Portfolio breakdown

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.

Description

Informa is one of the world’s leading exhibitions and academic publishing businesses. Throughout its history Informa has grown both organically and through acquisitions, whilst successfully disposing of non-core businesses. Its three B2B segments currently focus on: transaction led live events, content led events and offering content in order to generate qualified sales leads in the technology space. Additionally, Informa publishes academic research journals, across STEM, the humanities and social sciences.

Why we hold it

For information businesses, scale drives network effects. Informa’s size means it is difficult for competition to replicate events in several of its verticals, as well as in the academic journals franchise. Its networks are two-sided, meaning the value increases when either or both sides increase in number which is a valuable dynamic to possess. This also gives access to a large database of first party permissioned data which, in a world of greater privacy concerns, is preferable to third party sources, and which it can monetise.

Informa is a high return on capital business, with low capital outlay requirements. This enables high cash conversion and an attractive cash profile, which has driven organic growth and the acquisition of new assets to good effect. In a post Covid world, we believe that the value of premiere events such as theirs has increased. It is investing behind this, which should see organic growth higher than before, and subsequent margin accretion from operating leverage. Additionally, information is golden in an AI world and we anticipate deals with AI providers to unlock more value, as well as help users navigate a new world whilst also generating higher quality sales leads for its tech customers.

Operational momentum is coming through very well and their best-in-class brands will be resilient should any macro weakness impact demand. Recent acquisitions of Ascential (an excellent company that we know well given it was a portfolio holding into the deal) and a majority stake in TechTarget completes the major portfolio repositioning of the last couple of years and places it well to capitalise on the growth acceleration it is seeing in its markets. This should also lead to further reinvestment for growth, cash returns (both dividends and buybacks) and debt reduction.

Ashtead is the world's second-largest equipment rental company. Although UK-listed, the acquisition and subsequent growth of Sunbelt Rentals in 1990 means the US is its biggest market, representing over 80% of revenue. It serves several end markets, including Construction, Response and Special Events, with equipment ranging from elevating work platforms to studio equipment.

While operating in a capital-intensive and largely commoditised industry, Ashtead has proven to be an exemplary operator, led by what we consider is a high-calibre management team, who have achieved a scale advantage by doubling US market share through both organic and inorganic investment. Scale is imperative as it fosters a virtuous circle of lowering the cost of capital, giving better access and higher discounts on equipment, and allowing them to provide a broader offering. Account management and greater support/training on ever more complex equipment also differentiate it from smaller competitors.

Given this, profitability and returns are attractive, and our work suggests this can continue alongside growth well ahead of the market. The drivers are plentiful and diversified, from infrastructure legislation and reshoring initiatives in the US, of which Ashtead is an outsized beneficiary, to taking share by opening new depots and acquiring smaller competitors. It is also expanding in Canada and is increasing exposure to specialty equipment, which has lower rental penetration. An increasing trend to rent vs buying equipment is also supportive.

While some of their end markets are cyclical, we believe concerns of a slowdown are well discounted, and we feel the resilience of the business today is underappreciated. In particular, we believe the mega-projects borne out of US infrastructure legislation will not be affected and are multi-year in nature, providing greater visibility over future cashflows. The group's overall business mix is now less cyclical than in the past due to the growth of specialty and more diversified end markets.

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.

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.

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.

Barclays is one of the UK’s largest banks and can trace its history back to 1690 and two goldsmith bankers. Today it focuses on five main areas. Its UK retail and corporate banks, its US consumer bank, its global private banking and wealth management operations, and its investment bank. It generates income from both net interest income and fee-based products, split broadly 40:60.

Despite periods of turbulence in the long history of banks, many have survived hundreds of years and still dominate the landscape today, owing to their large installed base of customers and scale of their balance sheets. In a highly regulated and capital-intensive industry, this makes it difficult for new entrants to compete and coupled with the importance of trust, makes for strong barriers to entry for incumbents such as Barclays.

Post financial crisis all banks spent many years repairing balance sheets, rationalising non-core operations and navigating a low interest rate backdrop. However, the environment is more constructive post Covid with interest rates now expected to settle at a higher level than before. In the case of Barclays, the business is in better shape too with a healthy capital position and a clearer, more focused strategy. This should lead to higher returns on equity at a lower risk profile and thus greater shareholder returns.

