Portfolio breakdown

Originally established as an offline business providing mortgage listings in 1993, Moneysupermarket is now one of the UK’s largest providers of online price comparison services across: insurance, credit cards, loans, broadband, energy and mobile phones. It has also moved into the cashback market following its acquisition of Quidco. In addition to the Moneysupermarket.com website, it also operates the well-known MoneySavingExpert.com and TravelSupermarket.com.

Price comparison is a competitive market, but it has proven resilient to new entrants, with the last of the big four players launching over 15 years ago. Since this time, it has survived the entry of Google (now exited), and (in its Money vertical channel, where it offers comparisons between credit cards, loans and savings products) Credit Karma and ClearScore. Why? Scale and brand recognition allows it to spend large sums on marketing, driving traffic to its websites which is attractive to suppliers who use them to acquire customers cheaply. This creates a two-sided network effect. Its technology stack is also difficult to replicate given the number of suppliers it now links to.

Combined with its capital light business model, this means it has generated high returns on capital which we forecast will continue. Its platform structure means there is little reinvestment needed to carry on growing, so cash is returned to shareholders via an ordinary dividend. When circumstances permit, further excess capital comes back through special dividends or buybacks, and we believe it will reintroduce these once switching resumes in the energy market.

Aside from this driver, further growth should be supported by its increasing expansion into lower penetrated verticals such as mortgages. While elevated inflation makes consumers more cost-conscious, thus increasing the volume of people switching and looking for the best price. Even when accounting for a normalized energy market, we believe this is not currently reflected in the valuation. So combined with the dividend, this makes for an attractive total return opportunity.

Founded in Tyneside by John Gregg in 1939, Greggs has gone from being a door-to-door bakery round, to a company with a shop estate covering the entire UK. Most of these are company managed, but it also has franchise agreements to take advantage of locations it could not otherwise access, such as motorway services and petrol stations. It is vertically integrated, so it manufactures and distributes most of the products it sells.

Despite operating in a very competitive industry, Greggs' ability to provide its core baked goods at such low price points offers a certain amount of differentiation from most other chains and independents. This is attributed to its centralised in-house production and distribution which, combined with scale, makes it hard for others to compete. Also, their products are discrete from rivals, while improving brand perception has helped embed the offering and opened up newer locations for trade, such as Leicester Square.

Greggs has delivered profitable growth via new stores, and we think the company is at an important juncture with further penetration to come. Part of the strategy to 2026 is continuing to open more shops and we forecast it can achieve this without diluting returns. In addition, incremental growth is expected by extending opening hours to capture the evening market. Which then means it can service the delivery channel, bringing new sales as well as improved asset utilisation, not to mention driving more customer loyalty through the app.

Buying into a consumer stock when the end user is under pressure merits additional consideration and our work suggests demand should prove largely resilient to any changes in the economic cycle thanks to the value proposition. In addition, the stock’s valuation offers support on our analysis. Beyond the capital return opportunity, earnings growth and the financial model provide a growing dividend stream and thus an attractive total return investment.

Listed in 2016, Ascential’s portfolio of businesses has subsequently changed considerably. Following the disposal of WGSN and its Digital Commerce division in early 2024, it retains two world class exhibition assets, Cannes Lions and Money 20/20, as well as some smaller businesses based around these. Cannes Lions focuses on creative communications & advertising and include benchmark awards for the industry. Money 20/20 has three editions due to different regulatory practices in each region, the US, Europe and Asia. It focusses on innovation in finance, especially payments and banking.

Events benefit from two-sided network effects, where the value to both attendees and sponsors/exhibitors increases as either exhibitors and/or attendees increases. This means that scale becomes a virtuous cycle, with ever more value accruing to the leading events. As leading events in their verticals, this applies to both Cannes Lions (dubbed “The Oscars” of the advertising world) and Money 20/20. As such we think it is very difficult to displace them, and even though both advertising and payments/finance are cyclical, spend on these events is the last to be cut. Their importance is also underlined by how strongly they have rebounded post Covid, already much larger in 2023 than previously, and the pricing power they have enjoyed historically.

Events are high return on capital businesses that have low capital requirements, so have an attractive cash profile, to be used for M&A or returning to shareholders. In terms of growth, there is still runway for Cannes Lions, and especially some of the subscription businesses that also sit in its Marketing division. Money 20/20 should benefit from the scaling from the Asia edition, as well as another potential regional edition at some stage. Sponsorship for both has been strong and we anticipate this to continue.

The new reorganised Ascential offers a rare opportunity in the UK to get largely pure play exposure to two top quality assets that we see as materially undervalued. Combined with the growth prospects, these attributes also make it a potential takeout target offering further support.

Croda’s history goes back to Yorkshire in 1925 when it started refining wool grease into lanolin, something it still does. Today, it is a mid-sized chemicals company that, rather than focussing on volume, like its larger peers, focuses on value-add products in niche areas. The business is split into two main divisions: Consumer Care and Life Sciences. The former focuses on ingredients and fragrances in the beauty and home care space, and the latter on delivery systems in the pharmaceutical and crop industries.

Croda’s portfolio has skewed more and more to new and protected products, and its innovative culture, fostered by a successful management team, means these have been replenished over the years. Its products exhibit high degrees of switching costs, thanks to their specialised nature and the potential risk of changing to an alternative. These advantages are underpinned by a direct sales model which facilitates the formation of strategic relationships, where they are providing an embedded holistic service, rather than just selling a standalone product. This, so far, has enabled them to earn a persistent and high return on capital, and we believe the current strategy will see this continue.

Management recently sold most of its lower margin, more cyclical, Performance Technologies division, whilst selectively acquiring businesses to complement the Consumer Care and Life Sciences divisions, which are exposed to strong growth drivers. Namely, the sustainability of source ingredients, the beauty category in emerging markets and proliferation in smaller beauty brands for Consumer Care. In Life Sciences, the increased use of mRNA vaccines by pharmaceutical companies, as well as a growing world population, and climate change in the crop care segment.

Furthermore, we believe the company offers cyclical resilience at a time when the global economy is facing headwinds. Our forecasts generate significant potential capital upside, while the financial model and cash flow dynamics accommodate strong dividend growth, although remember there are no guarantees.

All this makes for, what we feel, is a classic Select investment.

Leading global credit bureau and data analytics business, which gathers data and turns it into information that banks and retailers can use to guide their lending and marketing decisions.

Experian is the largest of the world's three major credit reporting agencies (CRA). While the business still focuses on building and maintaining databases of credit histories for both consumers and corporations, it has also developed analytical tools to help customers assess fraud and identity risks, identify marketing opportunities, and evaluate credit risk. Additionally, within their direct-to-consumer offering, Experian helps individuals optimize their credit scores and serves as a credit broker to find mortgage, loan, and credit card offers.

Their vast amounts of data provide a strong starting position. However, it is the combination of this data with their analytical tools that creates a deep competitive moat that is hard to disrupt. Experian is continuously developing new datasets and functionality to try and stay ahead of its peers. They are embedded within their customers' workflows, making the cost of switching high and furthering their advantage to sustain profitability.

These factors partly explain how the company has consistently earned high returns on capital since it listed in 2006. Another principal reason is that management has successfully allocated capital into high-growth areas, such as becoming the pre-eminent CRA in Brazil after only entering in 2007. They have also built out their Decision Analytics capability, which helps customers make better decisions with the ever-growing mass of data. Regulatory risk is high, given their impact on society, but we are satisfied that management is very proactive in addressing this.

Experian is a world-class business and a classic Select investment. It is less cyclical than it once was, and therefore, should prove more resilient going forward. This will hopefully lead to strong and robust cashflows that can be reinvested to compound future value while returning surplus cash via a rising dividend and buybacks. Although of course there are no guarantees.

Founded by Scotsman Thomas Sutherland in 1865, the Hong Kong and Shanghai Banking Corporation (HSBC) was formed to help facilitate and support international trade with China. It has since transformed itself into one of the world’s largest banks, albeit with a focus still on China which we see as the crux of the appeal today as the country emerges from stringent COVID-19 lockdowns.

Banking is a competitive sector, but the scale, capital, and compliance required to operate has meant that it has been a challenging industry to disrupt. HSBC enjoys a first-mover advantage in Asia, giving rise to strong regional distribution networks and relationships. The UK position is also strong, with fewer end-market opportunities. So it makes for an unusual yet appealing investment, providing exposure to an entity governed by the Western rule of law, yet the economic growth of the East.

