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HL Select UK Income Shares - February Review

HL SELECT UK INCOME SHARES

HL Select UK Income Shares - February 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.
Steve Clayton

Steve Clayton - Fund Manager

19 March 2018

February was a weak month for most major stock markets around the world and the UK was no exception. A sell-off that began in mid-January continued into the early part of the month, before markets steadied a little. The total return from the FTSE All Share index during the month was -3.3%.

The weakness was led by utilities and consumer-related sectors while strength was seen in a range of cyclical sectors ranging from Industrial Metals to Technology Hardware.

Sterling has recovered some ground in recent months and just as its post-Referendum fall led to a boost to the earnings of many companies with profits earned in dollars or euros, so the opposite is now occurring.

We have seen several companies announce currency related downgrades with their results and these are often being taken badly by the market. Given the value of sterling is hardly covered by the Official Secrets Act, such moves should not be a surprise, but in a nervy market even stating the obvious can go down badly.

Markets have also had to contend with threats of trade wars, after President Trump announced swinging tariffs on Steel and Aluminium imports, in an international row that has continued into March and quite probably beyond. Brexit continues to make more headlines than progress, with the eventual consequences unlikely to be fully visible before the next decade.

Fund performance

In a weak month for the market itself the fund fell in value, although the drop of 2.5% was less severe than the market’s 3.3% decline. Below we highlight the main contributors to the fund’s return in February and report on key messages from our holdings which released results. However, this is over a very short period and past performance is not a guide to future returns.

Biggest positive contributors

Contribution to fund (%) Total return (%)
Fidessa 2.0 59.2
Ascential 0.4 12.1
Just Eat 0.1 7.6
Compass 0.1 4.3

Past performance is not a guide to the future. Source: Bloomberg 01/02/2018 – 28/02/2018

The key driver of the relative performance was Fidessa, which received a takeover offer at a substantial premium. We have discussed this in a previous blog and with no competing bidders having emerged, it seems likely that the takeover will complete as originally proposed.

Ascential produced what we felt were excellent results and the stock bucked the market’s trend accordingly. The group are moving to further increase their focus and have announced a Strategic Review of their Exhibitions business as they look to further focus upon providing information services to the digital economy.

Just Eat enjoyed a strong month, but has seen this reverse in March following an announcement of excellent results, offset by a decision to invest in providing delivery services on behalf of branded restaurant groups such as KFC and Burger King.

Biggest negative contributors

Contribution to fund (%) Total return (%)
BCA Marketplace -0.5 -12.1
Pennon Group -0.5 -15.3
Reckitt Benckiser -0.5 -15.1
Sanne Group -0.4 -13.0
Standard Life Aberdeen -0.4 -13.5

Past performance is not a guide to the future. Source: Bloomberg 01/02/2018 – 28/02/2018

Reckitt Benckiser suffered currency issues, allied to a drab period for volume growth across much of the business. Encouragingly, RB reported a solid start by newly acquired Mead Johnson Nutrition and raised the full year dividend by 7%, but this was not enough to support the stock.

Sanne Group saw a sharp drop, apparently in response to a persistent seller in the market. That seller appears to have withdrawn and the stock has already recovered much of the ground lost in February.

Similarly, BCA was weak, again with signs of a fairly persistent seller, rather than as a result of any specific news from the company itself. The weakening car marketplace should actually be positive for BCA, for when values are weak, dealers look to move stock through the auctions more, rather than have them depreciating on the forecourt.

Pennon suffered at the hands of the Shadow Chancellor, along with the rest of the utilities sector. Investors spooked at his threats to re-nationalise utilities, should the Labour party gain power.

Standard Life Aberdeen reported the loss of a contract to manage money on behalf of Lloyds Banking Group’s Scottish Widows division. Subsequent trading results also revealed a deal to sell the traditional life assurance operations to Phoenix group, which will take them a long way toward becoming a pure asset management business.

Given that Lloyds had praised the management of the assets by Aberdeen, but bemoaned that its merger with Standard Life had effectively left its asset manager competing against it, there seems a prospect that the Lloyds business could now be retained. The dividend rose by 7.5%.

Results season

It’s a busy time of year for company results and many of our portfolio companies released their updates, with both our major Pharmaceutical holdings reporting numbers broadly as expected and maintaining their dividends. It remains to be seen whether GlaxoSmithKline will strike a deal to acquire Pfizer’s consumer health division, as has been rumoured in the press. Meanwhile AstraZeneca appears to be making solid progress with its portfolio of drugs under development.

Primary Healthcare Properties reported a year of solid growth and raised its dividend for the 21st consecutive year. The portfolio continues to expand with Ireland an increasing focus, reflecting more favourable yields available to the business. British American Tobacco reported solid results for the year and a 15% increase to the dividend, but highlighted the headwind posed by sterling currently.

We felt Compass Group’s latest trading update showed excellent progress, with organic growth of over 5% but a similar currency impact. We still expect Compass to lift the dividend when it reports interim results later in the spring.

Reckitt Benckiser also suffered currency issues, allied to a drab period for volume growth across much of the business. Encouragingly, RB reported a solid start by newly acquired Mead Johnson Nutrition and raised the full year dividend by 7%, but this was not enough to support the stock.

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Important - This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research 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.