context the scale of the government’s target of building 1.5 million homes by 2030…) But housebuilder is a bit of a misleading term in the UK, as these companies are in large part landowners. Most companies sit on large banks of land and their expertise is as much in finding land and taking it through the laborious planning process, as it is in building a house. The game is to develop just enough plots to maintain a steady price i.e., there is no incentive here to build the million plus homes the country needs. This business model stems from land being so expensive in the UK – a recent study found that, on average, over 70% of the value of homes in the UK is the value of the land – and the UK planning process being so incredibly difficult. Bellway itself is less focused on London and the South East than some of its rivals, and so less exposed to high mortgage properties that may be more sensitive to interest rates. All these companies are however a play on the interest rate cycle, as evidenced by most stocks in the sector falling sharply as yields have risen in the past six months. There is a positive policy backdrop to building more housing in the UK, with significant planning reforms in the works. But I can’t quite work out if this is good or bad for the listed housebuilders, who have built their businesses on the back of a broken system. There also seems a fair risk of new taxes on land banks that aren’t developed, and/or “use it or lose it” development rights on existing sites.

Last updated: 8 January 2025 | Back to Top

🟢 BLOOMSBURY PUBLISHING

Mkt cap: £567m | Revenue FY24: £343m| Net income FY24: £32m | Latest price

I have to admit, this is a better business than I thought it would be. Bloomsbury is a leading independent publishing company in the UK, with a presence in the US, India and Australia too. Established in 1986 by Nigel Newton, who remains CEO to this day, it is most famous for launching JK Rowling on to the world, and still benefits from a healthy stream of Harry Potter-related royalties (revenues from each book sale are split between the author and publisher subject to contract). In recent years it struck gold again, picking up Sarah Maas’ fantasy fiction series, which having sold 40 million books, I probably should have heard of before. The consumer publishing business accounts for 73% of revenues, and academic and specialty publishing make up the remainder. I’d naively assumed publishing would be a low margin, volatile business; but operating margins of ~12% aren’t awful, and the Potter IP and other historic titles provide a stream of cash to reinvest into new authors and titles. Plus, the academic business is a counterpoint to the more volatile consumer one. Physical book sales have also been steadily growing, despite coming off pandemic highs, helped by a revival in bookstores. With the Potter tailwinds, Bloomsbury has delivered solid year over year results and entered the FTSE 250 earlier this year. It looks like a good business, but a key question is how Potter dependent is it? Operating profits in 2024 were almost all from the children’s trade section suggesting dependence remains high. The good news is that, for now, popularity does too - Harry Potter and the Philosopher’s Stone was the No.1 bestselling book in the UK in 2024 for the first time since 2002.

Last updated: 17 December 2024 | Back to Top

🟡 BODYCOTE

Mkt cap: £1.19bn | Revenue FY23: £803m | Net income FY23: £87m | Latest price

Bodycote is the world’s largest and “most respected” provider of heat treatment and thermal processing services, which for the non-engineers among us, means what exactly? Well, a turbine blade in a jet engine operates in an extreme environment, with temperatures higher than the melting point of the base nickel alloy material. Bodycote provides several solutions to protect the blade: hot isostatic pressing to densify and strengthen it; vacuum heat treatment for further strengthening; and, finally, the application of a thermal barrier coating. In short, Bodycote is one of those small, specialised manufacturing firms that are integral to larger industrial supply chains. The downside of that is its fate is closely tied to those larger industries, which currently means tailwinds from aerospace (30% of revenues) but headwinds from automotive (22% of revenues). The company is a long-time London listed stalwart, but its share price has gone sideways over the years. Covid hit hard, with cratering demand and cost inflation eating into operating margins. A new CEO joined in March 2024 and immediately scrapped a new enterprise software rollout that had not gone well. The firm recently announced a new strategy, organising itself into two clear divisions, and setting goals of mid-single-digit revenue growth through the cycle and expanding operating margins to >20% by 2028, from ~16% today. It’s a semi-turnaround story then, albeit my impression isn’t of a bad business, just a middling one.

Small/Mid Caps with Paul Scott

Tue 19 Nov 2024 - Paul Scott's Small/Mid Cap Value Report

Alun Morris…

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a year ago · 102 likes · 22 comments · Small/Mid Caps with Paul Scott

Last updated: 21 December 2024 | Back to Top

🟡 BREEDON GROUP

Mkt cap: £1.5bn | Revenue FY23: £1.49bn | Net income FY23: £106m | Latest price

Breedon terms itself a vertically integrated construction materials group, which means in practice that it produces aggregates, asphalt, concrete and cement. Aggregates is the term for gravel, sand, and other crushed stone that is quarried out the ground and used as the base for building foundations and roads. Breedon now has c.14 billion tonnes of these reserves from more than 100 quarries across the UK, Ireland and now the US. It also runs two cement plants, over 200 ready-mixed concrete plants and more than 50 asphalt plants. Revenues are fairly balanced across the four segments, growing at a 19% CAGR since 2011 from consistent M&A activity, including 17 “bolt-on” transactions and four major acquisitions. In March 2024, Breedon completed its largest transaction, the $300m purchase of BMC, a mid-west US aggregates, asphalt and concrete producer. BMC is Breedon’s first acquisition in the US and has been pitched as a beachhead into the market, providing a platform for further bolt-on transactions and growth. All this M&A has been largely debt funded but current levels look manageable, and the company seems to have integrated new operations well. However, its current share price is close to 2017 levels so there is a question on how much value has been created. Breedon clearly has big ambitions – and the BMC acquisition, as well as a move in its share listing from AIM to the main London market, are testament to that. Building materials is also a notoriously fragmented industry and the likes of CRH have had great success in scaling across the Atlantic. There are potentially also structural growth drivers in the UK from new housing and infrastructure. All those positives are offset by concerns on the cyclicality of the construction industry in general, and for Breedon specifically, how the BMC integration plays out.

Last updated: 7 January 2025 | Back to Top

🟢 BRIDGEPOINT

Mkt cap: £2.95bn | Revenue FY23: £321m | Net income FY23: £71m | Latest price

Bridgepoint is a UK-founded, European-focused private equity (PE) shop with a 40+ year history, and a track record that places it among the top PE performers. Post-IPO in 2021, AUM has more than doubled to $73 billion and the company has diversified into other business lines, building a private credit arm and acquiring Energy Capital Partners (ECP), a US-focused energy infrastructure firm. Its USP is a laser focus on middle market companies, which fly below the radar of large mega-cap firms, and which it sources via a large, established network of specialists across four sectors – advanced industrial, healthcare, services, and technology. The ECP business is focused on power and is the largest private provider of generation assets in the US. Bridgepoint’s shares soared on initial listing in July 2021, before tanking amidst rising interest rates, and concerns over its ability to exit current investments. Underlying performance has nevertheless remained strong with fee income almost tripling over the last three years. I’m no private equity cheerleader – rather than being a radically better form of ownership, I tend to think the industry’s value creation is based on tax breaks, fewer disclosure requirements, and investor’s desire to avoid mark-to-market. But there’s no denying that private assets continue to grow and grow, and in any industry, there are the good, the bad, and the ugly. Bridgepoint is among the good – or at least the smartest – which is where I want my money to be. Concerns are less about the company and industry, more about how much of the value filters through to shareholders, rather than being siphoned off at fund level and through performance-related pay. Having listed only a quarter of shares at IPO, there is also a question of whether secondary placements will weigh on the share price as lock-up periods continue to expire.

Last updated: 30 December 2024 | Back to Top

🔴 BURBERRY

Mkt cap: £3.27bn | Revenue FY24: £2.97bn | Net income FY24: £271m | Latest price

Burberry, along with Mulberry, is one of only two London-listed luxury brands, and while its trench coats and check remain timeless wardrobe staples, the company itself seems to lurch from one turnaround to another in five to ten-year cycles. From the Royal Family in trench coats in the 80s, Burberry took a nose-dive down the class spectrum in the 2000s when it became associated with chav culture. A turnaround ensued and the brand leaned into a modern but British aesthetic. In recent years though it attempted a move upmarket into lucrative leather goods that proved costly. The dividend was suspended, a new CEO joined in July, and the new strategy is focused on lowering prices, cutting costs and leveraging the band’s British heritage. Unfortunately, there’s a fair amount of cleaning up to do, including getting rid of a lot of excess inventory. I’m sure Burberry will right the ship as they’ve done it before, but the question is how much that will cost and what the longer-term growth prospects are. There are only so many trench coats that one person can buy. Burberry is also an increasingly rare breed of being a luxury brand that isn’t part of a large conglomerate. It’s a bit of a red flag to me that there hasn’t been more takeover interest.