While banks will not be immune from future cycles, the years ahead look very different to the previous chapter. Tailwinds from the structural hedge rolling onto higher yields is still to fully play out, while the prognosis for the investment banking operation and fee businesses looks equally supportive. While investors have started to realise this, we anticipate more runway ahead and for it to be reflected in the valuation.

Kerry Group is a leading global provider of taste and nutrition solutions for the food, beverage and pharmaceutical industries. As well as selling a broad range of flavours and ingredients, it is increasingly offering integrated solutions that its customers can leverage to increase their speed of innovation and time to market. This is particularly beneficial for its smaller and mid-sized customers who lack the capacity to do this inhouse. It also means it has a skew to the food service industry relative to its peers.

Kerry has evolved its portfolio over the last 10 years to support customers with trends around healthy eating and sustainability, as well as greater regulation across different markets. This means it is attractively positioned and with it being increasingly important to its customers, along with the low cost of its products relative to the customers' overall product costs, it should see high levels of customer retention in addition to its ability to win new business.

Its willingness to evolve and adapt to changing consumer trends and its customers' needs means Kerry has earnt consistent double-digit returns on capital for a sustained period of time. These returns have been slightly diluted in the last few years due to some of its M&A, but now the reshaping of the portfolio is largely complete and most of its growth should be organically driven going forwards - returns on capital could rise from here.

Kerry is a classic compounder, serving resilient end markets, that should see volume growth increase to mid-single digits in the medium term as its customers invest more in innovation, and consumers become ever more health conscious. We think this, along with expanding margins from greater operating leverage, could translate into double digit dividend growth with the optionality of further buybacks and/or bolt on M&A, leading to attractive total returns for shareholders.

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.

Description

A leading global provider of Assurance, Testing, Inspection and Certification services to businesses and governments.

Why we hold it

Intertek provides certainty and comfort to parties that are trying to trade with each other. That can range from testing the quality of finished products, or their adherence to technical standards, or even validating that an outsourced supplier is not breaching ethical standards in their factories.

Core areas of expertise include certifying consumer goods standards, validating commodity qualities (one barrel of oil is not the same as another), or inspecting industrial assets to vouch for their condition.

The company has a network of laboratories spanning the globe, where goods can be tested, and teams of inspection engineers that can travel out to plants and pipelines to verify their integrity.

The trend to outsource production has been a powerful driver of growth and Intertek gives the outsourcer the comfort of knowing that standards are being maintained, whilst the remote producer can use Intertek’s endorsement to win other clients.

Regulation is a big driver of business, and when governments impose higher standards on industries there is often work for Intertek involved.

The work is high margin, typically around 15%, more in the core Consumer Products division and represents one of their customers’ smaller costs. Few can offer the necessary expertise, which helps keep competition in check and reputation forms a high barrier to entry too.

The business typically acquires smaller operators, often focused on one particular industry and region and these can enhance earnings usefully over time. The lack of production plants means that capital expenditure is typically modest and returns on capital have been in double digits every year bar one. Cash generation is a strength. Analysts forecast double digit earnings growth this year and next.

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

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

One of the world’s largest hotel companies, IHG owns hotel brands, including Intercontinental, Holiday Inn and Crowne Plaza.

Why we hold it

IHG offers hotel owners the choice of either licencing the brand, as a franchise, or allowing IHG to manage the hotel day to day, in return for a slice of the revenues.

Either route means that IHG only needs to put limited capital into real estate; the building’s owners provide the bulk. IHG’s main role is to create the brand standards, so that guests know what they will get, deliver the standards, where they act as the Manager, or ensure that franchisees perform to the brand standards. Crucially, IHG provides the brand marketing and runs the website that channels visitor demand to the individual properties.

The group has hundreds of thousands of rooms operating under its brands and a large pipeline of hotels in development that will grow the estate over time. The US is their largest market and the pipeline of new hotels is heavily exposed to China too.

IHG’s margins are vast, 38% last year, and with hotel owners making most of the investments in bricks & mortar, the group generates free cash flow, year in, year out. This combination of low capital intensity, cash flow and visible growth from the development pipeline, especially with the focus on America and China, looks attractive to us.

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.

