It looks like your browser is not up to date.
This means our website may not look and work as you would expect. Read more about browsers and how to update them here.

Skip to main content
  • Register
  • Help
  • Contact us
HL Select UK Growth Q4 2020 Review

HL SELECT

HL Select UK Growth Q4 2020 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.
Steve Clayton

Steve Clayton - Fund Manager

22 January 2021

UK Market Review

The final three months of 2020 saw stock markets globally focusing on the prospects for economic recovery and stimulus efforts by authorities in the leading nations of the world. News of effective vaccines further propelled the markets higher, leading to a quarterly total return for the UK stock market of 12.6%.

With vaccinations comes the prospect of a return to something far closer to what used to be regarded as normality. Even if there is another period of lockdown to be endured before the hoped-for herd immunity is reached. This change in outlook prompted significant rotations in market leadership. Areas where the pandemic had hit hardest enjoyed a degree of recovery, whilst perceived “safe havens” fell out of favour.

At the very end of the quarter, a Brexit deal was announced, allowing the worst-case scenario of a no-deal outcome to be banished, giving a further boost to investor sentiment. The outcome of the US Presidential elections saw Joe Biden win office, but perhaps not much power, since control of the Senate rests on the Vice President’s casting vote, there being no underlying majority in place.

Hopes of an end to pandemic pushed energy and other commodity prices higher, even though travel remains tightly restricted in much of the world. Banking shares benefited from an easing of concerns over the scale of bad debt that will be left in the pandemic’s wake. For the quarter as a whole, the major market sectors were led by Banks and Oil Producers, which delivered total returns of 33.9% and 28.2% respectively. The major laggard was Pharmaceuticals, which lost 9.6%.

As we start the New Year, investors can bask in the comfort of a realistic prospect of vaccines bringing an end to the pandemic in Europe and North America. Brexit has gone relatively smoothly; central banks remain highly accommodative and President Trump is about to leave office. Markets go up when things are getting better. How much better can they get from here?

HL Select UK Growth Shares Quarterly performance

We run the fund as a concentrated fund, with a strong bias toward high quality growth stocks. We are focused on finding highly cash generative names which we believe are capable of generating rising amounts of free cash flow, far into the future.

We see the global economy becoming ever more digital as technology transforms more and more of human activity, at home, in government and in commerce. So we have substantial exposure to the technology sector and in addition, we often hold the companies we see as digital winners in other industries. We believe such companies can build deep and wide competitive moats that will support their earnings for years to come.

The flip side of this is that we are underweight in many of the more traditional industries, such as energy, mining, or traditional banking, where we see narrow moats and limited pricing power.

During the quarter, the fund generated a gain of 10.9%, a shade behind the market return of 12.6%. For the calendar year as a whole performance remains well ahead of the market, with a gain of 2.3% comparing favourably to the market’s loss of 9.8%. Past performance isn’t a guide to the future.

Performance during the quarter was driven in absolute terms by our technology stocks, which added 4.6% to the fund’s value, followed by Financials which added 2.1% to the fund. We look at the stories behind some of the major winning (and losing) stocks in the section below.

31/12/2015 To 31/12/2016 31/12/2016 To 31/12/2017 31/12/2017 To 31/12/2018 31/12/2018 To 31/12/2019 31/12/2019 To 31/12/2020
HL Select UK Growth Shares A Acc N/A 19.2 -3.2% 24.1% 2.3%
FTSE All-Share TR N/A 13.1% -9.5% 19.2% -9.8%

Past performance isn’t a guide to the future. Source: Lipper IM 31/12/2015 to 31/12/2020.

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

Significant Winners and Losers in Q4 2020

Winners

Stock Gain/Loss (%) Contribution to Fund (%)
Ideagen plc 47.5 2.2
Royal Dutch Shell "B" 35.4 1.3
GB Group 34.1 1.2
Autodesk Inc 25.0 1.2
Close Brothers 40.6 1.2
Ascential plc 30.4 1.2
Compass Group 16.6 0.7
Paypoint 31.4 0.7
Next plc 19.1 0.6

Past performance is not a guide to the future. Source: Bloomberg (30/09/2020 – 31/12/2020)

With the market betting that a vaccine-driven recovery was now on the cards, banking shares gained ground, on the basis that a cap had now been placed over their bad debt charges and that improved confidence might spur better income growth. Close Brothers benefited strongly, as investors viewed its pure domestic nature would make it a direct beneficiary of a UK economic recovery.

Ideagen was a superb performer this quarter, up almost 50%. We started buying this niche risk and compliance software provider in November 2017 at around 90 pence; at the time of writing the shares trade at around £2.70. Remember, past performance is not a guide to the future.

