- General Financial 13.2%
- Support Services 12.2%
- Media 12.1%
- Software & Computer Services 11.4%
- Travel & Leisure 9.9%
- General Retailers 6.3%
- Equity Investment Instruments 5.8%
- Personal Goods 5.6%
- Managed-Funds 5.0%
- Household Goods 3.7%
- Beverages 3.7%
- Tobacco 3.5%
- Other 3.2%
- Health Care Equipment & Services 2.0%
- No specific Industry 1.9%
- Cash 0.4%
Correct as at 15/9/2018
- >£50m and <£250m2.0%
- >£250m and <£1bn15.5%
- >£1bn and <£3bn14.1%
- >£3bn and <£5bn18.7%
- >£5bn and <£10bn14.3%
- >£10bn and <£20bn3.8%
- >£20bn and <£50bn11.8%
- Cash and Equiv0.4%
Correct as at 15/9/2018
Full fund holdings
The portfolio shown is correct at 15/9/2018. Holdings will not show if we are building or reducing a position in a particular stock.
|Name||Industry||Company size (£)||Weighting||Why we hold it|
|Burford Capital Ltd||Equity Investment Instruments||4.1bn||5.8%||More details|
|iShares plc Core FTSE 100 UCITS ETF (Dist)||Managed-Funds||n/a||5.0%||More details|
|GB Group plc||Software & Computer Services||0.9bn||4.7%||More details|
|Ascential Group Ltd||Media||1.7bn||4.3%||More details|
|RELX plc||Media||45bn||4.1%||More details|
|Compass Group plc||Travel & Leisure||26bn||4.0%||More details|
|Auto Trader Group plc||General Retailers||4.4bn||3.9%||More details|
|Experian Plc||Support Services||18bn||3.8%||More details|
|Unilever plc||Personal Goods||0.1t||3.8%||More details|
|Rightmove plc||Media||4.3bn||3.7%||More details|
|Diageo plc||Beverages||66bn||3.7%||More details|
|Reckitt Benckiser Group Plc||Household Goods||49bn||3.7%||More details|
|Sanne Group plc||General Financial||1bn||3.7%||More details|
|BCA Marketplace plc||General Financial||1.7bn||3.6%||More details|
|British American Tobacco plc||Tobacco||83bn||3.5%||More details|
|Ideagen Plc||Software & Computer Services||0.4bn||3.4%||More details|
|Close Brothers Group plc||General Financial||2.5bn||3.4%||More details|
|Intertek Group plc||Support Services||8bn||3.3%||More details|
|Merlin Entertainments plc||Travel & Leisure||4bn||3.0%||More details|
|Domino's Pizza Group plc||Travel & Leisure||1.3bn||2.9%||More details|
|XPS Pensions Group Plc||General Financial||0.3bn||2.6%||More details|
|Rentokil Initial Plc||Support Services||5.8bn||2.6%||More details|
|Bunzl plc||Support Services||8bn||2.5%||More details|
|Just Eat plc||General Retailers||4.6bn||2.4%||More details|
|Sage Group plc||Software & Computer Services||6.3bn||2.3%||More details|
|Medica Group plc||Health Care Equipment & Services||0.2bn||2.0%||More details|
|Schroders plc||No specific Industry||7.1bn||1.9%||More details|
|Burberry Group plc||Personal Goods||8.3bn||1.8%||More details|
|Alfa Financial Software Holdings Ltd||Software & Computer Services||0.4bn||1.0%||More details|
* This is the combined weighting of holdings that we are actively trading. When we are active in the market we won't announce the position until trading is complete to give us the best chance of obtaining good prices for our trading activity.View HL Select UK Growth Shares full fund factsheet
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
The world’s leading contract caterer, operating staff canteens, hospital and school kitchens, using Compass’s own brands, or franchised brands such as Costa or Burger King.
Why we hold it
Where Compass operate on a customer’s premises, the kitchen and canteen is normally fitted out by the customer; Compass provide the staff and prepare the food. They may charge the diners, or the employer might pick up all or part of the cost. Either way relatively little capital is required, making the business very cash generative. That recently enabled them to buy-back £1bn of shares.
Compass estimate that only around half of their market is already outsourced. That should leave plenty of growth potential still in front of them. Compass buy food on a colossal scale, serving millions of meals every day, which gives them buying power. They are also ruthlessly focussed on cost management, with a series of permanent programmes to identify best practices in every aspect of the business and spread them across all of their operations.
