HL Select UK Growth Shares - Portfolio changes

Steve Clayton - Fund Manager

20 November 2017

We have made a few adjustments to the portfolio. Here is what we have done, and why.

Sold – WPP

We have sold out of our position in WPP in its entirety. More and more evidence is emerging to suggest that the larger advertising groups are struggling to hold their positions in an increasingly digital world. The giant internet companies, from Google to Facebook and Amazon are offering services to brand owners that would historically have been seen as advertising agencies’ territory.

At the same time, there is a growing distrust between the agencies and brand owners, who fear the agencies have been over-charging them for advertising slots they have bought for them. It is showing up in a deceleration in the pace of growth for advertising business globally. At the moment, for all their undoubted creativity, it does not seem that the industry has an answer to the problems.

If the trend continues, then the scope of downgrades in the media sector could become distinctly uncomfortable and as the world’s leading media agency, WPP is in the firing line. The company has also been busily acquiring rivals and buying back stock in an attempt to accelerate a shift toward developing nations and digital services, whilst rewarding shareholders with cash returns.

These deals and buy-backs have taken the balance sheet to a position that whilst not over-stretched, could easily become so if earnings were to suffer a significant further setback. That combination of deteriorating trading and rising debts is riskier than we are comfortable with, leading us to exit the position. Overall, WPP has cost 0.5% of the fund’s value during the time it was held.

Reduced holding - Intercontinental Hotels Group

We have taken profits on a big slice of our position in IHG, which we first bought in the early days of the fund at around 3230p. Now, with the stock trading comfortably over 4100p we have decided to reduce our exposure.

IHG’s business model, of franchising and managing hotel brands, rather than owning the bricks and mortar has delivered strong returns for many years, so why have we decided to cut?

Our concern is that despite favourable economic conditions, the group is not achieving the levels of RevPAR (revenue per available room) growth that we might have expected to see from a group driven by the US and Chinese markets.

We believe there is a shift going on, one which IHG are attempting to counter, but where we think the jury is very much out. In IHG’s vision of the world, customers come to their properties after booking via the group’s online reservation system. When a customer makes IHG’s app the starting point, they are only ever going to end up in an IHG hotel.

But the world may not work like that. Online travel agents are capturing market share. Booking.com, Trivago and a whole host of other websites will all put a vast choice in front of the consumer. Google is muscling in too. Type in a destination and the word hotel into Google and up pops a map showing all the possible locations, with prices attached. We think this increased transparency will cap hotel pricing more and more and could be behind the modest growth in RevPAR.

With more capacity coming into the market, an economic expansion now many years old and interest rates on the turn, we see a potentially dangerous cocktail coming together in the mixer. Digital information is challenging more and more business models and IHG will not be alone in finding pricing under pressure as a result of this. So far our holding in IHG has added 1.26% to the Fund’s value.

Where has the money gone?

We have not yet decided where to reinvest the funds, so we have purchased the iShares FTSE ETF to keep the monies in the market. Once we have selected new holding(s) we will tell you which stock(s) we have chosen and why.

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