HL SELECT UK GROWTH SHARES

New holdings announced, results season kicks off

Fund changes

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

30 January 2017

Today we're revealing a couple of new holdings, each a smaller company where position building has taken some time. We've put descriptions onto the Portfolio Breakdown page. Previously, these holdings were in the ”Other” category at the bottom. That now has just two stocks left in it, one where we are half-way to where we want to be, but waiting for the price to come back after an early spurt took it out of buying territory, and another which is still in the early stages of position building.

Pushing further into e-commerce

Our first new name is GB Group, an AIM-listed business that is a key part of global e-commerce, because it provides software and database services that allow companies to verify the ID of their customers. In a store, a stack of notes is all that's needed for the seller to accept that the transaction works for them. But if goods ordered online are shipped and it later transpires that the buyer's ID was faked or their card details were bogus, then the costs to the merchant can be painful.

E-commerce keeps gaining share, compared to traditional retail and that augurs well for demand for GB's services. We've taken a 2.4% position in GB Group, at the time of writing. With other portfolio names like Just Eat, Auto Trader, Rightmove and Domino's Pizza also being big e-commerce plays, we're taking a very positive view of the continuing digital shift in the economy.

Dull is good

Our next new holding is Sanne Group. As far as businesses go, we like dull, as long as it is growing, and there is not a lot duller than the world of fund administration. Sanne Group's customers are fund managers, especially in the world of alternative investments, private equity, real estate and hedge funds. Sanne Group don't run the funds, they just provide all the administrative processes, like dividend processing and fund accounting that make it all work. In a world starved of yield, these asset classes are in demand and Sanne has grown like topsy. There are of course no guarantees this performance will continue.

A big deal to acquire a business in Mauritius (a company visit seems in order…) has seen the price push sharply forward and we have decided to hold our position steady, circa 2.15% as I write, whilst we see how that beds in. (Please remember, the Breakdown we show on the website is a week or so old). Longer term, the industry is consolidating and Sanne are determined to be part of the process, which could see some interesting possibilities emerge in the years ahead.

Portfolio news

Elsewhere, we saw the results season get underway in earnest at the end of last week. So far it's mainly been a tale of two consumer goods producers. Unilever produced a minor disappointment, revealing slightly tougher than expected trading, particularly in their developed markets in the final quarter of 2016. Diageo however beat expectations, with stronger underlying growth than the market had predicted. As far as price moves go, Diageo went up by about as much as Unilever went down at the time of releasing their figures, so very much a storm in a teacup as far as the portfolio impact went.

We don't really pay too much attention to quarterly or half year numbers from these sorts of companies. Both Unilever and Diageo are global behemoths, whose core strength is the ability to charge premium prices for strong brands, which generates lots of cash, a fair proportion of which gets reinvested back into marketing the brands to drive future volumes and pricing. That has led to both having track records of dividend growth and positive total returns that stretch back decades.

So we added a bit more money to the Unilever position after the shares dipped, because our long term view of the company is still very positive. For Diageo, we're just running with what we've got, because the stock is already some 14% or so ahead of the 1960p price we paid on Dec 1st. Please note past performance is not a guide to future returns.

Sage Group also gave a trading update, for the three months to end Dec. Most of the business looks to be growing nicely, but the States, where they are considering a sale of their payments business is a bit subdued. They're also seeing a sharp decline (10%) in some of their legacy product revenues as they try to migrate customers onto newer, recurring subscription models.

For us, the important thing is that organic, recurring revenue grew by 9.6%, overall organic revenues rose by 5.1% and Sage are confident of delivering a 27% margin for the year to September. In the long run, having a large base of high-margin recurring revenues is an extraordinarily strong position to be in, especially when married to Sage's historic cash generation track record. We are happy to run our position in Sage.

View the portfolio breakdown

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