The combination of increased outsourcing and focus on costs makes their margins relatively resilient. They are not as high as the margins of most of the companies we back, but there is only so much value anyone can add to a sandwich. But by using their scale to good effect, Compass have been able to grow revenues by over 70% since 2007, whilst profits and dividends have risen by just over 160%. Of course the future will be different and this pattern may not repeat.
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.
Why we hold it
Experian gathers raw data and turns it into valuable information that banks and retailers can use. Much of the data is given to it for free, by banks, because they need a broader picture of their customers’ overall financial position than they can see by themselves. Experian processes the banks’ data along with other data to come up with credit scores, which are then sold back to the banks.
The business earns about two thirds of its sales over in the States, and it reports in dollars as a result. When banks are doing well, Experian makes hay. The election of Donald Trump, with his announced intention to loosen bank regulations could bode well for Experian’s US revenue growth.
Because the business is selling data, some of which was obtained gratis, and because its products are data, not physical objects, capital expenditure requirements are modest and Experian generates a lot of cash, at high margins to boot. Customers have a limited number of places they can go to for the data and analytics they need, especially for credit-related matters.
So Experian ticks a lot of our boxes, with pretty unique products, good pricing power and margins, strong cash generation and debts that are well controlled. The group has paid regular, growing dividends for many years and has also returned surplus capital through share buy-backs.
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.
The world’s second largest operator of tourist attractions, behind Disney. Key assets include Alton Towers, Chessington World of Adventures and Thorpe Park in the UK, plus LEGOLANDs globally, and the Midway portfolio of smaller attractions like Sea Life Centres, Dungeons and Madame Tussauds.
Why we hold it
Merlin’s business model is capital-lite; they typically operate the attractions, whilst owning the rides and exhibits but leasing the land and buildings from property investors. That allows them to expand at a steady pace without needing to borrow heavily.
Most of the earnings come from overseas, making Merlin reasonably insulated from the UK economy. Earnings were under a cloud after the Alton Towers rollercoaster accident, but the group now seems to be making solid progress once more.
With less than 130 attractions globally, there are plenty of locations capable of supporting new Merlin openings. LEGOLAND is the jewel in the crown, and the family behind LEGO own 30% of Merlin. A string of new LEGOLANDs are set to open in the next few years, mainly in Asia and this, along with new Midway attractions should drive growth. Beyond that, Merlin can look to raise spend per visitor as well as visitor numbers. A recent acquisition of a stake in the Big Bus Tour Company offers the chance to cross sell Merlin entry tickets to the tourists crowding onto the bus tours.
Margins of over 20% combined with strong free cash flow and expected revenue growth in the low double digits, make for an attractive long term growth story in our view.
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.
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 recently received a takeover approach from a technology investment fund for a large premium, 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Schroders is a global investment manager with over £400 billion of assets invested across equities, fixed income, multi-asset and alternatives. Established in 1804, the founding family still owns almost half of the firm.
Why we hold it
We view Schroders as one of the highest quality asset managers around, benefitting from a sensible management team, significant scale, a deep product set, strong brand and powerful distribution network.
These advantages help to explain Schroder’s impressive track record. Since 2007, Profit Before Tax, Earnings per Share and Net Assets have compounded at around 7% per annum. The group has paid a healthy dividend throughout this period, maintaining the pay-out through the financial crisis, and growing it strongly since then. Please remember that dividends are variable and are not guaranteed.
In recent years the group has invested heavily in new product solutions and in expanding its geographic presence, particularly in the US and Asia Pacific. These investments strengthen Schroder’s market position and should sow the seeds for future growth.
We believe a key factor behind the group’s success is its culture. The Schroder family own 48% of the company’s ordinary shares and over 87% of the voting rights. This family influence means the business is very conservatively financed, with no long term debt and plenty of surplus capital to deploy into bolt-on acquisitions and new growth initiatives. It also means the business is managed for the long term.
A little quirk with Schroders is that it has two share classes – one with voting rights (SDR) and the other without (SDRC). We have chosen to invest in the non-voting share class. Other than the right to vote and lower liquidity for the non-voting shares, there is no difference between the two. However, the non-voting shares trade at more than a 20% discount to the voting shares, so their dividend yield is significantly better than that of the voters.