HL Select Global Growth Q1 2021 Review

Gareth Campbell - Fund Manager

16 April 2021

Market Review

A combination of weak GDP and employment figures in 2020, with additional stimulus from multiple governments means many economists are expecting particularly strong GDP and employment growth for the rest of 2021.

The improvement in growth forecasts has led to further increases in the expectation of future interest rates and inflation, helping support more cyclical sectors such as banks and airlines.

Despite much noise from financial journalists, and some market participants, we believe it is still far too early to determine that long term market leadership has changed.

The secular drivers of growth across the portfolio are powerful and persistent, and many of our holdings will emerge from the coronavirus pandemic stronger than their peers. As the businesses we invest in grow, their intrinsic value is compounding at a faster rate than the average company. This makes us confident in our ability to deliver excellent performance over a long-term investment horizon.

Performance Review

The HL Select Global Growth fund returned 2.34%* during the quarter compared to FTSE World Index of 4.09%. Sector and style exposures had a far greater impact on performance than regional allocations. Energy, Financial and Industrial sectors were the strongest contributors to performance, accounting for almost 70% of benchmark return over the quarter.

Style refers to quality, growth, value and other factors which are often used to breakdown a fund’s performance. Over the last quarter ”value” stocks outperformed ”growth” stocks by around 8% highlighting the headwind growth investors faced in Q1 2021.

Since launch the fund delivered a total return of 45.97% compared to the FTSE World index of 27.91%. Past Performance is not a guide to future returns.

Past performance is not a guide to future returns. Source: *Lipper IM to 31/03/2021.

N/A = figures for this time period are not available.

Positive & Negative Contributors to Performance

After a period of strong relative performance in January and February it was disappointing to end the quarter having underperformed. Overall, the improvement in fundamentals of businesses we invest in continues to be excellent, with the majority of underperformance being driven by general weakness across growth stocks relative to lower quality and more cyclical businesses.

Positive Contributors

Past performance is not a guide to the future. Run to 31/03/21.

Cryoport was our strongest positive contributor this quarter, having been our only significant negative contributor last quarter. In January with the stock up 80%+ over the previous few weeks we reduced our position by around 30%. This was our first sale since reaching our full position size, despite a 350% increase in the share price over this period. We are still very excited about the long-term growth opportunities for Cryoport, but our valuation discipline ensured that as sentiment became too optimistic, we trimmed our position and allocated to holdings that we felt offered a better risk adjusted return.

Zebra Technologies, Charles Schwab and Texas Pacific Land Trust all continued their strong performance from Q4.

Zebra Technologies is rare in that it is a technology business which has had very strong performance during this period, but it plays an important role in automating and improving efficiency of supply chains so will benefit from faster GDP growth.

Charles Schwab and Texas Pacific Land Trust are less surprising positive contributors given they respectively benefit from higher interest rates and higher oil prices.

Negative Contributors

Past performance is not a guide to the future. Run to 31/03/2021.

LSE was our largest negative contributor over the quarter with a -0.7% contribution to fund performance. The negative performance was due to an increase in operating and capital costs related to the acquisition of Refintiv. The challenge of integrating these two large businesses is significant and investors were rightly concerned with the news that costs involved would increase. What hasn't changed is the value of the data both businesses supply to their customers, the reduction in future operating expenses from the merger and the potential new opportunities from their combined resources. Given our confidence in the business’ longer-term potential we continue to hold the shares.

Ubisoft, Haemonetics, CarSales and GoDaddy make up the remainder of our significant negative contributors. They have underperformed for different reasons, but we have used weakness in the share price to increase our position in all four businesses.

Ubisoft’s execution has been mixed over our holding period; its core franchises have never been stronger but delays to new game launches have caused management to cut their profit guidance. Our positive view on the video game industry and analysis that Ubisoft’s content within that industry is underappreciated remain unchanged.