Last updated: 3 December 2024 | Back to Top

🟢 BYTES TECHNOLOGY GROUP

Mkt cap: £1.00bn | Revenue FY24: £207m | Net income FY24: £47m | Latest price

Bytes is a rare software business in the FTSE 250, but this is a slightly misleading categorisation, as its business is IT services, rather than software development. Bytes is a reseller, meaning it sits in the middle of developers and customers, which are UK businesses and the public sector. It pays money to the software companies (Microsoft is the most important, accounting for 50% of gross profits) to license and resell their products, and receives money from customers for providing these applications, mainly via subscription-based payments. Why don’t organisations just buy direct? Well, Bytes knows its customers and can offer tailored solutions across different vendors and products. The company listed at the end of 2020 and operates two divisions: Phoenix, which it acquired in 2017 and has some chunky contracts with the NHS and HMRC, and Bytes Software Services, which focuses on corporate clients. There is a lot of talk of AI and cyber security driving growing IT spending, although the shares haven’t benefitted from any AI-induced euphoria. Instead, stock performance has been sideways since IPO, not helped by an abrupt CEO departure last year after some dodgy share dealing. It’s far from exciting, and there doesn’t seem much buzz around it. But it has grown respectfully and because customers pay Bytes, before Bytes pays vendors, it generates a lot of cash along the way.

Last updated: 13 January 2025 | Back to Top

C

🔴 C&C GROUP

Mkt cap: £561m | Revenue FY24: £1.65bn | Net income FY24: £-114m | Latest price

England, Summer 2006. The sun was shining, the World Cup was happening, the idea of pouring a bottle of cider over a pint glass of ice arrived. No longer was cider for tramps and teenagers; Magners was cool. And C&C was the Irish company that produced it. Eighteen years later though and the high hopes of that summer haven’t been met. C&C got ahead of itself, sales growth didn’t materialise; the stock price cratered and has gone sideways since. Today, C&C is part alcoholic beverage producer – brands include Magners, Blackthorn and the Scottish lager, Tenant – and part beverage distributor. It’s an unexciting market with few growth drivers absent some Guinness-esque revival in Magners consumption. After languishing for years there are some catalysts for change: a small US-based activist investor called Engine Capital is a shareholder and has driven the appointment of an ex-investment banker board member. A restructuring/sale/spin-off is clearly in its sights. A new CEO has also joined, although this is the fourth one in four years. It’s a turnaround / value play, but not one for me.

Last updated: 23 January 2025 | Back to Top

🟡 CARNIVAL

Mkt cap: £2.7bn | Revenue FY24: $25bn | Net income FY24: $1.9bn | Latest price

£25 billion in revenue is not what you normally find in the FTSE 250. But Carnival Corporation & plc, the world’s largest cruise line company, and owner of the P&O and Cunard brands, is still recovering from the complete collapse in its business during covid. Cruise operations were suspended for over a year and the company was forced to raise billions of debt to cover the cash shortfall. Since then, the rebound has been strong. 2024 revenues hit at an all-time high, and guidance remains strong through 2025. Cruising is having a revival, with new ships and a younger generation on board. The main risk is that the debt on the balance sheet leaves little room for error should an economic downturn knock sales. But it’s impressive to me how well Carnival navigated the pandemic, when its UK/Panama-incorporated structure excluded it from major US government support.

Last updated: 23 January 2025 | Back to Top

🟢 CHEMRING

Mkt cap: £880m | Revenue FY24: £510m | Net income FY24: £40m | Latest price

Chemring feels like it should be doing better than it is. It’s a defence specialist at a time when geopolitical tensions are rising, and the world is rearming, with a record order book stretching out ten years. But it’s been knocked off course by some legacy problems at a US factory and in its US order book. A London listed company for over 50 years, Chemring made its name manufacturing decoys for radar systems (aka chaff, aka the stuff airplanes throw out to avoid being detected by radar). It remains a leader in countermeasures with over 65% global market share. It also has a niche energetics business (which “I think” is high explosive stuff that goes into rockets and missiles), and a Sensors and Information segment. Countermeasures and Energetics currently make up 90% of the current order book; Sensors and Information only 10%. Perhaps no surprise given the materiel expended in Ukraine and the Middle East. Still, the weakness in the future Sensors order book has weighed on the share price. But finding a good defence company investment is a no-brainer to me in today’s world and Chemring might be a chance to buy in to this growth trend at a reasonable level.

The Best Defense is a Good Offense (FT Alphaville, 25 February 2025)

Last updated: 23 January 2025 | Back to Top

🟢 CLARKSONS

Mkt cap: £1.3bn | Revenue FY23: £640m | Net income FY24: £86m | Latest price

British merchant banks of global importance may have long disappeared, and the London Stock Exchange withered away versus the US, but there are some things the City of London remains a world leader in. One is insurance, and one is shipping. Clarksons is a 166 year old shipbroker, that styles itself as a global leader in maritime consultancy and shipping services, but in which the core broking business of matching shipowners with charterers, and buyers with sellers, accounts for ~80% of revenues. Clarksons has been consistently profitable and cash generative over the years, weathering the inevitable cycles in global shipping, and profiting from volatility in shipping rates. In what feels like a rare exception in the FTSE 250, it also pays its CEO well. Long time CEO Andy Case took home £10 million plus in 2023, well above even FTSE 100 CEO levels. But having come from finance, where plenty of people can make that with a lot less responsibility, I’m not opposed to high CEO pay. I’m more worried by how little your average FTSE 250 CEO makes.

Last updated: 28 January 2025 | Back to Top

🟡 CMC MARKETS

Mkt cap: £633m | Revenue FY23: £333m | Net income FY24: £47m | Latest price

CMC is a financial spread betting firm, and spread betting is mostly a quirk of UK financial markets that emerged in the 1970s when an unemployed stockbroker noticed an opportunity to allow people to bet on the price of gold without owning it. At the time it was illegal to trade gold purely for speculative reasons. The stockbroker went on to found Investors Gold Index, now known as IG Index. CMC was founded as a competitor to IG in 1989 and they remain the two big players in the UK. It’s a curious world – not quite investing, not quite gambling, and it only exists because of tax breaks. For tax purposes, spread betting is treated as gambling, and there are no taxes on gambling wins or transactions in the UK. Why? Some combination of not being worth the bother, easier to tax the profits on gambling firms, gambling taxes being regressive, and effective industry lobbying. The founder of CMS is also a top Conservative donor so that probably helped. CMC, along with IG, present themselves as professional financial firms, and both are regulated by the FCA. They stay away from targeting the man on the street (presumably to avoid attracting government attention) but CMC’s turnover remains 65% retail. Its strategy to diversify away from spread betting to become a more traditional investment platform looks sensible, as there is always a risk that tax rules may change, and the growth of spread betting looks limited. But it remains a betting company and that has weighed on its valuation with exposure to volatile retail investment trends.

Last updated: 4 February 2025 | Back to Top

🟢 COATS GROUP

Mkt cap: £1.5bn | Revenue FY23: £1.4bn | Net income FY23: £74m | Latest price

Coats Group is a global market leader in apparel threads, structural components (insoles and other bits of shoes, etc.) and threads for footwear, with over 15,000 employees, serving more than 30,000 customers. It’s a business with 250+ years history, all the way back to the beginning of the industrial revolution and the emergence of the UK as a textile powerhouse, with Paisley, Coats’ hometown in Scotland, a global centre. Coats long ceased to manufacture at scale in the UK – and shut down its last facility small facility in 2022 – but it remains a British headquartered company. Manufacturing is now spread across Eastern Europe, Asia and Mexico, with revenue 59% from Asia, and 76% from apparel and footwear. It was taken private by Guinness Peat Group in 2003, then relisted in 2015. Its long heritage has been somewhat of a curse given a sizeable pension liability that has had to be managed over the years. In 2022 it completed a partial buy-in with Aviva, and switched off deficit repair payments, freeing up cashflow. The goal is to de-risk and get the pension off the balance sheet – the sooner the better, by the sounds of it. Shares have re-rated after hitting the doldrums in 2022 and 2023 as destocking hit sales. As a global industrial leader, but far from a household name, it feels worth a closer look.

