HL Select UK Income Shares fund - May review

Steve Clayton - Fund Manager

8 June 2018

UK Equity Market - May 2018

May was a strong month for equities, with the market delivering a total return of 2.8% over the month, as measured by the FTSE All Share index. The move was led by energy and mining sectors, accompanied by healthcare, industrial and technology stocks. Each of these sectors made gains of between five and seven and a half percent. The only sector to generate significant negative returns was telecoms, which dropped by over eleven percent, with both BT and Vodafone contributing to the drop.

The market’s move was driven by early strength in commodities and a sense of relief that interest rate increases, widely expected to be imminent until quite recently, might not come before the late summer. As always in the stock market, nothing is guaranteed and we feel compelled to point out that oil prices have already retreated by 10% from their May peak and that sentiment toward the course of interest rate increases is turning a shade hawkish once more.

HL Select UK Income Shares fund - May 2018

The fund delivered an underlying return of 3.2% over the month, a little ahead of the market. This was driven by strong outcomes from our Consumer Staples holdings, a return to favour for Utility shares and a zero exposure to poorly performing telecoms stocks, whilst our technology positions made a good contribution too. Our low exposure to commodity producers was a drag on performance. Please remember past performance is not a guide to the future and this is over a very short time period.

Biggest positive and negative contributors:

Positive contributors

Negative contributors

Relative contribution refers to how much the value of the fund was improved or worsened by holding the stock, compared to the outcome that would have been earned had the monies invested moved in line with the FTSE All Share index.

Past performance is not a guide to the future. Source: Bloomberg 30/04/2018 - 31/05/2018

Paypoint showed a welcome return to form, driven by reassuring full year results that included a renewed commitment to returning excess capital via a series of special dividends. Paypoint announced dividends of 55.1p to be paid in late July, making it a rare oasis of income at that time of year. The results themselves were somewhat clouded by multiple changes to the corporate structure in recent years, but the underlying trends seem positive. The cash generative nature of the business, which generates recurring revenues off a relatively fixed cost base gives Paypoint strong dividend paying potential. Questions remain over their relations with utilities as more customers move to smart meters, but Paypoint can offset this with the growth of its parcel collection and drop-off network, which gives the group exposure to e-commerce growth.

Britvic’s interim results were equally well received, with a solid performance from the group and reassuring signs that the sugar tax does not seem to be impacting too much. Britvic’s portfolio includes some strong offerings in the low calorie segment, with Pepsi Max gaining market share in recent years. Signs of improved performance in the UK Stills category, following a relaunch of Robinsons could still be a case of single swallows not a summer making, but at least they are not getting any worse. Drink bottlers like Britvic are great cash generators, for let’s face it, pop is cheap to make and the public pay premiums for brands. An ongoing restructuring of the group’s UK manufacturing assets should see margins and cash improve further in years ahead. Britvic raised their dividend by 10%.

Pennon Group had perfectly solid results and continued their existing policy of raising the dividend by RPI+4% each year under the current regulatory price controls. The share price strength was more a case of participating in a broader sector rally. This seems to have been driven by a sense that tighter regulation will be directed predominantly towards the utilities owned by private equity, where cash and tax management policies have been aggressive.

Close Brothers was one of only two holdings to have a (barely) noteworthy negative impact on the value of the fund, costing just over 0.1% during the month. A trading update showed steady growth in the banking loan book, a solid performance at Winterflood and little to worry about elsewhere. But the stock had rallied from 1400p to just over 1600p before the figures were released and with nothing that could be dressed up as a positive surprise within the numbers, the stock succumbed to profit taking.

Standard Life Aberdeen (SLA) cost the fund just under 0.1% during the month. The group is progressing the sale of its historic Life Assurance operations to Phoenix and has recently spelled out increased cost saving and synergy estimates. Investors would probably take this news better had SLA not fallen out so spectacularly with Lloyds Banking Group, where relations appear to be going from bad to worse. SLA now appear to be challenging Lloyd’s legal right to drop them as fund managers. We doubt SLA’s other clients are wildly impressed by this approach.

The merger with Aberdeen and now the disposal of the Life companies have led to Standard Life Aberdeen evolving into a fund manager and platform operator, primarily serving the advisor and institutional markets. The yield is highly attractive, at over 6% on current forecasts, but the business is becoming more cyclical as a result of its corporate activity.

Past performance is not a guide to the future. Source: Lipper IM to 31/05/2018.

n/a* - full year performance data unavailable.

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