HL Select UK Growth Shares – Q2 2021 Review

Charlie Huggins (CFA) - Fund Manager

15 July 2021

Market Review

The UK stock market's 5.6% return in the quarter continued the rally that began late last year when news of successful vaccines first broke. With the UK's vaccine programme having stolen a march on many other developed nations, optimism surrounding the domestic economy is buoyant.

Citizens hoarded cash through lockdowns, perhaps because of a lack of opportunities to spend it. With lockdowns falling away, there is plenty of potential for a consumer-driven recovery. The hospitality trade has reported strong demand, where it has been allowed to open its doors. Retail sales have also been robust, both on and offline.

Of the major sectors, pharmaceuticals led the way, up 16.4%, with strong performances from Beverages and Home Builders too. Banks were the only major sector to lose ground, with a decline of 0.2%. There was a degree of travelling and arriving; despite hospitality's robust trading in the real world, the Leisure sector lost 7.3% in value.

HL Select UK Growth Shares Q2 2021

The fund delivered a return of 6.9%* during the quarter, a little ahead of the broader market’s 5.6% outcome. The most significant contribution to the fund’s return was our position in Adobe, where a 23% increase in value added 1.1% to the value of the fund. Close behind was Ascential, which added 1.0% to the fund’s value with a 24% rise. Past performance isn’t a guide to the future.

Only Ideagen had a significant negative impact on the fund. It is a large position and has been one of the strongest performers during the years we have held it, but in Q2 the price drifted back 9%, reducing the funds value by 0.5%.

You can read more about the events impacting the significant movers in the fund during Q2 below.

Past performance is not a guide to the future. Source: *Lipper IM 30/06/2021

N/A = data for this period is not available.

Significant Winners and Losers

Winners

Past performance is not a guide to the future. Source: Bloomberg to 30/06/2021

Adobe was our strongest performer this quarter, following very encouraging second quarter results. Revenue grew by 23% year on year, with all areas of the business showing strong momentum. We added to our position before these results, and it is now our largest holding.

We believe Adobe is in a real sweet spot. Adobe’s portfolio is extensive, ranging from imaging, design, video and illustration to digital documents and tools to optimise online customer journeys. These areas are all growing as the shift to digital accelerates. While there are competitors in each vertical, no company comes close to matching the breadth of Adobe’s offering. This follows years of investment in new products and bolt-on acquisitions, especially in the Digital Experience segment. Adobe is also joining up more of its products and services, meaning it can offer integrated solutions to its clients, which the company increasingly sells on an Enterprise basis. With more customers taking more solutions from Adobe, we believe it is in an excellent position to capitalise on the favourable trends in its markets.

Ascential the digital subscriptions and events business, enjoyed a strong recovery this quarter. During the quarter the company further bolstered its exposure to digital commerce with the acquisition of Perpetua, which helps third-party brands optimise their performance on Amazon. We believe this deal is attractive and will further accelerate the growth of Ascential's e-commerce business.

Ascential is a very different business now to a few years ago. While the group still owns the Cannes Lions and Money 20/20 franchises, the company is less reliant on physical events than it once was. Meanwhile, the pivot to digital subscription assets has significantly improved both the group's growth prospects and earnings quality. Overall, we think management have done an excellent job of repositioning the business and believe the prospects have never been so strong. We added further to our holding during the quarter.

Diageo's performance was helped by a strong trading update in May, in which the group said it expects organic operating profit growth to be at least 14% in the fiscal year 2021. Performance was particularly strong in North America reflecting resilient consumer demand, the breadth of Diageo's portfolio and innovation. The group also announced a resumption of its capital return programme. Overall, we have been pleased with the resilience shown by Diageo during the pandemic and expect the business to benefit as more economies re-open.

Experian’s shares regained some poise, following a weak previous quarter. The performance of the business itself has barely missed a beat during the pandemic, with organic revenue and adjusted earnings per share growing by 4% at constant currency in the year ending 31 March 2021.

With economies now recovering, we expect Experian’s growth to accelerate. In the past few years there have tended to be issues with one or two parts of the business, e.g. Consumer, LATAM and more recently, the UK. The Consumer business now appears to be firing on all cylinders, and Latin America is also growing strongly. The UK remains a weak spot, but the performance of this business is improving under new management. This suggests to us an improving growth outlook.

London Stock Exchange shares recovered somewhat following a weak performance in the prior quarter, reflecting concerns over the Refinitiv acquisition. We expect to hear more on the group’s plans for Refinitiv in the coming months.

Sanne received a takeover offer during the quarter, causing the shares to leap higher. The bid came from private equity firm Cinven, who have so far made five approaches that we are aware of, with the Sanne board having agreed to enter into negotiations with Cinven after an indicative value of 875p was proposed. No agreement has been reached at the time of writing, and Cinven could yet walk away or be rebuffed by Sanne's board.

For our part, we shall be sad to see Sanne go, should it end up in Cinven's clutches, as we believe Sanne has excellent potential. New business tends to repeat because Sanne administers specialist funds from the cradle to the grave. Whilst there have been some operational mishaps along the way, Sanne has been a robust growth story nonetheless, and it will be hard to replace it with a business of equal potential.

Losers

Past performance is not a guide to the future. Source: Bloomberg to 30/06/2021

We suspect the weakness in Ideagen’s share price reflects little other than profit-taking, following a strong run. The business itself continues to perform well, with a pre-close trading update in May highlighting strong growth in recurring revenues and excellent cash generation. With a robust balance sheet, the business is in an ideal position to extend its leadership in compliance software for regulated industries through further acquisitions.

No other holdings generated losses greater than 0.1% of the fund’s value.