Last updated: 5 February 2025 | Back to Top

🟡 COMPUTACENTER

Mkt cap: £2.4bn | Revenue FY23: £6.9bn | Net income FY23: £200m | Latest price

This is a similar, if less exciting version of Bytes Technology. Whereas Bytes, and other rival Softcat, focus on small to medium sized businesses in the UK, and sell software, Computacenter focuses on large enterprises and sells a lot of hardware globally. It sources the hardware, designs the systems, pieces the products together, then services and maintains them, making it the largest technology Value-added Reseller (VAR) headquartered outside the US. Revenues are substantial, reflecting its global footprint, and are quite evenly split across the UK, Germany and France, and the US. But margins are thin, particularly on the technology sourcing component of its business that includes the hardware sales. This means it makes c.4x the net income of Bytes on c.33x the revenue. So, it’s much less profitable, or the accountings different, or some combination thereof. IT spending slowed in recent years after pandemic highs, and in October, Computacenter mentioned a cautious corporate spending environment holding back sales in the US. January’s update was far more buoyant on the US outlook, and 2024 turned out to be a record year. A solid, if low margin, unexciting business.

Last updated: 5 February 2025 | Back to Top

🟢 CRANSWICK

Mkt cap: £2.7bn | Revenue FY24: £2.6bn | Net income FY24: £113m | Latest price

Formed in the early 1970s by farmers in East Yorkshire to produce animal feed, Cranswick now owns 800,000 pigs and 6.4 million chickens, and is a vertically integrated producer of premium pork and poultry, plus other food and pet products. The focus is high quality, fresh foods, with 77% of sales to UK retailers, 5% to food service, 14% to manufacturers, and 4% exported. The core of the company is pigs and pork, and Cranswick has been consistently buying up smaller producers, while upgrading its production facilities. The company prides itself on 34 years of consecutive dividend growth, has little debt, and total returns for shareholders have been impressive over the last few years. It’s unexciting but solid, although certainly not cheap after the recent run of good performance. One to explore relative to other food staples like Bakkavor.

Last updated: 3 February 2025 | Back to Top

🔴 CREST NICHOLSON

Mkt cap: £462m | Revenue FY23: £658m | Net income FY23: £18m | Latest price

Another British housebuilder, another to avoid. See Bellway for further thoughts on the sector, as for Crest Nicholson, it’s one of the smallest and weakest housebuilders of the pack. Bellway took a look last year but walked away from the merger; and Crest just delayed its annual results so auditors can better assess the financial impact of improving fire safety in previously developed tall buildings. Not exactly confidence inspiring. The hope is that either a new CEO can right the ship, or another suitor will come looking, but neither seems a given.

Last updated: 3 February 2025 | Back to Top

🟡 CURRYS

Mkt cap: £1.1bn | Revenue FY24: £8.5bn | Net income FY24: £165m | Latest price

Currys is well known as the UK’s go-to for electrical goods and appliances. Its stores are a fixture in retail parks across the country, although it now styles itself as an omnichannel retailer of products and services, with 38% of sales coming online. Lesser known (to me at least) is that Currys has operated in the Nordics for the last 25 years under the Elkjøp brand, and the region accounts for 41% of revenues, with the remainder coming from the UK. The company took a big profit hit in 2023, a combination of a write down on goodwill from the merger of Carphone Warehouse and Dixons in 2014 which created the group, and weaker demand. A depressed valuations opened it up to takeover bids, with Elliott Management, the US hedge fund best known as a take no prisoners activist investor, throwing in an offer in March 2024. The board refused to engage and it’s not clear what Elliot’s plans were. Currys is showing signs of having turned a corner, but the business is still tied to consumer strength, and in the UK that remains worryingly weak. Add to that it it’s a fiercely competitive space with razor thin margins (the target for EBIT margins is 3%).

Last updated: 20 February 2025 | Back to Top

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🔴 DELIVEROO

Mkt cap: £2.1bn | Revenue FY23: £2bn | Net income FY23: £-32m | Latest price

I have two claims to fame vis-à-vis Deliveroo. The first is that the founder was in my MBA class. I didn’t know him personally but credit where credit is due – it took an American to recognise how awful London’s food delivery options were and do something about it. The second is that I was on a call with the Chancellor on the day Deliveroo listed (with many others on an entirely unrelated matter) and heard him bemoan how the market reaction (the stock tanked) was a disgrace to the UK. Maybe not those words, but certainly that sentiment. My (unvoiced) thought at the time was - isn’t food delivery just a bad business? That was five years ago, and I’d been reading a lot of articles like this. But as an investment Deliveroo hasn’t done much since, so either the UK market has got it wrong for five years, or food delivery isjust a bad business. A big part of why it’s a bad business is that there aren’t clear economies of scale. It’s a point-to-point model in which food needs to be picked up at a restaurant and delivered to someone’s house. Absent mass deployment of drones, which still seems far away, that requires a person, and people don’t come cheap. Commissions and delivery fees are therefore high so either the restaurant, which itself operates on wafer thin margins, bears the cost, or the consumer, who is fickle and price sensitive, does. Neither wants to. Deliveroo itself looks small, with fierce competition from JustEat takeaway.com, now the largest food deliver platform in Europe, and UberEats. The investment play is to wait for a takeover – especially now the founder/CEO no longer has a blocking vote via Class B shares, as these expired in April 2024. DoorDash took a look around that time, and Amazon continues to hold a large stake, but a concrete approach is yet to materialise.

Last updated: 20 February 2025 | Back to Top

🟢 DISCOVERIE

Mkt cap: £548m | Revenue FY24: £437m | Net income FY24: £16m | Latest price

Discoverie has an appealing business model. It designs and manufactures unique, custom electronic components, via a decentralised, capital light business model that combines organic growth with a healthy dose of M&A. Its underlying businesses sell into five target markets - renewable energy, transportation, medical, industrial and connectivity, and security – to customers that include Vestas in wind turbines, ABB in electrical equipment, and Abbott in medical devices. The strategy is engineering and design led, and the key is that the components it produces are a small part of total cost for customers (they part of a much bigger, more complicated piece of equipment) but they are unique, giving Discoverie a certain level of pricing power that it says it is doing better at capitalising on. Growth comes from winning new business and pull-through demand on underlying products. Growth is also perhaps why the stock has languished in recent years. Sales have not yet recovered to March 2020 levels, despite continued M&A activity, which the company attributes to the pandemic fall, disrupted supply chains and now industrial destocking. But on the positive side operating margins have steadily improved and the business model looks sound. I’m generally not into turnaround stories but this could be an attractive entry point should top-line growth recover.

Last updated: 24 February 2025 | Back to Top

🔴 DIVERSIFIED ENERGY COMPANY

Mkt cap: £668m | Revenue FY23: £868m | Net income FY23: £758m | Latest price

Another odd one for the FTSE 250. A US company, founded by Rusty Hutson Jr, whose destiny with a name like that could only have been as an oilman. Or a cowboy. Or Nascar driver. Or banker, which is what he did before buying a small, old gas well in West Virginia in 2001, and then buying tens of thousands more across the Appalachian Basin. Diversified Energy listed on AIM in 2017 because, according to Hutson, “we weren’t big enough at the time to float in the US. And I didn’t want to go down the private equity route because I didn’t want to work for somebody else.” DEC moved to the main market in 2020 and in 2023 dual-listed on the NYSE. The boom bust nature of upstream energy plus zero UK connection means it’s not for me.

Last updated: 24 February 2025 | Back to Top

🟡 DOMINOS PIZZA

Mkt cap: £1.1bn | Revenue FY23: £680m | Net income FY24: £115m | Latest price

This the UK outpost of US-based Domino’s Pizza. It owns the exclusive master franchise rights for Domino’s in the UK and Ireland, where it operates stores under sub-franchise agreements. I’d naively thought that pizza delivery may be more of a consumer staple, but the business is more cyclical than imagined. That may be because there are plenty of options to trade both up and down. Of late, UK consumers have been trading down and cost-of-living plus cost inflation have troubled Domino’s. It’s business model however remains appealing: asset light and highly cash generative, with a perpetual agreement with the US mother ship that renews so long as performance targets are met. Performance relies on expanding the number of stores so there is a question of how saturated the market is. Domino’s thinks there is a plenty of growth as people value hot food and fast delivery from close locations, so current store areas can be “split”. It’s the UK’s leading pizza delivery business and the franchise model should kick off a steady-stream of cash year-on-year. It’s a little surprising then that the stock hasn’t done better in recent years – requires more digging to know if that’s an opportunity or a red flag.

