HL Select UK Shares: April Review

Charlie Huggins (CFA) - Fund Manager

12 May 2017

April had been a fairly uneventful month for the UK stock market, until the Prime Minister’s decision to call an election stirred things up. The pound increased in value on the news, given a larger parliamentary majority for the Conservative government is now seen as more likely.

Since the Brexit vote sterling has been very weak. This has benefitted companies earning the majority of their profits overseas, and caused many UK domestic stocks to lag behind. Sterling’s April bounce has seen this trend reverse slightly with the FTSE 100 index, which is dominated by overseas earners, ending the month around 1% lower, while the more domestically-focused FTSE 250 rose by 3.5%.

Below we highlight the biggest positive and negative contributors to fund performance in April. Remember, this is over a very short period and past performance is not a guide to future returns. As ever, we remain focused on company results, rather than trying to predict currency moves, political outcomes or economic developments.

Biggest positive contributors

Past performance is not a guide to future returns. 31/03/17 - 28/04/17. Correct as at 03/05/2017.

Our best performer in April was our smallest company, GB Group. The company announced that full year pre-tax profits are expected to rise by 27%, comfortably ahead of market expectations.

GB’s software solutions allow businesses to verify their customers’ identities remotely, without the physical presentation of documentation. In a world where e-commerce is expanding fast, the ability to provide verification that a customer is bona fide is a vital enabler. Other factors driving GB’s growth include the switch from manual to electronic ID checks, and the growth in online fraud and identity theft. We can’t see these tailwinds going away any time soon.

There was no news from Ascential during the month, but it benefitted from some broker upgrades. Over the last few years the group has been selling off its smaller assets, which are heavily exposed to print and advertising, and has been acquiring faster-growing businesses. Once these asset sales are completed the group should be left with a collection of unique, world-leading events and services with excellent long-term growth prospects.

The minor rotation from international to domestic earners led to useful gains in Close Brothers and BCA Marketplace. The latter had been a pedestrian performer until very recently and we have been regularly adding to our position. After the month-end the company released a short trading update saying that it is trading at the upper end of market expectations. The group also confirmed that it will be seeking a premium listing on the London Stock Exchange which should hopefully bring it onto the radar screens of more investors.

We are encouraged to see a bounce-back in Domino’s shares following last’s months poorly received results where the company revealed a slowdown in like-for-like (LFL) sales. As we have said before, we are much more concerned by the strength of the business model than one set of quarterly numbers (the poorly-received LFL sales figure covered just 9 weeks!). We believe the strength of the Domino’s brand and the UK’s growing appetite for takeaway pizza remain firmly intact and have added significantly to our position since the trading update.

Biggest negative contributors

Past performance is not a guide to future returns. 31/03/2017 - 28/04/2017. Correct as at 03/05/2017.

Our weakest performer this month was Burberry after the company revealed slightly weaker than expected like-for-like sales in the fourth quarter, with the USA and Hong Kong proving tough markets. The group clearly has work to do to improve the perception of the brand in the US, and this is likely to hold back growth in the near term. In the long run, we still expect Burberry to do well, given the strength of its brand and digital leadership.

WPP continued to suffer from a downbeat advertising growth outlook, although it is important to note that financial performance by the group has so far remained robust, and we felt the recent 25%+ dividend increase for 2017 said more about their confidence in the future than anything else has done of late. Dividends are not guaranteed or a guide to future income.

Fidessa issued a somewhat downbeat outlook, suggesting that customers were delaying decisions ahead of political uncertainties surrounding the UK, Europe and the US. We are meeting the company very shortly and will report in a future blog.

The decline in Sanne looks like profit-taking following a very strong run, while the slight fall in British American Tobacco shares came despite a confident AGM statement, with the group saying it expects good underlying growth for the year.

Summary:

Political developments can have a big impact on stock markets in the short term, but in the long run they don’t really matter; and we don’t spend time worrying about them. In the longer term, what matters is the ability of companies to grow profits. On the whole, our companies have continued to make encouraging progress in that regard. If we see unusual price moves as a result of political manoeuvres we will try to take advantage of them accordingly.

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Please note the author or his connected parties own shares in Ascential, Sanne and British American Tobacco.