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

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

UK luxury goods brand, with retail stores globally, famous for its trenchcoats and signature "check" pattern, but increasingly diversified "across the wardrobe", offering accessories, perfumes and beauty products too.

Why we hold it

The last few years have been tough for Burberry. A corruption crackdown in China has had far-reaching effects on the nation, with affluent Chinese less willing to be seen wearing luxury brands for fear of being accused of earning them the wrong way. Beyond that, the strengths of the business are very attractive.

Luxury goods, done properly earn high margins, because they are sold to the well-heeled, who know what they want, know that they can afford it, but not what it costs to make. The brands control their distribution and their selling prices tightly, because protecting the price points is all-important to preserving the image of exclusivity.

Burberry stands out for having embraced digital technology more than most luxury companies, engaging with younger luxury consumers via social media and refreshing their ranges frequently to create more opportunities to keep engaging.

The strong margins generate good cash flows and the group has over £500m of net cash on the balance sheet. So Burberry is in a strong place and can easily fund its expansion plans. At the moment, the group is managing costs tightly to offset the near term pressures stemming from lower spending in China and by Chinese tourists abroad. But we believe longer term prospects look bright for the brand.

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.

Description

Bunzl is a distribution group specialising in the supply of goods used, but not sold, by their business customers. Main markets are grocery, catering, cleaning and safety.

Why we hold it

Grocers obviously have food and drink suppliers, but they also need someone to provide the plastic bags at the till, the packaging used by the butcher and deli counters and a whole host of other stuff used, but not sold.

The same goes for Bunzl’s other end markets; industrial businesses need safety kit like goggles and hi-viz jackets. Hospitals need stuff their cleaners can ignore, and school canteens need plenty of stuff, other than lunch, that the kids won’t eat.

Bunzl’s job is to source this stuff and deliver it on time, every time it is needed, which can be every day. The bill for Bunzl’s work is often a minor expense for the customer, but they can’t go without the service.

Bunzl has huge scale and that allows it to swallow smaller rivals, often without needing to retain much of the cost base of what they buy, they simply slot the acquired customers into their own existing operations. That means M&A can be very profitable for Bunzl.

Historically, it has added up to very consistent growth and we see few barriers to it continuing to do so, although there are no guarantees.

Description

Produces accountancy software that helps small and medium sized firms manage their finances.

Why we hold it

In recent years, Sage has moved its products and services increasingly online, and sold on a subscription basis. Renewal rates are high; once Sage is installed, it’s a lot of effort to move to an alternative provider’s product. So Sage’s revenues tend to repeat, year after year. Cash flow is a key strength of the business; once a product is designed, it costs Sage very little to sell another copy.

Management are focused on increasing the numbers of products each customer takes. This has been boosting organic sales growth, for very little additional risk. The balance sheet is solid, with debts of about one year’s cash flow, so easily serviced with plenty of scope to carry on investing for growth.

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, generating almost £70m of free cash flow last year.

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.

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

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

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.

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.

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

BAE Systems can trace its history back to the mass consolidation of UK aircraft manufacturers in the 1970s and today is the UK’s largest defence contractor and one of the top 10 globally. Its largest customer is the US government followed by the UK, and it has operations across several areas including air, maritime, cyber and systems. Given the size of the contracts in the sector, most will have a lead contractor and subcontract out some of the work. BAE operates in both capacities.

Why we hold it

The required security clearance surrounding defence and the size of the contracts mean that there are only a handful of companies trusted enough and that are large enough to fulfil the big programmes. BAE is one such business so it faces limited competition. Governments exercising their industrial policies plays to the benefit of local champions and the length of some contracts makes it difficult for rivals to gain the necessary expertise between tenders, dynamics that further amplify the barriers to entry.

Contracts are typically long term, which provides greater visibility than in other sectors, while a more disciplined strategy over the last decade has seen improved operational delivery. Subsequently returns have been consistently well in excess of its cost of capital and its industry-leading cash conversion (due to its relatively asset light part assembly model) has enabled it to increase or hold its dividend for the last 30 years, engage in M&A and also buyback its own shares which enhances earnings. Dividends are variable and not guaranteed.

Russia’s invasion of Ukraine, along with elevating conflict globally in years of late, has underlined the need for greater defence spending. Political tensions further afield only reinforce this and with Trump coming to power there is significant pressure from the US for increased expenditure among other NATO members. This gives good visibility for dependable medium-term growth and cashflows.

