Buy, hold or sell: JPMorgan European IT Income
Buy: Nokia (NYSE: NOK)
The income version of JPMorgan's European investment trust gives investors exposure to continental European markets. Since its launch, the dividend has been either maintained or increased every year and the trust currently yields 3.6%.
Fitzalan Howard's strategy is to focus on the top 30% of the market by yield and avoid those companies whose dividends he thinks are going to be cut. His main effort is in trying to identify these companies.
One company he bought recently is Finnish mobile communications firm Nokia. "It has been a restructuring story," says Fitzalan Howard.
Nokia sold its handset business to Microsoft last year, which left it with just the network business and a large patent portfolio.
The firm then merged with Alcatel, and Fitzalan Howard expects many synergies and cost savings as a result.
"The company has mentioned about €9 million (£7 million) of savings - that's the consensus - but we think it could be a bit more," he says. Further, the manager believes management will be able to refinance the company.
"Interest expenses should come down later this year and next year, and the market is not really focusing on that yet," says Fitzalan Howard.
And the result of all that, he says, is that free cash flows are picking up nicely. "They have quite a bit of cash on the balance sheet." Fitzalan Howard bought Nokia in October 2015 for the first time, at a share price of 664p.
It makes up approximately 8% of the portfolio and as of 1 February is trading at 720p. The shares are currently yielding about 3% and he thinks this will be boosted by special dividends and share buy-backs in the future.
Hold: Iberdrola (BME: IBE)
Fitzalan Howard holds quite a lot of utilities in the portfolio. He bought back into Spanish renewable energy firm Iberdrola in June 2013 for around 415p a share, having last held it more than three years previously.
He has since added to his position three times, most recently in June 2015. The firm accounts for approximately 1% of the portfolio and shares are trading at around 645p as of 29 January.
The manager finds Iberdrola particularly interesting, as it is experiencing good growth while earnings are being upgraded steadily.
There are a few reasons for that: first, electricity prices in Spain are higher than elsewhere in Europe; secondly, Iberdrola benefits from a weak euro because many of its assets are in the US and UK; and finally, according to Fitzalan, the company has a lot of renewable energy business.
Iberdrola is getting good returns from its renewables division, particularly offshore wind farms.
"So we're getting upgrades from that, and at the same time quite a lot of its businesses are in energy distribution networks, which tend to be regulated because they operate a RAB (regulated asset base) model," he says.
The benefit of Iberdrola having network assets in a RAB model is that the visibility of earnings is high.
Iberdrola shares yield about 4.3% and Fitzalan Howard expects the dividend to grow over the coming years. But he is not adding to his holding of the stock: "We've got a decent position in it, which we've had for a long time, and we're happy to run that."
Sell: Santander (LON: BNC)
Fitzalan Howard originally bought into Spanish bank Santander in February 2015 at around 640p per share. "The story there was that last January they cut their dividend," he says.
At that stage he thought that this was a turning point for the company and that "things would be more secure going forward".
However, he had changed his mind by last summer, and the stock has continued to fall since then. Since Fitzalan Howard first bought into the bank, shares have fallen a painful 38.6% to 393p (as of 29 January).
The problem, he says, is that the company is suffering earnings downgrades driven by its big emerging markets exposure, particularly its business in Brazil, which is currently experiencing an economic recession. Additionally, the profitability of its Spanish business is under pressure.
Santander delayed the date for reaching its target return on tangible equity of 13% until 2018, because of problems in Brazil and elsewhere.
Although Santander's capital level is technically 'OK', according to Fitzalan Howard the market thinks it is still too low and it is certainly below that of many of its competitors. "The market is worried that the bank may have to raise further equity," he says. He sold out completely in September 2015 at 474p.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
The practice of locating your financial affairs (banking, savings, investments) in a country other than the one you’re a citizen of, usually a low-tax jurisdiction. The appeal of offshore is it offers the potential for tax efficiency, the convenience of easy international access and a safe haven for your money. However, offshore is governed by complex, ever-changing rules (such as 2005’s European Union Savings Directive) and, as such, is the exclusive province of the wealthy and high-net-worth individuals.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.