A cautious COVID-19 policy in China has pressured return on equity in recent years. We believe management’s strategic focus on the region is the right one given the superior, longer-term prospects and a more differentiated proposition in those markets. A greater focus on Wealth Management should allow them to take advantage of its burgeoning middle class. Focusing on higher return areas while exiting lower return markets and segments should see financial performance improve alongside the pick-up in operating momentum.

China normalisation will drive volumes, and higher interest rates will drive profitability, so we anticipate a pick-up in delivery from here. Meanwhile, we forecast significant excess cash and capital generation from the above, which, coupled with divestment proceeds from the sale of the Canadian business, we expect will come back to shareholders. The sizeable total return proposition means we feel it is an opportune time for us to reduce the underweight position.

Founded in 1975 by a group of Yorkshire farmers who joined forces to mill their own feed, today Cranswick is a vertically integrated, farm to fork, producer and supplier of predominantly pork, and poultry-based products. Most of these can be found on the shelves of major supermarkets under retailers' own label brands, and they also provide meat for manufacturing, food service and export markets. In aggregate, their UK market share sees them sitting at number one in pork and number four in poultry.

Size and best-in-class practices means they are integral to the nation’s food supply and security, whilst also providing good visibility over animal welfare, where they are highly rated. The company has deeply embedded relationships with the retailers, making Cranswick’s revenues defensive, as it is very difficult for their customers to find alternative substitute supply with the same level of quality assurance.

We believe the management team have done a great job of diversifying the business, while also generating high and persistent returns on investment. We expect this to continue with a large number of opportunities to further invest growth capital, be it in premium and convenience pork products, in the poultry business, or from a recovering export business. The recently acquired pet food business also facilitates better utilisation of their inputs and thus better profitability, while also providing growth optionality in an attractive new category.

Furthermore, a conservative balance sheet and leading position means Cranswick are very well placed to weather the macro headwinds and emerge as a beneficiary by taking share from the stressed competition. Our analysis suggests that the above factors are not being accurately valued by the market, especially at a time when robust earnings in relation to the economic cycle should command a premium. Therefore, we are using the opportunity to buy into a quality compounder which makes for an attractive total return investment.

Description

A specialist UK motor insurer which targets non-standard risks (e.g. younger drivers, or students with no credit score) that mainstream insurers are reluctant or unwilling to take on.

Why we hold it

The motor insurance market is very competitive but Sabre has managed to carve out a strong position within a niche segment of the industry.

In what insurers call soft markets, where there are lots of insurers competing for business and premiums are generally low, Sabre isn’t that competitive. Instead, they target growth in hard markets, where fewer insurers compete to write policies, premiums are higher, and underwriting standards are tougher.

It means they write more premiums in the non-standard segment, where Sabre are sometimes the only quote. And they have a significant advantage over the competition in this part of the market because of the wealth of data they’ve built up over the best part of 20 years.

Their positioning feeds through to their financials. Sabre’s underwriting margins are extremely attractive - the best we can recall seeing in the UK motor market - and the balance sheet is simple because they have no debt and low costs given that they outsource non-core functions.

The business is very capital-light, scalable and highly cash generative, allowing the majority of earnings to be returned to shareholders. At the time of writing (Nov 2018) the yield is around 6.6% and we expect the dividend to grow over time, although remember dividends are variable and not guaranteed.

While this is a very competitive market, Sabre’s niche positioning and expertise combined with its proprietary data sets it apart, suggesting it should be able to sustain its industry-leading profitability.

Information provided about individual companies is our view as managers of the fund and is not a recommendation to buy, sell or hold any investment. Yield estimates are a consensus of analyst forecasts from Bloomberg and are not a reliable indicator of future performance.

Description

Handles the administration processes on behalf of fund managers. They’re not picking stocks or striking private equity deals, themselves. Other services include managing company share option schemes or executive incentive plans.

Why we hold it

The world of fund administration services is, to put it mildly, staid. Sanne Group comes from the Channel Islands, where there is a well-established investment community, often providing specialist fund products ranging from private equity to fixed income investments.

Sanne service the Alternative Funds sector, rather than mainstream fund managers, and Alternatives have been attracting a lot of fund flows in recent years because often their strategies are based on finding enhanced levels of yield, through investing in illiquid or riskier assets. Once Sanne is contracted to provide admin services to a fund, it normally does so for the life of the fund, because it becomes so deeply embedded into the fund manager’s operations that it is not economic to change administrators, once set up.

The group is growing out of the Channel Islands, and now has a global network of offices, making it less dependent on any lone market or asset class. Margins are strong, 37% at the half year stage, and revenues have been growing strongly. With most business tending to repeat, Sanne is in a strong position.

Its industry is consolidating and Sanne intend to be one of the major players. The group recently acquired a Mauritian-based provider of fund administration services. The deal is expected to be immediately earnings-enhancing, opening up significant growth opportunities in emerging markets and the potential for cost savings.

Description

The UK’s largest independent provider of sub-prime credit, Provident Financial offers home-collected loans, vehicle finance, online personal loans or credit cards via their Vanquis division.

Why we hold it

Our reasons for investing in Provident Financial were predicated on its tremendous track record of cash generation and dividend payments to shareholders and the group’s ability to generate high returns on equity, in both good times and bad.

Recent changes, and revelations of an FCA investigation mean our initial reasons for investing are no longer valid. A full explanation of what has happened and what our view is can be read here.

Description

Imperial Brands is the smallest of the world’s large tobacco companies, with substantial operations in the UK, Europe, USA and many of the world’s emerging economies.

Why we hold it

Imperial Brands has a dividend policy of paying a 10% per annum increase, whilst its current prospective market yield (as of May 2018) is circa 7.0%, variable and not guaranteed).

So long as Imperial’s performance allows it to maintain such a policy, the income attractions of the stock are clear. Tobacco is a controversial industry, but from an investment perspective, there are few others that offer the sheer consistency of delivery that Tobacco has achieved over many decades.

Tobacco companies possess enormous pricing power and have so far been largely immune to the effect of regulation as a result. The model is essentially simple: regulator makes business harder, the tobacco company puts up prices to compensate, smokers pay up.

Imperial made a big move into the states with the acquisition of much of what used to be Lorrillard, which also brought further exposure to New Generation Products, which deliver nicotine without actually burning tobacco. The US is an attractive tobacco market, because a pack of cigarettes is very affordable over there.

Imperial has been a regular acquirer of other tobacco companies, and could conceivably be the last big opportunity for the industry’s very largest players to do a major deal themselves. Takeover rumours are rarely too far away from Imperial, but any acquirer would need partners to divide Imperial up amongst themselves, since it is unlikely that any one would be allowed to buy all of it, for competition reasons.

A deal may happen, or it may not. In the meantime analysts project Imperial to generate around £2.5bn per annum, and rising, of free cash flow, and while that carries on it doesn’t really seem to matter whether a deal turns up, for £2.5bn goes a long, long way.

Description

National Grid owns a series of electricity and gas distribution assets in the UK and some US regions. They have responsibilities for balancing supply and demand for power in the UK and are a highly regulated business.

Why we hold it

National Grid is a key player in the transmission of electricity and gas, not only in the UK but also in the US, where it has operations in parts of New England and New York, meaning overall its exposure between the two countries is broadly 50/50. In recent years it has looked to pivot more towards electricity, selling some of its gas transmission business in the UK whilst acquiring Western Power Distribution, which is responsible for distributing electricity from the transmission network to customers’ homes in the South West, South Wales and the Midlands.

The transmission of gas and electricity is a natural monopoly, and National Grid is thus the sole supplier, meaning no competition (for now). However, its businesses are regulated, and regulators decide the returns that it can earn over set periods, as well as the growth of the asset base. The exact methodologies differ slightly between the UK and US, and returns for each of its businesses differ, with gas generally lower than electricity.

Whilst capped by regulation, the framework ensures it can earn sufficient returns on capital to merit the investment in the first place and due to the mechanisms in place, it ultimately offers a steady, long term, inflation-linked income stream. It also benefits from the growth of its asset base, and with the energy transition requiring significant investment in both electricity transmission and distribution, National Grid will benefit. Hence the pivot towards electricity and away from gas.

