HL Select UK Income Shares: April Review

Steve Clayton - Fund Manager

12 May 2017

The HL Select UK Income Shares fund has paid its first monthly dividend, reflecting the month of March, at a rate of 0.3p per unit. Investors should have received this at the end of April. If you hold Accumulation units in the fund, then the dividend will have been added to the value of your units. That is why there is a difference between the price of Income and Accumulation units and this will grow over time as more dividends are declared and reinvested into the fund.

Another 0.3p dividend has been declared for April, which will be received at the end of May. We intend to continue paying at this level until September, when a final dividend for the fund’s financial year will be paid. It should be remembered however that income is variable and should not be seen as a guide to future returns.

When the fund launched, our target was to declare a total dividend of 3.9p for the first twelve months to end Feb 2018. We are confident of meeting this target, although nothing is guaranteed. In October we will set a target for the new financial year, to end September 2018. Please note that these two periods will overlap.

Markets and Holdings

The stock market felt rather listless overall in April. The announcement that an election is to be held caused a flurry of excitement, but with the polls seemingly so decisive, the market generally now seems unconcerned by news from the hustings. Sterling however bounced on news of the election, which hurt overseas earners and benefited more domestic names. As a result, mid-cap shares fared rather better than their larger, more international FTSE 100 counterparts. The FTSE 250 mid-cap index rose circa 3.5% over the month, whilst the better known FTSE100 index of larger companies fell 1%.

Below we highlight the biggest positive and negative contributors to fund performance in April. However this is over a very short period and past performance is not a guide to future returns.

Biggest positive contributors

In general, the main positive contributions came from our stock selections in the Financials sectors and our Consumer Discretionary names. Holding no Energy shares also proved beneficial, because that sector lost ground during April.

Past performance is not a guide to future returns. 31/03/2017 - 28/04/2017. Correct as at 03/05/2017.

Ascential was the fund’s top performing stock; it benefitted from some broker upgrades. Over the last few years the group has been selling off its smaller assets, which are heavily exposed to print and advertising, and has been acquiring faster-growing businesses. Once these asset sales are completed the group should be left with a collection of unique, world-leading events and services with excellent long-term growth prospects.

The minor rotation from international to domestic earners led to useful gains in Close Brothers and BCA Marketplace during the month. The latter had been a pedestrian performer until very recently and we have been regularly adding to our position. After the month-end the company released a short trading update saying that it is trading at the upper end of market expectations. The group also confirmed that it will be seeking a premium listing on the London Stock Exchange which should hopefully bring it onto the radar screens of more investors.

Lloyds Bank reported a strong Q1, whilst Greene King benefited from easing concerns over the state of the economy.

Biggest negative contributors

Past performance is not a guide to future returns. 31/03/2017 - 28/04/2017. Correct as at 03/05/2017.

On the downside, our Pharmaceuticals holdings were weak, with the market fretting that US politics could still lead to the industry facing a squeeze on drug pricing, if President Trump’s reform agenda gathers pace. Results from the two companies were in fact broadly encouraging and AstraZeneca has received an important approval for its Durvalumab drug as a treatment for bowel cancers.

Fidessa issued a somewhat downbeat outlook, suggesting that customers were delaying decisions ahead of political uncertainties surrounding the UK, Europe and the US. We are meeting the company very shortly and will report in a future blog.

WPP continued to suffer from a downbeat advertising growth outlook, although it is important to note that financial performance by the group has so far remained robust, and we felt the recent 25%+ dividend increase for 2017 said more about their confidence in the future than anything else has done of late. Dividends are not guaranteed and should not be seen as a guide to future income.

Summary:

All in all, a solid enough month for the fund, in the context of a market that went pretty much nowhere over the period. We are happy with all of the holdings presently, and encouraged by the dividends announced so far. Please remember, past performance is not a guide to the future.

Political developments can have a big impact on stock markets in the short term, but in the long run they don’t really matter; and we don’t spend time worrying about them. In the longer term, what matters is the ability of companies to grow profits. On the whole, our companies have continued to make encouraging progress in that regard. If we see unusual price moves as a result of political manoeuvres we will try to take advantage of them accordingly.

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