HL SELECT UK GROWTH SHARES

HL Select UK Growth Shares: July 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

9 August 2017

July was a relatively quiet month in the stock market, with little movement in the broader market, which rose just over 0.6%. Being absent from commodity sectors was a headwind, for these areas did well, but the fund’s lack of pharmaceutical stocks proved beneficial as did its holdings of consumer-facing businesses and its stock selections within the financial sector.

Below we highlight the biggest positive and negative contributors to fund performance in July. However this is over a very short period and past performance is not a guide to future returns.

Biggest positive contributors

Positive Performers, adding 0.2% or more to the fund’s value:

Company	Total return (%)	Contribution to fund (%)
Burford Capital	20.6%	0.9%
Ascential plc	10.9%	0.4%
Sanne Group	8.3%	0.4%
Diageo plc	7.9%	0.3%
GB Group	6.8%	0.3%
Unilever	4.0%	0.2%
Burberry Group	4.8%	0.2%

Past performance is not a guide to the future. Source: Bloomberg 01/07/2017 – 31/07/2017.

As we mentioned in last week’s blog, Burford had strong results and the stock has made robust gains, which have been further boosted in the first few days of August, not least by media reports suggesting that Argentina may be close to conceding defeat in the group’s Petersen case, far and away the largest investment in the group’s portfolio.

The other risers all benefited from positive trading news during the period, though we confess to being mystified as to why GB Group reacted so positively to what was simply a report that trading is in line with management expectations. We suspect the move was more to do with having been weak the month before.

Biggest negative contributors

Negative Performers, subtracting 0.2% or more from the fund’s value:

Company	Total return (%)	Contribution to fund (%)
British American Tobacco	-9.9%	-0.4%
Domino’s Pizza	-9.4%	-0.4%
Medica Group	-7.7%	-0.2%
Reckitt Benckiser	-5.3%	-0.2%
Just Eat plc	-5.3%	-0.2%

Past performance is not a guide to the future. Source: Bloomberg 01/07/2017 – 31/07/2017.

Domino’s Pizza fell after reporting robust trading, but with some signs of margin pressure ahead, not least the need to bolster the group’s marketing budget. With the group continuing to gain market share and plenty of growth options at home and abroad, we are sticking with the holding.

Just Eat saw profit taking after excellent results, but again, the group talked of a need to up its investment into supporting growth which is limiting near term margin expansion. There should still be plenty of that ahead though, as overseas operations gain scale and swing from start-up losses to mature profitability.

Tobacco stocks were hit just before month end by news that US regulators (the FDA) are seeking further powers over the industry, albeit with no timetable for their actions. The FDA are creating more room for next generation tobacco products (NGPs), like e-cigarettes and heat-not-burn devices to receive regulatory approval, presumably in the hope that smokers will switch to these potentially less harmful products.

At the same time, the FDA seeks to regulate nicotine levels in traditional cigarettes and wishes to consider the impact of flavours added to some NGPs. Cigarette nicotine reduction was enforced in Europe many years ago, with little visible impact. The industry professes itself well prepared for a shifting US regulatory environment.

Medica retreated on no discernible news, with very little trading activity visible in the stock.

Outlook: uncertainty stresses our focus on financial strength

Overall, July was a busy month for company results and August should see the interim results season pretty much draw to a close. The outlook for the market remains wrapped up in the broader macro environment and much as one might wish to draw a line under it, Brexit will continue to be a major influence upon investor sentiment.

President Trump influences sentiment daily, via his Twitter account, whilst North Korea is predictably unpredictable. With such a challenging macro environment, companies need every bit of their resilience to keep moving forward.

The markets will likely continue to draw support from the high levels of Mergers and Acquisitions activity. The cost of debt remains at very low levels, leaving many companies to conclude that the cheapest investments they can make are via the merger and acquisition (M&A) route, or even in buying back their own shares.

This all makes for a rather unpredictable investment environment; our focus remains on seeking financially strong businesses with growth drivers that are largely independent of the wider economy.

Please note: a connected party of the author holds shares in Burberry.

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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.