We believe this strategic move is the right one and see a very large opportunity for the business to accelerate its spend to grow the asset base given that both the UK and US are looking to improve and modernise their energy infrastructure for a decarbonising world. Meanwhile our base case is that the regulator continues to allow decent returns to ensure the critical investment in the grid is made. With inflation seemingly having peaked and potential interest rate cuts on the horizon at the time of writing (June 2024), this should also provide a tailwind to the stock going forwards.

Description

Formerly known as Xafinity, XPS Pensions is a business that operates in the world of fund administration, focusing on the defined benefit (DB) pension fund space, where it is one of the UK’s leading operators.

Why we hold it

Although the number of DB schemes open to new members has tumbled, ever rising sums will be paid out to retirees for decades to come. XPS expect the payments out of DB pension funds will typically peak in the late 2030s. Schemes will need to be administered until then and far beyond with the last schemes set to finally close around the turn of the century.

The market for servicing pension schemes is dominated by three big players, who control most of the market. XPS is in the second tier and recently announced the acquisition of another operator, Punter Southall. It’s a business XPS’s management know well, for they began their careers there so we expect them to integrate it well. The deal creates cost synergies and the scope to deploy XPS’s Radar technology across a wider clientele. Radar allows clients to get a real-time view of their scheme’s financial position, a big step forward from the traditional three-yearly actuarial valuation.

With funds tending to switch Administrators infrequently, XPS has strong recurring revenues. If they can succeed in exploiting Radar and their other competitive offerings then they should be able to gain and retain market share. The merger with Punter Southall puts them into the position of being a clear challenger to the big players.

There is a Competition and Markets Authority investigation underway in the Pensions sector. This is expected to focus on the potential conflicts that can exist between the larger investment consultancy firms, investment managers and the advice provided to clients. XPS do not have a fiduciary management aspect to their work and do not expect to be adversely affected. Indeed, to the extent that action is taken to reduce the Big 3’s grip on the sector, the CMA investigation could be a catalyst for new business opportunities.

Fund administration is a capital-light activity and we expect the group to have strong cash flows in the years ahead. Dividend paying potential should be strong and the group has little need to retain cash. With much of the consideration for the Punter Southall businesses coming from the sale of new shares, debt levels remain modest in relation to the enlarged group’s scale.

Description

Lloyds Banking Group is the UK’s leading retail financial services group, owning Halifax, Bank of Scotland and Birmingham Midshires as well as the core Lloyds Bank. Life Assurance is provided via Scottish Widows.

Why we hold it

Lloyds is not exciting. Excitement almost did for Lloyds back in 2009, so the business is now thrill-averse. And that is a good thing for dividend-seekers.

Retail banking involves personal lending, unsecured but at attractive margins and mortgage lending, where margins are thin, but the equity in the customer’s property protects the lender from loss. Lloyds has a commercial bank in it too, providing typically plain-vanilla banking services to smaller and medium-sized businesses.

Bad debts are currently very low, for employment is strong and interest rates affordable. As a result, Lloyds is inherently profitable and cash generative, although PPI compensation continues to dog the reported numbers. That ought to fade away before too long even if the regulator extends the deadline again, for who truly is left to claim?

The bank is generating high returns on capital (PPI apart) and does not need to retain much to fund its growth. So Lloyds is committed to paying out a high proportion of its profits as dividends over the medium term, as both ordinary and special payments. The latter can be stopped if the economy turns down and bad debts turn upward, still hopefully leaving shareholders with a respectable income.

Lloyds, especially the former HBoS component of the group, is a lot less racy these days but we prefer the dependability of a retail bank that sticks to its knitting, keeps a strong balance sheet and diverts excess cash back to shareholders. Having cut costs enormously following the HBoS merger, Lloyds now has an industry-leading level of efficiency, which helps to support profit margins and cash generation, further reinforcing its attraction.

Description

Market-leading provider of insurance, passive investment strategies and pension solutions for companies and individuals.

Why we hold it

L&G’s scale means it benefits from lower costs than its peers, enabling it to offer very competitive solutions to its customers, while generating strong cash flows to reinvest back into the business and reward shareholders with healthy dividends.

The group is exposed to a number of favourable long term trends. These include: growing demand for low cost investment solutions such as index trackers, ageing populations, auto-enrolment and de-risking of company pension schemes.

Cash generation has been strong in recent years, allowing L&G to rebuild dividends to shareholders, having been forced to cut back in the financial crisis. Despite those dark days in 2008/09, dividends per share have still more than doubled over the last decade. We see scope for further growth in the pay-out over the coming years (although remember, dividends are variable and not guaranteed), underpinned by L&G’s strong focus on cash and market-leading positions.

Description

Pennon Group owns South West Water, Bournemouth Water and Viridor, a leading recycling, energy recovery and waste management company.

Why we hold it

Most of Pennon’s profits are earned by its water and sewage activities, which are highly regulated. The regulator sets the prices Pennon can charge and has an obligation to ensure that if Pennon runs itself efficiently, it will earn an adequate return from its utility activities.

Demand for water is highly predictable and Pennon has had a good track record in recent years of delivering services efficiently, allowing it to take advantage of the efficiency incentives in the pricing mechanisms the regulator sets.

Viridor has built a portfolio of Energy from Waste (EfW) facilities and expects to earn around £100m per annum from these. They basically burn “black bag” waste, the stuff that people can’t/won’t recycle and in the process Viridor recover some of the heat energy and use it to generate electricity. These facilities have long term contracts with local authorities and other large scale waste producers, to take their waste in return for fees, plus Viridor receives income from selling the power generated.

The combination of regular income from operating utility services and the rising stream of Energy from Waste earnings as new facilities have opened has allowed Pennon to operate a dividend policy of increasing the payment by RPI+4% each year.

That seems highly attractive, given a prospective yield of around 4% and with the EfW portfolio still expanding we are hopeful that Pennon will be able to continue their generous approach to dividends for some time to come. This of course is not guaranteed and dividends by their nature should always be considered as variable.

Description

A massive healthcare operator with major divisions focusing on pharmaceuticals, consumer healthcare brands, vaccines plus a large stake in a specialist HIV care and treatment company.

Why we hold it

GSK has been undergoing major surgery for several years and is now emerging as a business with improving cash flows generated from divisions that are less vulnerable to changes in the US pharmaceuticals market.

The attractions of Glaxo’s 6% prospective yield are clear, but the timetable for the dividend to return to growth is slipping backwards a little. In the near term, earnings may benefit from competitors apparently struggling to get approval to launch a generic challenger to GSK’s Advair, but this is only likely to be a temporary delay.

GSK has gone through a long period of major patent expiries and now looks to be set to deliver an accelerating pace of new product launches, with potential for >£6bn a year of sales from recently launched products next year and potentially rather more to come, as additional new products move from pipeline to market.

That all depends on success in clinical trials, and these are notoriously hard to predict, but GSK scored a big hit with the approval to launch their new Shingrix vaccine for shingles, which has the potential to become a new blockbuster drug for the group. During 2017, GSK received Breakthrough designation for their new Myeloma treatment that could lead to an accelerated approval to launch, so long as the data continues to support the product’s apparent efficacy.

By the end of 2018 GSK also expect to have submitted applications to launch new products addressing major disease categories including asthma and HIV and to have concluded key clinical trials for some of their most promising new drug candidates.

Description

Leading UK hospitality group and brewer, with brands including Chef & Brewer, Loch Fyne, Hungry Horse and Greene King inns and beers.

Why we hold it

Greene King is currently out of favour, with concerns about the impact of the National Living Wage, Business Rates and weaker consumer real incomes due to the inflationary impact of Brexit. That has led to a significant de-rating of the shares and a corresponding increase in their yield.

Greene King actually has a very good dividend track record, with payments having risen pretty steadily over the last twenty years, rising more than six-fold in the process, although there are no guarantees this will continue. Like many pubcos Greene King has quite a lot of debt on the balance sheet, but it is long term and backed up by freehold properties.

The dividend is covered about twice by earnings, so we think the group has plenty of scope to struggle its way through the current pressures. A recent deal to buy Spirit has given them the industry leadership position in Managed Houses, and better exposure to London and the South East, where long term prospects seem brightest.

More and more of the group’s estate is focused toward casual dining, where the long term growth trend is well established. The proportion of meals eaten outside of the home is rising steadily, and with brands positioned to cover much of the potential market, Greene King is well placed to benefit in the long run.

