HL SELECT UK GROWTH SHARES

Our Formula for Growth

Managers' thoughts

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

4 September 2017

Our Formula for Growth

A portfolio that could deliver long term performance, whichever way the world went.

That was top of the list when we planned the launch of the HL Select UK Growth Shares Fund. Eight months or so on, we’re more convinced than ever that this is the right way to be.

At home, we have the ongoing saga of Brexit and now a minority government to boot. Abroad, well President Trump is keeping the journalists very busy, whilst crises rage or threaten from the eastern Mediterranean to the Korean Peninsula. These are uncertain times, and we haven’t even mentioned the economy. But to us, it doesn’t matter.

We are purely focused on long term growth. We have chosen a portfolio of companies that, we believe, are in charge of their own destiny. With products and services that their customers will continue to pay up for, giving them fat profit margins, strong cash flows and the ability to re-invest back into the business and fuel their own growth. Regardless of where the economic winds are blowing.

In practice this has led us to a portfolio of stocks that fall into three distinct baskets.

1. Global Champions

Some of our investments are global giants that dominate their markets. Unilever, Diageo and Reckitt Benckiser are amongst the world’s leading consumer goods names, whose brands command premium prices year after year.

Other in this space include Intertek, one of a few major global players in Assurance, Testing, Inspection and Certification. Or Compass Group, whose sheer scale in the catering markets allows it to source food at prices that leave plenty of profit on the table, after the diners have left.

These and others are companies at the top of their game with strong track records of generating cash and earning profits through thick and thin.

2. Technology Innovators

Companies inventing completely new technologies can be wildly successful investments, but many fall by the wayside. Businesses that adopt newly developed technology early and push it deep into their own industry to drive competitive advantage can be just as successful, and with lower risk.

We’ve invested in stocks like Just Eat, who certainly did not invent either the internet or takeaway food, but have used technology to change the way consumers get their dinner, earning vast profit margins in the process. Rightmove and Auto Trader have both exploited the internet to dominate their territory, whilst Medica have used digital technology to transform the way that Radiology services are delivered.

All these companies generate strong profits and cash flows that they can reinvest into widening and deepening their competitive moats.

3. Special Situations

Each of our investments has its own unique story to tell. Not all fit neatly into the two baskets above. These stocks are our special situations, not recovery plays or restructuring stories as we are looking for businesses that can grow reliably, rather than just pick themselves up off the floor.

Our Special Situations include Sanne Group, which provides administration services to specialist investors, like private equity portfolios or hedge funds. Their clients almost always engage them for the life of the fund, so most of the group’s revenues repeat and new business wins tend to grow the business, rather than replace older work that just left via the back door.

GB Group verifies identities, enabling e-commerce businesses to know who they are dealing with. Demand there has been growing like Topsy and GB Group look to be in a strong position. Customers tend to embed GB’s technology into their own work processes, again creating a strong tendency for revenues to repeat.

View the portfolio breakdown

The highs and lows

In any fund, there will be some names that do better than others, the key is what it all adds up to over the long run. So far, we are very pleased with how our strategy is developing, with only a handful of holdings not delivering since launch.

So far our greatest success, Burford Capital, manages to be both a Special Situation and a Global Champion, for although it isn’t the biggest company in the world, it is still the clear global leader in the fast-growing field of Litigation Finance. Burford delivered over 150% growth in recent interim results, shares are currently just under 160% above our original purchase levels and we continued to add to our holding. Please remember past performance is not a guide to the future.

At the other end of the scale Domino’s Pizza, makes both great food and unhappy shareholders at the moment. Profits have ticked along nicely enough, with double digit sales growth and 10% earnings per share growth. But same store sales are struggling, the market is spooked and the shares are down almost a quarter since our initial purchase. We think the company is feeling the impact of rival takeaway and delivery offers, but pizza is not going out of fashion any time soon and we regard the current slowdown as temporary, so have continued adding to the holding at these lower prices.

Eight more stocks delivered total returns of 30% or more, with GB Group, our specialist in online identity verification, rising 48%. Our largest holding, Unilever, attracted bid interest from a consortium backed by Warren Buffett. That was quickly “rebuffetted” and the company went on to outline its own plans to fast-forward financial performance, helping the stock to deliver a 46% return to the fund.

Four other shares are down since launch. Auto Trader has fallen just under 9% amidst worries about a potential decline in used car transactions, despite reporting positive results. Similarly, in spite of strong new business performance in the first half of 2017 WPP is down 15% in light of concerns over a challenging near term outlook for the media world. Medica, the leading provider of Teleradiology services to hospitals and our newest holding, is down 2.6%. While Fidessa is trading around 2% lower than our original purchase price. In each of these cases, we are positive on their prospects, and have added to our holdings.

It's your money you deserve to know what we do with it

Each of our stocks has its story and unlike most funds, HL Select UK Growth Shares will tell you that story; you can find a rationale for every holding on the Fund Breakdown page, which shows you exactly where your money would be invested by the fund and why we have chosen the investments.

We’ll also keep investors regularly updated about the portfolio: News, results, changes to holdings, our view on the market. If we feel it’s important to our investors, we will let them know through our regular fund blogs.

You will also see that the fund holds only around 30 stocks, with each holding capable of making a difference, although this does increase risk. We don’t look at the index when we select our holdings, we just choose the best companies we can find and back them.

More about HL Select UK Growth Shares

Important - This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research

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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.