No savings? I’d use the Warren Buffett method to earn lifelong passive income

Story by Christopher Ruane

 

When it comes to passive income,  Warren Buffett is a one-man masterclass. His company Berkshire Hathaway earns billions of pounds a year for doing precisely nothing, beyond owning shares in known success stories such as Apple and Coca-Cola (NYSE: KO).

Here are three elements of his ideology I would employ as I try to build large income streams without working for them.

Do less, but better

Buffett has said his success is largely down to one really good investment every five years or so. He also says that if you would not consider holding a share for 10 years, you should not consider owning it for 10 minutes.

That is because he believes in long-term investing, based on finding brilliant companies selling at fair prices and then letting time work its magic.

But unlike some investors who take a scattergun approach and hope that some of their investments do spectacularly well, Buffett waits patiently for what he sees as an excellent opportunity and then goes into it in a big way.

I think investing in just a few great income shares could help me improve my long-term performance compared to buying lots of merely good ones.

Look at the source, not the current results

One common mistake people make when looking to earn passive income by owning shares is focusing on the current dividend yield.

I see that as a mistake because dividends are never guaranteed. Just because a company has an attractive yield today does not necessarily mean it will stay that way. After all, it may cancel its dividend.

Something that has helped Buffett in his investing career is understanding what really drives value. He does not look at what a company does now so much as what it has the potential to do over the course of decades to come. That helps him invest in firms that can potentially grow their profits – and their dividends.

Compound, compound, and compound again

An example is Coca-Cola. It is what is known as a Dividend Aristocrat, having raised its dividend annually for over seven decades. How is Coca-Cola able to do that?

That has helped give it pricing power which, in turn, can help profits.

Can that continue? One risk I see is consumers turning away from sugary drinks, potentially hurting sales. But, like Buffett himself, Coca-Cola has taken timeless business principles and applied them consistently, while moving with the times.

Buffett’s stake in the company generates hundreds of millions of pounds annually in dividends. But Berkshire does not pay dividends. Instead, it reinvests what it earns.

That is known as compounding – and could help me build my passive income streams over time even if I do not invest more money.

The post No savings? I’d use the Warren Buffett method to earn lifelong passive income appeared first on The Motley Fool UK.

20 highest-yielding FTSE 100 shares in 2024

Banks and insurers packed the biggest dividend punch for income investors in 2024, while last year’s top-yielding FTSE 100 company has fallen down the rankings.

31st December 2024

by Graeme Evans from interactive investor

Dividend yields of 9% and above at four stocks including HSBC Holdings 

HSBA

 and Legal & General Group 

LGEN

made banking and insurance the standout sectors for investors seeking income in 2024.

Long-term savings and retirement business Phoenix Group Holdings 

finished the year with a forward yield of 10.7%, the highest in the blue-chip index.

Boosted by strong levels of cash generation, the company whose brands include Standard Life and SunLife recently outlined a new three-year strategy that featured a pledge to deliver a progressive and sustainable dividend.

Savings and investment company M&G Ordinary Shares 

 yields dividend income of 10.3% after its share price fell more than 10% and it reiterated a policy of stable or growing shareholder payments.

A tough year for Legal & General after investors gave a cool response to the distribution plans of new chief executive Antonio Simoes has left shares yielding 9.4%. 

He announced £200 million a year of share buybacks and 2% dividend growth starting from next year. Simoes said this represented an increase on the previous policy of 5% growth under predecessor Nigel Wilson, who spurned buybacks in favour of investment.

Rival Aviva 

which this year sweetened guidance so that it now expects the cash cost of the dividend to rise by mid-single digits, trades with a 7.7% yield after a stronger year for shares.

HSBC, which is the third-largest company in the FTSE 100 and the stock with the third-largest forward yield at 9%, had a target payout ratio for 2024 of 50% of earnings. It resumed quarterly dividend payments in 2023 and recently paid a special dividend from the sale of its Canada operations.

The yield of Lloyds Banking Group 

 stands at 5.6% and is the next best in the banking sector. A strong capital buffer meant its half-year dividend grew by 15% to a total of £662 million.

The top ranked in the financial sector compare with the FTSE 100 average of about 3.7%, which is down from 4% last year due to higher share prices and some year-on-year dividend setbacks such as Glencore 

GLEN

 and SSE 

The headline figure still beats November’s inflation rate and the latest average no-notice savings rate of 2.9% but is short of the UK 10-year bond yield of 4.56%.

Yields of 8% and above are regarded as a sign that the market thinks a dividend may be unsustainable, as was the case with the 11% at Vodafone Group 

VOD

 at the end of last year.

This figure has since been reduced to 6% after the mobile phone giant unveiled a new capital allocation framework, which included rebasing the total 2025 dividend to 4.5 euro cents a share.

It had paid nine euro cents on an annual basis since 2020, while in August 2018 the distribution stood at 10.23 euro cents or 9.9p a share.

The new policy was introduced by chief executive Margherita Della Valle after a wide-ranging restructuring that has led to the sale of operations in Italy and Spain and the merger of UK operations with those of Three. 

The cut will be offset by plans for share buybacks worth four billion euros, part of the 12 billion euros of proceeds from the recent disposals.

The return of cash through share buybacks can be a positive move for investors should the impact on earnings per share translate into higher future dividends.

The housebuilding, energy and mining sectors, which have been traditional hunting grounds for investors seeking income, provided only five entries in the top 20.

The highest ranked was Taylor Wimpey 

TW.