Description

Tritax owns a £1.9bn portfolio of “Big Box” distribution centres in strategic locations around the country, leased to a mixture of mainly blue-chip tenants.

Why we hold it

Launched in 2013, Tritax Big Box has grown to become one of the biggest REITs in the UK. It focuses on logistics and in particular larger warehouses (“Big Boxes”), aimed at investment grade occupiers and forming the hubs for their customer distribution model. In 2019 it acquired DB Symmetry, a development business with a large land portfolio that meant it could develop its own warehouses, and more recently it has increased its exposure to urban logistics; smaller warehouses that are further down the supply chain.

Guided by a strong management team, Tritax identified the need for high quality logistics infrastructure in the UK, especially as ecommerce has taken off. The acquisition of the large land portfolio, mainly held under option so consuming little capital, was a game changer and in a market where scarcity of land and a difficult planning system make developing new assets difficult, gives it a significant advantage and one that is difficult for others to replicate.

Given the largely investment grade nature of its occupiers, rental income collection has consistently been at or close to 100%. This reliable income stream has grown, driven by open market and index-linked rent reviews. The development portfolio adds growth on top of this, with Tritax able to recycle capital into these opportunities at above market yields which are thus accretive to growth.

Now is a particularly opportune time to own Tritax, with interest rates looking like they have peaked, thus providing a tailwind to valuations in the chapter ahead. It has moved to take advantage of this with the acquisition of UK Commercial Property REIT (UKCM), which brings greater exposure to urban logistics offering superior rental growth, as well as capital from the disposal of non-core assets it can recycle into its development portfolio.

Description

Life insurer turned asset manager, combining a fund management arm, hugely boosted in scale by the merger with Aberdeen, with a UK savings and pensions business; which includes the Wrap platform for financial advisers and the group's corporate pensions proposition.

Why we hold it

The need for people to save more towards their own future is only likely to increase, as governments and companies take up less of the slack. We believe Standard Life Aberdeen is well positioned to take advantage.

The group benefits from a very strong distribution platform to channel money into its own funds. Its market leading Advisory Wrap platform continues to go from strength to strength and is well placed to benefit from growing demand for financial advice. The workplace platform also continues to generate good inflows, driven by rising contributions from auto-enrolment, where Standard Life has captured over one in six workers enrolled.

The merger with Aberdeen offers the scope to reduce costs whilst building scale in the global asset management sector. £350m of cost savings and synergies have been identified as a first step as the enlarged group integrates the two investment businesses, which between them manage or administer over £600bn of assets.

The merger makes the group less dependent on Standard Life’s flagship fund, Global Absolute Return Strategies (GARS) and brings in new strengths in fixed income and global emerging market products. Many of Standard Life’s funds are continuing to see good inflows, even if GARS itself has had some negative flows recently. A key challenge for the group will be to improve the net flows into the Aberdeen platforms. They have been negative, reflecting weak emerging market performance.

The group has lost Lloyds Banking Group as a client, due to the merger. Aberdeen used to manage a large amount of funds on behalf of Lloyds’ Scottish Widows business and Lloyds viewed the merger with Standard Life as leaving its business in the hands of a competitor. Around 5% of revenues are at stake. This episode has been a rare blot in the group’s copybook, but we do not consider it sufficient to negate the other attractions of the business.

More recently, the group has announced the sale of the traditional Standard Life insurance business to Phoenix Group, a deal which will see a £2.5bn return of capital to shareholders, if approved, later this year.

Standard Life was one of the few companies to raise its dividend throughout the financial crisis, with the pay-out having grown every year since listing. The current dividend looks well covered by underlying cash generation, while the balance sheet is in good shape, with approaching £1bn of cash and liquid resources. This gives us confidence in the group’s ability to maintain its progressive dividend policy, although remember dividends are variable and not guaranteed.

Description

Global tobacco giant, with a strong foothold in emerging economies and the USA.

Why we hold it

Tobacco is a horrible product, which generates very attractive financial returns. Since the beginning of the century, BATS has outperformed the world equity market by over 1,000%, whilst paying dividends that have typically offered a yield of 4% or so.

Most companies have to compete on price. Tobacco businesses are selling to addicts. So they have a degree of pricing power that is rarely found outside of businesses with a deep Colombian connection. This pricing power enables strong margins to be earned and this has fed through to phenomenal cash generation over a long period of time.

British American has a portfolio of operating companies spanning the globe, with particular strengths in emerging economies and the USA. A recently concluded merger with Reynolds American will give them greater US exposure. The US is an attractive market for tobacco businesses, because cigarettes are lightly taxed over there.

This combination of US and emerging market growth has allowed BATS to increase its dividend every year this century. Analysts forecast this to continue, though of course there are no guarantees . The company will have significant debt, post the Reynolds merger, but with BATS having generated an average of around £3bn of free cash flow for the last eight years, this should not be too troubling.

A recent announcement by the US Food & Drug Administration, that it was contemplating requiring the industry to substantially reduce nicotine levels, hit sentiment. In practice, the announcement may have little impact. It also announced a more supportive stance toward “reduced harm” alternatives, like e-cigarettes.

Any changes will have to pass inevitable legal challenges, and previous moves by the EU to reduce nicotine levels had little impact. In the meantime, smokers are switching to next-generation alternatives, where BATS & Reynolds have a strong position, and where the profit opportunity per user can often be greater than that of a conventional smoker.

Description

Lender, wealth manager and securities trader, with a focus on niche markets.

Why we hold it

Close Brothers serves specialist lending markets, focused on areas such as auto, property and small and medium-sized businesses. The niche market segments the group serves typically attract lower levels of competition, which has enabled it to earn high profit margins, and sustain high levels of profitability through many economic cycles.

The group benefits from long-standing customer relationships, augmented by a large direct sales force, which results in a high level of repeat business, and a recurring income stream. This is supplemented by a robust balance sheet and a conservative lending criteria, with the group typically choosing to lend more when competition is lower and pull back when the market gets frothy. We believe this common sense approach will continue to stand the group in good stead over the longer term.

Close Brothers’ conservative approach to lending has served it well, enabling it to grow or maintain its dividend every year since 1999, despite the extraordinary economic events along the way. Analysts are forecasting continued growth into the medium term.

Description

World's leading pizza delivery company that stole a march over its rivals by going early and big into technology.

Why we hold it

Domino’s Pizza used the online channel to gain a dominant position in the pizza delivery market. Domino’s holds the licence to use the American-owned brand in the UK and Eire and has grown to a chain of over a thousand stores in the last twenty years or so, growing profits enormously along the way.

Rolling out new stores offers plenty more growth to come; indeed Domino’s recently upped their target UK store numbers to 1,600 (around 1,000 today). Franchisees own the stores, make the pizzas and deliver them. Domino’s Pizza runs the online channels, across PC’s, smartphones and red buttons, makes and delivers the ingredients to the stores and controls the national brand marketing. Store owners make big money per store which encourages a high quality of franchisee.

It's been a virtuous circle, with a great product, brought to the customer by class-leading technology, at a price that makes high profit margins. Domino’s has thrown off cash, because the franchisees make most of the capital investments. The company has little debt as a result, despite the business expanding sales every year this century.

Domino’s cash generation has allowed significant growth in the dividend in recent years, with the company recently announcing an increase of 16% in the full year dividend for FY16.

Description

Playtech provides software and services that allow gambling companies to lower their cost of recruiting new customers and maximise their value over the life of the relationship.

Why we hold it

Playtech provides the “back end” of a bookie; all the systems and programmes that allow the bookmaker to operate efficiently and keep the punters punting for longer. They’ve been remarkably successful and now act for a vast number of well-known operators.

They support online operations, provide the systems that allow a punter’s account to operate both in the bookie’s shops and online and the software that supports the gaming machines and self-service terminals in the shops.

Their financials division offers spread-betting on shares, currencies and indices across Europe and shares many of the characteristics of online gaming.

They have gone from a start-up to being the dominant player in their space. By enabling the gaming industry to operate efficiently online, Playtech have carved a niche all of their own. Now they are back-filling products into the retail chains of the bookies, recognising that areas like betting terminals are the key must-have features for profitable shops these days.

Revenues have risen from token levels in 2004 to an expected £600m+ this year. Margins are good, having been over 20% every year since listing, with over 30% expected this year and next, on rapidly increasing turnover. There aren’t many businesses that have transformed a major industry as radically as Playtech has, and currently there seems no sign of the group slowing down.

