HL Select UK Growth Shares – November Review

Charlie Huggins (CFA) - Fund Manager

8 December 2017

The FTSE All Share index fell by 1.7% during November driven by weakness across most sectors. Sterling made decent gains against the US Dollar, although domestic stocks generally remain out of favour.

Companies that miss analyst expectations, even by only a small amount, are being severely punished. As are ‘old economy’ stocks whose business models are being disrupted by technological change; traditional retailers being the prime example here. Many businesses continue to perform well, however, particularly those considered to be on the right side of these technological forces.

HL Select UK Growth Shares – one year passed

The end of November also marked the end of HL Select UK Growth Shares’ first year in the market. With this landmark passed, we are now able to discuss performance of the fund in more detail.

We are pleased to report that the fund has delivered a total return of 21.5%* since launch on 1 December 2016, some 7.7% ahead of the FTSE All Share index which has risen by 13.8% over the same period. Although please remember past performance is not a guide to the future, and we still consider one year to be a short time period for investors.

Over the most recent month of November the fund lagged the market a little, declining by 2.1%. Several of our companies released results. The domestic trio of Auto Trader, BCA Marketplace and Close Brothers all reported encouraging progress and there were positive updates from Sage, Intertek, Experian and Compass.

Burberry released strong numbers although these were accompanied by a strategic review which left investors feeling rather cold and Playtech delivered a disappointing profit warning.

We discuss a number of these developments below while highlighting the biggest positive and negative contributors to the HL Select UK Growth Shares fund performance in November. However this is over a very short period and past performance is not a guide to future returns.

Biggest Positive Contributors

Past performance is not a guide to the future.

Source: Bloomberg 01/11/2017 – 30/11/2017

The positive move in Ascential’s share price came shortly after their Capital Markets Day, which we attended, giving investors a deeper dive into three of the group’s businesses - Cannes Lions, MediaLink and Money 20/20. The event reinforced the quality and unique nature of each of these assets. With the group investing heavily in digital initiatives and new products to deepen its competitive advantage and drive stronger growth, we are confident of further progress from Ascential in the years ahead.

Sage Group’s share price rose following a strong set of full year numbers, which showed organic revenues growing by 6.6%, operating profit up 10% and the dividend rising by 9%. Encouragingly the group is now seeing rapid take up of its cloud-based software offerings, helping subscription revenues to leap by 30%. Overall, future growth prospects look better than for some time at Sage with the company guiding towards an acceleration in organic revenue growth to 8% in the coming year.

Despite on-going jitters over the health of the UK economy, Close Brothers and BCA Marketplace reported encouraging progress. Close Brother’s Banking division grew its loan book by 1.4% in the first quarter with margins and impairments remaining stable. BCA Marketplace reported excellent first half results with adjusted operating profit rising by 18%, reflecting strong progress from both the vehicle auctions and WeBuyAnyCar. The interim dividend was increased by 18% which we view as a strong vote of confidence from the Board.

Just Eat’s shares rose after the Competition and Markets Authority unconditionally approved its merger with Hungryhouse. Fidessa shares have been strong over the last 3 months, but had been rather weak between June and August. Business performance has remained steady during this period so we are struggling to explain these moves.

Biggest negative contributors

Past performance is not a guide to the future.

Source: Bloomberg 01/11/2017 – 30/11/2017

Playtech, the provider of software and services to the gambling industry, disappointed in November. On-going challenges with its Sun Bingo contract combined with a crackdown on online gambling sites from the Malaysian government, were principally to blame. As a result, the group expects full year earnings to be around 5% below the bottom end of market expectations.

The shares lost around a quarter of their value on the day of the announcement, which we felt was an over-reaction. They have since recovered somewhat, ending the month around 15% down. There are many things we like about Playtech’s business model, including a strong balance sheet and excellent market positions. However, changing regulations and government actions present a constant risk in this industry. For now we are maintaining our position.

Interim results from Burberry were strong, with underlying profits and earnings per share leaping ahead by 28% and 32%, respectively. However, the real focus was on new CEO Marco Gobbetti’s strategy announcement.

Mr Gobbetti wants to take Burberry out of all but the most exclusive stores, starting in the US wholesale channel, and then more widely. Product is to be reinvigorated, and accessories emphasised. It’s a text-book luxury brand repositioning exercise, which should leave Burberry jostling up against the world’s most exclusive names, with the margins to match. Burberry expect an acceleration in sales, margins and operating profits as a result of the shift, but in the near term it will be a drag on sales and earnings.

There was no significant news concerning Sanne or Bunzl.

Conclusion

Change is a constant in the business world, but right now it seems like things are changing faster than ever. Amazon is looking to conquer the world, with the group foraying into new industries at a relentless pace, consumer preferences are evolving rapidly, and the internet is changing the way we shop and search for a whole host of goods and services.

Our aim is to invest in businesses that can not only survive, but thrive in this evolving environment. Specifically, we are looking for businesses that are:

• Adaptable, rather than set in their ways
• Creating lots of value for their customers, rather than relying too heavily on price increases or a lack of transparency in their markets
• Protected in some way by a ‘moat’ (brands, network effects, scale; for example) that will remain relevant in this changing environment and can help defend against the threat of new competitive entrants.

✝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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Please note the author or his connected parties own shares in Ascential, Sanne Group and invest in the HL Select UK Growth Shares fund.