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HL Select UK Growth Shares - August review

HL SELECT UK GROWTH SHARES

HL Select UK Growth Shares - August review

Monthly roundup

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 Huggins

Charlie Huggins (CFA) - Fund Manager

17 September 2018

The UK market had a poor month in August, declining by 2.75% with dividends reinvested. Weakness was driven by financials, consumer staples and commodity-related sectors, with President Trump’s trade war and sharp declines in a number of emerging markets largely to blame.

How did the fund do?

Despite the wider market’s decline, the fund rose by 0.58% in August, with performance aided by our lack of commodity exposure and a strong showing from the likes of GB Group and Burford Capital.

In the table, we list performance of the biggest positive and negative stocks by their contribution to the fund’s return. As always, remember these details are over a short period of time and past performance is not a guide to future returns.

Biggest positive contributors

Stock Contribution to fund’s return Actual return
GB Group 0.67% 15.93%
Burford Capital 0.47% 8.71%
Ideagen 0.40% 14.55%
Burberry 0.28% 6.12%
Auto Trader 0.24% 6.52%
RELX 0.15% 3.63%
Medica 0.14% 7.39%
Bunzl 0.14% 5.87%

Past Performance is not a guide to the future. Bloomberg 01/08/2018 – 31/08/2018.

August was a quiet month for company news, with most of our holdings having already reported earlier in the summer.

Our top three performers - GB, Burford and Ideagen - all reported results in the second half of July. Each business is making very positive progress and their share prices have been driven higher. We remain confident in the long term prospects of all three so haven’t been tempted to take profits.

We have however been reducing our Burberry position. We have held this position since launch, paying around £14.07 for our initial stake. At the time of writing the shares trade at close to £23. The price to earnings ratio (P/E) has risen from around 18 to 27 during this time, reflecting growing optimism that Marco Gobbetti’s brand elevation strategy will succeed.

While we still like Burberry as a business, transformations of this nature are always risky. For us the current valuation offers little margin of safety in the event of any hiccups, so we have been happy to take profits.

There was no news from the other names in the table with the exception of Bunzl, the specialist distributor of ‘bits and bobs’ that are essential to the day to day operations of its customers. Half year results on 28 August were characteristically solid, and the group announced its first foray into Norway via an acquisition, meaning it now has operations in 31 countries globally.

Biggest negative contributors

Stock Contribution to fund’s return Actual return
Sanne Group -0.53% -12.89%
Intertek -0.50% -12.69%
British American Tobacco -0.44% -11.41%
Domino's Pizza -0.21% -6.45%
Merlin -0.15% -4.92%
Sage -0.10% -3.84%

Past Performance is not a guide to the future. Bloomberg 01/08/2018 – 31/08/2018.

Sanne’s shares fell after the group released a long-winded interim trading update. In it, they said everything is on track and the business continues to perform in line with expectations, but profits will be weighted to the second half of the year. This news appeared to unnerve some investors.

Intertek reported solid organic revenue growth combined with rising margins in the first half of the year, although this wasn’t enough to prevent profit-taking following a very strong run for the shares. The group also announced the acquisition of Alchemy, a provider of online training and compliance solutions, for $480 million, followed by news that the Chief Financial Officer is to depart.

Domino’s shares fell despite reporting interim results that were in line with analysts’ forecasts. The group is executing well in the UK with strong growth in sales and resilient earnings.

But overseas, where the group has been expanding rapidly through acquisitions as well as new openings, profits have come in below par. The Norwegian business in particular has struggled to keep control of labour costs.

Domino’s have put their top UK Operations manager in charge of the International arm to bring these businesses back towards targets.

Merlin’s interim results were slightly disappointing. Organic revenues grew by 4.5%, but profits declined by 14%, reflecting cost pressures and currency swings. Merlin make the bulk of their money in the second half of the year and although they look to be on course to meet their expectations for the year, it seems unlikely that they will be able to provide any surprises on the upside.

We have held the shares since the fund’s launch and to be frank, results have not lived up to our expectations so far. However, we continue to like their long term roll-out potential, particularly for the LEGOLAND parks - there are currently just 8 globally, with plenty of scope for many more.

Sage shares fell at the end of the month after announcing that Stephen Kelly, Chief Executive, has stepped down by mutual consent. The group shed little light on the reasoning behind the move. The accompanying trading update revealed that hitting the full year numbers depends on signing a few large contracts in the next few weeks, clearly an uncertain situation.

Stephen Kelly achieved much during his time at Sage, but entered a company that was behind the pack in terms of moving its products from the PC to the cloud. Sage is better positioned today than it was then, but profit growth has been held back whilst the business reorganised. Finance Director Steve Hare steps into the CEO role on an interim basis. The eventual successor to Stephen Kelly will need to maintain the momentum of Sage’s journey into the cloud.

Please note the author or his connected parties hold shares in Sanne and BATS.

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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.