HL SELECT UK GROWTH SHARES

HL Select UK Growth Shares - February Review

Monthly roundup

Important information - The value of this fund can still fall so you could get back less than you invested, especially over the short term. The information shown is not personal advice and the information about individual companies represents our view as managers of the fund. It is not a personal recommendation to invest in a particular company. If you are at all unsure of the suitability of an investment for your circumstances please contact us for personal advice. The HL Select Funds are managed by our sister company HL Fund Managers Ltd.

Steve Clayton - Fund Manager

19 March 2018

February was a weak month for most major stock markets around the world and the UK was no exception. A sell-off that began in mid-January continued into the early part of the month, before markets steadied a little. The total return from the FTSE All Share index during the month was -3.3%.

The weakness was led by utilities and consumer-related sectors while strength was seen in a range of cyclical sectors ranging from Industrial Metals to Technology Hardware.

Sterling has recovered some ground in recent months and just as its post-Referendum fall led to a boost to the earnings of many companies with profits earned in dollars or euros, so the opposite is now occurring.

We have seen several companies announce currency related downgrades with their results and these are often being taken badly by the market. Given the value of sterling is hardly covered by the Official Secrets Act, such moves should not be a surprise, but in a nervy market even stating the obvious can go down badly.

Markets have also had to contend with threats of trade wars, after President Trump announced swinging tariffs on Steel and Aluminium imports, in an international row that has continued into March and quite probably beyond. Brexit continues to make more headlines than progress, with the eventual consequences unlikely to be fully visible before the next decade.

Fund performance

Meanwhile, with all this going on in the background, the HL Select UK Growth Shares fund proved relatively resilient, losing 1.8% of its value compared to the 3.3% decline in the market. Below, we look at which holdings contributed to this return. However, this is over a very short period and past performance is not a guide to future returns.

Biggest positive contributors

	Contribution to fund (%)	Total return (%)
Fidessa	1.9	59.2
Ascential	0.5	12.1
Just Eat	0.4	7.6

Past performance is not a guide to the future. Source: Bloomberg 01/02/2018 – 28/02/2018

The key driver of the relative performance was Fidessa, which received a takeover offer at a substantial premium to its market price. We have discussed this in a previous blog and with no competing bidders having emerged, it seems likely that the takeover will complete as originally proposed.

Ascential produced what we felt were excellent results and the stock bucked the market’s trend accordingly. The group are moving to further increase their focus and have announced a Strategic Review of their Exhibitions business as they look to further focus upon providing information services to the digital economy.

Just Eat enjoyed a strong month, but has seen this reverse in March following an announcement of excellent results, offset by a decision to invest in providing delivery services on behalf of branded restaurant groups such as KFC and Burger King.

Biggest negative contributors

	Contribution to fund (%)	Total return (%)
Burford Capital	-0.8	-15.0
Sanne Group	-0.6	-13.0
Reckitt Benckiser	-0.5	-15.1
BCA Marketplace	-0.5	-12.1

Past performance is not a guide to the future. Source: Bloomberg 01/02/2018 – 28/02/2018

On the negative side we saw weakness in the price of Burford, unaccompanied by newsflow. By the time this article is published, Burford, which is the fund’s largest equity holding will have reported full year results, which we shall cover in a future blog.

Sanne Group saw a sharp drop, apparently in response to a persistent seller in the market. That seller appears to have withdrawn and the stock has already recovered much of the ground lost in February.

Reckitt Benckiser also suffered currency issues, allied to a drab period for volume growth across much of the business. Encouragingly, RB reported a solid start by newly acquired Mead Johnson Nutrition and raised the full year dividend by 7%, but this was not enough to support the stock.

Company results

Merlin and Compass also released results recently. Merlin’s update was well received on the day and showed some welcome stabilisation at its important Midway division, which includes brands like Sea Life Centres, Madame Tussauds and the Dungeons. This was accompanied by a very strong LEGOLAND performance. Interestingly, ValueAct, a well-known activist investor, revealed a stake in the company during the month. As a highly international business, Merlin will face currency headwinds in 2018 given recent sterling strength.

We felt Compass Group’s latest trading update showed excellent progress, with organic growth of over 5% but a similar currency impact. We still expect Compass to lift the dividend when it reports interim results later in the spring.

Annual percentage growth
	Feb 2013 - Feb 2014	Feb 2014 - Feb 2015	Feb 2015 - Feb 2016	Feb 2016 - Feb 2017	Feb 2017 - Feb 2018
HL Select UK Growth Shares	N/A*	N/A*	N/A*	N/A*	7.73%
FTSE All-Share TR	13.29%	5.56%	-7.32%	22.81%	4.40%

Past performance is not a guide to the future. Source: Lipper IM to 28/02/2018

*Full year performance data not available

View portfolio breakdown

More about HL Select UK Growth Shares

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for more information. Unless otherwise stated performance figures are from Bloomberg and estimates, including prospective yields, are a consensus of analyst forecasts from Bloomberg. They are not a reliable indicator of future performance. Yields are variable and not guaranteed.