, whose dividend yield of 7.6% is underpinned by a commitment to return 7.5% of net assets annually. The shares are down 17% in 2024. The other housebuilder is Berkeley Group Holdings (The) 

BKG

One of last year’s highest-yielding mining stocks has fallen out of the top 20 after Glencore stopped paying top-up dividends in the wake of a major acquisition. That leaves Rio Tinto Registered Shares 

RIO

 as the leading pick, which has a projected yield of 6.6%.

BP 

 shares trade with a yield of 6.5%, having increased its second quarter dividend by 10% to eight US cents (6.05p) a share in September. However, the shares have fallen 19% to a two-year low as City analysts worry about the sustainability of 2025 buybacks.

Property stocks continue to trade with lofty yields as investors are paid to wait for the anticipated improvement in conditions, leaving Land Securities Group on 7%.

Urban logistics-focused LondonMetric Property 

 is not far behind at 6.6%, having joined the  FTSE 100 in the summer thanks to a decade of dividend growth.

Chief executive Andrew Jones pledged recently to be “ruthlessly efficient” in his quest to turn the company from “dividend achiever” to “dividend aristocracy”.

He added: “After all, income compounding is the eighth Wonder of the World – the secret sauce and the rocket fuel that creates wealth.”

The highest-yielding stock outside the financial sector is British American Tobacco 

, which stands at 8.1% having delivered 25 years of consecutive dividend growth. Its policy is built on distributing 65% of long-term sustainable earnings.

The yield of Imperial Brands 

 stands at 6.4% after shares rose to a five-year high in November, boosted by plans to increase shareholder returns to £2.8 billion in the 2025 financial year. This includes dividends of £1.5 billion, which will now be payable in four equal installments.

BT Group 

 has a forward yield of 5.6%, having increased the February 2025 interim award by 4%. Its full-year dividend of 5.69p a share in September was fully covered by free cash flow.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

£££££££££££

For comparison purposes only as the Snowball only invests in Investment Trusts.

Don’t Be A Landlord. Collect 12% Annually By Owning REITs

Brett Owens

Contributor

Brett uses “second-level thinking” to find dividend stocks to buy.

Jan 1, 2025,11:00am EST

Need more dividend yield in 2025? Consider real estate investment trusts (REITs), which were literally mandated to be dividend-paying machines. Income is the point—by law.

Select REITs even yield 10% or more. What a payout! We’ll discuss seven of them—and their prospects for 2025—in a moment.

Now we can’t just blindly pick any ol’ a REIT. The real estate sector—using the Real Estate Select Sector SPDR (XLRE) as a proxy—only pays 3% right now.

But the average yield among this REIT 7-pack is 12.4%. That’s 4x what the sector pays!

That level of income would easily allow us to retire on dividends alone. But REITs aren’t all a slam dunk heading into 2025.

The Federal Reserve handed the real estate sector a boost in the form of three cuts to its benchmark rate in 2024. In fact, equity REITs have already been making the most of an improved cost of equity capital by issuing new shares to raise funds.

But the Fed also tightened up its expectations for further cuts, with the official “dot plot” signaling that the central bank expects to reduce its benchmark rate by only a half a percentage point in 2025—as early as September, they had expected a full point in rate cuts.

Let’s review this group of REITs yielding 10.4% to 15.3%, with a special focus on business and financial quality.

This REIT Mini-Portfolio Yields 12.4%

Community Healthcare Trust (CHCT, 10.4% yield) is an extremely diversified healthcare real estate owner. It boasts roughly 200 properties—including medical office buildings, urgent care centers, surgical centers, dialysis clinics, and many more types—across 35 states, leased out to 315 tenants.

And it’s the owner of one of the most curious charts I’ve ever seen:

CHCT has taken a page out of the Realty Income (O) playbook, delivering dividend increases each and every quarter for years. In fact, Community Healthcare is up to 37 quarters of uninterrupted dividend growth. But this run has been conservative and deliberate, with CHCT only raising by 0.25 cents quarterly for much of that streak.

However, the company’s funds from operations (FFO, a vital REIT earnings metric) are down below 2020 levels. A large part of the negativity in shares comes from CHCT hopping from one tenant flare-up to another. One of its tenants, GenesisCare, declared bankruptcy in 2023, resulting in a variety of outcomes for its leases, including some being assumed and assigned, and others remaining with the operating GenesisCare entity. As that was being resolved, another significant tenant began paying rent in late and/or partial amounts—though CHCT has put a consultancy team in place to resolve that issue

Shares have stabilized of late, though. The Fed’s recent rate cuts should help the company’s cost of capital, though, and most earnings models show the company rebounding after a difficult 2024. But I’d be watchful. While CHCT has rarely struggled with dividend coverage (based on its non-GAAP “funds available for distribution”), that coverage could tighten, at least in the short-term.

Global Medical REIT (GMRE, 10.8% yield) is another double-digit yielder in the healthcare real estate space. GMRE currently owns 187 off-campus medical office and post-acute, inpatient medical facilities, leased out to 275 tenants, with an occupancy rate just above 96%.

Earlier in 2024, I said that “GMRE likely bottomed out in late 2022 after one of its tenants, Pipeline Health System, entered Chapter 11 bankruptcy protection. Regardless, it has been a roller coaster to nowhere, still down by roughly a quarter of its value over the past three years after a lot of hills and valleys.” GMRE has had to deal with another bankruptcy—Steward Health Care—and has lost another 10% since then.

There are reasons for optimism. GMRE has been able to sign a 15-year triple-net lease for its large Beaumont, Texas property that was previously leased to Steward Health. The company also went on the offensive across 2024, including closing on a 15-property portfolio for $80.3 million and more recently announcing a five-property acquisition for $69.6 million that will close in 2025.

