Portfolio Changes

Charlie Huggins (CFA) - Fund Manager

21 May 2019

While we always try to take a long-term view with our investment decisions, we’re constantly assessing the underlying prospects for the companies we hold. If we think the business prospects are deteriorating we won’t hesitate to sell and reinvest into a more attractive alternative.

We won’t always get it right, but we hope that over time these decisions will help to raise the overall quality of the portfolio and/or reduce the risks.

Bunzl - out

We’ve decided to exit our holding in Bunzl, the specialist international distributor, following a relatively downbeat trading statement. In an announcement on 17 April the company flagged slowing revenue growth owing to weaker market conditions particularly in its North American Grocery segment.

We are normally reluctant to read too much into a single quarter, but in truth our conviction in the business had been waning. This is why it was one of our smaller positions in the fund.

Although Bunzl has grown its profits in recent years, both margins and returns on capital have been on a downward trend. We think this may have something to do with the increasing pressure being felt by some of Bunzl’s customers, in particular the large grocery retailers, who are having to deal with rising competition from discount stores and online specialists. This has led to a greater industry focus on costs and suppliers like Bunzl are having to share some of the pain. We struggle to see this trend reversing any time soon.

We held Bunzl since the fund’s launch (December 2016), paying £20.31 per share for our initial position. Our average sales price was £23.49.

London Stock Exchange - in

We have reinvested the sales proceeds into London Stock Exchange (LSE). LSE is best known for owning one of Europe’s oldest and largest stock exchanges but in fact nowadays this part of the business makes up less than a fifth of group revenue. The bulk of LSE’s income now comes from providing post-trade services and information services, where we see excellent growth prospects.

Put simply, LSE ticks all the boxes we look for, generating very healthy profit margins and returns on capital from supplying must-have products and services to its customers. The business is enormously cash generative and over the last decade this cash has been judiciously deployed into a number of acquisitions, which we believe have significantly enhanced both the quality and growth prospects of the business.

A full rationale for this purchase can be found on our portfolio breakdown page.

Rotork - in

Rotork is a position we’ve been working on for some time. We’ve been pretty picky on the prices we were prepared to pay and the price has now moved up, before we’d reached a full position size. We waited a while, hoping it would drop back to our territory, but to no avail. So rather than keeping it under wraps any longer, we’ve decided to reveal it, because we’ve always said that you should know where your money is and why we’ve chosen the stocks we have.

The full rationale for this purchase is available on the portfolio breakdown page. In summary, Rotork is the global leader in actuators, which are devices used to automatically control the flow of liquids in a pipeline. Its biggest market is oil and gas, where its actuators are used in offshore and onshore production facilities, refining, transport, storage and distribution.

The downside of Rotork’s business model is that it is dependent on capital spending by oil and gas customers. Unsurprisingly, these decisions tend to be based on how the oil price is performing, which of course is very difficult to predict. This means Rotork is not completely in charge of its own destiny.

However, the reasons we like Rotork and have decided to add it to the portfolio are three-fold:

• The company has market-leading positions and benefits from strong competitive advantages leading to very healthy margins, returns on capital and cash flows.
• In recent years the oil price has been weak and volatile which means Rotork’s customers have been reluctant to spend. With oil prices having recently appeared to stabilise above 60 dollars a barrel, capital expenditure is now starting to come back with potential for some further recovery over the coming years.
• There is a very interesting self-help angle. The group has a new CEO who sees a big opportunity to improve margins and raise growth prospects through actions like streamlining the operational footprint and re-focusing research and development efforts. While there is undoubtedly some risk attached to these changes, early signs are encouraging.

Adobe - in

We have taken advantage of the flexibility in the fund’s mandate to invest in Adobe, a US-listed software company. This is the second time the fund has bought an overseas stock, following the purchase of LVMH in September 2018 and has been funded by reducing our position in the iShares FTSE 100 ETF tracker.

Over the last few months our team has been busily researching global businesses in preparation for the launch of HL Select Global Growth Shares. Adobe, the de facto standard in content creation software, stood out as a particularly high quality and unique business that adds something a bit different to our existing UK names (a full rationale is available here). Hence we have decided to hold it in both the UK Growth and Global Growth funds. Four of our UK holdings – Diageo, Burford, Relx and LSE – have also been added to the Global fund.

Over time we may decide to add one or two more global names to the UK funds. However, such holdings will always be a minority exposure, limited to no more than 20% of the fund’s value.