Early successes and lessons learned

Steve Clayton - Fund Manager

6 December 2019

We look for unique companies that have something hard to replicate. Me-too businesses always struggle somewhere down the line, because they can’t control the prices they charge.

The best companies generate a virtuous circle of great products, pricing power and cash generation. That allows them to stay financially strong and reinvest to fund their own growth.

The HL Select UK Growth fund was launched to find these exceptional companies, and hold them for the long term, whilst letting investors know exactly what we’re doing with their money in our monthly blog and full portfolio breakdown. We have the flexibility to scour the market to find large, medium or higher risk smaller companies we believe have the most potential.

We’re delighted with how the strategy is working. The fund has outperformed the market and its sector, with a total return of 44.16%* since launch. This is a short time period and past performance is not a guide to the future. All investments fall as well as rise in value, so you could get back less than you invest.  This blog post is not personal advice, if you’re unsure an investment is right for you, seek advice.

HL Select UK Growth Shares Performance

Past performance is not a guide to the future. *Source: Lipper IM to 02/12/19.

Past performance is not a guide to the future. Source: Lipper IM to 02/12/2019.

N/A† full year data unavailable as the fund launched in December 2016.

Holdings performance

Out of 40 companies held so far, 32 have risen in value. Where we’ve lost money, we’ve tended to cut the losses and move on.

Past performance is not a guide to the future. Source: Bloomberg, Correct as at 02/12/2019.

Lessons Learned

One of the most important decisions for any investor is when to sell. Very few companies have the right mix of characteristics to make it into the fund. If something changes, we make a calculated decision. Sometimes it’s right to get out quickly, but patience can pay off too.

We sold out of Alfa Financial, WPP, XPS Pensions and Domino’s Pizza having taken double-digit blows, it was clear there were better opportunities elsewhere.

Alfa Financial Software was a very disappointing investment. The company issued a major profit warning just after we bought. We aim to own companies that are largely in charge of their own destiny and with Alfa we got it wrong. The business model has proven to be much less predictable than we had anticipated, so we sold out.

Advertising agencies like WPP are facing an ever increasing challenge from digital businesses, like Facebook, Google and Amazon, which looks unlikely to get any easier, any time soon. Hotels are similar, and we sold Intercontinental Hotel Group  at a profit when it became clear that online travel agents were making it easier to find alternatives to the big branded chains, putting future pricing power at risk.

On reflection we should not have held both Just Eat and Domino’s Pizza, for one was benefiting from increasing people’s takeaway choices whilst the other would suffer if people chose anything other than a pizza. As it was, losses on Domino’s partially offset the gains we made on Just Eat when it was taken over.

Playtech was sold when the company revealed weak trading in Asia, but before the worst of its problems came to light. We acted quickly and dodged what would have been a pretty heavy caliber bullet, given the stock subsequently halved over the course of the next year or so.

Performance drivers

One of the reasons we only hold around 30 companies is so each holding can make real difference to returns, although it’s a higher risk approach.

Our technology picks have delivered a big chunk of the fund’s performance so far.

GB Group is firmly in a sweet spot within the digital economy. Their ID verification services are embedded deep into their customers' workflows, providing recurring revenue and predictable cash flows. That’s a big, big tick for us and has helped deliver the biggest contribution to overall performance.

Fidessa’s software links stock market participants electronically, reducing trading costs and improving market reporting quality. It generated great returns for the fund when a bidding battle erupted for the company . 

Luxury goods have certainly pampered the fund, Burberry’s cash generation was attractive when we launched. But when its shares became as expensive as its shops, we took profit and moved our money into rival LVMH, where we saw better value, and this continues to pay off.

You’ll seldom hear about companies like Compass Group, which serves diners in staff canteens, hospitals, and stadiums each and every day. But their growth has been delightfully reliable so far. And if one division slows a little, as their European arm is currently doing, the rest of the group tends to march on regardless.

Just Eat and Fidessa are not the only holdings that have attracted potential buyers. Car auctioneer BCA Marketplace was taken over at a healthy premium by a private equity firm. Even Unilever attracted bid interest at one point. That was quickly rebuffed, but led Unilever to take action to sharpen up its portfolio and focus on its scope to raise margins.

What does the future hold?

Early success gives us confidence in our strategy. But it’s the long term portfolio performance as a whole that really matters. Every holding has their own role to play in the portfolio. There are 27 stocks at the moment and you can find out exactly who they are, and why they were chosen, on the portfolio breakdown page.

You can also read more about the key themes of the fund over the first three years.