Domino’s Pizza Group (The Long View, August 2024)

Last updated: 2 March 2025 | Back to Top

🔴 DOWLAIS

Mkt cap: £934m | Revenue FY23: £4.86bn | Net income FY24: £-501m | Latest price

Another one bites the bust. Dowlais is a spin-off of Melrose plc, the British industrial acquirer, which nabbed the storied engineering firm GKN in a hostile takeover in 2018. Melrose spun-off the GKN automotive, powdered metallurgy and hydrogen businesses in 2023 under the Dowlais name, although independence didn’t last long. US-based American Axle and Manufacturing had a $1.44 billion bid accepted by the Dowlais board at the end of January and the transaction is now winding its way through shareholder and regulatory approval, expected to complete by the end of 2025. I have no idea if this is a good business, but it’s red because it’s now a merger arbitrage trade rather than a long-term investment.

Last updated: 2 March 2025 | Back to Top

🔴 DR. MARTENS

Mkt cap: £661m | Revenue FY23: £877m | Net income FY24: £69m | Latest price

Somewhere in the mid-90s I bought a pair of DMs in purple suede. I also had a knock-off black pair for school. Or maybe those were knock-off Kickers. But those purple suede boots, offset against that yellow stitch, oh how I loved them. Yet fashion moved on, and I distinctly recall those DMs going from the height of cool to the height of naff. Such is the vagaries of what’s in vogue or not, and such is why I have a sceptical view of Dr. Martens as a brand and business. Purchased in 2013 by private equity group Permira, Dr. Martens share price is down over 85% since it returned to public markets in 2021. Major operational and inventory management issues have plagued the company with five profit warnings in the last three years. A turnaround value-play perhaps, but for me it still feels too much of a one-trick pony and too at the whim of fashion trends. I feel the same way about Birkenstock and wouldn’t invest in that either.

Last updated: 2 March 2024 | Back to Top

🟡 DRAX

Mkt cap: £2.3bn | Revenue FY23: £8.1bn | Net income FY23: £561m | Latest price

Towering 374 feet over North Yorkshire lie the 12 cooling towers of Britain’s biggest power station, Drax, and with them a micro-history of UK energy policy. Drax the company owns Drax the power station, plus a portfolio of wood pellet production plants in North America and some small UK renewable assets. Drax the power station opened in 1975 and was the UK’s most advanced coal-fired plant. Energy generation was privatised in 1990 and by 1999 Drax had been acquired by US-based AES Corporation. That went pear-shaped, the group was restructured, and Drax Group listed on the LSE in 2005, by which stage it had begun to transition away from coal to biomass. That transition is now complete – and critics would say it’s come at a huge cost to the UK taxpayer with questionable environmental benefits. I don’t intuitively like energy generation as a business, but Drax enjoys more protection from boom bust market forces via a contract-for-difference that guarantees a minimum power price through 2031. I also think energy security will continue to grow in importance – and security of supply rather than net zero will be the primary policy concern – which should provide long-term support for Drax’s operations.

Last updated: 2 March 2025 | Back to Top

🟡 DUNELM

Mkt cap: £1.97bn | Revenue FY24: £1.7bn | Net income FY23: £151m | Latest price

My impression of Dunelm is that it’s a bit tired. There was a time when it seemed to be the go-to place for home bargains in out-of-town retail parks but that seems to have faded. Yet it remains the UK’s no.1 homewares retailer, and while sales growth has slowed, it’s a higher margin business than I imagined. Gross margins (revenues minus cost of goods sold) are over 50%; and operating margins (including administrative costs and overheads) are still ~13%, which seems pretty good for mass retail (compare that to UK supermarkets and electrical retailer Currys at ~3-4% operating margins). The Adderley family retains a 37% ownership stake in the company, despite selling 5% in October to “diversify their portfolio”. Further selling of this position could place downward pressure on the stock, and the company also needs to manage the departure of its long-term CEO.

Last updated: 3 March 2025 | Back to Top

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🟢 ELEMENTIS (ELM)

Mkt cap: £938m | Revenue FY24: £738m | Net income FY24: £-47.8m | Latest price

Elementis is one of those industrial firms that can trace its origins back 150 years, but which has morphed into different shapes, sizes and names in the intervening period, transforming itself as a company every 20 to 30 years. Its focus now is specialty chemicals, split between two divisions – performance specialties and personal care – accounting for ~70% and ~30% of revenues respectively, with margins notably higher in personal care. Net income took a hit in 2024 from a large impairment charge related to a talc business, which was fully divested earlier in the year. Shareholders responded positively to the sale, along with a buyback programme. Elementis is a leaner, simpler business than it was a few years ago, with some ambitious financial targets to match, including targeting ROCE above 30%. One concern is that future momentum looks tied to operational improvement rather than top line growth, which has languished at about 1% per year over the last decade – and at some point, those operational improvements may reach their limits.

Last updated: 4 September 2025 | Back to Top

🟡 ENERGEAN (ENOG)

Mkt cap: £1.71bn | Revenue FY24: $1.31m | Net income FY24: $188m | Latest price

Founded in 2007 as Aegean Energy SA, Energean is now the leading the gas exploration and production (E&P) company in the Eastern Mediterranean, with its Karish field comprising over 40% of Israel’s natural gas production. Since IPO in 2018 the company has continued to expand through a healthy dose of M&A, including acquiring the Karish and Tanin gas fields in 2019 and Edison’s oil and gas business that same year. I’m generally wary of the volatility of the E&P business, but Energean is interesting in that 80% of 2024 production came from its Israeli and Egyptian assets, backed by long-term off-take agreements. These contracts all contain price floor and take-or-pay provisions, meaning Energean is guaranteed to sell a set amount at a minimum price, limiting downside risk (absent any counterparty defaults). The contracted revenues support a steady dividend but also a debt pile of over $3 billion, built up to finance previous acquisitions. Net gearing of over 400% is punchy but manageable so long as current production and cash flow projections are met. I’m not sure you can call this a UK company, but it could be interesting if you’re looking for European energy exposure.

Last updated: 8 September 2025 | Back to Top

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🟡 FIRSTGROUP (FGP)

Mkt cap: £1.21bn | Adjusted revenue FY25: £5.01bn* | Net income FY25: £128m | Latest price

*Revenue excluding that element of DfT TOC revenue, and related intercompany eliminations, where the Group takes substantially no revenue risk

Across its First Bus and First Rail divisions, FirstGroup is one of the largest private sector operators of public transport in the UK, carrying almost 2 million passengers a day, meaning that almost 2 million people a day moan about it. Department of Transport Train Operating Contracts (TOCs) used to form the bulk of group revenues, but the big change in recent years has been the transfer of these contracts from private operators to the public sector (started under the Tories, continued under Labour). Hence FirstGroup’s remaining TOCs will soon cease with the group dependent on bus revenues (74% of adjusted revenues in FY 2025) and “open access rail”, in which private operating companies use Network Rail tracks but receive no direct subsidies from the taxpayer. A profits beat for 2025 plus the approval of new open access rail routes has given the stock good recent momentum – although it’s worth noting that the RMT does NOT like open access and the government has made mutterings about curbing its use. For now, I’m neutral, wondering if the stable business profile and recent performance offsets any future risks from policy change.

Last updated: 9 September 2025 | Back to Top

🔴 FRASERS (FRAS)

Mkt cap: £3.2bn | Revenue FY25: £4.9bn | Net income FY25: £293m | Latest price

Frasers is the holding company for SportsDirect and all the other previously bankrupt retail businesses hoovered up by Mike Ashley, Britain’s favourite love-to-hate rags-to-riches entrepreneur. Despite Ashley stepping down as CEO in 2023, this remains a family affair, with his son-in-law leading day-to-day operations and the family still owning more than 70% of shares. A lack of comfort in its corporate governance has been one reason for a persistently low valuation, as well as an increasingly complex operating structure, which includes cross holdings in other companies. Credit to Ashley for building a multi-billion-pound business from scratch, but I’m just not sure I’m comfortable with the governance or have much appetite to look in detail at a discount retailer.