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.

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

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.

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.

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

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

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

Medica is the UK’s leading provider of Teleradiology services to hospitals, allowing quick remote analysis of X-rays and body scans, often out of normal hours, using a large roster of highly qualified Radiologists.

Why we hold it

Sit a radiologist at a desk in a hospital and he or she might be busy, or they might not. Patients do not always require scanning at a predictable rate, making it hard for hospitals to match supply and demand for radiology work. Medica offers a solution; a large pool of radiologists working from their own homes, or dedicated centres, all able to receive and analyse scan data whenever it comes in and wherever it comes from. Providing out-of-hours radiology services (Nighthawk) is a key product for the group.

Currently, only a small percentage of total radiology work is outsourced, but capacity shortages in hospitals can mean that the in-house solution can take a long time to deliver a result. We think this will keep driving a greater percentage of radiology work toward Medica. Their technology and high clinical governance (a former President of the Royal College of Radiologists is their group Medical Director) reassure hospitals that quality will be matched and often bettered by deploying Medica compared to the home-grown solution.

Other medical services are suitable for remote digital delivery, such as the interpretation of Pathology data, and international opportunities could be potentially significant in the future. These could be either in-country, replicating what Medica's Nighthawk service does, or cross-border, taking advantage of time differences to deploy radiologists in their own daytime to nations where it is night.

Description

Ideagen's software helps companies comply with regulations and understand the risks they face. Its customers are typically large, well-established businesses in industries where the risks and potential costs of failing to comply with regulations can be severe, like aviation, life sciences, and financial services.

Why we hold it

Risk and compliance may not be the most exciting topics at a dinner party, but they are increasingly important topics in company Boardrooms. This growing concern for IT security, risk and health & safety across a wide range of industries, accompanied by ever tightening regulations and standards, are driving strong demand for Ideagen’s software solutions.

Ideagen's software provides the framework for processes ranging from internal audit to quality control. Once installed and up and running, the Ideagen solution becomes part of the clients’ everyday business processes, helping them to deliver compliant outcomes day in, day out.

Ideagen tends to serve large customers that have greater compliance requirements such as British Airway’s parent IAG and Ryanair in the airline sector. The main competition comes from in-house IT solutions (often spreadsheet-based) and once a customer is signed up to the software, they are unlikely to switch to a competing provider. With Ideagen products embedded deeply into their business processes, customers face high switching costs to change provider. This combined with multi-year contracts gives the group a very loyal customer base and a high and growing proportion of recurring revenues.

Ideagen benefits from an ambitious and long-standing management team and has an excellent track record of growing both organically and through acquisition. Its markets are highly fragmented, the balance sheet is strong and cash flows robust, so there should be plenty of scope for further acquisitions in the years ahead.

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

Alfa are a global leader in producing software that allows financial services companies to run their leasing operations.

Why we hold it

Leasing companies, vehicle and equipment manufacturers, banks and finance houses all need IT systems to run their leasing activities. Alfa are the global leader in providing these systems. The software is hugely complex and just installing it into a business can take years due to the intricacies of integrating it with existing systems and data. Replacing it is a huge step, so once it is in, it tends to stay at the heart of its customers’ operations, generating revenue for Alfa, year after year.

Regulations surrounding leasing vary from country to country and the software has to be customised and kept up to date with each nation’s requirements. Customers tweak their product offerings on a continual basis, often requiring bespoke work by Alfa to facilitate the change.

The group has three main revenue streams. Fees for installing the Alfa system into new clients. The company typically has a handful of these major projects underway. Then there are Ongoing Development and Services revenues earned from systems already installed and lastly Maintenance revenues, which are regular, contracted fees covering services such as customer help desks run by Alfa.

These are not small contracts. Alfa generated revenues of £88m last year from a base of 32 active customers. Last year, half of revenues came from six ongoing contract implementations with the balance equally split between ODS and Maintenance billings. 55% of customer revenues came from the leasing arms of banks, with equipment manufacturers the next largest group. Around 60% of revenues come from customers that are leasing cars, with the balance from equipment finance customers, who may be providing lease finance over anything from giant mining trucks to farm tractors.

