HL Select UK Growth Shares - Q2 2025 Review

James Jamieson - Fund Manager

7 August 2025

Market review

It was a quarter packed with drama and confusion. Yet another instalment in the post-Covid pattern of heightened volatility and low conviction. The FTSE All-Share finished +4.4% with the period split into two distinct halves: the first saw a sharp sell-off on the back of Trump’s ‘Liberation Day’ tariffs, before recovering all the ground as he U-turned on the worst and most damaging of the threats. The second half was a steadier upward grind.

Trump’s actions were at the centre of sector leadership on both the positive and negative side. Industrials and Financials outperformed markedly. Within the former, Defence was a standout as NATO spending commitments came into focus following US policy shifts, and global rearmament remained a live theme. The Financials sector strength was broader based but Banks were especially strong as interest rates remain elevated with no sign of deteriorating credit quality.

Energy was the main underperforming group. This is interesting considering the US intervention in Iran; something we have been waiting on for decades. To be clear this isn’t about the threat to Iran’s 1.5% share of Oil production, but rather the 20% of global supply that flows through the Strait of Hormuz that they could potentially disrupt. Once the conflict was deemed to have remained contained, the Oil price quickly normalised to reflect the weaker economic outlook posed by tariffs and the Energy stocks retreated. Healthcare was the other main laggard as the change in US administration cast doubt over future Pharma earnings.

Fund review

The fund returned +3.3%* over the quarter, or +3.8% excluding the impact from currency (mainly a weaker US dollar). A solid result given the market remains heavily skewed toward value, a style we are structurally underweight and one that has been dominant post-Covid. As you would expect the quality bias helped during the Trade War sell-off, but didn’t allow us to fully participate in the latter stages of the rebound.

Sector attribution mostly mirrored that of the market. Industrials were similarly the strongest contributor, although our underweight to Capital Goods meant full participation was limited. Consumer Discretionary was the other main lifter thanks to our overweight position and a big turnout from Games Workshop (see below under Stocks review). On the downside, Energy detracted as Shell gave back gains in line with Oil, while Healthcare weighed as AstraZeneca pulled back sharply on US policy concerns (see below under Stocks review).

In terms of portfolio activity, it was a busy period. We followed through on plans to diversify, using the early-quarter sell-off as an opportunity to build exposure selectively. We sold our position in Lancashire where we had already seen strong gains, and added three new names to the fund: BESI, Antofagasta, and 3i. Each adds a different dimension to the portfolio and improves the balance between global macro sensitivity and structural growth (Rationales on each can be found on the website).

Stocks review

The winners

Barclays

Added last quarter to help hedge against the momentum strength in this area of the market, Barclays delivered as intended. The driver wasn’t stock-specific so much as macro led, as banks continued to perform well for the reasons laid out above. Q1 earnings were solid, with upgrades following. Crucially there is no sign of credit quality deterioration and capitalisation is strong. Meanwhile the valuation remains deeply discounted.

BAE Systems

Another name added last quarter that’s working to brief. Some initial nervousness around the US Department of Defence cost-cutting intentions has proved misplaced. In fact, BAE’s focus on technological leadership sits well with current US/NATO procurement trends. Trump's sabre-rattling has worked and resulted in the desired increase in budgetary participation among NATO members. BAE is structurally very well aligned for this shift.

Diploma

Concerns about tariffs in Q1 were put to bed when management clarified that 75% of products are made and sold locally, limiting cross-border exposure. Meanwhile they have various levers to offset and defend elsewhere. That took the pressure off in early Q2, and a strong H1 report that beat expectations and led to upgrades sealed the rally. It’s a proven compounder that remains a core conviction name.

Games Workshop

This name often trades without reason and there is little to say this time around. A full year trading statement met expectations. A new IP licensing deal was announced with Stillfront to develop a Warhammer mobile/desktop multi-player strategy game. They already have two existing partnerships in place so the relationship strengthens. Licensing their core intellectual property is a key part of our thesis as it’s very lucrative thanks to the limited additional costs required to deliver the new revenues. In other words, the incremental margin is very high. So it’s good for profitability but it also helps increase the total addressable market by raising awareness of the core physical game.