Haemonetics are executing brilliantly and we have never been more confident in the industry shifting to next generation products, which should lead to higher revenue and gross margin for Haemonetics. These positive announcements were rewarded after their quarterly results with the shares increasing almost 20%. Since then a new round of stimulus payments to individuals in the US has increased investor concerns that fewer people will choose to donate plasma for financial reasons. This is undeniably true, but we believe any short-term weakness ignores the long-term growth opportunity of the plasma industry, the improvement in margins from a new product cycle and that the demand for plasma is unchanged so supply (plasma donations) will have to increase otherwise patients won’t get their treatments.

New Positions

Since our last quarterly update, we have added Fiserv to the fund.

Fiserv are a key part of the payments ecosystem and provide software and services to banks. It is a beneficiary of the shift from cash to electronic payments, this is a growth driver we know very well given our holdings in Visa and PayPal.

Fiserv had underperformed Visa and PayPal as it is more exposed to in-person payments and as an incumbent payment business there are concerns around their ability to adapt and thrive in an increasingly online and software focused world.

We believe the business is well positioned to compete with the “disruptors” within the payment industry and although it may never be valued as highly as its peer group, its consistent growth and strong FCF generation should be rewarded by investors as concerns around disruption decline.

Fiserv should also be well positioned for the reopening of the in-person economy. We believe this attribute is under appreciated by investors and means they will benefit from the continued rollout of vaccines and a return to a more normal 2021.

Sold Positions

In January we completed some analysis to better quantify our conviction and our long term expected return for every holding. The outcome of this exercise was that we reduced the overall number of holdings and added to our highest conviction investments. This gives us more time to focus our analysis on the remaining businesses and ensures a larger proportion of our assets are focused in our best ideas, whilst retaining good diversification.

We believe the new structure of the portfolio should offer better risk adjusted returns, as we have lowered the median valuation, while increasing our expected growth rates and our expected return.

After this exercise we sold 5 businesses that have all been held since the launch of the fund:

Past performance is not a guide to the future.

RELX was impacted by the coronavirus due to the restrictions around its conference and events business as well as facing continued headwinds from open access in its publishing segment.

Diageo is a collection of some of the greatest drinks’ brands in the world, but it is a very similar company to Pernod Ricard. We used the proceeds from the Diageo sale to increase our holding in Pernod Ricard given our analysis suggests greater margin upside from restructurings and better long-term growth due to their relatively higher ownership of distribution.

Ansys is an exceptional business but we thought valuation was increasingly challenging, and Autodesk’s’ lower pricing model meant we had higher confidence in their ability to disrupt and grow within the design and simulation industry.

Xylem is an excellent business with a multi-decade growth driver tied to water scarcity and infrastructure investment, however we felt valuation was increasingly hard to justify.

Accenture is a great business, but we believe the lack of operating leverage in their business model means there are better ways to invest in the growth of technology spending, for example software businesses such as Adobe and Microsoft.

As a result of the exercise we also sold Unilever. We bought Unilever in March 2020 when we had real concerns about how the economy and market would manage through coronavirus. At the time we were looking for resilience and security of cash flow and for that Unilever is hard to beat. Adding the name at “peak fear” has meant it underperformed relative to the FTSE World, despite this it still delivered a positive total return of 9.6% and contributed 0.33% to fund performance.

We bought Texas Pacific Land Trust last year as we thought it was a high-quality way to invest in the energy sector with an attractive risk reward, given the oil price was substantially below its marginal cost. Since then the oil price has recovered to significantly above its marginal cost and the share price delivered a total return of 79%, contributing 1.06% to fund performance. Our analysis suggested there was limited upside unless oil prices continued to increase. That is something we have no confidence in forecasting, so we sold our position.

Portfolio Changes

The funds raised from our conviction exercise were used to increase our holdings in Microsoft, Visa, GoDaddy and Haemonetics to 5% positions. We also increased our holdings in Pernod Ricard, CarSales, Moody’s, Booking, Adobe, TriNet and CAE.

In the quarter we reduced our holding of Phreesia after an excellent 150+% gain in share price. Despite our long-term confidence in the business, the risk reward was less compelling, so we reduced our holding. This is another example of the importance of valuation discipline as since then the stock has fallen almost 30%.

Over the quarter we also added to Vulcan Materials, Phillips, Linde and Aon as we believed their quality, growth and valuation was not fairly reflected in the current price.