Analysts are forecasting double-digit compound growth in Playtech’s dividend over the next three financial years.

Description

One of the world’s largest consumer goods companies, with 19 Powerbrands for Health, Hygiene and Home including Scholl, Finish, Vanish and Cillit BANG.

Why we hold it

Fast Moving Consumer Goods (FMCG), when designed well and marketed effectively, are a great source of predictable growth.

The company has a sharp focus on innovation, adding new variants to an existing brand to extend its reach and keep it fresh with the consumer. RB puts huge weight behind its brands each year, with a marketing budget (or Brand Equity Investment as RB describe it) of over a billion pounds a year.

Over the last twenty years, RB has done a series of deals to bring new brands into the portfolio, adding Scholl footcare, Strepsils, Nurofen, whilst also creating brands like Cillit BANG from scratch. A pharmaceuticals business was sold a year or two ago, leaving the group totally focused on FMCG products.

The results have been impressive, with underlying growth in pretty much all environments since the start of the century. Margins are strong, over 25% and RB has thrown off cash allowing it to do deals when the opportunities arise, without becoming over stretched.

Reckitt has an ongoing thorn in its side, which is currently proving costly. A business acquired in Korea made a humidifier sanitising fluid, the use of which has been linked to respiratory deaths and illnesses. So far this issue has cost the company over £300m, a large sum but affordable in the context of a wider group that generated around £1.8bn of cash last year.

The recent acquisition of Mead Johnson Nutrition is a bold step into the infant formula milk market, with strong exposures to the US and China. Consumer health and nutrition is now the core focus of the group’s portfolio. The deal is large and not without risk. MJN has struggled in recent years and Reckitt’s need to improve its performance. In the meantime, substantial debts have been taken on, partially recouped through selling the French’s Mustard and Frank’s Red Hot Sauce brands for $4.2bn.

Recent management changes have seen the head of marketing leave, perhaps in response to a botched Scholl footcare product launch that has held back sales this year. The company also fell victim to a cyber attack in June that impacted a number of production sites. The next few months will be important as a result. Reckitt needs to show it has fully restored its manufacturing sites, improved its marketing performance and begun the successful integration and rejuvenation of MJN, whilst generating cash to pay down its debts.

Description

Professional publisher, providing high quality technical information and networking to demanding users.

Why we hold it

Relx’s scientific, medical and technical journals, like The Lancet provide forums for top academics, clinicians and scientists to review the latest research, after peers have reviewed it to assure the quality of the work.

Relx's Exhibitions division brings buyers and sellers from 43 industries together. Over 7m people a year attend Relx Exhibition events, ranging from SinoCorrugated (not one for the casual visitor) to The London Book Fair.

Their Risk and Business Analytics division provides specialist information to insurers and others, helping them to understand the risks they face and to price their policies accordingly. In the legal business, LexisNexis has a suite of products ranging from practise management software to databases enabling lawyers to research their cases better.

Relx provides information and enables the exchange of information between professionals. No factories, no heavy machinery. Just capital-lite publishing and events activities that throw off cash at high margins, often from dominant global positions in Relx’s chosen niches.

Analysts are forecasting double digit annual earnings growth over the next few years and with its relatively defensive profile, Relx looks attractive to us.

Relx’s reliable cash flows should support continuing growth in the dividend. For the last financial year, Relx increased dividends to UK investors by 21% and analysts forecast continuing growth out to 2019.

Sage is one of the world’s leading providers of accounting, payroll and enterprise resource planning software to small and medium size businesses. It was founded in 1981 by David Goldman who was looking to automate basic accounting processes in his own business, Graham Wylie, a student and Paul Muller, a lecturer, both at Newcastle University. It listed on the London Stock Exchange in 1989 and 10 years later it entered the FTSE 100, where it has remained ever since.

Accounting software sits at the heart of a business and increasingly other software is connected into it. Subsequently switching costs are very high as the risk of something going wrong has a large impact on the customer’s business. This, along with their long history in the space, means they have developed a large installed customer base and distribution network of partners and resellers, and so benefit from high levels of recurring revenue and pricing power.

These factors have also enabled them to make the transition to cloud-based software and a more subscription-based business model in recent years, which should lead to even stickier revenues. While returns have dipped during the shift, we anticipate them trending back upwards now that most of the transition is complete. Growth will be driven by its Intacct software, one of the leading products aimed at mid-sized companies in the US, as they expand internationally and into new verticals.

We believe Sage is at an inflection point and is primed to go through a period of accelerated top line growth and thus now is the right time to establish a holding which has many Select hallmarks that we look for. This should deliver compound growth over the long term and additional upside if we are right about its prospects and strategy. Unlike most tech stocks it also offers a dividend which they have a long history of increasing. We believe this could continue although, as ever there are no guarantees as all dividends are variable.

Description

One of the world’s leading Fast Moving Consumer Goods (FMCG) companies, the Anglo-Dutch group’s products fill yard after yard of supermarket shelf space across the world. From Indian tea to soap from Port Sunlight on the Wirral, the Unilever portfolio is vast. Brands include Domestos and Dove, Knorr and Hellmans, Magnum and of course, Marmite, surely the world’s greatest product.

Why we hold it

As if making Marmite were not enough, the numbers stack up too. First off, the business is spread far and wide across the planet, with a high exposure to faster growing emerging markets, not least because of a huge Indian subsidiary, dating back to the days of plantations and Empire. So no one economy is likely to derail Unilever, and with much less than even a quarter of sales earned in the UK, the business should be largely immune to the challenges of Brexit.

Operating profits have grown steadily, from £1.5bn in the late 1980’s to almost £8.0bn in 2017. Unilever rarely delivers giant strides in profits, it just edges ahead on a pretty consistent basis, with the dividend following along behind. It’s a get rich slowly sort of situation. Not too much debt, just over 1x EBITDA, which is unlikely to be troublesome for a business that makes items that people buy week in, week out.

Over time, the business has delivered great returns, and it generated free cash flow of over £5bn last year, leaving plenty of scope to reinvest back into growing the business. This cash generation attracted the attention of a potential suitor in 2017, when Kraft Heinz, backed by Warren Buffet made a tentative approach, quickly rebuffed by Unilever’s board. This was followed by an announcement of a restructuring programme designed to boost profit margins over the next few years.

Unilever also announced a shift up in the rate of dividends at that point. If only the dividends could be paid in Marmite.

Description

The world’s largest media and advertising agency, with over 200,000 employees in a group of businesses spanning everything from creative campaigns to media buying and market research.

Why we hold it

By operating as a collection of smaller, independently managed media and advertising businesses, WPP combines the benefits of scale with local decision making. Administrative tasks such as budgeting, planning and tax affairs are handled by the parent company, freeing up the individual companies to get on with what they do best; while still benefitting from WPP’s enormous buying power. It’s a tried and tested strategy that has seen operating profits grow more than ten-fold over the last couple of decades.

WPP’s excellent track record stems in large part from its prolific cash generation. This has funded a growing dividend, earnings-enhancing share buybacks and acquisitions, with recent deal-making focused on raising exposure to digital media and faster growing nations.

Marketing budgets are often the first to be cut in a recession, so we would expect WPP to suffer in a global economic downturn. But the group’s tremendous cash flow should enable it to weather any bouts of economic weakness, while capitalising on more favourable conditions; and we still see a long runway of growth ahead.

Description

An Exchange Traded Fund (ETF), which can be bought and sold in large quantities, which aims to track the performance of the FTSE100 index.

Why we hold it

We hold this ETF tracker as a source of dry powder, rather than build up large cash positions in the fund. Stock markets have risen over the long term, so we believe holding cash in this fund is more likely to end up acting as a drag on performance. Once we have identified a company we want to buy, we will sell down the ETF and allocate the proceeds accordingly.

Description

Global leader in alcoholic beverages with a collection of iconic brands, including Johnnie Walker, Smirnoff and Guinness. Its products are sold in more than 180 countries around the world.

Why we hold it

We like businesses that own strong brands, which keep their customers coming back again and again. In our view, Diageo falls firmly into this category. Brands like Johnnie Walker have immense aspirational appeal, not only in developed nations, but increasingly in developing regions, where demand is being supported by rising disposable incomes.

