Imagine you run a large bakery business, supplying hundreds of thousands of loaves a day to the nation’s supermarkets and corner shops.

Though margins are thin, your heritage brand and past investments in plant and machinery serve as high barriers to entry. A mass-market product and a growing population add some certainty. “Brits buy bread” isn’t a cutting-edge business strategy, but it’s a reliable one.

Still, a few things keep you up at night. The price of wheat is one, energy costs another, although in both cases you at least know your competitors face the same challenges. More pressing are the small unknowns, such as equipment failure. A few days or even hours of plant downtime can mean lower output, higher wastage, bigger maintenance bills and negative cash flows.

Suddenly, those wafer-thin margins collapse, leaving you less prepared for the next battle.

Knowing when your machines might fail is therefore a huge advantage. The issue is that traditional predictive tools offer limited insights. You can stick every kind of sensor on every part of the production line, but deciphering what those sensors say is its own separate challenge. What your workforce has in experienced plant managers, it probably lacks in data scientists.

This is where IntelliAM AI (INT) comes in. The Sheffield-based group, which is this week tapping shareholders for the first time since listing on Aquis in July 2024, has developed a set of machine learning tools that can parse millions of data points to spot issues ahead of time. Critically, these tools involve self-training algorithms, meaning IntelliAM offers a bespoke solution for each manufacturing site or process, rather than a standardised platform.

Although the product is still nascent, demand has been strong and customer testimonials are glowing. Amid all the noise surrounding artificial intelligence (AI), IntelliAM appears to have developed a real-world, productivity-enhancing application of the technology.

Small cap, big partners

There are some clear signs to suggest IntelliAM’s product is the real deal. Chief among these is the calibre and profile of its external partnerships.  

Its customers include Müller, which processes half the UK’s milk, and today uses IntelliAM software across its entire milk production line. Another is Archer-Daniels-Midland (US:ADM), one of the world’s ‘big four’ agricultural companies, which having rolled out the monitoring and predictive software across its network of UK mills is now adding sites in the US.

Hovis, which is currently being acquired by Associated British Foods (ABF), has been another major success. Despite a tough few years for the bakery group, it hasn’t wavered in deploying IntelliAM’s platform. An initial contract for just over £100,000, first signed in September 2024, has since grown nine-fold. Hovis has described the product as “a game-changing shift” for its business that has reduced invasive maintenance costs by 80 to 90 per cent and reduced engineering support contracts by a fifth. The return on investment has taken less than a year.

The big-name associations don’t end there. Proceeds from this week’s fundraising will be used to advance an established partnership with SKF (SE:SKF.B), the world’s largest bearings and lubrication group, to integrate SKF’s technology with the IntelliAM platform.

Recently, the company also signed a deal with CTC, a US-based manufacturer of industrial sensors, which has agreed to build interfaces that foster smoother connections between clients’ legacy systems with IntelliAM’s software and work orders.

Having made good headway in the fast-moving consumer goods (FMCG) world, the company is pushing into other sectors. Alongside its half-year results, published on Tuesday, IntelliAM announced a series of new contracts in the building products industry, via tie-ups with CRH (CRH) subsidiary Tarmac, Marshalls (MSLH), H+H (DK:HH) and Knauf in the UK and Japan.

Although these contracts are only expected to generate £0.25mn in the current financial year, IntelliAM expects material growth from 2026 onwards.

Background

Although IntelliAM AI was incorporated in the summer of 2023, it wasn’t from a standing start.

Its co-founders, chief executive Tom Clayton and chief operating officer Keith Smith, previously ran a small but profitable engineering consulting firm called 53 North, which provided a similar – albeit more analogue – set of services to an established manufacturing client base.

Then came technological convergence. Over a few years, Clayton and Smith saw how the development of cheap, network-connected sensors, cloud storage and machine learning could turn a bespoke consulting service into a bespoke software product.

Initially, the founders planned to spin out the business as its own entity. They then realised the burgeoning platform’s growth would be better served by a merger with 53 North, which could already boast solid cash generation and an existing client base. The tie-up was facilitated by last year’s float, backed by a sizeable subscription from Gresham House.

As well as keeping a degree of control over their company, Clayton and Smith say another benefit of a public listing has been access. Previously, IntelliAM’s salespeople and management could get the ear of plant managers. Today, contact is increasingly with clients’ boards and senior executives, where company-wide cross-selling opportunities are far more likely.

That’s understandable. Unlike some software-as-a-service businesses, IntelliAM will have a much clearer (and real-time) understanding of its customers’ savings from the platform.

