2019 fourth quarter review

Gareth Campbell - Fund Manager

12 February 2020

For British investors the UK election was the most significant event of the last few months but with just three UK listed stocks accounting for less than 9% of our assets it wasn’t as important an event for the HL Select Global Growth Fund. This level of diversification is one of the key benefits of investing in a global fund.

Despite these benefits we are still constantly scanning for any potential risks to investor returns. A key event in 2020 which we’ve been looking into is the US election and its potential impact on our holdings. With nine months before polling day a lot can change but we will undertake to keep you up to date and ensure you know exactly how your money is being invested.

Market Performance

Global markets were generally quite strong in Q4, however a recovery in the value of sterling against other major currencies meant that the FTSE World index delivered a return of 1% for the quarter. In US dollar terms the FTSE World index returned almost 9% in the quarter.

Sometimes currency moves will act to boost returns to UK investors, and sometimes they will lower them. In the long run we strongly believe that it is the underlying progress of the companies in which the fund invests that will be the strongest driver of returns.

Less bad news is good news

Overall news on the economy has been mixed. The global economy is hardly roaring, but equally the risk of a recession in Europe and Asia seems to have been lowered as countries cut interest rates to encourage investment and growth.

The US and China trade war has stepped back from its extremes and there are signs of a longer term agreement. The US economy has continued to grow and improve with consistently positive employment growth.

In the world of equity investing less bad news is typically good for stock prices so collectively these events have made it a good period for investing. Although please remember past performance is not a guide to the future and all investments will rise and fall in value so you could get back less than you invest.

Winners and losers deserve different valuations

The start of the year is when every economist, investment strategist and fund manager gives their enlightened opinion on what the future will hold. Typically, these forecasts assume low but steady growth and 2020 looks no different. Accuracy of these forecasts has generally been poor - no one has ever been promoted for their pessimism!

But it’s increasingly undeniable that the market is being divided into winners and losers of the future. When you look at just the average valuation of the market you find it hides a growing gap between areas that are very cheap and others that are expensive. We believe that more often than not the areas that are cheap are cheap for a reason and with technology reshaping the global economy at a rapid pace we see no reason for this trend to change.

Two new positions in the Fund

Sometimes the changes in stock prices don’t match our opinion of the underlying value of the business. When that occurs we look to reallocate capital into areas that we believe will provide you with a better risk-adjusted return. With that in mind, in the last 3 months we added two new positions to the fund, Aon and Autodesk.

Aon is an insurance broker. We think it is a high quality company because it has unique long-term relationships with clients and the saving it can deliver clients on premiums far outweighs the cost of its service, giving it all important pricing power. There is also growing demand for its products as risk and complexity of customer needs increases.

Autodesk and Ansys benefit from secular trends

Autodesk is a design software business focused on the manufacturing and construction industry. It has a dominant position in design and is using that foothold to add additional services. Over the last few years the business has converted from a license to a software-as-a-service business model, which has increased the proportion of recurring revenue and we believe should lead to an acceleration in free cash flow and margin expansion.

Autodesk is a business we have liked for a while and decided to buy in mid-October after concerns around cyclicality and free cash flow generation meant the stock had significantly underperformed its peers. Our own internal analysis suggested these concerns weren’t justified and it has since been our best performing stock over the quarter with a 23% return.

Another of our holdings Ansys benefits from many of the same secular tailwinds and has returned 8% in the last quarter, but since fund launch it has been exceptional returning 32.5%. Despite these high levels of return, the secular growth supporting these investments continues to accelerate and we remain high-conviction holders as a result. Of course as always there are no guarantees.

Sold three positions in the fund

We sold three positions in the fund, one became a victim of its own success, while the other two were driven by changes in the business which meant we no longer felt they justified a position in the fund.

Fisher and Paykel is New Zealand listed and is a global leader in the technology of managing patient airflow in hospitals. Since fund launch the stock has delivered a total return of 32% and margins have benefited from a favourable move in the New Zealand dollar making long term targets more challenging.

We are still confident in the business’s growth potential but the valuation had been pushed to extremes and we felt we would get better risk-adjusted returns reallocating capital to Aon and GoDaddy, one of our highest-conviction long-term ideas.

We sold Christian Hansen and Align Technology because the risk and volatility in their results increased more than we had anticipated. Both businesses had been great long term performers with high margins and high return on capital.

For Align Technology we became increasingly concerned with competition and growth of the direct-to-consumer model which reduced the barriers to entry that Align had developed around orthodontic clinics.

Christian Hansen’s core business is exceptional but as it matured more growth has been reliant on emerging markets and new technologies which have lower barriers to entry and more volatile results. The funds from these sales were used to fund our new position in Autodesk.

Visa preferred over MasterCard

In November we switched our holding from MasterCard to Visa. We are confident in both businesses as they continue to be the infrastructure for electronic payments across the majority of the developed world.

We have a preference for Visa because it has a higher exposure to the US which is far behind the UK on moving to electronic payments, for example in 2017 there were still 16 billion cheques written in the US. In addition after stronger performance from MasterCard in 2019 we could buy Visa at a more attractive valuation than MasterCard.