Last updated: 9 September 2025 | Back to Top

🟢 FUTURE (FUTR)

Mkt cap: £746m | Revenue FY24: £788m| Net income FY24: £77m | Latest price

Being a Future shareholder from 2019 through August 2021 was one great ride, as this media company went on an acquisition tear, revenues quintupled, and investors bought into it deftly transitioning to a digital era. Being a Future shareholder since then has been gut wrenching to say the least – a series of profit warnings, growth failing to meet expectations, and investor capitulation. Things have stabilised a bit in the last year or two and Future is now a somewhat diversified business that owns a portfolio of established media brands (including Marie Claire, Country House, Golf Monthly, Horse & Hound, Yachting World and MoneyWeek) and makes its money roughly equally from: selling digital advertising on online platforms; selling print and digital subscriptions to magazines; and earning commissions on insurance purchases via the GoCompare price comparison websites. Unsurprisingly, the magazine subscription business is in decline, and it’s digital advertising and GoCompare where growth lies. Future has EBITDA margins of over 25%, is highly cash generative, and since 2022 has been distributing cash to shareholders rather than burning it on flashy M&A. One concern is that both advertising and magazines revenues are highly cyclical, and right now both the US and UK consumer look to be weakening. Still, if this is priced in, and if the stock is still suffering from a loss of trust, it could be an interesting opportunity. There’s a new CEO in post since March 2025 and an investor webinar (available to all) at the end of September that I’ll use to take a deeper dive.

Last updated: 9 September 2025 | Back to Top

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🟢 GAMMA COMMUNICATIONS (GAMA)

Mkt cap: £907m | Revenue FY24: £579m| Net income FY24: £70m | Latest price

In some ways Gamma feels eerily like to Future. Sure, this a business that makes a lot of money from hosting telephone calls (around one third of all business calls transit the Gamma network in the UK), rather than owning a portfolio of magazines, but like Future, its business is rooted in the old economy, its share price went on a tear until 2021 as investors re-rated it as a new economy, cloud-driven, growth stock, and its shares then slumped as growth expectations failed to deliver and the P/E ratio came crashing back down to old economy levels. But like Future, it remains a highly cash generative business and is using this to fund modest M&A plus a healthy buyback programme. It also recently moved from AIM to the main UK market, which is a positive sign of management intent and stock liquidity. Technological obsolescence is a big risk here – is anyone going to talk to anyone on the phone in ten years’ time (especially if Gen Z don’t talk at all)? But any uptick in UK or German growth (where Gamma recently completed acquisitions) could trigger a re-rating over a shorter period. There also seems an ongoing growth opportunity, as companies migrate from fixed lines to cloud communications, with Gamma serving as the integrator/enabler of these different services (e.g. connecting Microsoft Teams to phone lines).

Other views: Margin of Value | Investing with Wes | Vinvest

Last updated: 18 September 2025

🟡 GENUIT (GEN)

Mkt cap: £842m | Revenue FY24: £561m| Net income FY24: £33.5m

Genuit, formerly known as Polypipe, is a manufacturer of plastic piping systems for water and ventilation systems, which now pitches itself as a provider of “sustainable building solutions”. The company has gone all-in on the sustainability pitch – and while this feels a little out of vogue today / not to be mentioned in the US, there’s no denying that climate change, and the need for civilisations to adapt to changing temperatures, remains a long-term investment theme. Okay, there is plenty of denying but let’s not get into that here. So, the question is really to what extent this business is geared to climate adaptation, or whether it’s all just a bit of marketing spiel. My quick take is that it’s less climate-geared, and more UK construction-geared, which is in turn UK-economy geared. Parking in neutral for now.

Last updated: 25 September 2025

🟢 GENUS (GNS)

Mkt cap: £1.54bn | Revenue FY25: £673m| Net income FY25: £19.3m

Did you know the UK was a world leader in pig semen? I didn’t, and I spent a lot of time a few years ago dwelling on UK sectoral strengths. Well, it turns out that Genus, a company that traces its roots to the Breeding & Production Division of the UK’s Milk Marketing Board, and an old British firm called the Pig Improvement Company (no messing around with names back in the day) is the global leader in porcine genetics with a 16% market share. This isn’t petri dish-style genetic modification but rather rearing, selecting and breeding “super” pigs at the very top of the pig breeding pyramid, which can then be sold on down. Genus makes money either from a direct sale of an animal or from future events such as a baby piglet coming along courtesy of Genus’ products. There is a lot of IP at the top of this pyramid, which insulates the business from competitive threats and makes it less exposed to production cycles. Porcine is where Genus has historically made its money, with the bovine (cow) segment of the business operating in a more fragmented market with more competition. Global leadership – even in the less than glamourous world of pig breeding – doesn’t come cheap. The P/E ratio is currently around 25 and has been close to 50 in the past, quite the leap from the sub 15 levels that dominate the FTSE 250. However, this is an interesting company with what appears to be niche IP and growth opportunities from further market consolidation.

Last update: 25 September 2025

🟢 GOODWIN (GDWN)

Mkt cap: £1.00bn | Revenue FY25: £200m| Net income FY24: £24.6m

Goodwin’s share price has more than doubled in the last six months so something must be going right. This British industrial founded in 1883 retains the motto “on fonde pour le monde” on its annual report, translated as “one founds (as in to found, meaning to cast molten metal into a mold) for the world”. It is based in Stoke-on-Trent and occupies market-leading positions across two operating divisions: mechanical engineering, which is the heart of the business accounting for 71% of revenues, and includes the steel castings unit that produces huge valves and other parts for the defence, nuclear and oil industries; and refractory engineering, which accounts for the remaining 29% of revenues, and focuses on “mineral-based products” including investment powders that are used to create molds for jewellery castings. The business is still 54% owned by the Goodwin family and doesn’t care much for such things as financial forecasts. However, the fundamentals of the business look solid, and I like how it combines niche engineering expertise with the structural themes of rearmament and nuclear revival. There is also a huge opportunity for Goodwin to capture market share in its Duvelco division, where it has developed a competitor to Dupont’s highly successful Vespel product, a “super-plastic” resin. The company has said it expects Duvelco to be its “largest and most profitable division in years to come”.

Other views: The Curious Compounder

Last updated: 26 September 2025

🟡 GRAFTON (GFTU)

Mkt cap: £1.72bn | Revenue FY24: £2.28bn| Net income FY24: £122m

Grafton is an Irish headquartered building materials distributor that has set itself on becoming one of Europe’s leading firms in this sector. Through a series of acquisitions, including the Spanish firm Salvador Escoda in 2024, the company has expanded its footprint across Europe, while retaining a strong balance sheet and returning lots of cash to shareholders in recent years. It feels to me like a quintessential FTSE 250 firm – not exciting but a critical cog in the economy, with some not exciting but solid financials to go alongside. The business is clearly cyclical so any uptick in European growth should support an uptick in top line performance. It’s all very solid, just not that interesting.

Last updated: 26 September 2025

🟢 GRAINGER (GRI)

Mkt cap: £1.41bn | Revenue FY24: £205m | Net income FY24: £31m

Grainger just converted to a REIT, which along with investment trusts, is a sector I’m normally skipping on this tour. Not because I don’t like REITs (although I don’t like investment trusts), but because I feel it’s a specialist area, more of an infrastructure or fixed income investment, versus let’s find an interesting UK company. But I think Grainger is worth looking at – it’s only very recently converted, and its business benefits from big structural tailwinds. Those tailwinds are the UK’s consistent failure to build enough houses to meet supply, politician’s consistent failure to countenance tax changes that could cause house prices to fall, and governments consistent action to make the UK rental sector more consolidated and professional. With roots in the North East of England, Grainger has transformed itself over the last nine years to focus on the build-to-rent sector – a small but fast-growing segment of the UK’s private rented sector (also known as multifamily housing). This sector is far more developed in the US than in the UK, and with sustained government backing its growth looks set to continue.