Risks and valuation

There are, of course, risks. While a recent move to the Apex segment of the Aquis Exchange was intended to broaden the investor base, liquidity remains poor, and less than a quarter of shares are in public hands (see table). Put bluntly, smaller independent shareholders aren’t likely to have much of a voice and will have to submit to wide bid-offer spreads whenever they trade.

Still, this week’s fundraising – which for retail investors closes at 2pm on 1 December – offers some hope. For one, an at-the-money share sale suggests the company is serious about balancing dilution with demand. The desire to involve both institutions and ordinary shareholders (who are being offered £0.15mn of the £0.4mn issuance) is another positive.

Then again, this is a tiddly fundraising even by the standards of microcap companies. If the company needs less than half a million pounds to seize the opportunities before it, you might conclude that the balance sheet isn’t yet fit for purpose, or that the next request for cash is just a few months away.

Such is the grand bargain with fast-growing small caps. For his part, Clayton is confident the company will reach break-even by March. As sales grow and become increasingly weighted to annually recurring software contracts, operational gearing should kick in. In a few months, attention could well switch to profit growth and margin expansion.

Dan Risdale, Edison’s head of technology research and the only analyst currently covering the stock, expects sales to rocket to £4.7mn in the second half of the current financial year, up from £2.4mn in the six months to September. IntelliAM’s board, for its part, “remains comfortable with estimates provided to the market at year-end”.

Against a market capitalisation of £22mn, this implies a price-to-sales ratio of around three. For a software company growing sales by triple digits and on the verge of profitability (Risdale expects earnings of 7.9p a share in the year to March 2027), that looks more than reasonable.

It still feels extraordinary that a relatively small Swiss city is host to two major European pharmaceutical companies.

The so-called ‘Sisters of Basel’ have been a regular source of investor returns over the years.

Novartis (CH:NOVN), created by the merger of Ciba-Geigy and Sandoz in the mid-1990s, now vies with the much older Roche (CH:ROG) for pre-eminence.

It is the younger sister that is our focus of interest. Like much of the industry, Novartis has spent the past few years reshaping itself from a sprawling pharma company, with products in almost every therapeutic area, into something that is nimbler and more focused.

Pharmaceutical companies currently face some of the trickiest market conditions in a generation as trade tariffs and economic nationalism fundamentally change the business model. However, amid the uncertainty there are grounds for optimism. A recent capital markets day (CMD) showed management’s thinking on how Novartis intends to overcome the challenge of patent expiries on its key medicines, while maintaining margins that, at around 40 per cent, are some of the highest in the industry.

The problem for the company is that perceptions can change very quickly. What looks like a highly profitable business can also seem mature and ready to go ex-growth, depending on the market’s mood. Indeed, overcoming a lull in profitability in 2026 and extending sales growth through to 2030 is management’s top priority.

Clearly, this is necessary as worries over margin dilution have tended to dominate recent discussions. The purchase of Avidity Biosciences (US:RNA), a San Diego-based developer of therapies targeting genetic neuromuscular diseases, has added to these, with the $12bn (£9.1bn) all-cash deal set to close in the first half of next year.

Although the company has enjoyed a long run of expanding margins going back to at least 2018, Novartis will probably see operating margins fall as phase 3 clinical programmes peak in 2026-28. While management guidance for a return to 40 per cent core margins by 2029 looks credible, investors may treat any interim weakness harshly – particularly in a market that traditionally prizes short-term profitability over long-term pipeline strength.

The key question is how the company responds to the challenge.

Plugging the gaps

Novartis’s CMD had to make its message unmistakably clear – the company will return to margin growth and it has enough in the tank to overcome the coming wave of patent-expired medicines. Indeed, management raised its 2024-29 compounded annual sales growth rate target to 6 per cent, which feeds into guidance that margins will recover by 2029, suggesting the expected dip in 2026-28 will reverse as new launches scale up.

The core of this optimism lies in a group of eight different assets whose sales Novartis expects to peak at annual levels of between $3bn and $10bn. Among these, breast cancer drug Kisqali (ribociclib), food-allergy treatment Rhapsido and prostate cancer drug Pluvicto (tetraxetan) stand out.

Kisqali is gaining a good reputation in breast cancer treatment. It gained a new US prescriptions market share of more than 50 per cent within weeks of its launch this January, making it one of the strongest immunology product launches in recent years. Pluvicto, the radioligand therapy for prostate cancer, focuses on a treatment area where Novartis currently has the lead.  

