HL Select Global Growth - Q1 2025 Review

Gareth Campbell - Fund Manager

21 May 2025

Market review

Q1 has been a challenging start to 2025, a reversal from recent years as growth, AI and US exceptionalism have taken a pause, allowing value and European stocks to be the main positive drivers of market returns.

Breadth improved with equal weighted indices outperforming market cap weighted indices, although this primarily reflects a weakness in mega cap ($250B+ market cap) stocks, as large cap has been very strong, while small and mid-cap continues to struggle.

President Trump’s first term began at pace. A cabinet stacked with loyalists led to a sharp dismantling of many federal departments and substantial layoffs of government workers. The checks and balances that have helped make the US market such an attractive market for external capital are being tested and 2025 may prove to be the year we find out if political risk can bring an end to US exceptionalism.

Europe’s strength during this period is encouraging, with financial reforms in Germany potentially unlocking substantial government support, justifying some of the strong market returns. In addition, concerns around the US’s role and relationship with Europe likely strengthens ties across Europe and the UK, which should have a positive impact on economies and respective markets.

The AI trade has taken a breather as investors take profits and digest relentless capex spending, with still limited real-world examples that can sufficiently monetise these investments. This is frustrating timing for the fund as after a long period of it dragging on performance, we used recent weakness to add to positions within this theme. Unfortunately sentiment has only worsened, so this has been a significant drag on performance.

We have made multiple changes to the portfolio with 3 additional net positions, quickly cutting stocks where our conviction in the thesis has fallen and rebalancing the portfolio to higher-quality compounders we think are best positioned to navigate whatever market or political conditions 2025 may have in store.

Performance review

The HL Select Global fund returned -8.08%* during Q1, compared to the FTSE World Index return of -4.40%, resulting in 3.68% underperformance versus the benchmark.

Positive and negative contributors

Our negative relative performance was due to our overweight in North America and Information Technology, combined with poor stock selection across multiple areas. Industrials, Communication Services and Information Technology were our main drivers of underperformance. Financials, Consumer Discretionary and Consumer Staples were our only positive drivers of relative performance in the quarter.

Not owning Energy, Real Estate or Utilities detracted 0.72% from performance as they all outperformed in Q1. Energy was the main driver of this with the sector outperforming by over 10%, as investors looked for inflation protection.

Positive contributors

Heineken and Elevance flipped from some of our weakest performers in Q4 2024, to our best performers in Q1 2025. Heineken shares had become very depressed with its relative multiple at 15-year lows, so upbeat results with improving volume trends led to a very strong share price reaction. For Elevance, we think declining concerns around Medicaid and reassuring guidance attracted investors back to a sector that has delivered exceptional long-term returns.

Visa continues to execute well, helping to improve the multiple. We trimmed the position to help fund new ideas.

Marsh & McLennan had a strong start in the fund as its consistent execution and highly-defensive growth is increasingly valued in this uncertain market.

Medtronic's defensive and consistent growth was rewarded by the market in Q1. We think the improvement in quality and pipeline is still very underappreciated.

Negative contributors

TSMC is a poster child for declining sentiment around semiconductors and their role in AI. It announced very positive results and reaffirmed guidance, but concerns around the semiconductor cycle resulted in a sharp derating of it and peers. This also led to underperformance in our holdings in Nvidia, Broadcom, BESI and Disco Corp.

West Pharmaceuticals substantially lowered its guidance, which given its scarcity premium and high multiple resulted in a significant derating of the share price. We have owned shares in the business since launch and think the core business is one of the highest quality ways to invest in the growth of biopharma. However, we aren’t convinced by management’s explanation as to the weakness of results and think capital allocation has detracted from returns. Given our lower conviction in management and concerns of further downgrades, we sold our position.

Autodesk is executing well, but the share price reacted negatively to management withdrawing long-term revenue guidance. Given investors thought the guidance was unrealistic and it had been missed for multiple years, we think this was an overreaction. Especially as we believe investors are missing that Autodesk are further through its transition to a consumption-driven model than many software peers.

Alphabet and Amazon - cloud businesses were weaker than expected. This was matched by Microsoft, and we think more short-term noise than the end of a large and persistent growth driver. We trimmed our position in Alphabet in February to fund other ideas.

TetraTech had 10% of revenue tied to US AID. After this was effectively disbanded, the share price reacted very negatively. Given the Trump presidency’s anti-environment and deregulation platform, we thought there was a risk of further negative revisions and so we sold the position.

New positions

JPMorgan is one of the largest banks in the world and its management team are highly respected. In industries with more challenge and uncertainty such as banking, we think it is important to own higher-quality companies.

Chubb are a large US based insurer. Insurance isn’t a choice in most instances, which makes it highly defensive, while the steady increase in insured volumes helps mitigate the business from periods of inflation.

Idexx Laboratories are the leaders in animal health diagnostic equipment. We first bought it in 2020, but sold in 2021 after the valuation became stretched. The relative multiple had fallen to near 10-year lows and we think the negative revisions post COVID have now slowed, enabling the business to return to compounding in the teens. We think investors don’t appreciate the upcoming wave of demand, as pets acquired during the pandemic age and their healthcare needs increase meaningfully.

United Healthcare is the largest managed care business in the US, and a close peer to Elevance. Given our increased conviction in this industry, we added another position.

Broadcom are the leaders in ASIC’s chip manufacturing, which we think could play an increasingly important role in AI technology infrastructure.

Eaton are a US based industrial focused around electrification. The business has improved quality over the last 10 years, which can be seen in its margins and organic growth. It had derated as AI thematic slowed, but we think the broad electrification theme is still in its early stages and Eaton are well positioned to benefit from this secular growth.

DISCO Corp are a Japanese listed business and the global leaders in cutting and grinding equipment used in the semiconductor manufacturing process. These tools are of increasing importance to enable innovation within advanced 3D packaging, so we think the business is well positioned to benefit from innovation and a recovery in the semiconductor cycle.

Sold positions

Stedim was sold due to its valuation and our view that Danaher offer better risk-adjusted returns and has lower expectations if there are continued delays to the recovery in bioprocessing.

Intuit is an exceptional business with limited near-term risks. We sold the business as we think there is a higher risk of derating from AI-enabled competition and the substantial price increases to existing customers limit the abiltiy for Inuit to respond without cannibalising its existing profits.

Zebra Technologies had recovered from the lows as the business worked through supply chain issues and excess inventory in the channel post the pandemic. Nevertheless, we had increased concerns about slowing demand and think the business has higher cyclicality than our initial assessment, so we sold the position in early February.

Portfolio Changes

In addition, we trimmed LSE, Compass Group, GoDaddy and GXO. These were done largely to reinvest proceeds in ideas such as API Group and Vulcan Materials, as well as new ideas with higher expected risk reward.