Turning water into wine (or spirits), and charging consumers a princely sum, earns the group huge margins, and means the business throws off cash. This has enabled Diageo to raise the dividend every year since at least 1999 though there is no guarantee this will continue.

Despite its many strengths, Diageo’s progress has been relatively uninspiring in recent years, partly due to economic and currency pressures, but also, we suspect, due to weak execution. Recent management changes have resulted in improvements to the distribution model, more emphasis on volume growth and productivity; and increased focus on free cash flow. These changes now seem to be bearing fruit. The fall in sterling provides an additional tailwind, underpinning our confidence in the group’s ability to grow sales and profit margins; whilst continuing to return cash to shareholders.

Description

Operates a national retail network across 40,000 convenience stores in the UK and Romania, enabling customers to make energy meter prepayments, bill payments, mobile phone top-ups, and more. The group also offers parcel collection and return through its Collect+ joint venture, as well as a range of services to retailers such as card payments and till systems.

Why we hold it

Paypoint has an unrivalled installed base of terminals in convenience outlets, providing basic payments services. Every time a customer makes a payment in store, using one of Paypoint’s terminals, the group gets a small slice of the sale. These payments are made little and often, so the vast majority of Paypoint’s revenues are recurring. Because it’s the shop-keeper and not Paypoint that’s actually serving the customer, the business has modest expenses and few capital requirements, so enjoys high margins and strong cash flows.

The challenge Paypoint faces is driving growth from its retail network, in an increasingly digital world. Mobile phone top-ups are in long term decline, while the roll-out of smart meters will open up alternative payment options for Paypoint’s pre-pay energy customers, which could reduce cash-based top-ups in store.

We do not expect demand for Paypoint’s cash-based services to evaporate overnight. Many of the group’s end-customers still rely very heavily on cash having experienced bad debt problems in the past. Some don’t even have a bank account.

In addition, a number of Paypoint’s services, like card payments and click & collect, look well placed to thrive in an increasingly digital world. The group has rolled out its next generation terminal, which combines the core Paypoint terminal with additional services to help retailers to manage their store operations. This should open up further revenue streams over the coming years.

Description

PHP is a Real Estate Investment Trust that owns a portfolio of specialist buildings that are leased to healthcare operators, typically GP practices, dentists and pharmacies.

Why we hold it

Despite the often lurid headlines, the NHS (and its Irish equivalent) are not disappearing any time soon. PHP has built a business through providing the buildings that healthcare practices need as they evolve to meet modern medical needs.

The NHS has little desire to tie up capital in real estate, so leasing new facilities, rather than buying land and building them makes sense. The nature of healthcare and the NHS makes PHP’s tenants relatively blue chip, with their rents often backed by the Department of Health and their leases long term.

PHP makes its money by funding these developments and then collecting the rents. So far it has assembled a portfolio of almost 300 primary healthcare properties, last valued at £1.2bn and financed by a mix of equity and debt. The group is currently eyeing up additional properties in the UK and Ireland that could add around 10% to the size of the portfolio.

The group has taken a fairly conservative approach to financing its portfolio and this has paid off by allowing it to increase its dividends to shareholders every year for 20 years consecutively. It might not be the most exciting business; it is rarely, if indeed ever, linked to stories of corporate swashbuckling. But for sheer consistency of delivery, there are few stocks out there that can match PHP, which is why we have made space for it in the portfolio.

Description

Tritax owns a £1.9bn portfolio of "Big Box" distribution centres in strategic locations around the country, leased to a mixture of mainly blue-chip tenants.

Why we hold it

Big Boxes line our motorways and trunk roads and form a fundamental part of modern retail and distribution activities. Retailers and distributors fill the boxes with massive amounts of automated stock handling systems, often spending many times the value of the building on this kit. Having made such a big commitment, the tenant is likely to want a very long lease to protect their investment.

Often, the tenant will use the big box to house their e-commerce operations, and Tritax’s tenant roster includes M&S’s online business at Castle Donington and Ocado at Erith. E-commerce growth is far outstripping traditional retail sector growth, helping to keep big box demand buoyant.

Tritax have an average unexpired lease term of 15 years, with the portfolio 100% let, making their income quite secure. Rents can be open market, inflation-linked or fixed-uplifts. The robust state of demand is supporting solid rental growth when leases come up for renewal.

With yields of 5-6% available from these properties, Tritax is able to enhance earnings through acquiring new sites. Supply of new projects is fairly tight, and Tritax, as a big box specialist, often get the first call from developers when new assets are being planned. Most of their recent transactions have been conducted off-market, with sellers who value Tritax’s expertise and commitment to the niche.

Tritax offers an attractive prospective yield with visible growth potential. We see little prospect of e-commerce fading away, and we expect the UK to continue to import a lot of the goods sold in shops. That will maintain demand for high quality distribution assets so we think the prospects for Tritax are strong.

Description

Runs world class Exhibitions and Festivals, such as Spring Fair and Cannes Lions which draw vast crowds to Birmingham and the Riviera, respectively. Also provides Information Services, mainly to businesses.

Why we hold it

As well as the events division, Ascential owns unique service businesses like WGSN, which forecasts global fashion trends to help retailers and designers get their ranges right for market, or Groundsure, that provides environmental data, like flooding risks, to enable property transactions to proceed.

The Consumer Magazines and radio stations that were a millstone around the former EMAP’s neck are long gone, and where Ascential has trade press titles like Nursing Times, or Retail Week, these are largely online. Print advertising revenues are a tiny proportion of the group’s income, and fading fast toward the vanishing point.

Ascential's businesses are relatively capital-lite and two thirds are the market leader in their category globally. Acquisitions have taken them further into e-commerce, with One Click Retail adding data analytics that help brands optimise their sales through Amazon and other online channels.

We like the quality of Ascential's portfolio and its growing exposure to serving online markets. Class-leading events tend to be more resilient than the average. Debt is a shade higher than we would like, but with profit margins of around 25% and limited capital expenditure needs, cash flow should quickly reduce these.

Ascential aims to pay out around a third of its earnings as dividends, which makes it one of the lower yielding stocks we own. However, analysts are expecting the dividend to grow strongly over the next few years.

Description

Owns and operates the UK and Europe’s largest used-vehicle marketplace. Almost four in five cars in the UK that go to auction pass through one of BCA’s auction lots. Cars come from dealers, fleets, leasing companies and even We Buy Any Car, which BCA also owns.

Why we hold it

New car auction facilities are rare events, for councils don’t like them. They take up lots of land, create loads of traffic and employ next to no-one.

But they generate cash prodigiously. After all, once you’ve built the thing, cars turn up, get sold and driven off, leaving the auction fee behind. The auctioneer is paid for providing a liquid market, and with 78% market share, no-one else can match BCA for liquidity. So the fees keep rolling in, with not much needing to be spent to keep the process rolling along. In the UK, BCA make about £69 of cash earnings per car sold, a little less than this in their European operations and almost £100 each time WeBuyAnyCar.com buys and sells.

BCA are steadily expanding their services; they can often add value to a slightly scruffy car with a few minor repairs and a deep valet. BCA knows the value of cars and offers finance to dealers, allowing them to expand without having to find the cost of their inventory. BCA can charge a high rate, which is worthwhile to the dealer, because they earn far higher by shifting the inventory multiple times a year. Software packages can help dealers keep their stock priced correctly.

The group can distribute most of its earnings, because it has little need for cash. With volumes going through the auctions currently strong (last reported 8% growth in the UK) the prospects for the business look good, in our view.

Description

Financial services software provider covering the whole life cycle of the trading process, from trading to settlement, compliance and risk management.

Why we hold it

Fidessa has accepted a takeover offer from Ion Capital and the shares will soon be delisted. The fund realised a substantial gain from its investment in Fidessa.

Fidessa has built up a very strong global market position, with customers ranging from the largest investment banks to boutique hedge funds and smaller brokers. In each of Fidessa’s geographies there are some regional players that compete but very few can match Fidessa’s scale, expertise or market positioning.

Fidessa charges for its solutions primarily on a rental and subscription basis resulting in a high level of recurring revenue (c. 86% of sales) and strong cash generation. Once a customer has signed up it is very difficult and costly for them to switch to another provider. This is because the group’s software solutions are deeply embedded into applications, requiring long deployment times, customisation and integration into a customer's trading IT infrastructure.