With businesses ever more focused on capital efficiency, the outlook for equipment leasing is positive. Leasing allows a business to use a finance company’s capital to finance its own assets, often in a tax efficient fashion. Vehicle leasing, in its various guises is a market that has been around for a long time and is unlikely to go away any time soon. Alfa’s customers cannot operate their businesses without ongoing support from the group, creating a large base of recurring revenues.

Alfa charge a premium price, backed up by the capabilities of their product and services. Profit margins are approaching 50% and Alfa is highly cash generative. The cost of developing the software is a significant barrier to entry, with Alfa having spent over £37m in the last three years alone on R&D, all of it expensed through the profit and loss account.

Their growth is driven by signing up new customers and by helping existing clients further develop their capabilities. The core product is best suited to large businesses with complex needs across many asset classes and territories. For smaller clients with less complex needs the company has developed a simpler, cloud-delivered service which should open new markets up for the group. Alfa signed up their first three clients for their cloud offering last year.

Recent maiden results were badly received by the market, and the share price tumbled. We felt the problems lay more with the level of market expectations than the company’s underlying performance. After all, Alfa have delivered a compound rate of revenue growth of 24% p.a. over the last five years, delivered at strong margins. So with the stock trading at a more attractive valuation we took the decision to invest.

Description

Experts in pest control and property care, Rentokil has also undergone a remarkable transformation in the last few years.

Why we hold it

They say that leopards never change their spots and normally we’d agree, but we think Rentokil is an exception. Five years ago, the group owned a number of disparate businesses with chequered track records and very poor prospects. The transformation since then has been quite remarkable.

The loss-making City Link business, so often the thorn in Rentokil’s side, was disposed of in April 2013. This was followed a year later by the sale of the facilities management business to Interserve and in June 2017 the Workwear and Hygiene business was hived off to Haniel, with Rentokil retaining a small stake.

Although there are still some lower quality divisions within the group, collectively these account for less than 10% of profits. Nowadays, well over half of profits come from Pest Control, which we have always viewed as the jewel in Rentokil’s crown, with the remainder from Hygiene (air fresheners, sanitisers, soap dispensers and the like). Both these divisions benefit from high levels of recurring revenue, and are very profitable with margins being driven by route density (servicing as many customers as possible in any tight geographic zone).

The global pest control market is expected to grow annually by around 5% over the next five years, supported by urbanisation, increasing regulation and rising global temperatures. Rentokil is the leading pest control company in 46 of its 66 markets around the world, with a number two position in 12 countries.

The market is highly fragmented with the five major players accounting for well under half the market and a long tail of much smaller operators. Rentokil’s brand recognition, scale and innovation capability give it a distinct advantage, especially over the smaller competition.

Given these characteristics, both the Pest Control and Hygiene sectors lend themselves to bolt-on acquisitions which is the quickest and easiest way of boosting route density. As route density rises, so too do margins providing additional cash flow to acquire – a virtuous cycle. The group’s medium term guidance calls for revenue growth of 5-8% and profit growth of c. 10%, which we think looks achievable.

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.

Schroders is a significant investment manager in the global arena, with assets under management totalling hundreds of billions of pounds, invested across all the different asset classes and on behalf of all the different client profiles. It was established a long time ago in 1804 and the founding family still owns almost half of the firm. They have proved to be excellent stewards of the business.

Similar to HL Select, long term thinking is the crux of the Schroder family philosophy and has fostered a strong culture within the operation and at every level of the organisation. We believe this to be an important factor in perpetuating their success and combined with a good management team, significant scale, a deep product set, strong brand and powerful distribution network, will result in the investment continuing to compound into the future.

The asset management landscape has changed materially and at speed over the past 10 years. Schroders has navigated well, increasing proximity to the end client, expanding geographically into high growth markets such as China, India and the US, while also adding in-demand products to the suite. It has done this both organically and through M&A. Importantly, Schroders has demonstrated value creation on both fronts, while also being primed to deliver on the future needs of clients.

It is a common misconception that asset managers are mere market proxies. It is true to say that they are geared to financial markets, but as Schroders has demonstrated time and time again, certain operators can prove to be value creators through the cycle, irrespective of the market backdrop. Another measure of this resilience is the dividend which has been maintained or grown for many years, including through the global financial crisis, which is an important part of the investment opportunity, although remember dividends are variable and not a guarantee of future income.

