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HL Select UK Growth Shares - October review

HL SELECT UK GROWTH SHARES

HL Select UK Growth Shares - October 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

21 November 2018

October was a difficult month for markets around the world. Rising interest rates and bond yields, especially in the USA, took most of the blame, but there were notable shifts within markets.

Recent weeks have seen sharp negative reactions to results in the US technology sector, with both Amazon and later Apple registering significant price drops, despite reporting strong growth. It marks a rotation in sector preferences witnessed amongst the wider volatility, with investors shunning highly rated growth names like these.

The ten year US bond yield has risen beyond 3%, edging above the rate of inflation, allowing cautious investors in the States to protect the real value of their money without taking the risk of equity markets.

With the Federal Reserve talking about further interest rate increases to come, markets have fretted that as rates rise, more investors may prefer the lower potential, but greater security of fixed interest investments.

That, the reasoning goes, could reduce demand for shares, leading to lower prices. As usual, rather than waiting for the future to arrive, markets anticipate it, leading to selling pressure from those worried about what others may worry about in the future.

Fund performance in October

Against this backdrop the fund declined by 7.36% in October, underperforming the wider stock market’s 5.2% decline. As we’ve talked about, high quality growth stocks bore the brunt of the sell-off but small and mid-sized companies also fared worse than their larger peers. Both of these factors counted against the fund last month.

Sentiment towards our stocks will inevitably wax and wane, but we remain confident in the fund’s long term prospects. We see strong progress from our holdings, with the vast majority growing profits and dividends at a healthy clip, which is exactly what we’re looking for because in the long run share prices follow earnings.

Below, we look at which stocks contributed most positively and negatively to the fund’s return last month. 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
Domino’s Pizza 0.05% 1.40%

Past Performance is not a guide to the future. Bloomberg 01/10/2018 ‐ 31/10/2018.

Domino’s Pizza was the only holding to generate a positive return this month. The shares have had a tough 18 months but responded positively to a trading update which revealed solid UK sales growth and good progress on store openings.

The business does face some challenges. International progress remains subdued, for example, while in the UK the group must work harder to keep franchisees on side against a backdrop of rising food and labour costs. However, the strength of the Domino’s brand and business model gives us confidence in the group’s long term prospects.

Rentokil shares held up well in the market sell-off, losing only 0.69% compared with the markets’ -5.2% return. The pest-control specialist reported a c. 12% increase in revenue in the third quarter with around two thirds of this growth coming from acquisitions.

One of the nice things about Rentokil’s business is its resilience – whether it's Trade wars, Brexit or the latest Trump tweet – pests don’t really care. This means demand for Rentokil’s services tends to grow regardless of which way the economic winds are blowing, which feels like a pretty good place to be right now.

Unilever also reported solid third quarter results this month, with accelerating growth across all divisions. Shares were down 1.65%. Unilever’s markets have never been more competitive, with the internet and social media having opened up the playing field to smaller and more agile competition.

Unilever has significantly upped its game in response, launching more new products, and at a faster pace. We are pleased to see these efforts now starting to bear fruit.

Biggest negative contributors

Stock Contribution to fund’s return Actual return
Burford Capital -0.84% -14.71%
Merlin -0.62% -19.28%
GB Group -0.60% -13.06%
Sanne Group -0.49% -12.50%
Ascential -0.41% -9.86%
Compass Group -0.40% -9.73%
LVMH Moet Hennessy -0.40% -12.14%
Reckitt Benckiser -0.39% -9.73%

Past Performance is not a guide to the future. Bloomberg 01/10/2018 ‐ 31/10/2018.

Burford Capital was our biggest decliner this month. The shares have enjoyed a very strong run and the announcement of a share placing at the start of the month combined with weakening sentiment towards growth stocks as the month wore on, led to a c. 15% correction.

The share placing should actually be good news – providing the group with additional ammunition to take advantage of the multiple growth opportunities in front of it. Despite the recent share price falls, Burford remains our largest position in the fund.

Merlin Entertainments weakened following a trading update which talked of growing cost pressures as labour becomes more expensive in many parts of the world. This is a common theme we see across many companies at the moment.

The group has a productivity agenda designed to mitigate the impact, although the benefits are unlikely to be seen until the end of next year. More positively, the group said there are signs that London trading is picking up following a spate of terror attacks over the last couple of years, which turned overseas visitors off.

GB Group weakened despite announcing the acquisition of Vix Verify Global for £21.2 million in cash. The business helps clients in Australia and New Zealand validate the identity of their own customers and looks to be a good fit for GB. The group also announced a first half trading update confirming that the business is performing in line with expectations.

Investors reacted negatively to Reckitt Benckiser’s third quarter results. While most parts of the group are performing well, a problem in their European baby milk plant cost them £70m in lost sales. The problem looks self-inflicted and appears to be isolated to one factory, but there will be knock-on effects; new mothers who could not find Mead Johnson products on the shelf will have switched to competitor brands and probably won’t come back. While disappointing, full year sales targets were maintained and it does not change our positive long term view.

LVMH declined despite reporting strong Q3 results, with revenues growing by 10%. The whole luxury goods sector has been weak of late as investors worry about a slowdown in China. The evidence so far suggests that demand from Chinese consumers is holding up fine. In the long run, we can only see it growing although of course there are no guarantees.

Declines in Sanne, Ascential and Compass were purely sentiment-driven, with no news on trading.

Please note the author or his connected parties hold shares in Sanne, Ascential and Reckitt Benckiser.

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.