These high-growth medicines are complemented by drugs Kesimpta (ofatumumab) for multiple sclerosis, Scemblix (asciminib) for chronic myeloid leukaemia, and Fabhalta (iptacopan) for rare blood disorders. These all benefit from patent lives stretching into the 2030s, providing an unusually long runway in a sector that is often constrained by shorter patent expiry timelines.

Novartis’s pipeline also looks to have strength in depth, with the company highlighting that productivity has improved significantly. Management says it has accelerated times for late-stage trials, with some processes running 15 to 40 per cent faster than a year ago. Median peak sales estimates per project have risen by more than 50 per cent since 2022, suggesting that investment is being funnelled more effectively into higher‑quality, higher-yielding products.

Tariffs may be this year’s prominent story, but it was the pandemic that highlighted how brittle pharmaceutical supply chains could be under the wrong conditions. Like most pharmaceutical majors, Novartis is expanding its US manufacturing presence by investing $23bn over five years. Six new facilities – spanning radioligand therapy, biologics, small molecules and RNA medicine production – are planned or under construction. Building a ‘US‑to‑US’ supply chain should immunise the company against regulatory and trade flux.

Another competitive advantage for Novartis is that its commercial rollout is solid – one only needs to reference Novo Nordisk’s (DK:NOVO.B) increasingly shaky rollout of its weight-loss drugs in the US as a case study for when this goes wrong.

In short, Novartis is still managing to achieve early traction for its products at a time when generic competition and the hurdles put up by large payers make gaining quick market share much harder.

Yet despite its strengths, Novartis faces real challenges and investors must be mindful of all the risks.

Mind the gap

The first is the patent cliff. Several significant medicines will lose exclusivity between 2025 and 2030, including Entresto, Cosentyx, Jakavi and Tasigna. These products generated $17bn in annual sales last year, and even though the new launches are scaling quickly, the erosion from these legacy therapies will be substantial (see charts below).

Secondly, the highly anticipated wave of clinical readouts in 2026-27 represents heightened binary risk. Cardiovascular studies are among those with the lowest chance of success, and pelacarsen and abelacimab, which are the two crown jewels in the company’s cardiovascular pipeline, must pass the test for the medium‑term growth narrative to hold true.

Meanwhile, remibrutinib, Novartis’s oral multiple sclerosis medicine, is another asset carrying both promise and risk. The MS market is growing fast, but regulators will scrutinise its safety closely.

Both generic and conventional big pharma competition is ever present. Novartis’s niche in immune therapy faces intensifying pressure from biosimilars and newly launched biologic competition in dermatology and rheumatology. Even hard-to-treat conditions such as multiple sclerosis are witnessing a crowding market, despite the strong lead that Novartis has built up. In short, success attracts imitators.

The shares on their own merits are not cheap, but then the range of valuations in European pharma is wider than it has been for many years. Novartis currently trades at a FactSet-compiled 2026 consensus price/earnings ratio of 13.9, which is a discount to both its five-year average and its neighbour in Basel.

The company trades in line with the European big pharma average, and to avoid falling behind, the quality of Novartis’s execution and its pipeline must be substantial over the next two years.

However, the business looks more like a long‑term compounder than at any point in the past decade. The combination of durable, growing products, a deep late‑stage pipeline, improving R&D productivity and strengthening US manufacturing makes for a compelling strategic picture that is greater than the sum of its parts.

But investors must be realistic; the next two years will be volatile, driven by a dense sequence of clinical readouts and temporary margin pressure. For those willing to hold through the noise, Novartis offers exposure to some of the most exciting scientific and commercial themes in global pharmaceuticals. Sometimes, as with AstraZeneca (AZN), it pays to go with the best in class.

When equity valuations look as frothy as they do now, it becomes very difficult for investors to make decisions. Divesting entirely is the wrong choice for the long term, but you inevitably start wondering whether you should at least take some profits and reduce risk in your portfolio.

The questions don’t end there, either; if you do de-risk, where should the money go? Cash, bonds, perhaps some ‘boring’ income stocks?

There is an argument for letting a professional make those decisions for you. This is the job of wealth preservation strategies such as Capital Gearing Trust (CGT).

The primary aim of a wealth preservation trust is to protect your portfolio – although it tends to outstrip with inflation, growing its value over time beyond this is a secondary consideration. The focus on protection means the managers invest in a broad range of assets, usually a combination of equities, bonds and gold. The managers tweak the asset allocation based on their interpretation of market conditions.

Note that for this kind of investment, your time horizon and risk profile are a crucial consideration. If you have decades before you need the money, you are better off keeping it all in stocks and staying well clear of any attempt to time the market.

