HL Select UK Growth Shares - December Review

Steve Clayton - Fund Manager

8 January 2018

The stock market in December

The UK stock market enjoyed a strong performance in December 2017, delivering a total return of 4.8%. This was driven by strength in commodity producers, pharmaceuticals, tobacco producers and housing stocks, offset by weakness in utilities. Optimism in the strength of the global economy and perhaps a sense of relief that some sort of a Brexit divorce had been agreed.

The December rally topped off a year of positive returns for the market, with the All Share index rising by 12.9% with dividends reinvested. With returns from bonds and cash remaining at very low levels, investors have been prepared to turn a blind eye to risks ranging from political upheavals to nuclear tensions. With higher interest rates expected on both sides of the Atlantic before too long, we believe this preference for yield in the face of risk could be tested in 2018.

HL Select UK Growth Shares in December

With a portfolio heavily exposed to global consumer names like Unilever and Diageo, as well as tech-driven businesses like GB Group and no positions in mining and energy stocks, a month like December was always going to be a challenge for the fund. In the event, the fund managed a rise of 3.3% over the month, to leave it ahead of the FTSE All-Share by more than 6% since launch in Dec 2016.

Biggest positive contributors

Past performance is not a guide to the future. Source: Bloomberg 01/12/2017 - 31/12/2017.

The total return column represents the stock’s return over the month, whilst the contribution column reflects how much that added or subtracted from the fund’s value. Thus Sanne Group rose by 11.1% in December, which added almost a half of a percent to the value of a unit in the fund.

With a limited number of trading days in the month and few scheduled trading updates from companies in December, the market tends to be driven at least as much by sentiment as information in the run-up to year end.

The move in Sanne was welcome, but we cannot point to any new news that emerged in the month to drive it. But there had been some earlier weakness, which we attributed to a persistent seller in the market. Their apparent absence appears to have allowed the stock to claw back towards previous levels. We next expect news from Sanne towards the end of January when they issue a trading update.

Equally, Rightmove’s strength came without any obvious catalyst, other than strength in housebuilding stocks, which rallied on hopes that future interest rate increases would be limited in scope.

Ascential had enjoyed a reasonable run-up to Christmas and then spiked towards the New Year after announcing the acquisition of Clavis, a specialist marketing consultancy. Clavis specialise in advising manufacturers how to position their brands and products across online platforms. It looks a good fit with Ascential’s One Click Retail business, which has grown like Topsy since it was bought a year or so ago. The market is hungry for online exposure and Ascential is fitting the bill nicely as it continues to position its portfolio further towards the digital economy.

British American Tobacco benefited from a solid pre-close trading update, with FX tailwinds and good volume performances from key brands helping to offset a weaker pricing environment in some markets.

Domino’s Pizza continues to recover from the weakness seen back in the spring. Recent trading updates have been good and the company recently announced plans to acquire a further stake in its Icelandic offshoot. We approve of the latter move; Icelanders are phenomenal consumers of pizza. For some reason they seem to prefer tucking in to a piping hot pizza delivery over traditional “delicacies” such as rotten shark meat. This could be a long term trend.

Biggest negative contributors

Past performance is not a guide to the future. Source: Bloomberg 01/12/2017 - 31/12/2017.

Burford Capital fell by 6.5% in December, which subtracted just over a third of a percent from the value of a unit in the fund.

In early December Burford announced a positive trading statement, albeit brief and revealed that the founders of GKC, acquired roughly a year ago, would be stepping down, but retaining a long term interest in the funds they established. That saw some profit taking, already partially reversed.

Medica is relatively illiquid and fell in modest trading volumes. At the start of the month the Health Secretary highlighted the shortage of qualified radiologists and radiographers and announced plans to increase hiring of endoscopists to aid cancer diagnoses. This seems to reinforce Medica’s argument of a structural undersupply of the highly qualified radiologists needed to interpret scan data.

*Full year performance not available

Past performance is not a guide to the future. Source: Lipper IM to 30 November 2017

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