HL SELECT UK GROWTH SHARES

HL Select UK Growth Shares - October 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

8 November 2017

The stock market enjoyed a robust performance during October. A total return of almost 2% was driven by strength across the board, especially within the energy (where the fund has zero exposure) and information technology sectors, which both gained over 5%. The only sectors to fall in value by any meaningful degree were healthcare and utilities, both losing a little over 2%*.

The month marked the 30th anniversary of the Crash of 1987, an event that saw billions wiped off stock markets around the world. Thankfully there was no repeat. Economic news was broadly as expected, whilst politics continued to be dominated by Brexit at home and President Trump’s “unique style of governance” across the pond. Little changed, despite many headlines.

The energy sector recovery was driven by signs of much improved cash flows as efforts to mitigate the lower oil prices of recent years bear fruit. Mining shares rallied in sympathy. GlaxoSmithKline made the largest negative contribution to the market after a poorly received set of quarterly earnings. The bank sector achieved the feat of providing both a leading positive contributor in the shape of HSBC, and a leading loser in Barclays, where Q3 figures were greeted with dismay. We do not own any of these stocks within the fund.

Below we highlight the biggest positive and negative contributors to the HL Select UK Growth Shares fund performance in October. However this is over a very short period and past performance is not a guide to future returns.

Biggest Positive Contributors

Winners	Total return (%)	Contribution to fund (%)
Burford	20.1	0.9
GB Group	18.9	0.8
Just Eat	16.7	0.7
Medica	13.6	0.3
Intertek	8.9	0.3

Past performance is not a guide to the future. Source: *Bloomberg 01/10/2017 – 31/10/2017

Burford topped the leaders, with a rise of 20.1%, which contributed 0.9% to the value of the fund. Burford was the biggest loser the previous month, when it fell by 11%. In neither month was there any significant news from the company. We remain very confident in the prospects for Burford.

GB Group put out an encouraging trading update, including the news of an unusually large, one-off order. Even putting that to one side, the group appears to be growing at solid double digit rates as the need for GB’s ID verification services in the online world becomes ever more critical. The rise contributed 0.8% to the fund’s value.

Just Eat rose by 16.7% ahead of their Q3 trading statement, which when delivered in early November indeed proved worthy of the anticipation. Provisional clearance for their Hungry House acquisition was another positive for the stock, which made a 0.7% contribution to the fund’s value.

Medica's rally more than made up for weakness in the previous month and contributed 0.3% to the fund’s value.

Intertek has been one of the biggest winners for the fund since launch and it added a further 8.9% in value, boosting the size of the fund by 0.3%.

Biggest negative contributors

Losers	Total return (%)	Contribution to fund (%)
Auto Trader	-12.7	-0.5
Merlin Entertainments	-15.0	-0.4
BCA Marketplace	-5.1	-0.2
Close Brothers	-3.2	-0.1
WPP	-2.1	-0.1

Past performance is not a guide to the future. Source: *Bloomberg 01/10/2017 – 31/10/2017

Weakness in Auto Trader and BCA Marketplace can be attributed to concerns over the state of the automotive sector. Rapid growth in PCP finance plans in recent years suggests a large volume of used cars will come to market in the next few years. With real incomes under pressure, the used car market could see tougher trading.

One thing is certain, those cars will need to be sold. Both BCA and Auto Trader earn most of their money in fees and commissions from the selling or listing of the vehicles passing across their premises, real or online. More vehicles being sold ought to be good for them.

BCA’s webuyanycar subsidiary does take ownership, but only for a few days, limiting the scope for a hit on residual value. Loans made to dealers are secured on the cars and as the leading auctioneer, BCA can convert problem loans back to cash pretty swiftly. So we remain happy with these positions, but recognise that during October, they deducted a combined 0.7% from the fund’s value.

The drop in Merlin was triggered by a worse than expected trading update. Legoland performed well, but theme parks and Midway attractions like Sea Life Centres and Madame Tussauds had a poor summer. Weather and terrorism took the blame, both out of Merlin’s control, but impacting nonetheless. The stock knocked 0.4% off the fund’s value in October.

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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.