Last updated: 8 October 2025

🟢 GREENCORE (GNC)*

Mkt cap: £1.04bn | Revenue FY24: £1.8bn | Net income FY24: £46m

When anyone asks me what the UK is a world leader in, my first response is packaged sandwiches. Export potential may be limited, but no one can tell me there’s a better sandwich than an M&S prawn mayo? And the company that supplies most of those sandwiches is Greencore. It produces over 700 million a year, in a 24-hour continuous process, and they account for close to 50% of revenues. The rest of the firm’s business is made up of salads, ready meals, soups, quiches and other ready-to-go food. After falling into a bit of a rut around covid the company has delivered steady operational improvement in recent years. I like this sector of the food industry (which is more under the radar and less cutthroat competitive than UK supermarkets), and flagged Bakkavor, a similar-sized competitor, as one to watch last year. Greencore and Bakkavor announced plans to merge in April, and both stock prices are up since so investors seem to approve. However, the merger is currently being reviewed by the CMA and looks like a test of the UK’s new approach to merger control. I’d wait to see how this plays out but think the industry and the companies involved remain worth a detailed look.

Last updated: 9 October 2025

*As of writing Greencore was in a takeover situation

🟡 GREGGS (GRG)

Mkt cap: £1.71bn | Revenue FY24: £2.0bn | Net income FY24: £153m

You might argue that as well as being a world leader in packaged sandwiches, the UK is a world leader in sausage rolls, and if so, Greggs is undisputed national champion. The high street chain has been on a tear over the last ten years, expanding from around 1,500 stores to close to 3,000, funded largely by retained earnings. Investors took notice and from 2015 to end-2024 the share price close to quadrupled. Greggs is still opening new stores in the UK, although not at such a break neck speed. It’s a good business, and certainly captured the cultural zeitgeist in the last decade, but I’m a little worried we might be past peak-Greggs, and the big investment play here was ten years ago. The flip side of lower growth is that the stock is no longer priced for it. Valuations are less demanding, but I’d prefer to see how the next year plays out.

Further reading:

• The Berkshire Backstop (Sep 2025)

• Wonder Stocks (Apr 2025)

Last updated: 9 October 2025

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🔴 HAMMERSON (HMSO)

Mkt cap: £1.51bn | Revenue FY24: £121m

Hammerson is another UK REIT, first admitted to the LSE in May 1945. With a portfolio of shopping and leisure centres, it’s a commercial real estate play that was hit hard by the double-whammy of covid shutdowns and rising interest rates. After a big rights issue in 2020, it’s rebuilt the balance sheet and stabilised the business, but as this is ultimately a play on UK commercial real estate, headwinds of higher interest rates, higher costs, and lower office occupancy rates remain. There may be cyclical value here, but I prefer the UK residential sector for long-term trends.

Last updated: 9 October 2025

🟡 HARBOUR ENERGY (HBR)

Mkt cap: £2.9bn | Revenue FY24: £1.8bn | Net income FY24: £46m

Until a few years ago Harbour Energy was a North Sea-focused oil and gas exploration and production company, churning out 159,000 barrels of oil equivalent per day, most of which came from UK waters. To put that in context, the world’s largest E&P company, Aramco, churns out ~12 million barrels per day. A $11.2 billion acquisition of Wintershall Dea’s non-Russian oil and gas assets later, and Harbour has more than tripled production, and gained geographic diversification across Norway, Argentina, Mexico, and beyond. This was a big acquisition for a FTSE 250 company that at the time had an enterprise value of only £2.8 billion, and to fund it, Harbour issued ~$4 billion of equity, with German chemical giant BASF (the previous owner of Wintershall) now a 47% shareholder, took on $4 billion of Wintershall’s debt, and used $2 billion of its own cash. The integration appears to be progressing well, and I like the intent of management to pursue it and diversify away from the UK. I’m all for cleaner energy sources but global demand for oil and gas isn’t disappearing any time soon. Harbour feels like a well-run, ambitious UK company taking advantage of that.

Last updated: 10 October 2025

This is not investment advice. It is my opinion only and is not a recommendation to buy or sell any stock. You should do your own research and invest according to your own financial circumstances.

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In June 2021 the EU and the US called time on their 17-year battle over subsidies for their respective national champion aircraft manufacturers, Airbus and Boeing. The final ruling from the World Trade Organisation (WTO) was a bloody draw, or a slight points win for the US, depending on your view.

What then emerged was a series of retaliatory tariffs, in which each side aimed to damage the other in an annoying but not debilitating way. Scotch whisky, alongside other completely unrelated industries, ended up in the middle.

All the talk of Trump’s tariffs reminded me of this slightly bizarre episode of recent years, and I think it’s an interesting vignette of how trade wars play out in practice, and a warning on how the UK could find itself caught between the US and EU.

The trade dispute itself is a subject of vast literature, and no doubt consumed the career of many a lawyer. Since I like planes, I’m going to give a potted history of it here, but the short summary is that both Airbus and Boeing have received a tonne of government help over the years, albeit in slightly different ways.

This was generally fine until Airbus started making better planes than Boeing and selling more of them. Boeing got p$%#ed and the US filed a complaint at the World Trade Organisation (WTO). The EU filed a complaint back. The whole dispute is basically a function of the chart below.

A brief history of Boeing and Airbus

The slightly more detailed story behind this chart is that by the 1970s, Boeing had a near monopoly in the production of large civil aircraft. After World War II, the German and Japanese aerospace industries were disbanded for military reasons, and the French industry lay in tatters.

The US and UK were the only game in town west of the Iron Curtain, with Boeing, McDonnell Douglas, and de Havilland, all looking to launch commercial jet planes. It was the Brits who got there first. The de Havilland Comet launched in May 1952 as the world’s first commercial jetliner, but its entry into the market proved short lived. In May 1953 a Comet crashed in India due to structural failures in the airframe. Two further high-profile crashes followed, and the Comet 1 was withdrawn from service in 1954, with de Havilland’s reputation never to recover. This opened the field for American domination, and by the end of the decade Boeing’s 707 and McDonnell Douglas’ DC-8 were in pole position. Boeing cemented its lead in the 1960s with the launch of the 727, 737 and 747.

It didn’t go unnoticed in Europe that the Americans now had a global monopoly in an industry viewed as central to industrial prestige, defence and employment. And while European countries possessed strong technical capabilities in aerospace, by the 1960s it had become clear that no single European company (or country) had the scale and resources to challenge the Americans. So, in 1967 Airbus was born, in the form of a memorandum of understanding signed by the UK, France and Germany to collaborate on civil aircraft development.

Many twists and turns later (I recommend the Airbus website for a blow-by-blow account) and the first flight of the Airbus A300 took place in October 1972. Sales were slow to start but over time grew, until that point in the chart above, when Airbus finally delivered more planes than Boeing. Airbus is a European success story. An example of active industrial strategy that secured the future of an industry.

Back to trade wars…

But that success didn’t come for free, and here’s where we return to trade wars, if not quite Scotch whisky, yet. The crux of the trade dispute was how Airbus got the money to develop the A300, ride out the early years of no sales, and then develop subsequent models. The answer is “launch aid”, the name given to the loans provided at less than commercial rates by Airbus member governments. The loans typically only had to be repaid when aircraft were delivered.

Round 1 to the US

After years of back and forth, a WTO panel concluded that launch aid, also known as member state financing, constituted a subsidy, and that:

“Airbus would have been unable to bring to the market the Large Civilian Aircraft (LCA) that it launched as and when it did but for the specific subsidies it received from the European Communities and the governments of France, Germany, Spain and the United Kingdom.”

WTO Ruling

Some further rounds of appeal later, and in October 2019, towards the tail end of the first Trump administration, the WTO ruled that the US was entitled to impose tariffs on $7.5 billion worth of EU products in retaliation for the damage done to the US from the Airbus subsidies.

Robert Lighthizer, US Trade Representative at the time, potentially returning again in some form, said:

“For years, Europe has been providing massive subsidies to Airbus that have seriously injured the U.S. aerospace industry and our workers. Finally, after 15 years of litigation, the WTO has confirmed that the United States is entitled to impose countermeasures in response to the EU’s illegal subsidies.”

Robert Lighthizer, US Trade Representative

Round 2 to the EU

Of course, it wasn’t as simple as that, because Boeing had also been receiving massive subsidies, just in a different way. In its countersuit at the WTO, the EU argued that Boeing had benefited from $23 billion of subsidies in the form of state-level tax breaks; R&D funding from NASA and the Department of Defence that cross-subsidised its commercial programmes; and export subsidies.

The WTO upheld most of these complaints and in October 2020 ruled that the EU was entitled to impose tariffs on $4 billion worth of US products in retaliation for the damage done to the EU aerospace industry from the Boeing subsidies. On principles then, it was a US-EU draw; on dollar amounts of damages, a points win to the US.

