We don’t support this browser anymore.
This means our website may not look and work as you would expect. Read more about browsers and how to update them here.

HL Select Global Growth Shares - Q1 2022 Review

HL SELECT GLOBAL GROWTH SHARES

HL Select Global Growth Shares - Q1 2022 Review

Managers' thoughts

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

29 April 2022

Market Review

Q1 2022 was a very challenging period as the war in Ukraine and COVID shutdowns exacerbated supply chain challenges and further increased inflation. In response the US central bank increased interest rates and provided commentary that they will take the necessary steps to ensure a return to price stability.

Despite inflation increasing to levels not seen for multiple decades, long term inflation expectations remain muted. This suggests the market largely agrees with the assessment that inflation is mostly due to pandemic related factors, and although these pressures are lasting longer than expected, inflation should return to more normalised levels.

This situation has increased uncertainty and increased the risk of a central bank policy mistake, so it is unsurprising that the markets’ response has generally been negative, particularly for higher-multiple growth stocks, which have substantially underperformed the market overall.

GDP and employment trends remain strong across most developed markets, but the consumer is facing significant pressure. In the UK we have seen a further rise in taxes, a 50% increase in energy bills and higher mortgage costs. With interest rates still low versus history, we acknowledge there will likely be a need for further increases, but we are doubtful that we are facing a return to the super-inflationary conditions of the 1970s.

Uncertain times and volatility make investing more challenging, and we are sceptical of anyone who confidently predicts long term macroeconomic changes, given the poor history of success doing this.

At HL Select we focus on what hasn’t changed. We believe demographics mean global growth will be lower in the future, and that this growth will be unevenly distributed as the world continues to be divided into digital winners and losers. And that investing in companies with strong pricing power, will protect long-term margins from higher rates of inflation.

Performance Review

The HL Select Global Growth fund returned -6.3%* during the quarter compared to the FTSE World Index of -2.0%. The US was our largest negative geographical contributor to performance, with Information Technology, Healthcare and Materials, the largest negative contributors to performance.

Since launch, the fund has delivered a total return of 50.4% compared to the FTSE World Index return of 47.0%. Past performance is not a guide to future returns.

Annual Percentage Growth % Growth % Growth % Growth % Growth % Growth
31/03/2017 To 31/12/2018 31/03/2018 To 31/12/2019 31/03/2019 To 31/03/2020 31/03/2020 To 31/03/2021 31/03/2021 To 31/03/2022
FTSE World 2.6 11.1 -6.0 39.9 14.9
HL Select Global Growth N/A N/A N/A 47.6 3.0
IA Global 2.9 8.8 -5.6 40.4 9.1

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2022

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

Positive and Negative Contributors to Performance

Our negative relative performance was primarily driven by stock selection, with the Healthcare and Materials sectors responsible for most of the underperformance.

Having a large allocation to Information Technology, and no investment in the Energy sector or commodities was also a large contributor to underperformance.

The stock-specific issues are discussed in more detail below, however the majority of our businesses are fundamentally executing well, and we have taken advantage of what we believe will prove to be temporary price weakness to increase our position size in many of our largest negative contributors.

Positive Contributors

Business Quarterly Return (%) Contribution to Fund (%)
Aon 11.66 0.44
TriNet 6.22 0.27
Visa 5.45 0.24

Past performance is not a guide to the future. Source: Bloomberg to 31/03/2022

Aon is a quality business, whose shares had been unfairly punished in January, so we increased our position size. As an insurance brokerage it typically takes a portion of premiums as commission, this has enabled it to benefit from stronger insurance pricing, which has historically been a useful hedge against inflation. Aon ended the quarter close to all-time highs.

Visa had a challenging 2021, but it is a very high-quality business, and we think the amount of concern around disintermediation by new fintech-type operators is unjustified. We believe the outlook for Visa is positive with record global payment volume, whilst a recovery in cross-border payments is still expected to benefit revenue and margins.

TriNet had record quarterly and full year results, increasing the scale of the share buyback plan, as well as announcing an acquisition that increases its addressable market. Retaining talent has become even more important, given challenges in labour market, so we think TriNet are well positioned for growth longer term. We used weakness in the share price in January to increase our position, which accounted for most of the outperformance.

Negative Contributors

Business Quarterly Return (%) Contribution to fund (%)
Diversey -41.49 -1.38
Zebra Technologies -28.50 -1.07
Autodesk -21.58 -1.05
Elekta -34.36 -1.03
Cryoport -39.31 -0.81
Phreesia -34.91 -0.70
Masimo -48.86 -0.68
GXO -19.20 -0.56

Past performance is not a guide to the future. Source: Bloomberg to 31/03/2022

Diversey is a supplier of cleaning chemicals, so its margins are negatively impacted by higher oil prices. In recent conversations, management couldn’t have been more confident in their ability to put through pricing and return to previous margins. Recent quarterly results were in-line with our expectations and given the historical pricing power of Diversey and peers, we think the market has severely mispriced the business, so we increased our position size at the end of the quarter.