While the trading environment remains difficult for many of Fidessa’s customers, the group believes it is entering a period where opportunity is returning to the market. Recently introduced MiFID 2 regulations, which place increased reporting burdens onto investment firms could drive increased demand for Fidessa’s solutions, while the company is investing heavily to extend the range of asset classes it supports, and expand its regional coverage further.

Fidessa has not been shy of returning cash to shareholders. The group has paid a special dividend every year since 2009, and has held or grown the pay-out every year since listing; although remember dividends are variable and not guaranteed.

Description

Britvic has the exclusive long term licence to bottle Pepsi products in the UK and also owns a portfolio of its own brands, including Britvic juices and mixers, Robinson’s squashes and barley waters, Fruit Shoot and R Whites lemonade. The group also owns non-alcoholic beverage companies in France, Ireland and Brazil.

Why we hold it

Once a bottling plant is built, it throws off cash like billy-o, because adding a bit of concentrate, maybe some bubbles too, into water does not cost much, but branded drinks sell for good prices, even to supermarkets.

Britvic has a unique position in the UK on-trade. The British Vitamin Company was a fruit juice producer in the post-war era and over the years it ended up under the joint control of Bass Brewers, Whitbread and Allied Domecq who eventually listed it in 2005. Along the way, Britvic were chosen by Pepsi to be their UK bottler and Britvic found its way to becoming the default provider of the soda gun in the UK’s pubs, not least because its owners were hardly likely to use Coca Cola in their own establishments.

The group’s brands are sold across the off-trade too, and Britvic is the clear number two player in the UK soft beverage market, after Coca-Cola Schweppes Beverages. The Pepsi licence has been in place for decades and was renewed for a further ten years in 2016.

The cash generation of a bottling business allows it to support a good dividend to shareholders, whilst funding expansion. Britvic has moved beyond the UK in recent years, establishing footprints in Europe and more recently, Latin America. These should provide growth opportunities over and above those that the rather mature domestic market can offer.

The shares offer a healthy yield, and analysts predict earnings and dividends will grow at a mid-single digit pace, though of course, these are forecasts and not guaranteed. The total return could be attractive.

Description

One of the world’s leading banking groups, with a focus on Asia. HSBC is London based, but its roots lie in Hong Kong and China, where it was founded over a hundred and fifty years ago. The business is particularly strong in retail and commercial banking, with an emphasis on trade finance.

Why we hold it

HSBC is currently engaged in a major restructuring exercise that has already seen around $5bn a year in cost reductions, as it pivots its operations back toward its historic roots in Asia. Originally known as the Hong Kong & Shanghai Banking Corporation, HSBC has long been a major force in the financing of cross-border trade.

The business got a little lost through the nineties and noughties, acquiring businesses across the developed world, including the UK’s Midland Bank. That deal might have worked, but not all did, especially an ill-timed deal to buy a US sub-prime lender, just before the wheels fell off that wagon.

The result was a bank with insufficient focus on its core activities and too thinly spread across the globe. More recently, the bank has been returning to its roots, exiting from weaker positions and reinvesting the capital it frees up back into Asia.

The vision is to become the premier bank for facilitating business between China and the rest of the world. Investment is being poured into China’s Pearl River delta region and early signs are encouraging. The vast expansion of Chinese infrastructure and industrial capacity seen in recent decades bodes well for the region’s future growth and HSBC should be well placed to benefit.

Capital ratios are strong and the group has long been known for taking a conservative approach to financing its balance sheet, with deposits significantly outweighing loans. Costs are under tight control and returns on the banks assets have begun to improve. At the time of writing (Nov 2017) the stock offers a yield of over 5%.

Description

Allows the public to order food online for takeaway or delivery from businesses that would otherwise still depend on the telephone or walk-ins.

Why we hold it

Small scale food producers are rarely technology experts, so Just Eat squares the circle, offering takeaway owners the chance to reach customers via ecommerce.

Just Eat dominates the mass-market takeaway space, whilst rivals like Deliveroo focus on providing the delivery service for a more upmarket slate of outlets. A series of deals have brought Just Eat strong positions in a portfolio of markets around the world. Like many online businesses, Just Eat benefits from the tendency for a dominant player to emerge.

Hectic lifestyles mean more meals are bought-in rather than cooked at home, which keeps underlying demand firm. Customers are fast adopting online ordering as their default order route and Just Eat has been growing order numbers and revenues at a fast clip. Like all good online operations, Just Eat throws off cash.

Description

Owns the leading online auto marketplace in the UK and Ireland.

Why we hold it

The management of Auto Trader and Rightmove have been a bit interchangeable over the years, so perhaps it’s no surprise that both companies came to be dominant in their chosen sectors. Most of Auto Trader’s revenue comes from forecourt owners, rather than private sellers. The business charges according to the number of vehicles for sale and the precise type of listings selected, with advertisers able to pay for greater prominence.

Auto Trader can also provide dealers with data management tools to help them price their stock and give guidance on when and how prices need to be adjusted to get vehicles to roll off the forecourt toward a customer’s driveway.

The business is wholly online these days, and has little need to spend money on physical assets. For traditional businesses, capital expenditure sees assets bought, valued on the balance sheet and depreciated over time. But an online publisher like Auto Trader has little need for capital expenditure. Instead, they spend money on IT staff and software, most of which is just expensed from day to day. So profits convert strongly into cash flow.

When Auto Trader first came to market, debts, left over from private equity ownership, were higher than we like to see. But so strong has been their cash generation that the balance sheet now looks very healthy, whilst analysts forecast strong profit growth ahead.

Description

Where Britain goes to check out what the neighbour’s house is selling for.

Why we hold it

Who goes to look in Estate agents windows anymore? Nowadays, almost all agents list their stock of houses for sale on Rightmove, making it the clear market leader. Rival Zoopla received a takeover approach from a technology investment fund for a large premium last year, whilst the relatively new entrant, OnTheMarket.com looks to be OnLifeSupport.com, so Rightmove’s position seems secure.

A web-based publisher has little need for capital spending, and market leadership gives Rightmove a lot of pricing power. So it throws off cash and pays pretty much all of it back to investors. Regular price increases help revenues tick along, and the group sells added-value data services to agents and premium listings slots on the site to further boost revenues.

It’s been a huge success. The arrival of Purplebricks et al may complicate the picture. If home sellers desert traditional agents, and online players become very large, Rightmove’s bargaining power could be impacted. But on balance, we think they hold the whip. No-one can currently afford not to be on Rightmove, whether they sell houses from an office or an app. There is still an awful lot of property print advertising and over time, we expect to see that spending by agents move toward Rightmove, driving growth for some time to come.

Description

A market minnow that we think could become a bit of a whale. GB Group’s software products allow businesses to verify their customers’ identities. GB Group can pinpoint the ID of about four billion people, to the standards required for anti-money laundering legislation.

Why we hold it

In a world where e-commerce is expanding fast, the ability to provide verification that a customer is bona fide is a vital enabler. GB have stolen a march on big rivals, who specialise in credit data, rather than ID verification, and look set to grow strongly.

Often, GB's services are embedded deep into their customers' work flows, making the revenues recurring and the predictability of cash flows strong. That’s a big, big tick for us.

This company is riskier than most of the stocks we hold, for it is small, and has been a deal-maker along the way. But it has cash in the bank and occupies a very sweet spot in the global economy and we think it is well worth the extra risk.

Description

One of the largest providers of insurance services in the UK.

Why we hold it

The UK and European life sectors contain a large number of closed-book funds, no longer writing much, if any, business and typically running-off to the point where the last policy matures. This can be years or decades away.

Phoenix exists to consolidate these orphaned assets onto their low cost administration systems, reducing the cost of operations and allowing the reserves within the funds to be released over time, to the benefit of shareholders.

The result is a highly cash generative business model with excellent dividend-paying potential. The company pays two equal biannual dividends each year, which grow as and when the business acquires new portfolios of business.

Phoenix acquires its assets at a discount to their fair value, because the owners are struggling to manage them efficiently, or because they wish to redeploy the capital committed into other areas of their business. Opportunities to acquire are plentiful, and it completed a deal with Standard Life Aberdeen (SLA) that has given them a major increase in scale and future cash generation.

With a strong balance sheet and cash flows underpinned by the Standard Life deal, we believe Phoenix could be a reliable dividend-payer for many years to come.