The dividend still warrants a close eye. Global Medical REIT pays out 21 cents per quarter, and is on pace to deliver 90 cents per share in adjusted funds from operation (AFFO). That’s a 93% payout ratio—rather tight unless GMRE starts growing again.

Innovative Industrial Properties (IIPR, 10.8% yield) isn’t a typical real estate investment trust. It doesn’t deal in residential properties or office buildings or warehouses. It deals in weed.

Innovative Industrial Properties provides capital for the regulated cannabis industry through a sale-leaseback program. IIPR buys freestanding industrial and retail properties (primarily marijuana growth facilities), then leases them right back, providing cannabis operators with much-needed influxes of cash that they can use to expand their operations. At the moment, it owns 108 properties representing nearly 9 million square feet across 19 states, leased out to 30 tenants.

IIPR was once the REIT industry’s growth darling, delivering nearly 900% in total returns between 2018 and its 2021 peak before cratering, losing 70% of its value since then. That includes a similarly hot-and-cold 2024, with shares up as much as 40% before cratering to 20%-losses for the year-to-date.

IIPR’s shares have fallen off in quick order across two events, one of them much more worrying than the other:

1. In November, shares dropped after the company missed revenue and normalized funds from operations (FFO). The double-digit dip was even big enough to bring out the class-action suit firms. (For what it’s worth, shares also slipped a little more a few days later after Florida’s recreational-marijuana amendment was voted down.)
2. Just a few days ago, Innovative Industrial Properties announced that PharmaCann, a tenant representing 11 properties and 17% of IIP’s total rental revenues across 2024’s first nine months, defaulted on its rent obligations for six of the 11 properties, which thanks to cross-default provisions, meant PharmaCann effectively defaulted on all of its leases.

On the one hand, IIPR now trades for less than 8 times its annualized FFO (based on 2024’s first nine months). On the other hand, this gut shot is emblematic of a marijuana industry that seemingly refuses to make money despite the actual marijuana trade exploding.

Let’s stand back and let the smoke clear.

Once upon a time, Brandywine Realty Trust (BDN, 11.1% yield) was an office-focused REIT, but it has since diversified into a hybrid REIT with a mix of properties, largely focused on greater Philadelphia and Austin, Texas. The projected net operating income of its current pipeline, for instance, is 42% office, 32% life science, and 26% residential.

Following a 2023 that saw Brandywine reduce its dividend by 21%, the REIT enjoyed a stable, uneventful and even outperforming 2024. While it’s facing some issues in Austin, its Philadelphia portfolio is thriving. Its two most exciting projects are Philadelphia’s Schuylkill Yards and Austin’s Uptown ATX, which could help drive long-term FFO growth. It also trades at a thin 6 times next year’s FFO estimates—not terribly surprising considering the recent dividend cut, though its dividend coverage has improved.

Global Net Lease (GNL, 15.3% yield) is a commercial REIT operator with 1,223 properties in 11 countries, leased out to 723 tenants in 89 industries. The U.S. accounts for roughly 80% of straight-line rents, though it also has a presence in Canada, as well as western European nations including the U.K., the Netherlands and Germany.

It’s also one of the highest-yielding equity REITs, at a whopping 15%-plus, despite what appears to be management’s best efforts to keep the dividend low. GNL has slashed its payout almost in half since 2020, across three cuts, including a 22% reduction in 2024.

Global Net Lease is currently selling off properties left and right in an attempt to bring down its leverage—it’s on pace for nearly $1 billion in dispositions in 2024, and Wall Street sees some $500 million to $600 million more in 2025. Net debt to adjusted EBITDA, at 8.4x at the start of 2024, is projected to come in at 7.8x-7.4x by the end of the year.

It’s a much healthier position, but it’s difficult to ignore the dividend track record. GNL’s high sensitivity to interest rates could also be a problem should the Fed clam up in 2025.

Double-digit yields are a relative rarity among equity REITs, but they’re commonplace among mortgage REITs (mREITs), which usually don’t own physical properties, but instead invest in “paper” real estate.

New York Mortgage Trust (NYMT, 13.7% yield), for instance, invests in a variety of mortgages and other securitized products, including residential mortgage loans, agency residential mortgage-backed securities (RMBSs), non-agency RMBSs, structured multifamily investments and more.

30-year mortgage rates have rocketed from less than 3% in mid-2021 to the high-6%s today. That has wreaked havoc on the mREIT’s residential securities. In turn, NYMT shares and the dividend have both been cleaved in half—the latter across a pair of cuts announced in 2023.

The company has almost completely unwound a multifamily joint venture that has weighed on book value, and shares trade at just 54% of adjusted book value. But the company’s undepreciated earnings (a non-GAAP financial metric NYMT uses) haven’t covered the dividend in at least three years. I’d be wary, though management seems unconcerned, saying they expect earnings will move closer to the dividend in time.

Dynex Capital (DX, 14.4% yield) is almost entirely invested in agency debt. The market’s longest-tenured mREIT is a specialist in agency MBSs—residential agency MBSs make up a whopping 97% of the portfolio, and commercial agency MBSs are another 2% or so. Non-agency CMBSs make up the remaining fraction.

Agency MBSs are considered “safer” than non-agency, but they also generally pay lower rates. As a result, agency MBS-focused REITs will utilize a lot more leverage to try to maximize performance and income. Dynex’s leverage decreased in the most recent quarter—to 7.6x, a still very robust rate.

I said in summer 2024 that“should the yield curve steepen (the gap between short- and long-term rates widen), Dynex is positioned well to benefit.” The yield curve obliged.