Performance has been driven by a business model transformation, which has seen the proportion of subscription revenues rise significantly. We like subscription revenues at HL Select, because they recur year-in, year-out. Over 80% of Ideagen’s revenue is now recurring, compared to around 50% five years ago.

Ideagen’s software is integral to its customers. It’s used to perform tasks that need doing regardless of which way the economic winds are blowing. Risk management is a growing industry and Ideagen has done an excellent job of recruiting new customers and selling more to existing ones. This has supported impressive organic growth, in spite of one-off headwinds caused by the transition from up-front licences to recurring subscriptions.

Ideagen has supplemented organic growth with highly judicious acquisitions, which has significantly added to cash flows and earnings, while accelerating the transition to subscription. The latest deal is that of Huddle, which completed just before Christmas. Huddle’s software enables secure document collaboration and benefits from increased remote and digital working. This looks like a classic Ideagen deal to us, where the sum of the parts is worth more than the individual components.

Following the recent performance, we wouldn’t be surprised to see the shares pause for breath. But the business itself is firing on all cylinders and still looks to have a large growth opportunity ahead.

The strong performance of Ascential and Compass is not a surprise. Both should be major beneficiaries of vaccines and the re-opening of economies. Ascential owns two major events – Cannes Lions and Money 20/20 – both of which rely on international travel. In truth, we don’t know whether these events will go ahead as planned in 2021. That will depend on how long it takes international borders to re-open. However, looking to 2022 and beyond, we can now be much more confident of a return to normality.

Compass needs workers to go back to the office, students to return to campuses, and sports stadia to be filled. We expect the return to normality will be slow and beset with setbacks (as we’re seeing now), but we don’t buy the argument that people will stay in their homes forever. Yes, there will likely be more home working but there will also be opportunities for Compass to win new business, through gaining share from weaker competitors. With a rock-solid balance sheet, Compass is also well positioned to accelerate growth through acquisition, should it find attractive targets.

Next also falls firmly into the camp of businesses that should benefit from recovery. Clearly the current lockdown will be hurting, but as we have previously observed, despite their High Street presence, the company is predominantly an online retailer. The company pushed their underlying profit guidance higher in a statement in early January which has ensured a strong start for the stock in the New Year.

Last quarter we wrote that Paypoint had announced an Ofgem enquiry on the last day of the quarter, leading to a sharp drop in the stock. During Q4 the market came to the view that the matter was not going to prove impactful and the stock recovered all of that earlier drop and more. The company also announced acquisitions that take it deeper into the Payments sector, offering improved growth potential.

Energy companies enjoyed strong rallies in the quarter, aided by a recovering oil price as economic optimism mounted. The fund’s holdings were no exception and made useful contributions to performance. We see the current oil price, in the low $ fifties as approaching a level where energy producers are likely to feel more confident in their cash generation potential, which could have positive implications for their dividend paying capacity, however we must not count chickens before they hatch!

Losers

Stock Gain/Loss (%) Contribution to Fund (%)
Unilever -7.3 -0.4
Intertek -10.8 -0.3
Experian -4.9 -0.3
Adobe Inc -3.6 -0.2
Rentokil Initial -4.9 -0.2
Sanne Group -6.0 -0.2

Past performance is not a guide to the future. Source: Bloomberg (30/09/2020 – 31/12/2020)

Our weaker performers in December were those businesses that have fared relatively well through the pandemic, and are seen as well insulated from covid headwinds. The vaccines are not going to meaningfully alter people’s propensity to buy Ben & Jerry’s ice cream, for example, so Unilever’s lacklustre performance isn’t a major surprise.

Rentokil, Experian, Intertek and Adobe have all been very resilient performers for us through the pandemic and vaccine news saw a rotation towards more obvious beneficiaries. Adobe has been a major beneficiary of work-from-home trends so in that sense the vaccines aren’t great news. However, as for GB and Autodesk we expect the vaccines will give renewed confidence to Adobe’s customers to accelerate their digital transformations. We think the same can probably be said for Experian. Rentokil is an interesting one – its pest business benefits from economies re-opening, but the virus has seen demand for disinfection services soar. With an enhanced focus on disinfection likely, even once the virus has been contained, we think the business is strongly positioned.

Sanne group lagged the wider market in the quarter. A trading statement in early December went someway to improving sentiment and the stock did claw back some of its earlier losses to end the quarter 6% down. The business is seeing growth held back to a degree by the slow pace of fund raisings by its clients. We expect that this issue will ease when the wider economy reopens, both at home and abroad. Investor’s needs for Sanne’s services are unlikely to have been much impacted, indeed the current ultra-low interest rate environment arguably increases demand for the alternative assets that Sanne administers.

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.