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Finally, we get to Scotch whisky

In a bygone era, these countermeasures might have just been netted off and a truce called. Jeffrey Garten, a trade official for Clinton administration, wrote in 2005:

“The judicial outcome is already clear: both aerospace companies have taken considerable government handouts. The court will declare both guilty, creating a political stalemate in which both sides will probably ignore the penalties the WTO wants to impose.”

Jeffrey Garten, former Clinton administration trade official

But this wasn’t 2005, it was 2019. Trump was in office, the US imposed its tariffs, and a year later the EU did the same; although it made clear it would prefer not to. By the end of 2020, the US was imposing tariffs on European airplanes and a load of agricultural goods from European countries, while the EU was imposing tariffs on US airplanes and a load of agricultural and industrial goods.

Although Britain had Brexit-ed, it was still involved in all this as a party to the original dispute and a key contributor to the Airbus consortium. UK exports of single-malt whiskies, cashmere jumpers, and industrial equipment were targeted, but it was single-malt that got a parliamentary debate and caused the most headlines.

This was partly due to the industry’s recent renaissance, partly due to politics. The Scotch Whisky Association (SWA) estimates that the industry contributed £7.1 billion in gross value added to the UK economy in 2022, supporting 66,000 jobs and generating over £5 billion in exports per year. It’s also highly productive – producing £273,000 GVA per employee versus a UK industry average closer to £50,000.

As importantly, it’s very regional - every Scottish MP with a distillery in their constituency was no doubt getting lobbied hard about the tariffs.1 - and even more importantly, the US is the largest single export market. It was therefore a perfect target for US tariffs. Outside of single malt drinkers, tariffs would have little impact on Americans; but they were going to cause a big fuss and lots of anguish for UK politicians.

Counting the cost

The Scotch Whisky Association claims the dispute cost the industry over £600m in lost exports to the US over the 18-month period over which the tariffs applied. I haven’t managed to back that figure out but think it is based on the reduction in UK exports.

A more sophisticated study from the Scottish government in 2021 attempted to control for other factors going on at the time, such as Covid.2 Its conclusions are (shockingly) less clear cut than the industry group, but the punchline is that the tariffs had a negative effect on output.

Local MPs were certainly far from happy:

“The finest single malt whisky is distilled on the isle of Arran in my constituency, and the tariffs are a matter of great concern. Ultimately, jobs are threatened, and sustainability of employment is extremely important in island communities such as Arran. Hundreds of Scottish exporters, including our world-renowned Scotch whisky industry, face paying the price of punishing US trade tariffs.”

Patricia Gibson, MP for North Ayrshire and Arran

It wasn’t just the Scotch whisky industry that was damaged though, the American whiskey makers didn’t like it either. That’s partly because they were caught up in another US-EU tit-for-tat, this one kicked off by the Trump administration imposing tariffs on EU imports of aluminium and steel. In retaliation the EU whacked tariffs on US whiskey and bourbon, said to be targeted at Mitch McConnell and his fellow Kentuckians. It was also partly because American companies were suppliers of barrels to Scottish whisky distilleries.

Calling a truce                                                            

After the UK left the EU single market at midnight on 31 December 2020, it was free to pursue its own trade policy; and it used this freedom to almost immediately remove the tariffs on US goods stemming from the Boeing dispute. This was pitched as a gesture of good will to pave the way for a future settlement, although earlier in the month the US claimed the UK had no jurisdiction to impose tariffs once outside the EU – so it may have also been an elegant solution to avoid a Brexit-induced legal quagmire.

Conveniently, the timing coincided with Biden taking up residence in the White House and a more conciliatory dialogue between the US and EU. In March 2021, the US announced a temporary suspension on its tariffs on the UK and the EU, including the Scotch whisky industry, as did the EU on the US. A five-year suspension was then negotiated later in the year. At some point, the EU also dropped its US whiskey tariffs as part of the steel and aluminium dispute, but at this point I’m too confused by the world of trade and tariffs to go into it further.

What happens from here

1,800 words later and there you have how the history of civil aviation influences the future of Scotch whisky.

I find it a fascinating episode of how trade wars play out in practice. Interests get traded off against each other (what matters more to the UK - exports for Scottish whisky or manufacturing wings for Airbus), domestic lobby groups jockey for position (we need to persuade politicians that we matter more), small decisions have wider implications (who cares about whisky, this is about the global trade order and not getting bullied by Trump), and industries targeted are as much to do with politics as economics.

I don’t know how Trump’s trade policies are going to play out in practice, but I can foresee a lot more incidents like the above. You do X, we’ll do Y, and so on and so on and so on. And the UK will need to work out how to manage that, stuck as it is between the US and EU.

Unilaterally removing US tariffs as a gesture of good faith might have worked under Biden, but I’m not sure I’d trust Trump in making that move. The Airbus-Boeing truce is due to expire in 2026, and Boeing is in a worse state than it was three years ago. “America first” could again see whisky, cashmere, and stilton caught in the crossfire.

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Last week’s post tackled the question of why bother picking stocks at all. This week, I’m going into more detail on my process for doing so. If you missed last week, you can start here:

The UK Investor

Building a UK Equity Portfolio: Part 1

One of my goals in starting this Substack was to shine more light on investment opportunities in the UK given a decade of dire news. It seemed a good time to do this with attractive valuations set across a more stable economic and political backdrop…

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a year ago · 5 likes · 5 comments · Victoria Lonsdale

My experience with professional asset management was that an investment approach that looked streamlined, methodical and consistent on paper, was always messier in practice. Investment styles could drift. Losing positions could linger. Risk management could fall by the wayside. But that doesn’t mean you want a blank sheet of paper instead.

It’s important to have some guiding principles – otherwise how are you going to wade through the thousands of listed companies out there? Broadly these fall into the following buckets:

1. Universe – where are you going to pick your stocks from?

2. Style – what type of company do you want to invest in?

3. Process – how are you going to find those firms?

4. Portfolio construction – how many companies to hold and for how long?

5. Risk management – how can you protect against complete disaster?

If you’re a professional, you’ll spend hundreds of pages detailing the above in an RFP for any investment mandate. But I’m not a professional, although I have written and read my fair share of RFPs. They’re mind-numbingly dull and largely sound the same. I’m going to keep things simple.

Investment universe

First up is an easy one. I’m going to limit myself to companies in the FTSE 250 index, excluding investment trusts. I don’t like investment trusts because if I’m going to outsource money management, I’d rather have a low-cost passive fund then some quirky active mandate with hidden fees.

I’m focusing on the FTSE 250 because this is a Substack about the UK, designed to showcase UK investment opportunities; the FTSE 250 contains mid-cap companies that are lesser known, particularly to an international audience; and the index itself has been trading at a discount to historic valuations suggesting there’s opportunities in there. There’s around 160 non-investment trust companies in the FTSE 250, which also seems like a reasonable number to have a cursory knowledge of as a one-man band.

Investment style

With the universe set, the next part is to determine what type of companies make the cut. One way to do this is to ask what characteristics have driven returns in the past. Which leads me to the Fama-French three factor model and the Morningstar style box that emerged alongside it.

The style box was launched in 1992, the same year that Fama and French published a paper on stock market returns.1 It places an investment strategy in a 3x3 matrix based on the characteristics of firms targeted (value vs growth) and size (large-cap vs small-cap).

The style box was consistent with Fama and French’s research that showed stock returns could be explained by the overall market return, the market cap of the company and whether it was growth or value. They found that historically small cap stocks outperformed large cap stocks, and firms with low valuations outperformed those with high valuations, as measured by price-to-book ratio.

Fama and French went on to refine their work – finding that “quality” companies with higher profitability and higher levels of investment also outperformed. Separately, momentum (in which stocks that have gone up in the past continue to do so) and low volatility (stocks that have lower volatility than the market) were also identified as “factors” that could explain stock returns. But a 5x5, or a 6x6, is far too complicated, so the 3x3 remained.2

At first glance it’s tempting to say let’s have a small-cap value investment style, that seems to work! But as with a lot of financial data, it’s heavily time-period dependent. What worked in one period, under one set of economic conditions, doesn’t work in another. And so it is that in broad terms, small-cap value investors got hosed over the last decade, because during this time you would have been best owning large-cap technology stocks in the US, despite many trading at what seemed like eye-wateringly high valuations at the time.

