HL Select UK Growth Shares - January Review

Steve Clayton - Fund Manager

5 February 2018

The UK stock market gave up some of the ground it had won in December, with a total return of minus 1.9% in January. For us, two market themes stuck out as the month went on.

The first is the poor performance of the UK outsourcing sector, following the collapse of Carillion and an ugly profit warning from Capita at the end of the month.

We do not own any construction or public sector out-sourcing companies in the portfolios. These companies tend to exhibit low profit margins, since there is little to differentiate one firm from another, the accounting is complex and cash flows are volatile. This is not a combination we favour.

The other theme which continues to dominate is digital disruption. Many traditional retailers, including M&S, Debenhams and Card Factory, endured Christmas trading that was patchy at best, as consumers continue to click away from the comfort of the sofa, instead of venturing out into the wintery cold of the High Street.

E-commerce continues to gain market share and there seems little reason to expect this trend to reverse when the sun does finally emerge. We are seeking to position ourselves on the right side of these shifting sands and do not own any traditional retailers within the funds.

Despite dodging these bullets, January was a relatively difficult month for the fund, which declined by 3.2%. The Consumer Staples sector, where we are strongly represented, had a weak month as bond yields rose. While Materials, where we are absent, was again the strongest-performing sector.

In terms of stocks, Medica and Burberry were notably weak. We discuss these along with the other major contributors to performance below.

However this is over a very short period and past performance is not a guide to future returns.

Biggest positive contributors

Past performance is not a guide to the future. Source: Bloomberg 01/01/2018 – 31/01/2018

Burford Capital, our largest holding, was again our strongest performer. The litigation finance provider raised $180m of funding during the month through a bond issue, which was very positively received by investors.

This additional funding should give Burford plenty of firepower to capitalise on the explosive growth in this market. They also reported strongly rising commitments to new litigation funding, over the course of 2017. If Burford continue their past track record of earning high returns from the cases they fund, this bodes well for future earnings. As always though, the predictability of when cases settle or fail remains opaque.

Ideagen, a recent addition to the portfolio covered in last week’s blog, gained 22% during the month on the back of very strong half-year results. With most parts of the business firing on all cylinders and plenty of opportunity to acquire, we remain confident in the group’s prospects.

Close Brothers rose after saying that it has seen a strong start to the financial year, with all parts of the business performing well. Meanwhile, Just Eat had another good month. Full year results are out on 6 March so we will have to wait until then to see whether this optimism is justified. If Bristol is anything to go by, the trend towards ordering takeaway food online shows little sign of stopping.

Biggest negative contributors

Past performance is not a guide to the future. Source: Bloomberg 01/01/2018 – 31/01/2018

Medica, one of our smallest positions, was the biggest disappointment for the fund this month. A trading update on 16 January said that full year performance is expected to be slightly behind market expectations, leading to a sharp sell-off in the share price.

As we have stated in previous blogs, the growth opportunity for Medica is very large due to the growing number of scans performed, combined with a structural shortage of radiologists to interpret them. Medica mis-judged the pattern of demand in Q4 and delivered a weaker than expected end to the year.

However, the growth drivers in the industry remain very much in place, and the business is still growing at a double-digit rate. Radiologists are in short supply and Medica’s teleradiology allows their skills to be used more efficiently. The group’s recruitment efforts leaves it well placed to capitalise on the rising demand and we remain positive on the stock.

Burberry’s third quarter results were also met with disappointment by investors as sales growth slowed down a little. For us the investment case at Burberry is more about the transformation plans that new CEO Marco Gobbetti is pushing forward.

They are designed to push the brand into the upper echelons of the luxury sector, where margins are highest and returns more reliable. Progress on this front is said to be strong, but with returns unlikely to be visible for some time, patience is required.

We put weakness in Relx and Diageo down to a weaker dollar, with both companies generating a significant proportion of their sales in the USA. The latter released a very solid set of interim results during the month and raised its dividend by 5%.

There was no news from Sanne or BCA. Both are relatively illiquid meaning their shares can move around more than might otherwise be expected. We focus on business results not share prices, with the former the biggest driver of the latter in the longer term.

View portfolio breakdown

More about HL Select UK Growth Shares

Read more blog articles