Description

LVMH stands for Moët Hennessy Louis Vuitton. While the initials may be mixed up, the group’s focus on luxury brands is not. It owns an unparalleled stable of labels stretching from Christian Dior to Givenchy, Tag Heuer to Bulgari, in categories from fashion through leather goods and into jewellery, fine champagnes and cognacs.

Why we hold it

Valued at around €150bn as of September 2018, LVMH dominates the luxury sector. The group has been built up over more than forty years by Bernard Arnault, whose family own just over half of the group. The business operates globally and many of its brands have over a century of tradition behind them. Fashion and Leather Goods are the biggest earner within the group.

Despite being the biggest player, LVMH has been outgrowing its smaller rivals and organic growth has averaged over 8% p.a. since 2010. The virtuous circle of strong margins delivering buoyant cash flow to reinvest back into growing the business has been playing out well at LVMH and we think this can continue for some time to come.

Financially the group is strong. Leverage is less than 1x earnings before interest, tax, depreciation and amortisation and even if we treat their store leases as debts and recalculate the ratio accordingly, it doesn’t reach 2x.

We like the group’s strategy of controlling its own distribution globally for key brands. This allows it to keep control over where its brands are seen, vital to retaining cachet and maintaining price discipline.

Description

LSE owns one of Europe’s oldest and largest stock exchanges. The group also provides information services and data on a subscription basis to its customers.

Why we hold it

LSE has completely transformed its business model over the last decade. 10 years ago, almost two-thirds of LSE’s revenues were generated by traditional exchange activities like trading and issuance of cash equities, fixed income and derivatives. These heavily cyclical activities now constitute less than one-fifth of LSE’s revenues.

Following a number of high quality bolt-on acquisitions, the bulk of LSE’s income is now generated from areas with strong growth potential and high barriers to entry. The clearing business is growing rapidly due to regulatory changes forcing over-the-counter (OTC) transactions in derivatives to be cleared by registered and regulated clearing houses. LSE’s index businesses are meanwhile benefitting from the structural growth in Exchange Traded Funds (ETFs) and benchmarking. This has driven strong growth in revenues and an expanding margin profile.

Outside of the Capital Markets division LSE benefits from strong pricing power and limited competition. Its business is capital light and throws off cash and the marginal cost of providing extra services is practically zero. Operating margins of approaching 50% combined with mid-teens returns on capital provide clear evidence of LSE’s strong market position.

Description

Adobe is a multinational computer software company, focused in the areas of multimedia, creativity and digital marketing.

Why we hold it

Adobe is the number one choice in all its markets and its strong market positions are supported by brand reputation and technical know-how.

Creative software was one of the business’s original focuses and these products have now become the gold standard in areas such as graphic design, web development and photography. One of its well-known applications has even evolved into a commonly used verb – to photoshop.

Over time, and with the help of acquisitions, Adobe has also built up what they call the ‘experience cloud’. This offers products and tools that allow customers to build personalised marketing campaigns. These products are tied directly to customers’ revenue-generation, meaning they’re hugely valuable, raising the barrier for any customer to switch away from Adobe.

Adobe has transitioned from a one-time purchase business model, where their products are just installed onto customers’ computers from a disc, to a cloud-based subscription model – effectively renting its product to its clients. This shift has created recurring revenues, reduced cyclicality and ultimately expanded operating margins. It also serves to curb piracy concerns.

Finally, and importantly, unlike many of its cloud-based software competitors, Adobe is robustly profitable thanks to the maturity of its creative software offerings. Financially the business is in a strong position, with net cash on its balance sheet.

Description

Flutter Entertainment is a world-leading gaming business, having grown from its origins as Paddy Power and Betfair in Ireland and the UK. It now has a global presence via various acquisitions, including in the US, Australia, Italy, Brazil and India. Its main operations are split between online sports betting and online casino games, and it also retains a physical store presence in the UK, Ireland and Australia.

Why we hold it

Transformational deals across the world to take advantage of liberalising gaming markets, combined with a shift to online betting, enable Flutter to leverage its expertise and technology platform globally. Its scale makes for an enviable position that is hard for others to compete with, especially in sports betting where it facilitates more choice and better odds, while still earning higher margins than rivals. Gaming taxes also confer advantages to scale given they are taxed on gross profits.