Morgan Stanley predicts a brighter future for “out of favour” UK property stocks in 2025 after a “lost decade”.

The broker noted the sector is “out of favour, buffeted around by top-down concerns, most recently around the UK budget and post the US elections.”

“We argue that markets are extrapolating the present; the future looks better with solid property fundamentals, falling rates, credit spreads that have normalised, capital markets that are opening and a macro calendar that should be less congested and therefore will likely dominate news flow to a lesser extent.”

“More emphasis on the bottom-up could do the trick,” the broker thinks.

Near-term Morgan Stanley sees most re-rating potential in British Land Co PLC, Derwent London PLC, Great Portland Estates PLC and Land Securities Group PLC, with a preference for British Land and Landsec as their high dividend yields means investors are ‘paid to wait’.

The broker has an ‘outperform’ rating on all four UK listed stocks.

“The UK has experienced a lost decade for real estate during which capital was deflected to other shores and confidence was low; but confidence is returning, balance sheets are healthy and assets have been marked down,” Morgan Stanley said in a note reviewing prospects for the European property sector in 2025.

More stocks should start delivering a return on equity that is closer to, or exceeds, their cost of equity, it thinks.

Morgan Stanley pointed out UK net asset values have started to turn, noting several companies reported September NAVs ahead of their March NAV.

This is an “important inflection point,” Morgan Stanley explained, noting that historically NAV growth turning positive has consistently been a “major re-rating event”.

“Real estate is a total return asset class with an income and capital growth component; when asset values (and therefore NAVs) fall, the income component is eaten up by capital value declines, which means investors make no return.”

“But when NAVs stabilise investors make the income part, and when they start rising, their return is further boosted by a non-cash capital growth element, which usually takes the return on equity closer to the equity market’s required return, triggering a major re-rating,” the broker explained.

Discount Watch

Santa works his magic in London’s investment company sector once again. That is, if the more than halving in the number of funds trading at 52-week high discounts to net assets is anything to go by. Still, we estimate nine funds hit year-high discounts over the course of the week. No prizes for guessing which funds contributed the most names – alternatives of course.

By Frank Buhagiar•30 Dec, 2024

We estimate there to be nine investment companies that saw their share prices trade at 52-week high discounts to net assets over the course of the week ended Friday 27 December 2024 – 14 less than the previous week’s 23.

Last week, we highlighted that Santa appeared to be leaving it late this year if he was going to work his magic and trigger a seasonal rally in share prices across London’s investment company space. Well, one week on and, true to form, Santa has delivered, that is if the sharp drop in the number of investment companies trading at 52-week high discounts is anything to go by. Lesson learned. Never doubt Santa!

Turns out though, Santa’s magic was not enough to give the share prices of all funds a boost, particularly those belonging to the alternatives camp. Of the nine on the list this week, seven are alternatives: one from debt, two from property and four from renewables. Alternatives have featured regularly in the Discount Watch in recent weeks on concerns that higher bond yields may lead to higher discount rates which in turn could lead to lower valuations for the underlying assets held by alternative funds. Some investors clearly not waiting around to find out.

The top five

Fund	Discount	Sector
HydrogenOne Capital Growth HGEN	-79.96%	Renewables
CEIBA Investments CBA	-74.95%	Property
VPC Specialty Lending Investments VSL	-54.47%	Debt
Ecofin US Renewables RNEW	-52.82%	Renewables
Gore Street Energy Storage GSF	-51.92%	Renewables

The full list

Fund	Discount	Sector
VPC Specialty Lending Investments VSL	-54.47%	Debt
North Atlantic Smaller Cos NAS	-34.90%	Global Smaller Companies
Urban Logistics REIT SHED	-35.09%	Property
CEIBA Investments CBA	-74.95%	Property
HydrogenOne Capital Growth HGEN	-79.96%	Renewables
Gore Street Energy Storage GSF	-51.92%	Renewables
Ecofin US Renewables RNEW	-52.82%	Renewables
US Solar Fund USF	-43.57%	Renewables
Vietnam Enterprise VEIL	-23.85%	Vietnam

The first dividend for 2025 of £232 has been received, as we start our journey for this year.

I have bought for the portfolio 1k of Assura and 1k of Supermarket Reit adding around £160 of income to the Snowball.

A journey of a thousand miles begins with a single step is a Chinese proverb that originates from the Tao te Ching.

It means that even the most difficult and longest ventures have a specific starting point. It also suggests that daunting tasks can be accomplished by doing something very simple. The proverb emphasizes the importance of the first step in any journey or endeavour.

Cash for re-investment £88.00

Alan Ray – European Smaller Companies Trust

This year’s pick is the same as last year and the basic thesis is outlined in the article we published on Christmas Eve. As an investor it’s quite hard to love Europe, I think. The book I’ll most likely never write called “Europe: settling for second best” would be about why Europe should stop looking for the secret formula that will create a West Coast venture capital vibe on the shores of the North Sea and come to terms with its own reality. A little more of a social safety net, a few more holidays and a little bit of a quieter life.

Right now, it feels deeply uncomfortable investing in European equities, with the incoming US administration making its feelings so plain. My own view is that this could be very good for Europe as it is struggling for an identity, exposed as weak and indecisive in the face of a hot war on its doorstep and lacking the industrial might to do anything about it. A few home truths from Europe’s most important ally could, then, be just what it needs to pull itself together. One of the least polarising things one can say about the UK’s vote to leave Europe in 2016 is that the side campaigning to stay completely failed to present a positive vision of Europe, and this wasn’t just because they hired the wrong PR firm, but because, well, what exactly is that vision? Maybe we get to find out next year.

