HL SELECT UK INCOME SHARES

HL Select UK Income Shares - August review

Monthly roundup

Important information - The value of this fund can still fall so you could get back less than you invested, especially over the short term. The information shown is not personal advice and the information about individual companies represents our view as managers of the fund. It is not a personal recommendation to invest in a particular company. If you are at all unsure of the suitability of an investment for your circumstances please contact us for personal advice. The HL Select Funds are managed by our sister company HL Fund Managers Ltd.

Charlie Huggins (CFA) - Fund Manager

17 September 2018

The UK market had a poor month in August, declining by 2.75% with dividends reinvested. Weakness was driven by financials, consumer staples and commodity-related sectors, with President Trump’s trade war and sharp declines in a number of emerging markets largely to blame.

How did the fund do?

The fund declined by 1.21% in August, less than the market, helped by our limited commodities exposure and a strong showing from GB Group.

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

Biggest positive contributors

Stock	Contribution to fund’s return	Actual return
GB Group	0.19%	15.93%
RELX	0.11%	3.63%
XPS Pensions	0.11%	4.42%
Ascential	0.10%	3.03%
Standard Life Aberdeen	0.09%	3.82%

Past Performance is not a guide to the future. Bloomberg 01/08/2018 – 31/08/2018.

August was a quieter month for company news, with most of our holdings having already reported earlier in the summer.

Our top performer this month was GB Group, which reported results in the second half of July. The business is making very positive progress and the share price has been driven higher. We remain confident in the long term prospects of the group so haven’t been tempted to take profits.

There was no news from the other names in the table with the exception of Standard Life Aberdeen. Half year results on 7 August showed fund outflows continuing, but the share buyback programme was accelerated which was taken well by investors.

Progress on the integration programme and achievement of cost synergies is on track and the interim dividend was lifted by 4.3%, underpinning a current yield of around 7% (variable, and not a reliable indicator of future income).

Biggest negative contributors

Stock	Contribution to fund’s return	Actual return
Sanne Group	-0.38%	-12.89%
British American Tobacco	-0.37%	-11.41%
HSBC	-0.37%	-7.41%
Imperial Brands	-0.21%	-5.15%
Royal Dutch Shell	-0.14%	-3.57%
Sage	-0.10%	-3.84%

Past Performance is not a guide to the future. Bloomberg 01/08/2018 – 31/08/2018.

Sanne’s shares fell after the group released a long-winded interim trading update. In it, they said everything is on track and the business continues to perform in line with expectations, but profits will be weighted to the second half of the year. This news appeared to unnerve some investors.

HSBC’s half year results revealed costs rising significantly faster than income. Cost growth of 7% reflected increased investments into growth and technology, far outpacing the 2% of revenue growth.

The quarterly dividend of 10 cents per share was exactly as expected and financially the group is in a strong place. This current yield of around 6% (variable and not guaranteed) looks secure to us, although we aren’t expecting the dividend to grow in the near term.

Domino’s shares fell despite reporting interim results that were in line with analysts’ forecasts. The group is executing well in the UK with strong growth in sales and resilient earnings.

But overseas, where the group has been expanding rapidly through acquisitions as well as new openings, profits have come in below par. The Norwegian business in particular has struggled to keep control of labour costs.

Domino’s have put their top UK Operations manager in charge of the International arm to bring these businesses back towards targets.

Sage shares fell at the end of the month after announcing that Stephen Kelly, Chief Executive, has stepped down by mutual consent. The group shed little light on the reasoning behind the move. The accompanying trading update revealed that hitting the full year numbers depends on signing a few large contracts in the next few weeks, clearly an uncertain situation.

Stephen Kelly achieved much during his time at Sage, but entered a company that was behind the pack in terms of moving its products from the PC to the cloud. Sage is better positioned today than it was then, but profit growth has been held back whilst the business reorganised. Finance Director Steve Hare steps into the CEO role on an interim basis. The eventual successor to Stephen Kelly will need to maintain the momentum of Sage’s journey into the cloud.

Please note the author or his connected parties hold shares in Ascential, Standard Life Aberdeen, Sanne, BATS, HSBC and Imperial Brands.

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for more information. Unless otherwise stated performance figures are from Bloomberg and estimates, including prospective yields, are a consensus of analyst forecasts from Bloomberg. They are not a reliable indicator of future performance. Yields are variable and not guaranteed.