HL Select UK Growth Shares - September Review

Charlie Huggins (CFA) - Fund Manager

19 October 2018

Talking about the market’s movements in September seems rather academic, given the rather more dramatic moves that have erupted around the world in October.

The market’s total return of 0.7% in September was driven by strength in commodity stocks, partly offset by weakness in areas ranging from tobacco, to pharmaceutical and banking names.  

Before we recap performance in September, we’ll share a quick update on what we’ve seen so far this month. Early October has seen markets across the world fall quite sharply, with the FTSE 100 having dropped almost 500 points, circa 7% at the time of writing (Oct 11th 10:00 hrs).

Bull markets they say, climb a wall of worry. At the moment the worries have the upper hand and these  range from rising interest rates,  especially in the USA to fast-developing trade wars between the USA and whosoever President Trump chooses. Meanwhile there is still no clarity on where Brexit is headed, nor what it will look like when we get there. Ongoing US rate increases seem likely, in our view. All of the other factors can spin on a sixpence.

Within the overall movement of the market, there has been a pretty marked rotation from growth toward value. Stocks that had been leading the way have been punished for high valuations and investors have  been turning toward (often lower quality) businesses trading on lower multiples of earnings.

Some of the moves have been dramatic, many growth stocks that have not delivered any bad news have still seen double digit price falls. We don’t know how long this bout of nerves will go on for, but we do see it as an opportunity to add to some of our favourite companies at more attractive valuations than we have seen for some time.

Fund performance in September

The fund declined by 1.62% in September, underperforming the wider stock market, which rose by 0.70%. Just over half of this underperformance was caused by the fund’s zero exposure to Materials and Energy, the two strongest performing sectors this month, with individual stock declines accounting for the remainder.  

Below, we list performance of the biggest positive and negative stocks by their contribution to the fund’s return. As always, remember these details are over a short period of time and past performance is not a guide to future returns.

Biggest positive contributors

Past Performance is not a guide to the future. Bloomberg 01/09/2018 – 30/09/2018.

Sanne’s share price rose following the release of interim results which were in line with analysts’ expectations. The fund administrator reported revenue growth of almost 20% in the first half and increased its dividend by 9.5%, although profit fell slightly.

Sanne’s focus over the last year has been on integrating acquired businesses. As part of this process it has invested heavily in areas such as compliance, IT systems and new management which has inevitably weighed on margins.

However, we believe these investments should position the business strongly for the future. The acquisitions have transformed Sanne from an industry minnow into a business of scale, with a network of offices across the globe. This global platform is particularly attractive to larger fund groups looking to launch funds in multiple jurisdictions, and is allowing Sanne to bid for work they didn’t previously have access to. With the ground work having been laid in the first half of the year, management expect both stronger growth and higher margins in the second half.  

Ideagen’s shares rose after it announced the acquisition of a competing provider of governance, risk and compliance software. The acquisition is being funded with a combination of debt and a £20m equity placing, which we participated in.

The deal accelerates Ideagen’s growth strategy, provides potential for cost synergies and should significantly enhance earnings. While acquisitions are never without risk, Ideagen has been a regular acquirer and has established an excellent track record, so we are backing management to deliver.  

Biggest negative contributors

Past Performance is not a guide to the future. Bloomberg 01/09/2018 – 30/09/2018.

BCA Marketplace shares weakened despite issuing a brief trading statement confirming that the year has started strongly, with the Board remaining confident in future prospects.

There is plenty of nervousness around car markets at the moment, due to things like Brexit and new emissions standards weighing on car manufacturers. However, BCA has a strong, resilient and diversified business model which is allowing it to make progress at a time when many other businesses in this sector are struggling.  

Rumours during the month that Uber Eats is in talks to buy Deliveroo caused sentiment towards Just Eat to weaken. Both Uber and Deliveroo compete with Just Eat in the food delivery market and the worry is that a single, deep-pocketed competitor could pose a greater threat to Just Eat.

Maybe, but it doesn’t change the fact that both Deliveroo and Uber Eats are burning through cash at a rate of knots, while Just Eat generates cash in spades. We would rather be in Just Eat’s position – funding investment into delivery from internally generated cash flow, rather than relying on the goodwill of debt and equity investors to fund expansion plans (as in the case of Uber and Deliveroo).

Nevertheless, with the competitive dynamics of the industry evolving quickly, we are monitoring the situation closely.  

Half year results from Alfa Financial Software confirmed what we already knew – that the first half of the year has been very tough. Revenue fell by 21% at constant currency as a result of previously announced contract delays, and profit more than halved. The sales pipeline remains healthy but customers are taking longer to make decisions.

This is disappointing but the reasons we initially made the investment haven’t changed. The need for businesses to upgrade legacy IT systems isn’t going to go away and Alfa are the market-leader in their niche, with the best technology and broadest solution set. As such, we are hopeful that the business can recover.  

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