HL Select Global Growth Q4 2020 Review

Gareth Campbell - Fund Manager

21 January 2021

Market Review

As the UK and other countries return to lockdown measures to halt the spread of the coronavirus there is a sense of déjà vu for many of us, but the arrival of effective vaccines means this is a different investment scenario to prior lockdowns.

Pfizer’s announcement in November that their vaccine was highly effective was the most important development over the last quarter as investors quickly changed their assumptions on the pace of economic recovery and the implications for different businesses.

Higher global growth assumptions combined with additional stimulus from governments has led to an increase in expectations of future interest rates and inflation, helping to support previously out of favour “value” sectors.

We believe the “Growth vs Value” debate gets more attention than warranted as no one willingly buys a business they know to be overvalued. This is a topic we plan to address in a blog later in the year. Until that point, we assure investors that we are still finding high quality businesses, with excellent growth potential whilst retaining the same valuation discipline we have had since the launch of the fund.

US Election

On 5 January two Democrat senators were elected in the state of Georgia giving the Democrats an effective majority in the Senate and control of all three branches of government. This is a huge change from immediately after the election where bookmakers gave Republicans an 80% chance of retaining the Senate.

The implications of this on size and scope of Democratic policy shouldn’t be underestimated, with likely areas of change being economic stimulus, a greater focus on sustainability and tax policies. However more conservative members of the party are likely to limit some of the perceived more radical proposals such as free healthcare for all citizens, a “Green New Deal” and free college education.

Performance Review

The HL Select Global Growth fund returned 11.36% during the quarter compared to the FTSE World index of 8.61%. The United States underperformed the FTSE World as the drivers of performance differed to the rest of the year with energy and financials being the highest returning sectors. Financials had the largest overall positive contribution as expectation of higher interest rates helped banks deliver strong positive performance.

Over 2020 the fund delivered a total return of 32.08% compared to the FTSE World index of 12.74%.

Past performance is not a guide to future returns.

Past Performance is not a guide to future returns. Source: *Lipper IM to 31/12/2020

N/A – data for this time period isn’t available.

Positive & Negative Contributors to Performance

Despite country and sector headwinds to the fund, we delivered strong performance versus the index over the quarter. Our positive view on vaccine news meant that we had already positioned the fund towards businesses that would disproportionally benefit from a re-opening of the wider economy.

Positive Contributors

Past performance is not a guide to future performance. Source Bloomberg 31/12/20

The two most negative contributors from last quarter are now amongst our strongest positive contributors this quarter, with a very strong net performance benefit. This was mostly driven by CAE which contributed 1.98% to fund performance. CAE is the global leader in pilot training so are well positioned to benefit from a recovery in air travel. While Texas Pacific Land Trust, our only energy sector holding, contributed 0.52% to fund performance as the oil price recovered to almost $50 per barrel.

Zebra Technologies had an excellent quarter, rising 44% and contributing 1.53% to fund performance. Zebra Technologies is benefitting from the already positive trends in automation and productivity gaining further momentum as a result of the pandemic. Demand from large strategic customers is at record levels, with smaller customers recovering faster than expected.

Phreesia was only added to the portfolio in September but has had excellent performance so far delivering a return of 60% and contributing 1.24% to fund performance in Q4. We believe strong results from the business have led to greater appreciation by other investors about the long-term growth opportunity at Phreesia as they look through the immediate disruption caused by the coronavirus.

Charles Schwab is Hargreaves Lansdown’s much larger US based peer, during the quarter it contributed 0.91% to fund performance. We like the business as it has high barriers to entry and is growing quickly from new client inflows. However, the main driver of performance over this period was due to interest rates as higher rates increase the return it can make on client assets.

Booking Holdings is a business familiar to many. With the likelihood that people will be able to holiday normally in future boosted by the vaccine news, the stock rose 23%, adding 0.75% to fund performance. We continue to think it is undervalued relative to its growth, barriers to entry and opportunity to become an increasingly important partner for independent hotels.

Negative Contributors

Past performance is not a guide to future performance. Source 31/12/2020

Cryoport was our only meaningfully negative contributor in the quarter with a -0.32% contribution to fund performance. The negative performance was due to positive vaccine news from other drugs which don’t require storage at extremely cold temperatures. The business has benefited from its role in the coronavirus vaccine supply chain but none of this was part of our original investment thesis in January. We believe an acceleration in industry growth and higher barriers to entry from recent acquisitions justifies the 120% return we have seen since owning the stock and we are still confident in its long-term growth opportunity.

As recovery “stocks” performed strongly, we did see some weakness across our higher growth and technology businesses but over the quarter these didn’t have a meaningfully negative contribution to fund performance.

Our biggest negative contribution relative to the index was from not owning Apple or Tesla. Running a concentrated fund of 30-40 businesses we are never going to catch all investment opportunities. With the benefit of hindsight, we regret not owning some of these businesses given their exceptional performance, but in both cases, we believe holdings in our portfolio will deliver better risk adjusted returns over the long term.

New Positions

Since our last quarterly update, we have added three new positions to the fund: Haemonetics, Teleflex and TriNet.

Haemonetics is one of the largest positions in the fund due to our confidence in the plasma market and the increasingly important role Haemonetics will have in the industry. Coronavirus has significantly disrupted the plasma collection industry but technology advancements from Haemonetics should help improve the patient yield and ensure underlying patient demand can be met. We expect at least one of their main customers to announce an equipment upgrade in 2021.

Teleflex is a business we have followed for years, over the last decade it has used acquisitions and divestitures to transform from a multi-industrial conglomerate into a fast-growing medical technology business.

Professional Employer Organisation are taking share from other employment models due to increasing complexity from regulation and benefits of scale to cost and plan flexibility for healthcare benefits. We believe Trinet’s unique industry-specific go-to-market strategy, along with the investment it has made in its technology platform should help it grow faster than the wider industry.

You can read more about these companies in our earlier blogs which you can find here: Managers' blog

Sold Positions

We sold 4 positions since our last quarterly update, all in response to periods of strong performance that led to us seeing higher risk-adjusted returns elsewhere.

IDEXX Laboratories is a great business but at 70X P/E for 10% revenue growth we could no longer justify holding it. Since we bought the position in March it has delivered a 76% return and contributed 0.90% to fund performance.

We had owned West Pharmaceuticals since the launch of the fund. It’s a great business but we believe a P/E of over 60X is too optimistic and fear there is a greater chance of management missing expectations for 2021. West Pharmaceuticals had been our best performing holding since launch with a return of 115% and contribution to fund performance of 2.71%.

The acquisition announcement of Varian in August has meant it has been a source of funds for new ideas. Our sales of Varian and West Pharmaceuticals were used to build our new position in Haemonetics.

Live Nation is an unfortunate permanent loss for the fund. Since we bought the position in July 2019 it has delivered a return of -11.57% and detracted -1.00% from fund performance. Our previously high conviction idea was brought to a complete halt by coronavirus. We sold our position after the vaccine announcement, when valuation rose but business conditions still seem very challenged.

Portfolio Changes

The main theme of our portfolio changes has been trimming from our more highly valued businesses to add to businesses we thought would benefit the most from a reopening of the economy. We added to Pernod Ricard, Booking Holdings, Visa, RELX, Compass Group and Aon.

With the benefit of hindsight, we were too early on both of these decisions but overall, the strong portfolio performance relative to the index across all quarters in 2020 is a good example of the diversification benefits of a portfolio.

After strong performance from Zebra Technologies we used this opportunity to reduce the position back to 3% which combined with positive client flows over the quarter were used to increase our position in Microsoft, TenCent, Elekta, Moody’s and CarSales.