HL SELECT UK INCOME SHARES

HL Select UK Income Shares - September 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.

Charlie Huggins (CFA) - Fund Manager

16 October 2017

The stock market made little movement over the course of September, with the All Share index falling by about 0.4%. Amongst the major sectors, Oil and Gas producers rallied by 6.5%, whilst Mining Companies declined by 6.7%. Technology was in favour, advancing around 5% and the General Retailing sector saw its best monthly performance for some time, rising almost 8%, principally due to a sharp rally in the shares of Next plc.

Mobile Telephony was out of favour, falling almost 6% and many Utility shares were friendless, perhaps reflecting threats to re-nationalise and to cap energy prices made during the party conference season. But with none of the Banks, Pharmaceuticals, or Tobacco sectors featuring in the list of major movers, there was little to move the overall level of the market along much in either direction.*

Below we highlight the biggest positive and negative contributors to fund performance in September. 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 (%)
BCA Marketplace	19.3	0.8
Domino’s Pizza	14.7	0.5
AstraZeneca	9.1	0.3
Lloyds Banking Group	6.1	0.3
Fidessa Group	7.1	0.2

Past performance is not a guide to the future. Source: *Bloomberg 01/09/2017 – 30/09/2017

BCA Marketplace enjoyed a strong month, rising by 19.3% after providing a positive trading update and announcing an early move to a premium listing on the LSE and with it, to join the FTSE index series. BCA’s dominance of the car auction sector is an incredibly strong asset to own in our opinion and their ability to offer additional value to car importers, distributors and retailers looks promising.

Domino’s Pizza saw a useful recovery over the course of the month, in the run up to a Q3 trading update on October 10th. That proved to be very positive, with a strong recovery in like for like sales in the UK (+8.1%) and excellent growth overseas, leading to total sales growth across the Domino’s system of 20.8%. The shares rose by 14.7% over the month and have rallied further in October on the back of the Q3 trading update.

AstraZeneca enjoyed a strong month rising 9% and the shares have now recovered all of the ground they lost following the disappointing MYSTIC clinical trial result, which saw the potential value of their Imfinzi drug take a hit. Other subsequent product trials have been more positive, with the US regulator granting Breakthrough Treatment Designations to some of the company’s new products, which should accelerate their commercial adoption. We have taken advantage of the rally to further trim the position, reflecting the increased valuation, despite Imfinzi’s lowered prospects.

Sentiment towards Lloyds Banking Group improved as investors started to anticipate a rise in UK interest rates. As interest rates rise, the difference between what banks can charge borrowers and what they pay for funding widens, leading to higher profits. In recent weeks analysts have been increasing their earnings expectations which leaves the group trading on a forward P/E of less than 9x for the current year, and offering a yield of 5.7% (variable and not guaranteed).

Fidessa shares also recovered from a weak August. We suspect weakness prior to September has been driven by concerns over the implementation of MiFID II, a new set of regulations governing the investment industry due to come into force at the start of 2018. As Fidessa’s customers ready themselves for the new regulations, other projects have taken a back seat, and Fidessa has struggled to generate growth. In the long run, however, new regulations like MiFID II tend to create demand for Fidessa’s software solutions, as customers seek to demonstrate compliance with the regulations.

Biggest negative contributors

Company	Total return (%)	Contribution to fund (%)
Greene King	-20.4	-0.6
Ascential	-8.6	-0.4
Reckitt Benckiser	-7.1	-0.3
Diageo	-5.4	-0.2
National Grid	-5.1	-0.2

Past performance is not a guide to the future. Source: *Bloomberg 01/09/2017 – 30/09/2017

Greene King had a horrid month, dropping 20.7% after announcing worsening trading conditions with its AGM statement. British consumers are pulling their horns in, leading to weaker like for like sales at some of Greene King’s pub brands. Analysts have trimmed their forecasts for the company’s earnings by around 7% and the stock is now trading on a very low earnings multiple. Dividends remain well covered by earnings and the yield is currently in excess of 6%.

Ascential delivered no specific news, but their Cannes Lions festival serves the creative sector, which itself is under pressure to reduce costs and this could lead to lower attendances in future. That said, there are other levers that Ascential can pull to drive revenues at Cannes, such as raising prices for premium passes and targeting sponsorship revenues. Besides, Ascential is far from a one trick pony, with numerous other market-leading events and services within its portfolio.

There was some fairly widespread weakness in the prices of consumer goods companies during September, with Diageo and Reckitt Benckiser (RB) lagging the market by a few percent. Growth in the number of units sold is typically quite muted, with most revenue growth coming from price increases. Earnings growth is underpinned by the cost cutting underway at Diageo in particular, whilst RB has the prospect of restructuring gains to come from its ownership of Mead Johnson, assuming that integration there goes to plan.

National Grid suffered along with other utilities from a party conference season that saw one side pledging to renationalise utilities and another threatening to cap prices. Whether any actions that directly impact National Grid will actually occur is a moot point; historically, utilities have been political whipping horses a lot more often than they have actually been whipped.

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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.