The liberalisation of online gaming across the world as governments seek to regulate and raise much needed tax revenue has created a huge addressable market for Flutter, creating a long runway for growth. The important US market is at a key inflection point and with more states expected to introduce online sports betting in the coming years it will continue to grow, while increasing profitability potential. International markets like Brazil offer further optionality, with mature markets such as the UK and Italy providing good cashflow.

As in other industries with online markets, there are often one or two big winners. Given its current positioning, we expect Flutter to continue to dominate online gaming. Strong getting stronger and the vast structural growth opportunity still in its infancy is an attractive proposition, albeit with some cyclicality along the way. There is also the benefit of increasing free cash flow which should allow it to return excess cash to shareholders, while continuing to invest for growth.

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.

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.

Description

RDS, or "Shell" is one of the world's largest integrated oil and gas producers. In 2016, Shell completed the acquisition of BG Group, to give it a leading position in Liquefied Natural Gas production and deep water oil production.

Why we hold it

Royal Dutch Shell has an unparalleled track record for paying its dividend through thick and thin, having maintained or increased it every year since the end of the Second World War. It is reassuring to know that Shell have a serious track record of looking after their shareholders, however it should be remember that dividends and yields are of course variable and not guaranteed.

We must stress that the dividend is declared in dollars, and then paid in sterling at the prevailing exchange rate, so that introduces a degree of uncertainty at the margin.

Like other oil producers, Shell's earnings were hit when oil prices fell in 2014. The company responded by aggressively cutting costs and also bringing new, low cost production assets into the group through a merger with BG Group. This has left the group much more strongly cash generative and reinforced RDS’s dividend-paying capabilities.

The group is raising further capital through disposals of non-core assets and intends to buy-back shares to reduce the future cost of dividend payments.

In the long term, Shell, like all other hydrocarbon producers, faces the challenge of the changing patterns of demand, as renewables account for more and more of the world’s energy production. But demand for oil and gas will remain strong for decades to come. The International Energy Agency (IEA) forecasts rising demand for both oil, and especially gas out to 2040, notwithstanding the acceleration in renewables demand.

Shell itself is targeting a long term reduction of 50% in the energy footprint of its operations and its production, as it improves its own carbon efficiencies and switches production toward cleaner fuels.

Description

An Exchange Traded Fund (ETF), which can be bought and sold in large quantities, which aims to track the performance of the FTSE 250 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 a tendency to rise over time, so holding cash in a fund is more likely, we believe, 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

Autodesk is a leading provider of computer aided design software. Their products have wide and varied uses, from the refurbishment of Big Ben to special effects in the film Avatar. In all, they serve more than 200 million customers across industries such as construction, manufacturing and media.

Why we hold it

Autodesk is moving from a perpetual license business model, where customers pay when they want the latest software, to a subscription business model, where they make repeated payments and receive updates as and when they’re ready.

This change has significant benefits for growing the number of users and revenue per user, key metrics that drive long term revenue growth. The other key benefit from a subscription business model is it reduces the economic cyclicality of the business as customers can’t delay software purchases, even in a recession.

Autodesk has eighteen million active users but only four million of them are currently on a subscription contract. Less than two million are still on old perpetual licenses who are likely to upgrade as the need for updated software and functionality increases. The remaining twelve million are using pirated copies of the software!

Autodesk’s management have a long-term plan to coax customers into subscription plans, and while the cadence of new user additions will vary, we’re excited by the growth opportunity for new users. And once new subscribers are on-board, revenue per user should increase because Autodesk won’t need to offer the same level of discounts to turn old users into new subscribers.

Autodesk also has some unique characteristics which increase its barriers to entry. It provides free software to higher education covering an estimated 200 million students. Collectively these factors create a strong network effect as students choose software that the industry uses and the industry adopts tools that most graduates know well.

In addition, Autodesk spend more on R&D than peers, which creates value for customers, enabling them to increase prices, which increases profitability and grows the funds available for further product development.

This virtuous cycle fits well with Autodesk’s strategy of developing software that offers 80% of the functionality but at 20% of the price. Collectively this means Autodesk can offer a strong and growing value proposition to customers.