Zebra Technologies are a leading provider of barcode scanners, printers, and related technologies, making them a key enabler of automation and workflow tracking. Despite raising its expected growth, the market expected more, and the stock reacted weakly. Fundamentally the business is executing well and with the multiple 30% lower than most of 2021, and we used this opportunity to increase our position size.

Autodesk is a leading provider of architecture, engineering, and construction software. They have a very strong competitive position, which gives the business pricing power and high gross margins. Investors were concerned about weaker FCF growth this year, but we believe this is missing the 10+ year growth opportunity for the business. We increased our position in January.

Cryoport and Phreesia continue to execute ahead of our expectations, with weakness we believe driven by a market rotation away from high growth and smaller market cap companies, that are still in the process of scaling up toward profitability. We increased our position in March.

GXO raised guidance at last results, and we think the market underappreciates the persistence and durability of their revenue growth. We think that concerns around the margin impact from inflation are misguided, given many of their contracts allow a simple pass-through of these costs. Margins held up well in their most recent results, reinforcing our conviction in the strength of their business model and its ability to cope with volatile input costs. We increased our position in March.

Elekta had record orders and backlog, but supply chain challenges continue to negatively impact margins and the COVID pandemic limited new installations and revenue growth. Management was very confident in their ability to return to 7%+ revenue growth and margin expansion, but the added uncertainty around timing of this recovery and relative performance of the business versus competitor Varian means we haven’t added to the position.

Masimo announced an acquisition of Sound United, a manufacturer of consumer audio products, which spooked investors about the strategic direction of the company. A $4B fall in market cap, for an acquisition made using $1B of cash, suggests to us an overreaction. We do see Masimo founder and CEO Joe Kiani as a thought-leader in the industry but are waiting for more information at their investor day before we make a final decision on the position.

New Positions

Kornit Digital are a leading manufacturer of digital printing technologies for the clothing and textile industry.

The global textile market is worth over $1T per annum, with analogue printing accounting for 95% of output. The textile industry is the second most polluting industry in the world, accounting for 10% of carbon emissions and wasting 28 trillion litres of water per year. Analogue printing has long inflexible design cycles and a supply chain, with design and manufacturing taking multiple months.

Digital printing uses around 5% of the water and causes a fraction of the pollution, while more efficient, demand-led supply chains mean there is less waste. We believe companies will have to move to a digital printing solution to meet their net zero commitments, and that increasingly consumers won’t choose brands which aren’t operating sustainably.

Kornit are global leaders in digital textile printing, dominating the direct to garment market. This has enabled them to invest heavily in R&D, launching new products, with higher throughput, expanding their addressable market. Higher throughput also means more consumables per printer, which is positive for margins and return on capital.

Kornit have developed a proprietary ‘wet-on-wet’ printing process and neo-pigment inks, which are protected by multiple patents. The new KornitX software solution fully digitises the supply chain, maximising the value of their global fulfilment network by providing an outsourced procurement solution to creatives and designers, increasing barriers to entry. Kornit’s customers already include Amazon, Nike and Adidas.

The shares had more than halved, before we invested, as high-multiple smaller market cap business derated over the last few months. We believe this has created an opportunity to own a global leader, with very exciting long term growth opportunity at a much more attractive entry price.

Sold Positions

During the quarter we sold our positions in PayPal and Haemonetics.

We sold the remainder of our position in PayPal in January, having already reduced our position in 2021 on valuation concerns, but our exit was driven by increased concerns about the growth and margin opportunity for the business.

We saw PayPal’s key value as being the intermediary that lent trust to small businesses, which in turn, enabled a higher conversion of e-commerce transactions. This was a very powerful and successful virtuous cycle.

What changed in our analysis was we believe aggregation of e-commerce onto platforms such as Amazon, Shopify, Etsy etc is now inevitable, and we struggle to see how this will not be negative for the core business, impacting both revenue growth and margins.

Shortly after the sale PayPal reported results and the shares fell almost 30%, given our concerns are more long term and structural, we do not intend to buy back into PayPal.

Haemonetics has been the most negative contributor to performance since the launch of the fund

After completing a review of our analysis and decision making, we found no fault in our investment process, as the loss of a key customer, to a new competitor hadn’t happened for multiple decades. It also seemed very unlikely given management’s announcement of software adoption, the higher rate of innovation and increased industry pressure in sourcing plasma.

There is no doubt though that the loss of a key customer has weakened the business in the core US market. The company does have the potential to recover from this setback, all the signs are that their latest technology is being well received by donor clinics around the world. But equally, we cannot believe that Terumo entered the market only expecting to sign one client, which leaves us wary that competitive conditions will get tougher from here. After seeing some recovery in Haemonetics relative performance we took the decision to recycle the funds into higher conviction positions elsewhere within the portfolio.

Portfolio Changes

Although we are conscious that headwinds from inflation and higher rates are unlikely to change in the short term, we used the poor performance of growth stocks during the quarter as an opportunity to increase our position size in some high conviction businesses at the end of January and in March.

We focused our additions on businesses where fundamental execution has still been strong, versus those with more uncertainty around execution. In addition to the companies mentioned earlier, we also increased our position in Amazon and Adobe.

These additions were funded by trims to Microsoft, Pernod Ricard, Moody’s, Vulcan Materials, Compass Group and Linde.

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.