However, if you have a balanced portfolio, from which you may need to take income to fund your lifestyle, preserving your wealth becomes very important – particularly when the risk of a crash or correction in equity markets over the next year or so is significant.

Confident investors, of course, can choose to handpick assets for the non-equity portion of their portfolios themselves – making calls on the types of bonds they want to hold and what kind of alternatives to add. However, this is not an easy job and it requires keeping a close eye on market dynamics. Wealth preservation trusts can be a useful, more hands-off alternative.

In protective mode

“Our aim is to spend time worrying so that you don’t have to. As we write this, the list of things we are worrying about is long,” the managers of Capital Gearing said in the trust’s latest interim report, for the six months to 30 September.

They then proceeded to list their concerns, which include: the risk of a fiscal crisis in developed countries, in particular France, the US and the UK (they deem this an “entirely plausible” scenario in the near future); high equity valuations; rising macroeconomic risks, including tariffs; and the artificial intelligence investment boom, which they fear will disappoint because the technology won’t generate enough revenue to wholly justify the costs.

“We are left with a world of unappealing choices,” they continue. “US equities are very expensive and much of the relative better value of other equity markets has, through good performance, been eroded. Bonds offer, on a long-term view, good value but are very vulnerable to fiscal crises in the near term. Credit spreads are exceptionally tight and gold is at record valuations.”

As all of the above makes abundantly clear, this is not a trust for people who are feeling optimistic about financial markets. UK investors can choose between three wealth preservation trusts: Capital Gearing, Personal Assets (PNL) and Ruffer Investment Company (RICA). None of them is particularly bullish at the moment, but Capital Gearing is the most defensively positioned.

In asset allocation terms, this translates to a split of 26 per cent equities, 42 per cent index-linked bonds, 19 per cent other government bonds, 9 per cent corporate credit, 3 per cent cash and 1 per cent gold. The chart below gives you an idea of how this approach compares with its peers’.

There is some additional nuance. Unlike Ruffer (39 per cent) and Personal Assets (11 per cent), Capital Gearing does not explicitly disclose how much of its bond allocation is in short-term instruments, which are generally lower risk – almost cash-like.

But in the interim report, the managers say: “Where we take interest rate risk, it is via inflation-linked bonds. We have a high weighting to cash-like assets within our managed liquidity reserve, which offer reasonable returns. We judge the opportunity cost of not being invested in the market to be very low.”

Capital Gearing’s defensive positioning has historically meant low volatility but also low returns, which investors should be very clear about before investing. As the chart below shows, its two peers have performed better in the past five years – although Ruffer has been much more volatile than an investor focused on wealth preservation might like.

It is also worth noting that Ruffer’s gold allocation includes exposure to gold mining stocks rather than just bullion, and that, unlike the other two, Ruffer also has some exposure to derivatives. This does mean it offers even more diversification, but it is also more expensive, with an ongoing charge of 1.07 per cent, against 0.56 per cent for Capital Gearing and 0.67 per cent for Personal Assets – meaning it needs to do better than the other two in order to achieve the same performance.

What’s in the portfolio?

Capital Gearing’s biggest exposure is to index-linked bonds, a lot of which are in the UK. “Our UK inflation-linked bonds profited from strong inflation accruals that were partly offset by a steepening yield curve,” the managers say.

Improved yields prompted “the largest portfolio change” in the six months to 30 September, with the allocation to UK index-linked gilts rising from 5 per cent to 20 per cent of the portfolio. The rest is in US index-linked bonds, while most of the non-indexed bond allocation is in Japan.

Investment trust fans might want to check that the overlap with the rest of their equity portfolio isn’t too pronounced. The table below lists the trust’s biggest equity holdings as of 30 September.

North Atlantic Smaller Companies (NAS) invests in quoted and unquoted smaller companies, mostly in the US and in the UK. Its share price performance has been poor this year and the trust is trading at a hefty discount to net asset value – 34.6 per cent as of 20 November.

Capital Gearing has a decent exposure to ‘core’ infrastructure trusts, which should be offering low-risk income. But it remains to be seen what will happen to HICL Infrastructure (HICL) following the announcement that it plans to merge with The Renewables Infrastructure Group (TRIG) – Capital Gearing opposes the move.

Overall, Capital Gearing is a trust with a solid record of doing what it says on the tin, namely protecting its shareholders’ money and staying ahead of inflation in the long term. If you are concerned about the current state of financial markets and want someone else to take care of your defensive allocation, it could be a worthy addition to your portfolio.