It’s of course a fantasy to think that in 12 months’ time Europe will have relaunched itself after a dressing down from the US, but stock markets are much more about the journey than the destination and right now sentiment is stuck at low tide. Even a hint that Europe is waking up to its own reality could be very good for sentiment. And after all, the quieter life that most Europeans dream of doesn’t come cheap. Something has to grow to pay for it.

In the meantime, European Smaller Companies Trust (ESCT) doesn’t really care too much about my macro meanderings and has a very impressive track record of performance that, over recent years, has kept up with or even exceeded large cap equities, no mean feat considering how far behind the small cap index is to large caps. This is achieved by taking a pragmatic view of the returns on offer from earlier stage growth companies, quality growth companies and more mature reliable companies all the way to turnaround and value situations.

And yet as outlined in the previous section, generally European smaller companies are still subject to that very wide valuation gap that has persisted for some time. Readers will no doubt be very aware that global stock market returns in the last year have been driven by the US, and within that by a few stocks. I think the idea that very large companies can’t grow fast has been completely debunked in the last 20 years, so I don’t think there’s a glaringly obvious switch out of the US on that basis, but it’s nevertheless reaching uncomfortable proportions of concentration risk, and a little bit of that risk capital could be well used taking a contrarian position in ESCT.

Alan Ray

alan@keplerpartners.com

Alan joined Kepler in October 2022. He has worked in the investment funds industry for over 25 years. The first half of his career was as an investment trust analyst, leading a highly-rated sell-side research team. More recently he has worked in corporate advisory and investment banking roles, with a focus on alternative asset classes.

David Brenchley – Fidelity China Special Situations

It’s with some trepidation that I embark on my first ever ‘top pick’ for the year. I’ve decided that the best tactic is to not be afraid of finishing stone-cold last, since that’s the most likely outcome.

Simplistically, I boiled my choice down to a momentum trade (technology to continue its ascent and verge on bubble territory) or a contrarian pick (China to bounce back aggressively). Both are tempting, but I’ll plump for the latter and go with Fidelity China Special Situations (FCSS).

I’ll first observe that there’s certainly a good chance that the technology bull market will continue to roll. The artificial intelligence-led US market boom has been replaced by the Trump trade. Corporate earnings will be boosted by tax cuts and regulation will loosen.

Still, there’s a contrarian hiding within me somewhere. Maybe that’s why only c. one-third of my portfolio’s underlying holdings are listed in the US, according to the portfolio X-ray tool on my platform AJ Bell’s website.

We’re almost four years into the Chinese bear market and I need to acknowledge that things can get worse from here, especially if POTUS-elect Donald Trump goes ahead with slapping massive tariffs on Chinese goods.

Notwithstanding that, valuations are undoubtedly cheap, with the MSCI China Index trading on a forward price-to-earnings (PE) ratio of 9.8x to the end of November. To put that in context, the forward PE on MSCI United Kingdom was 11.5x.

In addition, we’re finally seeing what seems like a concerted effort for stimulus both from the fiscal and monetary side – a powerful potential catalyst, as we’ve already seen. Markets in China and Hong Kong soared c. 40% in September, when the People’s Bank of China (PBoC) announced a package worth c. 100 trillion renminbi aimed at reinvigorating consumer confidence. The Politburo hinted that more easing measures were on their way the weekend before I write this (09/12/2024), leading to another bump in indices.

It’s by no means a buy across the board. Banks for instance look like they’re being used as a conduit to reflate consumer confidence by allowing borrowers to refinance their mortgages at artificially low rates, while parts of the property sector remains heavily indebted.

So, it’s best, then, to tap into the consumer story. Consumer confidence is currently low, largely because the country is going through a property crisis at a time when c. 50% of household wealth is in property.

Yet, China’s household savings rate stood at 31.7% in 2023, according to J.P. Morgan Economic Research. If policymakers can successfully reinflate confidence through stimulus, the more domestically focused Chinese stocks could benefit.

FCSS could be in a sweet spot, considering manager Dale Nicholls’ bias to small- and mid-cap companies, which he views as the best way to capture the growth opportunities from the increasing wealth of the Chinese consumer and to generate excess returns.

Dale is also able to invest in unlisted businesses, which can help to boost returns, as can his structural gearing, which should boost returns if Chinese shares can lift themselves off the floor.

David Brenchley

david.b@keplerpartners.com

David is an investment specialist for Kepler Trust Intelligence and joined Kepler Partners in June 2024. Before joining, he worked as money reporter for The Times and The Sunday Times where he wrote about all facets of investment for retail investors. He has previously worked for Money Observer magazine, Interactive Investor, Morningstar and Investment Week. He graduated from the University of Huddersfield with a degree in Media and Sports Journalism.

Jo Groves – Rockwood Strategic

This year’s decision was a close call between UK equities and the biotech sector, the latter benefiting from powerful growth trends such as ageing populations, game-changing obesity drugs and innovative breakthroughs in cancer therapies.

In the end, I’ve decided to stick with the UK and indeed, Rockwood Strategic (RKW) for the second year running. Some managers have described current valuations of UK small-caps as a “once in a decade” opportunity and I’m inclined to agree. However, there are undoubtedly some potential headwinds at the macro level: the Autumn Budget didn’t bring a lot of cheer for corporates and higher-for-longer interest rates could weigh on confidence and consumer spending.

On the flip side, the UK’s projected GDP growth is the third-highest among G7 nations (behind the US and Canada) and nearly double that of France and Germany. The UK also offers relative political stability (LinkedIn career histories and company phone losses aside) to its European counterparts and Trump 2.0 might just favour the UK (he hasn’t done it yet, he may do it, I’d say almost definitely).

