Final two holdings revealed

Charlie Huggins (CFA) - Fund Manager

20 April 2017

We've just published the final two holdings on our portfolio breakdown page. This page now displays all 27 holdings, their size relative to that of the fund and a rationale explaining why we own each stock. Our position sizes will continue to evolve over time, as we allocate inflows to some names, rather than others, always keeping our trading costs to a minimum.

Britvic

Our first new holding, Britvic, should be familiar to tennis fans. The group’s Robinson’s brand has been sponsoring the Wimbledon championships for 80-odd years, making it the second-longest sports partnership in history (Slazenger is the oldest such relationship, but it doesn’t taste so good). Other well-known brands in the group’s stable include Britvic juices and mixers, barley waters, Fruit Shoot and R Whites lemonade. Britvic also owns the exclusive long term licence to bottle Pepsi products in the UK, and has been expanding overseas, establishing footprints in Europe and more recently, Latin America.

Adding a bit of flavour concentrate, and some bubbles, into water does not cost much, but branded drinks sell for good prices. So Britvic generates good profit margins and throws off cash. This has supported regular increases in the dividend, which has grown at a compound annual rate of 9.4% over the last decade. There are of course no guarantees these increases will continue.

The UK soft drinks market has been quite challenging of late, not helped by a supermarket price war. As a result, Britvic has struggled to grow its sales in recent years, and the shares have fallen somewhat out of favour.

We are not overly fazed, since we expect market conditions in the UK to improve at some point (indeed the Q1 update in January showed UK sales returning to growth), while we believe the much less mature international operations offer good long term growth prospects. We are also hopeful that the significant investment Britvic is currently making in its UK supply chain will generate long term efficiencies and cost savings, supporting margins.

We acquired the bulk of our holding at the start of March, meaning our average purchase price is around the £6.40 mark. The shares have bounced a bit since then, but still look to have plenty of long term potential, trading on a P/E of c. 14x and offering a prospective yield of around 3.7% for the current year, although this should not be seen as a guide to future income.

Fidessa

The second new holding, Fidessa, is also held in the HL Select UK Shares Fund. The company provides software to investment banks and other financial institutions which is integral to their day-to-day operations, enabling them to place trades and conform with all relevant regulations.

Once a customer has signed up to Fidessa, it is very difficult and costly for them to switch to another provider. This is because the group’s software is deeply embedded into applications, requiring long deployment times, customisation and integration into a customers’ trading IT infrastructure. This results in loyal customers and underpins high levels of recurring revenue.

The business model is enormously cash generative and Fidessa has not been shy about returning this cash to shareholders. The group has paid a special dividend, on top of ordinary dividends, in each of the last 8 years. The total dividend for 2016 (including specials) was raised by 11%, so the shares offer a prospective yield of about 3.6% currently. Although, again, this should not be seen as a guide to future income.

Fidessa has also struggled to grow sales in recent years, owing to pressures on its customer base. Throughout this period, Fidessa has continued to invest heavily, developing new solutions to help its customers deal with changing regulations; and extending into other asset classes. We expect these investments will eventually pay off, in the meantime the dividend means we are being paid to wait.

View the portfolio breakdown

More about HL Select UK Income Shares

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