HL Select Global Growth shares Q3 2020 review

Gareth Campbell - Fund Manager

28 October 2020

Market Review

Across the globe coronavirus and respective policy responses continue to be the main factor impacting equity markets. The world enjoyed a brief summer of positive news as cases fell and life began to feel a bit more normal, but with second waves now impacting the US and Europe it is becoming increasingly clear that without a vaccine or effective treatments coronavirus will continue to be a significant issue, impacting the economy and our daily lives.

The collective effort of global therapeutic companies combined with the data they have so far released leaves us believing we are likely to see some positive news around vaccines before the end of the year. However, confirming safety, receiving regulatory approval and organising the logistics of vaccinating a large proportion of the global population means the existence of a vaccine doesn’t necessarily mean anything will change soon.

United States Election

On 3 November the United States will elect its next President. Neither candidate is necessarily “good” or “bad” for equity markets, but sectors of the economy are likely to react differently depending on the result. With the unprecedented amount of postal voting this year there is a greater risk of volatility during election week as the winner on the 3rd may not necessarily be the same person once all the votes have been counted. Although we expect a normal transition of power, we remain aware of these risks and would look to use any volatility to improve our long-term positioning.

Performance Review

The HL Select Global Growth fund returned 4.8% during the quarter, compared to the FTSE World Index of 3.4%*. The North American market together with growth stocks contributed the most to the markets’ performance, this was a favourable backdrop to the Global Growth fund which has the majority of its assets in North American companies and a focus on identifying companies with long term secular growth.

Over the last year the fund has delivered a total return of 21.6%, compared to the FTSE World Index of 5.7%*.

Past performance is not a guide to future returns.

Past performance is not a guide to the future. Source: *Lipper IM, to 30/09/2020.

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

Significant Winners and Losers in Q3 2020

The fund's performance was not driven by one specific sector, instead the top 10 performing stocks came from a broad range of 6 different sectors (Technology, Healthcare, Consumer Discretionary, Consumer Staple, Material and Industrials).

Winners

Past performance is not a guide to the future. Source: Bloomberg (30/06/2020 – 30/09/2020)

The most positive contributor this quarter has been Cryoport, it has continued its excellent performance in the fund since being added in January, with a total return of 140%. The business has performed strongly as updates on clinical trial progression suggest continued high levels of growth through the rest of the year and 2021. Cryoport also made two acquisitions during the quarter which have significantly increased its scale and are likely to have increased the business’s overall barriers to entry.

CarSales is an Australian based equivalent of AutoTrader with operations in Australia, Korea and across South America. During the quarter it contributed 0.59% to fund performance as increased market share in Australia and high growth from its Korean business led to strong share price performance. Xylem, a global leader in water technology and equipment has contributed 0.46% to fund performance as investors have become more positive around infrastructure spending and place greater value on its strong ESG (Environment, Social and Governance) characteristics.

Losers

Past performance is not a guide to the future. Source: Bloomberg (30/06/2020 – 30/09/2020)

Our two notable negative contributors were CAE and Texas Pacific Land Trust. CAE is the global leader in pilot training and with the onset of a second coronavirus wave and the negative impact to the airline industry the business has struggled. Even at current low levels of utilisation, the business is still near cashflow breakeven. That should leave it well positioned for the recovery in air travel.

The pandemic has reduced demand for fuels, and oil prices have been below the marginal cost of production in much of the world. Even though the world is transitioning toward a greener economy, physical demand for oil will remain substantial for some time. Texas Pacific’s royalty business model should prove its worth as and when oil prices better reflect the cost of producing oil and gas from the ground.

New Positions

Since our last quarterly update, we have added three new companies to the fund, Varian, Elekta and Phreesia. Varian and Elekta are the global leaders in radiotherapy, while Phreesia is a US based healthcare IT business.

We believe radiotherapy is a very attractive industry to invest in due to increasing prevalence of cancer from population growth, ageing demographics and increased diagnostics in emerging markets. The radiotherapy industry is expected to grow even faster due to increased utilisation of radiotherapy outside the United States. Our positive view on the industry was supported by Siemens Healthineers, a large German healthcare company, who agreed to acquire Varian in August, giving us a return of 40% on our investment and contributing 0.7% to our performance over the quarter.

Elekta has also had a great start since we added it to the fund as a well-received new product launch and the halo-effect of its main competitor being acquired has resulted in performance of 30% during the quarter.

Phreesia is a small healthcare IT business but as a beneficiary of some of the strongest trends in US healthcare, a large addressable market and a unique business model we are very excited about its long-term growth opportunity.

Sold Positions

ServiceNow is a software business based in the United States, we have held it since launch in May 2019 and sold the last of our holding at the end of July. We still like the business and are confident in its ability to continue growing but after a period of exceptional performance it’s P/E increased to just over 100X 2020 EPS and we believe other businesses in the portfolio offered a better investment opportunity. Since launch the stock returned 62.5% and contributed 1.15% to fund performance.

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

Portfolio Changes

After a period of very strong performance from some of our Technology and Healthcare stocks we trimmed our holdings and used this opportunity to increase our position sizes in companies that we believe have a better risk reward opportunity such as GoDaddy, Visa and Zebra Technologies, with all three now top 5 positions in the fund.

In addition, we added to Elekta and Booking, businesses which have been impacted by coronavirus, but we believe still have excellent long-term growth opportunities.

Anti-Trust Regulation

Some of our technology sells were driven by increased concern around regulation, particularly anti-trust. Anti-trust regulation is designed to promote competition and benefit consumers. With the global economy increasingly dominated by a handful of major technology companies we think there is greater potential for regulation that will be used to limit or potentially reverse their influence. It is also one of the few areas where both political parties in the US agree something should be done.

Multiple technology leaders have been summoned to the United States Senate to give evidence and with the more recent headlines surrounding the fallout between Apple and Epic Games this issue has received greater awareness. We see little immediate risks to any of these businesses but with Amazon for example returning around 70% this year it seemed prudent to reduce our position and add to areas with similar levels of growth but potentially less risk.