As for stock markets, we’ve written many column inches over the last year asking when the current concentration of the Magnificent Seven will end? Maybe we’ll be writing the same thing this time next year but Ruffer’s Jasmine Yeo summed it up aptly by suggesting that they’ve “borrowed future returns” with heady valuations predicated on some pretty punchy earnings forecasts. And when this concentration of capital eventually unwinds, renewed interest in UK equities from their homegrown crowd might prove to be the long-awaited catalyst for a sustained period of outperformance.

That said, I’m hedging my bets somewhat as RKW’s strength lies in its company-specific turnaround stories, rather than needing a rising tide for UK equities. The concentrated portfolio is a higher-risk option but has historically paid off in superior returns. I’m also hopeful that M&A will provide further upside if bargain hunting by overseas and private equity buyers continues, given that RKW’s portfolio is well-positioned to capitalise on this.

Jo Groves

jo@keplerpartners.com

Jo is an investment specialist for Kepler Trust Intelligence. Prior to joining Kepler Partners, she worked as an investment writer at Forbes Advisor and The Motley Fool. Jo started her career as an auditor at Arthur Andersen, before joining the corporate finance department at Close Brothers where she advised corporate and private equity clients on acquisitions, disposals and other strategic issues. Jo has a BSc in Geography from Durham University and is a Chartered Accountant (ACA).

Josef Licsauer – JPMorgan US Smaller Companies

Looking ahead to 2025, there’s much to consider: the impact of US tariffs, Starmer’s policies in office, the pace of interest rate cuts and ongoing conflicts across Europe and the Middle East, are just a few factors likely to shape another year of uncertainty and volatility.

Yet, one can’t help resonating with what Warren Buffett has said over the years on volatility: “The true investor welcomes volatility. A wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses. It is impossible to see how the availability of such prices can be thought of as increasing the hazards for an investor who is totally free to either ignore the market or exploit its folly.”

I currently see many opportunities for investors willing to embrace uncertainty, and I’ve tried to set my sights on areas of the market where unpredictability reigns, rather than playing the 2025 top pick safe. With that in mind, my attention turns across the pond, where I believe JPMorgan US Smaller Companies (JUSC) could perform well in the year ahead.

Some may view this as a risky call, given the uncertainty surrounding Donald Trump’s tariff plan, and they wouldn’t be wrong. However, whilst tariffs aren’t usually good for growth overall, I argue they could potentially be good for US smaller companies. Trade tariffs often favour domestic businesses over international conglomerates, and smaller companies tend to be more domestically focussed, potentially positioning them to navigate this environment more effectively.

JUSC focusses on small and medium-sized companies across various sectors, with a particular emphasis on industrials. The managers target quality companies with durable franchises, strong management teams, and stable earnings, trading at discounts to their intrinsic value – an approach they argue can add stability to investor portfolios over time.

There is also currently a notable valuation gap between US small- and large-caps, with the former trading at historical lows relative to the latter. Whilst broader market factors will inevitably influence outcomes, the risk-reward profile on offer appears compelling, in my view. In the best-case scenario, US smaller companies could see a significant re-rating given their growth potential and current valuation levels. Conversely, they could struggle, but it’s hard to envisage valuations falling much further. Of course, making such predictions tempts fate but for those seeking a high-risk, high-reward strategy with differentiated US exposure beyond the Magnificent Seven, a trust like JUSC offers a strong case.

Josef Licsauer

josef@keplerpartners.com

Josef is an Investment Trust Research Analyst and joined Kepler in September 2023. Prior to this, he was an Investment Analyst at Hargreaves Lansdown, where he was responsible for fund research across a number of sectors including Japan, Europe and Alternatives. He obtained a first-class degree in Business and Management from the University of the West of England. He also holds the Investment Management certificate.

Ryan Lightfoot-Aminoff – International Biotechnology Trust

One of my biggest investing weaknesses has been a tendency to plumb for a contrarian option, when there is a much more obvious choice on offer. Sometimes, cliches are cliched for a reason. Surrey is a nice place to live, Majorca is a great holiday destination, the Germans make good cars. With that in mind, with my pick this year, I am going to do my best to play it straight, although sometimes, old habits do die hard…

Looking at the biggest drivers in the market at the moment, there seems to be no escaping the Trump trade. Putting my opinion of him and his politics to one side, he has been very clear about his plan for the economy, and that is pro-business and America first. Regrettably, that is likely to be to the detriment of… well everywhere else really. As such, my pick for 2025 is going to have a strong US tilt to it.

Looking further into some of Trump’s decisions, he has made Vivek Ramaswamy co-lead of the Department of Government Efficiency. Looking over the irony of having a second government agency (after the Government Accountability Office) to identify spending inefficiencies, Vivek is likely to use his new found power to tackle healthcare regulation. He made his billions in the pharmaceutical industry and has long railed against over regulation stymying innovation, particularly amongst small-cap biotech firms.

Taking all this into account, my pick for 2025 is International Biotechnology (IBT), managed by Ailsa Craig and Marek Poszepczynski. The vast majority of the portfolio is based in America, in line with the broader index, and the managers have a bias towards small and mid-cap companies which make up over two thirds of the portfolio, in order to tap into earlier-stage companies. On top of this, the managers can invest up to 15% in private companies which has delivered impressive returns in the past few years. M&A has been a meaningful contributor to this historically, and I believe it will continue to do so in light of potential changes to the regulatory backdrop.

