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Four New Holdings

HL SELECT GLOBAL GROWTH SHARES

Four New Holdings

Fund changes

Important information - The value of this fund can still fall so you could get back less than you invested, especially over the short term. The information shown is not personal advice and the information about individual companies represents our view as managers of the fund. It is not a personal recommendation to invest in a particular company. If you are at all unsure of the suitability of an investment for your circumstances please contact us for personal advice. The HL Select Funds are managed by our sister company HL Fund Managers Ltd.
Charlie Bonham

Gareth Campbell - Fund Manager

24 May 2019

Written by Gareth Campbell

Three weeks in from launch, we’re now 90% invested with 34 holdings across 12 countries. The remaining 10% is mostly held in the iShares MSCI World ETF, which we’re using as a source of dry powder, rather than build up cash 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.

You’ll notice the ETF doesn’t appear on the portfolio breakdown, but cash does. This is because we took a snapshot of the portfolio one week ago. As it happens we invested the majority of our cash into the ETF shortly after this point, which will appear on the page next week.

View the full portfolio breakdown

Noteworthy or just news

Over the last few weeks, the US and China trade war appears to be escalating, there’s been no progress on Brexit and global growth continues to disappoint. Yet, despite this seemingly complex global environment the world’s major equity markets have delivered strong positive performance year-to-date.

In the HL select team we’re alert to these risks but, as we said at launch, we focus our time on identifying great companies, in charge of their own destiny which can grow irrespective of the prevailing economic or political climate.

To that end, we’re pleased to reveal four new businesses, which tick this box.

London Stock Exchange

London Stock Exchange (LSE) is known for being one of the oldest and largest stock exchanges in the world but over the last 10 years the business has gone through a transformation which means it’s now the global leader in derivative clearing and the 3rd largest provider of stock indices and information services.

This has shifted the business model from being heavily reliant on transactions to one that’s driven by a diversified mix of subscription revenues with high barriers to entry.

As a clearing house, LSE acts as the middle-man between buyers and sellers, mainly to ensure each party honours their side of the deal. Its growth has been accelerated by regulation, which has forced over-the-counter transactions in derivatives to go through a clearing house, where they were previously the domain of big banks. While the index and information services business has benefited from rapid growth in Exchange Traded Funds (ETFs) and benchmarking.

The economics of a clearing house mean clients tend to concentrate on one exchange as the trading costs are very low versus the amount of collateral they are required to hold against their positions. In the indexing and information services business the costs of switching provider are high, both financially and reputationally - it looks bad to change the index you compare yourself against in a bid to improve your performance numbers.

These high barriers to entry are shown in LSE’s operating margins which are almost 50% and are expected to increase over the next few years. The combination of strong revenue growth, high barriers to entry and a low need for capital reinvestment make us very positive on the business’s long term free cash flow growth.

Carsales.com

Carsales is the largest online classified business for vehicles in Australia. It has diversified geographically with investments in emerging markets and domestically through the addition of financing and other services.

Carsales’ leading business in Australia can be compared to Auto Trader in the UK, one of the largest holdings in the HL Select UK Growth fund. Knowing the business model was invaluable in helping us to determine the drivers, barriers to entry and risks of investing in Carsales.

Online classified businesses have strong network effects as the dealerships get access to the largest pool of potential consumers, while buyers get access to a vast collection of available vehicles which have been collated in a standardised format.

The efficiency of this scale is far greater than print media which means dealerships have managed to improve their sales while lowering their overall marketing spends. This market structure creates a winner-takes-all environment and reinforces existing barriers to entry.

The main differences between the two business models is that Carsales charge sellers for every buyer who registers interest in their vehicle, while Auto Trader charger sellers for every vehicle they list. This difference aligns Carsales more closely with their core customers, car dealerships. And enables Carsales to earn more revenue per vehicle listed in Australia.

The other difference has been management strategy. Auto Trader has a laser-like focus on its core UK market while Carsales has expanded internationally, and acquired businesses in South Korea and Latin America.

Carsales’ investments in South Korea and Brazil are the largest and most exciting of these international opportunities. While, compared with Australia, they earn less than half the revenue per vehicle on their international business, these markets are earlier in development so are seeing faster growth of car ownership, market share and online penetration. Collectively we think these factors should support high growth in international sales for the foreseeable future.

DiaSorin

DiaSorin is a global leader in the specialty diagnostics sector. Diasorin’s equipment is installed in labs worldwide and can perform over 115 diagnostic tests.

DiaSorin typically monetise their equipment through long term contracts of reagents. Each test requires a specific reagent supplied by Diasorin so once equipment is installed it creates a growing stream of predictable recurring revenue.

Growth comes from selling new machines to labs and increasing the numbers of tests that can be performed by the machines. The business has hundreds of millions of euros of cash on the balance sheet and looks capable of robust long term growth in our opinion.

Fisher & Paykel

Fisher & Paykel (F&P) dominates the market for providing humidified air to patients undergoing ventilation within the Intensive Care Units of hospitals worldwide. Based in New Zealand, F&P sell over 95% of their product overseas.

The company have developed a high flow oxygen delivery technique, Optiflow, which can improve a patient’s oxygen saturation, often without the need for intubation. Optiflow should be capable of delivering growth at F&P for many years to come. In the meantime, the group’s existing presence within the respiratory support markets provides a strong starting position.

Patiently building

Our positions in DiaSorin and F&P are smaller than typical. We began building positions in both and their prices moved up. Rather than chase them at any price, we have stepped back. We may get a chance to add further to them, should markets allow, or we could end up taking profits if they continue to rise. But those are decisions for the future.

View the full portfolio breakdown

Important - This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information. Unless otherwise stated performance figures are from Bloomberg and estimates, including prospective yields, are a consensus of analyst forecasts from Bloomberg. They are not a reliable indicator of future performance. Yields are variable and not guaranteed.