Description

Offers a no-win, no-fee service for legal claims. Burford will assess the case’s merits and offer to finance it if they think it is likely to succeed, in return for a share of the proceeds.

Why we hold it

Assets come in many shapes and sizes. One of the more unusual varieties are law suits. In commercial law, there is typically a large sum of money at stake, with two or more parties claiming the right to it, for any number of reasons. It might be a patent infringement, a claim for breach of contract, or for damage caused to another party’s assets or wellbeing.

Companies can pursue these claims, if they see merit in doing so. But legal expenses are just that, expenses that must pass through the profit and loss account. So pursuing a claim for recovering what is due, means lowering profits in the near term. Quoted companies in particular, don’t like things that lower profits.

So along comes Burford, who essentially offer a no-win, no-fee service. They’ll assess the case’s merits and offer to finance it if they think it is likely to succeed, in return for a share of the proceeds.

Cases can take years and judges are not as predictable as one might wish. So Burford deal in uncertainties, but by having a large portfolio of cases on the go at once, a degree of smoothing is possible.

Historically, Burford has achieved great results. The company claim an average achieved return of 28% p.a. from their portfolio. With cash generation from successful investments having been strong, Burford have substantially increased the portfolio of active cases, suggesting future income growth could be very attractive, if they maintain their track record of winning in court, or settling on the steps outside.

Since we first invested, Burford have been busy. A merger with their largest rival brought greater scale and brought in a third party funds management arm. Their largest case, against Argentina, who allegedly expropriated an oil company worth billions of dollars a few years ago, has seen outside investors buy stakes in the lawsuit from Burford, at values that imply a huge uplift in value.

Another case, again involving Argentina expropriating assets unlawfully has gone Burford’s way, once more generating a potentially large gain for Burford. Half year results saw the company announce profits greater than they have made in any prior full year. Past performance is not a guide to future returns.

BP is one of the world’s leading energy producers. Traditionally it was an integrated oil and gas business, active across the entire value chain from exploration and production, to transportation, refining and marketing. With the need to decarbonise our world ever more pressing, in 2020 the company set out a decade-long plan that serves as a roadmap of how it intends to transition away from hydrocarbons.

This is a huge undertaking but after a period of uncertainty and several years to frame the detail, there is now much greater clarity on the business’ direction and how it will deliver. In summary they will divest some of the legacy oil assets, but the greater emphasis is placed upon accelerated investment into lower carbon energy. The new operational focus will continue to touch the entire value chain, encompassing upstream generation from biofuels, renewables and hydrogen, as well as downstream endeavours such as electric vehicle charging points.

Beyond a credible intention, our work suggests that BP is well placed to execute. Scale, financial power, geographic reach, relationships, and project management prowess are all imperative to successfully competing in the new upstream arena. While its strong brand equity and retail installed base of forecourts makes for a very strong foundation to cross sell new energies in the downstream space.

The industry has proven to be capital disciplined for some time and BP’s commitment to return cash via dividends remains resolute and perpetuates the discipline. The excess cash flows being generated on the legacy fossil fuel book provide headroom as they reposition, offsetting the new energy ramp up costs until critical mass is reached. Returns on alternatives are lower than that of their fossil cousins, but the size of the opportunity more than offsets in our view. Even when making provision for further windfall taxes, our view is that the valuation has been too cheap and does not reflect the above proposition.

Description

Persimmon is one of the UK’s largest housebuilders, operating nationwide. The group also owns the Charles Church and Westbury brands allowing it to serve distinct market segments.

Why we hold it

A stable government with a large majority, traditionally supportive of home-ownership, allied to what we see as a longer term outlook of low interest rates, is a supportive backdrop for the housebuilding sector. As one of the leading players, we expect Persimmon to be able to operate successfully, exploiting its key strategic advantages to shareholders’ benefit.

The group produces around 16,000 units each year, but has a land bank of nearly 100,000 permissioned plots. Much of this land was bought some time ago, at prices that offer high profit margins when developed at today’s housing prices. The group also has some 15,000 acres of strategic land, where it hopes to add value by obtaining planning permission in the future.

The group has a robust balance sheet, with a net cash position. That could help provide vital shelter if the operating environment should toughen, further down the line. In current conditions, Persimmon is robustly profitable and highly cash generative. We expect it to continue to generate substantial amounts of surplus cash, which will be available to fund growth and for distribution to shareholders. As a result, we expect Persimmon to make a strong contribution to the fund’s own dividend potential.

Description

EMIS Group is a software business, specialising in healthcare. Their products serve the primary care markets, pharmacies and some hospital specialisms.

Why we hold it

EMIS has a majority share of the market for English GP Practice management software. Their products allow GPs to keep and access their patients’ records, manage their appointments and surgery resources. Data can be shared electronically with other healthcare professionals.

Their pharmacy management software is the UK market leader, with over a third of pharmacies using their systems.

Most of the group’s revenues are recurring, with customers subscribing to take the products month after month. The services provided are core to the GP and pharmacist’s daily workflows, and switching is potentially costly, risky and bothersome. So customers tend to stay with EMIS a long time.

A new generation of their software is due in the next couple of years that will move their core services into the cloud and place their products at the heart of the primary care information ecosystem, driving future growth.

The group has a strong balance sheet and has been able to pay dividends throughout the COVID-19 outbreak. Their customers are often public sector bodies and can be relied upon to pay promptly. They have had no need to furlough staff. Margins are almost 25% and the group has a strong record of cash generation.

Nothing is without risk; EMIS could mishandle their product development plans, or suffer data losses that lead to patient harm. But on balance we think the strength of the group’s market position, its secure revenues and future growth potential add up to an attractive proposition for the fund.

Description

Reliable fashion for men, women and children; housewares and furniture; sold online and in-store.

Why we hold it

Fashion Retail is a very tough business and not normally an area we fish in. However, we are prepared to make an exception for Next as it is one of the best-managed businesses we’ve come across, and has a number of advantages which most of its competitor’s lack.

Lord Wolfson has been at the helm of Next since 2001 and has built a superb track record, both as a business operator and capital allocator. Like-for-like store-based sales have been in decline for years but Wolfson and his team saw this coming. They kept leases short and flexible, adeptly restructuring the store footprint, bulking up the group’s out-of-town presence while reducing reliance on the structurally-challenged High Street.

Cash flow from the stores has been shrewdly diverted to bulking up the UK e-commerce business, profits from which now comfortably exceed that from stores. A valuable online overseas business has also been created and partnerships forged with brand partners via Label, offering them a low cost online route to market.

While we expect sales in-store to decline further, perhaps at an accelerated pace post-COVID-19; we expect Next’s strong digital footprint to more than make up for this, as the shift to e-commerce accelerates. The online business is tightly integrated into and complements the retail stores. The ability to handle 50% of online sales/returns in store means Next is competitively advantaged versus online-only competitors and the business model is much more robust with higher margins and returns on capital; and immense cash flow.

In summary, we see Next, marshalled by Lord Wolfson, as being significantly advantaged relative to both traditional retailers; and online-only players, leaving it well placed to prosper in the long run, although there are no guarantees.

Description

Operator of pubs and hotels, predominantly in southern England and the capital. Fullers is a premium operator and has a high-quality estate of primarily freehold properties. Fullers has been trading for well over a century.

Why we hold it

The pub trade is not an easy one, and in 2020 it has been exceptionally difficult due to lockdowns. Fullers caught our eye because it is a business we have long admired but felt was valued rather expensively. The fall in its share price when the pandemic emerged created an opportunity to buy into Fullers at around half its pre-pandemic price.

Fullers has been a familiar brand throughout London and the south of England for a very long time. Over the decades it has built a portfolio of pubs and hotels of unrivalled quality (although we acknowledge local rival Youngs would say the same). The group has long maintained a solid balance sheet and entered the pandemic better financed than most, having sold its iconic Chiswick brewery to become a pure play pub, Inn and hotel operator.

Fullers proposition has long been to serve high quality food, drink and accommodation at a price that reflects the quality. That premium pricing, plus a largely freehold estate means the business is very cash generative, for it has few rents to pay. The company has been able to continue investing in the business at a time when rivals have been on life support and we expect the group to emerge from the pandemic stronger placed than when it entered.

We expect growth to come from a gradual extension of the estate, both organically and through selective acquisitions, backed up by strong consumer demand for Fuller’s high-quality offering.