The outlook for the asset class is also supported by the prospect of falling interest rates, which can weigh heavily on an industry that often requires a fair bit of financing. Furthermore, the trust itself is also trading at a wide discount to NAV, both in absolute and relative terms. The current level is c. 12%, which is close to its widest point in the past five years, despite the impressive NAV returns and arguably positive outlook.

So, whilst picking biotechnology may not exactly be a cliched decision, I believe there are so many positive factors in favour of the outlook for IBT, it makes for an obvious choice for my 2025 pick.

Ryan Lightfoot-Aminoff

Ryan@keplerpartners.com

Ryan joined Kepler in August 2022 as an investment trust research analyst. Prior to this, he spent seven years as a senior research analyst at Chelsea Financial Services where he worked on fund selection for their retail clients and on their multi-asset fund range. He holds an MSc in Finance & BA in Accounting & Finance from the University of the West of England.

Jean-Baptiste Andrieux – Fidelity Special Values

I wasn’t at Kepler last year to pick an investment trust for 2024, having only joined the team this summer—which probably saved me from some embarrassment. However, it seems I won’t escape it this year. For my debut pick, I’ll be a polite guest (as my name suggests, I’m not British) and choose a trust specialising in UK equities: Fidelity Special Values (FSV), which I recently covered (you can read the note here).

FSV’s manager, Alex Wright, invests across the entire UK market-cap spectrum with a contrarian approach, focusing on companies that may be overlooked and undervalued by the market. While seeking out stocks with low valuations, Alex ensures that there are potential catalysts for a turnaround and avoids highly leveraged companies. This approach has historically proven effective both in the short and long term, with FSV generating c. 1.6x the returns of the FTSE All-Share Index (on a NAV total return basis) over the past 10 and five years, as well as year-to-date (to 10/12/2024).

UK equities are currently trading at lower multiples than their international peers and relative to historical levels, which suggests to me that they offer a favourable risk-reward profile: in the best-case scenario, UK equities could re-rate; in the worst case, they likely won’t fall much further.

Given the risks for 2025, including potentially volatile inflation, trade tensions, and geopolitical risk, I believe cheap UK equities offer both downside protection and potential for re-rating.

Jean-Baptiste Andrieux

Jean-Baptiste@keplerpartners.com

Jean-Baptiste joined Kepler in August 2024 as an investment trust research analyst. Prior to this, he worked as a reporter for Money Marketing and Trustnet where he wrote news, features and opinion pieces. He graduated from the University of Vienna with a BA in History and from City, University of London with an MA in Newspaper Journalism. He also holds the Investment Management Certificate.

Kepler Trust Intelligence

Updated 01 Jan 2025

Kepler symposium

Disclaimer

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

A symposium, in ancient Greece, involved a group of men sitting on couches arranged around a circular room designed for the purpose called an andron, each taking turns to discuss a topic put forward by their host – the symposiarch – who would also choose the wine, and dictate the pace at which the assembled company would drink it.

The Roman equivalent followed a similar pattern and its Latin name, convivium, captures the atmosphere of this social occasion so well that we use it to this day to describe an event or atmosphere which according to the OED is ‘friendly, lively and enjoyable’.

To pull off a good symposium, the Greek playwright Euboulos advised that for sensible men three kraters (bowls) of wine should be sufficient. The next three, he said, would induce bad behaviour, rudeness and shouting, seven would provoke a fight, by number eight the furniture would be broken, while depression and eventually madness would set in at the ninth and tenth.

Having consumed a sensible three kraters of wine to mark the rapidly approaching death of the old year and the birth of the new, it was in convivial spirits that the team at Kepler Trust Intelligence sat down to hold a symposium of our own, the aim of which was to identify the trusts we think are likely to deliver the best (share price) returns in 2025.

Naturally, none of this is meant as advice – and you should regard our choices more as the latest instalment in an amusing annual tradition than a serious attempt to predict the future, for which we all know past performance and the wisdom of analysts is no guide….

Pascal Dowling – JPMorgan UK Small Cap Growth & Income

My bet for 2025 is JPMorgan UK Small Cap Growth & Income (JUGI). Led by veteran UK equities manager Georgina Brittain and co-manager Katen Patel. The trust delivered a stellar performance earlier in the first half of 2024 and saw its discount narrow sharply after it absorbed stablemate JPMorgan Mid Cap (JMF). It was trading close to par when we last covered it in September.

Since then however the discount has slipped out to 12.4% as confidence in the UK’s long awaited recovery has slumped under a barrage of anti-Labour newsprint and simultaneous barrage of myopic decisions, own goals and poor communication (or more concisely: poor leadership?) from the Labour Party itself.

Whilst I have mixed feelings about VAT on private schools and taxes on farmland, these to my mind are not particularly important to the UK’s economic success in the grand scheme of things (which is perhaps why they might’ve been best left alone). What is important is the impact of higher national insurance contributions on corporate profitability, and the potential for unemployment to rise – squeezing confidence further and potentially driving us towards a recession.

So far, so downbeat – perhaps I should be the Prime Minister – but with the proviso that the national insurance hike could prove to be my undoing, I remain convinced that the UK is in a better position than it has been for many, many years – if only by dint of not being an absolute political basket-case.

America’s too expensive, China’s bust, the German government collapsed last month, Spain hasn’t had a functioning government for a decade and poor old France is on the verge of its sixieme republique – quite possibly under the leadership of Mme Le Pen who, like her far-right counterparts in Denmark, Austria and Italy, is definitely not a massive racist with protectionist instincts when it comes to international trade.

In the words of one of our recent short-lived (though to her credit not outlasted by a salad vegetable) prime ministers Old Blighty, at least relative to its European peers, is in the unusual position of being a strong and stable destination for investors’ money. It is also, thanks to almost a decade in the wilderness under an increasingly deranged ruling party, cheap.

