HL Select Global Growth shares Q2 2020 review

Charlie Bonham - Senior Equity Analyst

10 July 2020

Unfortunately, during the second quarter the impact of coronavirus continued to be the most significant factor influencing equity markets. The second quarter of 2020 was unique for the HL Select team - as it will have been for many people up and down the country - because the whole team spent the entire period working remotely. We are fortunate because HL had already put in place the technology necessary for us to work from home, which we’d tested with trial runs, so we could continue to look after your investments without skipping a beat.

Market Commentary

As we entered the quarter, most of Europe and the USA were in the first few weeks of lockdown and market thoughts turned to how successfully nations were ‘flattening the curve’, when restrictions might end, and the impact on the companies we invest in. Equity markets are notorious for trying to predict the future and as the worst fears of the pandemic subsided, countries across the globe started to relax restrictions and share prices rallied. Overall, this meant that the second quarter proved to be a very strong one for global equity markets.

Fund Performance

Performance of the HL Select Global Growth Shares Fund was good during the second quarter. Over this very short period the HL Select Global Growth Fund appreciated by 23.5%, compared to the FTSE World Index which rose by 19.7%.

Performance since launch also remains good, with the fund up 22.2% since 3rd May 2019, compared to the FTSE World Index which is up 9.3%. Remember past performance is not a guide to future returns.

Performance of the fund during the quarter was relatively broad based but led by a group of internet and technology stocks which accounted for 8 of the top 10 contributors to performance; PayPal added over 2% to the fund’s performance, with positions in Autodesk, Carsales.com, Microsoft, Adobe, Amazon, GoDaddy and Tencent each contributing over 1% to the fund’s performance. We invested in all these companies before the coronavirus pandemic, believing that they all have strong long–term drivers to their businesses, but they benefited from a belief that people will make greater use of these technologies after the coronavirus outbreak. Two healthcare stocks, West Pharmaceuticals and Cryoport, rounded out the top 10 contributors with contributions of +1.3% and 1.1% respectively during the quarter.

The fund only had three negative contributors to performance during the quarter. These were new position Compass Group, Raytheon Technologies and Live Nation. These three holdings are discussed in more detail below, but detracted a combined 0.8% from fund performance.

Annual percentage growth

Past performance isn’t a guide to the future. Source: Lipper IM 30/06/2020.

N/A = performance for this time period is not available.

Portfolio Changes

As we moved in to the second quarter market volatility remained high. This created opportunities to make investments as share prices diverged from our view of long-term value. Reflecting this we adjusted the portfolio more than we typically would. We continued the actions of March by increasing positions in existing holdings where we felt share prices had been unduly hit by sentiment and trimming positions that had performed well, as well as building some new positions.

The largest purchases of existing holdings were CAE, the aeroplane pilot trainer, and Booking.com, the travel booking company. Both these companies have seen weak share prices given the tough trading environments they face, but we felt that the long term future of both is secure and we used the opportunity to buy more shares. The most notable share sales were in our holdings of West Pharmaceuticals, Ansys and ServiceNow which had all benefited from very strong share price moves.

During the quarter we reduced our exposure to Live Nation, the live event promoter and ticket seller. Given that its events involve crowds of people gathering in close proximity to one another, Live Nation has been one of the companies hardest hit by coronavirus. We, along with others, are uncertain as to how long the government restrictions will last and, possibly more importantly, how consumer attitudes towards such gatherings will have changed. As the share price has recovered from its lows in the first quarter, we have used the opportunity to take some of the risk off the table by reducing our exposure to Live Nation.

New Positions

We also saw opportunities to take new positions in companies. We established a position in Texas Pacific Land Trust. The company earns royalties from oil and gas companies wishing to use its land and also from its related water business that supplies these companies. With the oil price slumping to record lows during the quarter the share price fell to a level where we saw a compelling opportunity to invest in a business with high profit margins and sustainable barriers to entry into its market, but limited risk from a prolonged period of low oil prices.

We invested in Vulcan Materials, the largest aggregates supplier in the US, too. Vulcan benefits from a hard to replicate, network of sites which helps keep crucial transportation cost low, around 80 years’ supply of materials still in the ground, and a history of good pricing power. Additionally, infrastructure in the US – roads, bridges, airports etc. - is in need of updating. The US economy has been plunged into a coronavirus induced recession. Our view is that this means there is an increasing likelihood of a government spending package to revive the US economy, and that will likely include provision to update infrastructure quality. While we recognize that such spending is not guaranteed in the short term, we think that the infrastructure needs of the US economy, combined with the qualities of the business, mean that the long-term prospects for Vulcan are good.

Zebra Technologies is another company we’ve added to the fund. It provides businesses with barcode printers, scanners, mobile devices and related software to help identify and track items or people. This could be inventory for retailers, parcels for delivery companies or patients in hospitals. It has a strong market position and we believe that there is a secular trend towards electronic and automatic tracking and monitoring that will stand the company in good stead.

Compass Group, the contract caterer, is the final position we added to the fund in early June. The company, which has been a long term investment in our UK Growth fund, provides food services in all manner of establishments – from hospitals and schools to company campuses and sports venues.

Quite clearly with schools, universities and workplaces closed and sports on hold during the lockdowns Compass has lost significant revenues. Getting back to business will take time and extra expenses. However, the company reinforced its balance sheet with a placing of new shares and we believe that it should be in a better position to exploit opportunities in the future. Combined with a significantly lower share price than at the beginning of 2020, we felt that it was an attractive way to gain exposure to an opening up of economies as coronavirus restrictions are eased.

We exited the position in Raytheon Technologies during the quarter. We invested in Raytheon at the launch of the fund in May 2019, and afterwards the company announced a merger with United Technologies. We were unsure of the merits of the deal given its complexity and the new exposure to civil aerospace, but were of the view that the valuation would improve once some of the United Technologies divisions were divested. Unfortunately, this didn’t prove to be the case as the impact of the coronavirus pandemic pushed the share price lower. We exited the position in early April but with hindsight should have done so sooner.

You can see every holding in the portfolio and find out why it was chosen, on the portfolio breakdown page.

* All performance data from Bloomberg to 30/06/20 unless otherwise stated