All this leads me to believe that being laser focused on one style isn’t a great idea. And that trying to time the market on what style outperforms when is a losing game, much like trying to time the market in general (the short version is, it doesn’t work).

As an individual I think what is perhaps as important is to choose a style that fits your temperament and interests. I like the idea of quality firms that can reinvest capital that compounds over time. This is in large part due to laziness. I have no desire to be actively trading holdings, and particularly with smaller cap names, with larger bid-ask spreads, see it as a path to eroding long-term returns. A buy, hold, go work on my golf game approach appeals much more to my temperament. Quality, if at times boring firms, fit that bill more. Some of these may be more “value”; some may be more “growth”.

Investment process

To find these firms, a typical process is to start with quantitative screens to narrow down the universe, before diving into more detailed research. Choose some measures that align to your preferred style - Return on Invested Capital, Operating Margins, Profit Margins, etc. – and see what firms pop up. At the extreme you can make the whole process quantitative and invest purely based on these rules.

I’m going to do things slightly in reverse. Rather than starting with the numbers, I want to start with the story. I have 160 stocks to get through, and I’m not familiar with a lot of them.

So, I’m doing a whistle-stop tour of the FTSE 250 index – a fly-by each firm, which I’ll share here – what the company does, how it makes money, key risks that stand out. Something that goes beyond the generic description on Google but avoids detailed financials and valuations, yet. The goal is to see if this is a story that peaks further interest or not.

From that – and yes, this is going to take some time but I’m in no rush – I’ll have a short list of candidates for further analysis. This is where the financials and valuations come in, and where the process becomes, well, a little looser, but it will generally involve working out how the companies map to the desired style of being a quality firm.

Portfolio construction

With the style set, the next question is how many stocks to hold and how to combine them in a portfolio. Diversification is often called the only free lunch in investing, meaning that diversification can bring higher returns without higher risk. So long as the individual stock returns are not corelated 1 for 1, then it simply falls out of the maths that adding stocks reduces overall risk.

But there is a trade-off between reducing risk and replicating market returns. Most research shows that the benefits of diversification get noticeably smaller once you get to around 20 stocks, but the really big reduction in risk comes from going from 1 to 10[3].3 There is also a question of capacity and how many stocks you can really understand. Someone like Terry Smith at Fundsmith has ended up at around 30 stocks, but I don’t have that capacity. 10 to 15 feels about right for me.

I also want some diversification across sectors. This isn’t going to be a 90% tech portfolio (and it’s the UK, so good look with that anyway) but nor do I need to be restricted by percentage limits on either sectors or individual positions.

One of the reasons for not being too restricted is the advice of cutting your losers and letting your winners run. Simple on paper, much harder in practice – and probably one reason passive strategies do better – but something to aspire to no less. 3i, the UK listed private equity manager, purchased the Dutch retailer Action in 2011. It’s now two thirds of 3i’s portfolio, which feels a little too high for an individual stock, but this one investment has driven a +1,000% increase in 3i’s share price over the period.

Risk management

With that all done the final consideration is managing risk.

There are a few ways to think about risk. There’s the risk to the portfolio that the market goes down and it’s nothing to do with what you own (the beta), and then there’s the risk a company you do own blows up and it’s everything to do with it alone (the alpha). There’s also the risk that you can’t buy or sell when you want to, or you can, but it’s going to come at a cost (liquidity).

Most of the approach to this falls out of the above. I’m happy to accept general market volatility because this is an equity portfolio. If I don’t want the beta, I’ll just keep everything in cash. And I’m happy to tolerate a higher level of volatility than owning the broad market because I want a concentrated portfolio. And I’ll accept that brings the chance of a blow-up on any one position because what is public is public, and what isn’t isn’t, meaning you never really know the full story. The key will be getting out of the position if the fundamentals change.

Finally, the FTSE 250 should be liquid enough for my meagre investment amounts, although I’m intrigued to see how bad the transaction costs are, especially as an overseas investor into the UK.

So, there we go, a high level and basic approach but I think it should work for setting some guardrails.

In coming weeks, I plan to return to some bigger picture topics while working my way through the FTSE 250. You can read my thoughts on the first five firms here.

IMPORTANT: This is not investment advice. It is my opinion only and is not a recommendation to buy or sell any stock or invest in a particular investment style or strategy. You should do your own research and invest according to your own financial circumstances.

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One of my goals in starting this Substack was to shine more light on investment opportunities in the UK given a decade of dire news. It seemed a good time to do this with attractive valuations set across a more stable economic and political backdrop.

I also wanted to do it for personal reasons. To keep my brain ticking away while avoiding full time employment, and to set up my own portfolio having worked in and around the investment industry for many years, but never been the investor myself. I was also convinced that amid the 1,000+ listed UK companies there must exist some that defy the Jurassic Park stereotype of aging banks, miners and oil companies.

Since then, I’ve meandered on the opportunity part. Austerity in Hindsight and The Slow Death of the UK Stock Market hardly painted an optimistic note; and I’m sure I will continue to be distracted by rudimentary commenting on economics, politics and local authority property portfolios.

But I do now want to re-focus on investment opportunities and I’m going to do that by telling the story of building my own UK equity portfolio.

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Should you bother picking stocks?

Before getting into how I plan to do that, let’s address the question of why bother at all.

Historically I’ve invested in the stock market via low-cost index funds (also know as passive). These are investment funds that replicate the holdings, and therefore track the performance of, an index such as the S&P 500 or FTSE 100. I’ve held a mix of US, emerging markets and UK-focused index funds.

The reason for doing this is well known. Passive funds outperform active funds - very much so in equity markets, a little less so in fixed income.

Sure, in any one year some active funds outperform the index, e.g. in the first six months of 2024, 43% of all active large cap US fund managers outperformed the S&P 500, and around 85% of small cap managers outperformed the S&P SmallCap 600.1

The problem is that this outperformance is not persistent. Successful managers in one year are not the same as those in the following year, and so on and so on. And so, by the time you get to 10 years and beyond, only around 20% of small cap managers outperform.2

Active funds, in which people try and pick the best stocks, simply do not live up to their billing. Investors end up being charged higher fees for worse performance.

Why is this? Well, partly it’s because of those fees. Once you net off the higher fees paid for active managers with their bevy of analysts and research staff, your average active fund underperforms your average passive fund.

It’s also a function of structure and incentives. It seems a blindingly obvious point to make but if you’re running a portfolio investing in FTSE 100 stocks then to outperform the FTSE 100 that portfolio needs to look materially different from it. But when you’re judged on performance relative to the FTSE 100 there is a high price to pay for that deviation.

Combine that with a need for liquidity to manage daily client inflows and outflows from the fund, and historically a typical active equity strategy of the kind easily available to individuals, might hold a portfolio of 50 to 100 names. Once you get to that size much of your performance is just replicating the market – and then those higher fees versus passive kick in and you’re better off with an index fund.

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Which leads me back to the original question of why bother picking stocks at all?

The honest answer is that for most people, I don’t think it’s worth the time and effort. As I’ve written before, investing really needn’t be that complex. Putting whatever amount of money works in a low-cost index fund, reinvesting the dividends, and forgetting about it for as long as possible (particularly if, and when, the market lurches down!) is the advice I’d give to most.

For others though, I do think it’s possible to outperform an index, but only if you invest a certain way – a concentrated, best ideas approach. Call it a private equity approach to public markets. A small number of holdings with high conviction.

The good news is that I think individuals have some advantages over professional managers in doing this. That’s because as an individual you can hold a highly concentrated portfolio because you don’t have to answer to external investors (whether you want to is another question); and you don’t have to worry about selling holdings to meet withdrawal requests (unless you have a lot of money and/or are investing in teeny tiny stocks).

All that means you can beat an index – as evidenced by the stream of Substack-ers with newsletters highlighting their double digit outperformance vs. said index. You can also massively underperform, but people tend not to brag about that so much.

The other reason for investing in individual stocks is that the investment process itself can be fun. Learning about companies and industries, doing your own research, taking some risk. For me there’s also something about putting your money where your mouth is. I can sit here and write about the UK; I can do it a lot more credibly if I own some UK firms.

So that’s why I plan to set up a UK equity portfolio and be honest about how it goes, for good or bad. It’s also why most of my money will remain in widely diversified funds!

Next week I’ll go into more detail on the process for picking stocks.

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