This combination of cheap valuations and an unusually stable environment for investment in a volatile world is a compelling one and that – in my view – hasn’t changed on the back of a piss-poor start from Starmer & Co, though there’s time yet, of course.

Pascal Dowling

pascal@keplerpartners.com

Pascal is a partner at Kepler Partners LLP and launched Kepler Trust Intelligence when he joined Kepler in 2015. Prior to this he managed FE Trustnet, one of the UK’s largest investment research websites, for ten years. In a former life Pascal was a financial journalist and he has written extensively about investment trusts and other investments for the trade and national press.

Thomas McMahon – Geiger Counter

There are two possible approaches to this sort of task. Obviously, nobody can have a strong conviction when it comes to picking one investment over a one-year time horizon. That’s why nobody would dream of putting all their actual money in one fund over 12 months. How you answer depends on your attitude to glory and to shame: do you go for something solid and sensible, and hope that events don’t lead to your pick underperforming by 50bps rather than outperforming? Or do you swing for the fences, and pick something that has the potential to do exceptionally well or exceptionally badly? Well, sick of finishing in the middle of the pack, I have decided to take the latter strategy this year.

One of the adjacent trades to the AI boom is nuclear energy. Microsoft has struck a deal to reactivate a reactor at Three Mile Island in Pennsylvania to power its AI data centres. Oracle is designing a data centre that would require 1 GW of power which would be supplied by three small modular reactors, while Amazon is funding the development for SMRs and siting a data centre next to an existing nuclear facility. These tech giants recognize that nuclear is going to play a significant role in any post-energy transition grid. If AI comes even close to fulfilling its potential, it will require a huge investment in new energy supply, and for a number of reasons that will involve nuclear.

Geiger Counter (GCL) is a small listed fund that invests in the uranium mining sector. Some stocks in the space have rallied in recent months, notably Cameco, the world’s second-largest producer and largest outside Kazhakstan, while NexGen, GCL’s largest holding has had a decent year. Other stocks have disappointed though, and GCL’s shares have been weak, declining around 10% in 2024 at the time of writing. The shares trade on a discount of over 20% and the trust had 16% net gearing as of the end of October. I think there is a real chance that 2025 is a breakout year for GCL, while if it disappoints, I will have the comfort of knowing I gave it a real shot.

Thomas McMahon

thomas.m@keplerpartners.com

Thomas is Head of Investment Companies Research and joined Kepler in April 2018. Previously he was senior analyst at FE Invest, where he was responsible for fund selection for a range of model portfolios. He covered all asset classes over time, but has particular experience with emerging markets and fixed income as well as UK smaller companies funds. He has a degree in Philosophy from Warwick University and is a CFA charterholder.

William Heathcoat Amory – BH Macro

The word “portfolio” comes from the Italian word portafoglio, which means “a case for carrying loose papers”. The word is made up of porta, which means “carry,” and foglio, which means “sheet” or “leaf”. Not so long ago, a wealth manager would keep each of his or her clients’ investments in a separate notebook or portfolio. A portfolio differs from a single sheet of paper, in that it has many different elements to it. Which feels desperately old fashioned in the current market, where the only show in town is Nvidia.

It is in this context that I am picking BH Macro (BHMG) as my investment trust pick for 2025, with an eye towards diversifying away from the crowded trades such as the US market. BHMG is a feeder fund into the Brevan Howard Master Fund, run by one of the foremost hedge fund managers in the world. As a manager, Brevan Howard is unique in many ways, not least in that it has a closed-end fund that effectively allows investors to access its returns by investing only around £4 (a single share). This is in contrast to most hedge funds, which generally only accept capital in the form of an institutional mandate, with a minimum investment running into the millions.

BHMG performed very strongly in 2020, and again in 2022. It has had a relatively fallow period since then, but with US election and political wobbles in Europe seeing heightened volatility in interest rate, bond and FX markets BHMG has seen returns perk up over the very short term. This fits a long running pattern to returns which sees it typically perform well when market uncertainty rises. There are no guarantees, but as the graph below shows, over the last ten years BHMG has delivered handsome returns in the worst months for world equities. In the context of an elevated US stock market, with Trump’s anticipated tariffs potentially impacting economies all around the world, it feels a fair bet that uncertainty and volatility is set to rise. This could usher in a new chapter for Brevan Howard’s traders, and offer them the potential to deliver strong returns.

BHMG’s discount remains wide by historical standards – it is not long ago since early 2023 when the shares were on a chunky premium. At that time, investors had recent memories of BHMG’s very strong outperformance of equities and bonds during 2022. With the board buying shares back, the risks of the discount widening significantly for a sustained period are arguably limited. On the other hand, if BHMG’s NAV returns improve – especially if equity markets struggle to gain ground or perhaps fall, there is a good chance demand for the shares may improve, and the discount narrowing will add a nice tailwind to returns. In a ‘portafoglio’ context (or just seen against my colleagues picks for this year) this would serve as a good reminder that it helps to have some different looking ‘sheets’ in your ‘folder’.

WORST TO BEST MONTHLY RETURNS OF WORLD EQUITIES

Source: Morningstar, Kepler Partners
Past performance is not a reliable indicator of future returns

William Heathcoat Amory

william@keplerpartners.com

William Heathcoat Amory is a co-founding partner of Kepler Partners LLP and leads the Kepler investment trust research team. William has over 20 years of experience as an investment company analyst. Prior to co-founding Kepler Partners in 2008, he was part of the Extel number 1 rated research team at JPMorgan Cazenove.