Ryanair

The stock joined the MSCI World Index at the end of May, which likely drew some index-linked buying flow. However, operationally the KPIs continue to come through well and Trade War impacts are manageable so far. On that topic, the company have flagged the possibility of aircraft delivery delays due to tariff escalation, but they have options and can potentially switch delivery to the UK to avoid the additional tax. We did note that the CEO Mr O’Leary sold a significant portion of stock valued at approximately E21m, but don’t see this as a signal or concern given it is only 2% of his overall holding.

The losers

Shell

The stock gave back gains from earlier in the year, in line with falling oil prices. As mentioned above, demand expectations weakened due to tariffs, which seems to have trumped any risk premium from Middle East tensions. Fundamentally Shell remains sound: cash generation is strong and the balance sheet is conservative and more than manageable. These properties mean it is well placed in a lower Oil Price environment as cash returns are still assured. We deliberate on the level of exposure to the space in general, but Shell remains our preferred exposure within it.

AstraZeneca

Another top to bottom name which pulled back sharply as multiple risks from the US emerged: sector specific tariffs, pricing pressure from the new administration, and new left field decision markers abound. While AstraZeneca is relatively less exposed to the US than some of its pharma peers, it is still their most significant market representing >40% of sales. On our measure it was cheap before and given the main driver of long term value creation in the sector is innovation, it is even more attractive now given what we deem to be one of the best pipelines out there.

LSEG

We deem recent underperformance to be digestion, not deterioration. LSEG had a very strong run last year, rerating materially to reflect the quality and future prospects that form the basis of our investment case. In terms of new news, there is not a lot to say. Operationally the business is fine with a Q1 acceleration in Data & Analytics which is good to see.

Rio Tinto

Like Shell and other commodity demand proxies, it has suffered from the Trade War jitters outlined above. It could also be said that some uncertainty has been added after the CEO unexpectedly announced his departure. Rio has been busy allocating capital in Q2, with another Lithium deal acquiring a 50% stake in Chile’s Maricunga project and capex being mobilized to modernize the Isle-Malign hydro plant in Quebec Canada. The risk versus reward tradeoff is now in better balance so we have reduced the position to reflect this and used the proceeds to broaden the Mining stable.

GB Group

Disappointing to see it here again. Operationally FY results were satisfactory given the subdued and uncertain environment, but ID segment growth slowed, FX was a headwind, and that led to EPS downgrades. But the bigger issue for the stock is the intention to move to a main market listing. This forced IHT (Inheritance Tax) focused funds, that are estimated at more than 20% of the shareholder register, to become forced sellers as the stock will lose its IHT tax shield enjoyed by AIM stocks. Medium term its inclusion to indices that track the main market will likely be a net positive for demand, but it has resulted in a mechanical sell-off no less. Knowing the dynamics at play, there is a question as to why the board and management have handled this as they have. While we investigate further, the hold remains as we continue to see fundamental value.

The outlook

Q3 starts with a degree of trepidation. While certain macro proxies (like Oil) are discounting some impact from the change to the global trade order, the market has recovered to pre ‘Liberation Day’ levels. This is uncomfortable given growth will slow to some extent if what is already known stands, and uncertainty has clearly increased as few provisional frameworks have been made.

So Trade Wars remain the dominant issue; agreement, enforcement, escalation, and retaliation. Our gut says that it’s been too smooth so far post the initial shock. Subsequently we expect volatility to persist. Q2 corporate updates that start later this month will be a crucial first indication of how the effects of all this change are working through for companies.

Russia-Ukraine has slipped off the radar with the Middle East recently stealing media coverage and geopolitical attention. The situation has since gone backwards, with Putin doubling down and showing no will to seriously engage on peace negotiations. The risk here is if more sanctions are introduced. Something that could hit commodity prices and raise inflation expectations.

Investors have been quick to appreciate Europe’s intention to lift the fiscal break (i.e. governments spending more), with Germany leading the way. We agree that it is no doubt a positive stimulation for future growth and constructive for equities as a result, but there are funding questions which are not easy to resolve. In other words the spirit is willing, but the wallet may be constrained for some.

As always our focus remains on operational resilience and we’re paying close attention to earnings quality, cash generation, and pricing power. Diversification efforts remain ongoing in the portfolio. We see value among medium and smaller-sized companies which are often less exposed to the various global issues discussed throughout and who will benefit from further interest rate cuts that are anticipated in the second half of the year.