HL SELECT UK INCOME SHARES
HL Select UK Income Shares - October review
Monthly roundup
HL SELECT UK INCOME SHARES
Monthly roundup
Steve Clayton - Fund Manager
21 November 2018
October was a difficult month for markets around the world. Rising interest rates and bond yields, especially in the USA, took most of the blame, but there were notable shifts within markets.
Recent weeks have seen sharp negative reactions to results in the US technology sector, with both Amazon and later Apple registering significant price drops, despite reporting strong growth. It marks a rotation in sector preferences witnessed amongst the wider volatility, with investors shunning highly rated growth names like these.
The ten year US bond yield has risen beyond 3%, edging above the rate of inflation, allowing cautious investors in the States to protect the real value of their money without taking the risk of equity markets.
With the Federal Reserve talking about further interest rate increases to come, markets have fretted that as rates rise, more investors may prefer the lower potential, but greater security of fixed interest investments.
That, the reasoning goes, could reduce demand for shares, leading to lower prices. As usual, rather than waiting for the future to arrive, markets anticipate it, leading to selling pressure from those worried about what others may worry about in the future.
The fund declined by 4.19% in October, outperforming the wider stock market’s 5.19% decline. As we’ve talked about, high quality growth stocks bore the brunt of the sell-off but small and mid-sized companies also fared worse than their larger peers.
Both of these factors presented headwinds for the fund this month, but the impact was more than offset by our exposure to defensive sectors such as utilities, healthcare and real estate which held up well in the market falls.
Sentiment towards our stocks will inevitably wax and wane, but we remain confident in the fund’s long term prospects. We see strong progress from our holdings, with the vast majority growing profits and dividends at a healthy clip, which is exactly what we’re looking for because in the long run share prices follow earnings.
Below, we look at which stocks contributed most positively and negatively to the fund’s return last month. Remember these details are over a short period of time and past performance is not a guide to future returns.
Stock | Contribution to fund’s return | Actual return |
---|---|---|
Pennon Group | 0.12% | 4.63% |
National Grid | 0.10% | 4.78% |
Domino’s Pizza | 0.05% | 1.40% |
Britvic | 0.03% | 1.09% |
Astrazeneca | 0.02% | 0.45% |
Past Performance is not a guide to the future. Bloomberg 01/10/2018 ‐ 31/10/2018.
Domino’s Pizza shares have had a tough 18 months but responded positively to a trading update which revealed solid UK sales growth and good progress on store openings.
The business does face some challenges. International progress remains subdued, for example, while in the UK the group must work harder to keep franchisees on side against a backdrop of rising food and labour costs. However, the strength of the Domino’s brand and business model gives us confidence in the group’s long term prospects.
Pennon, National Grid, Britvic and Astrazeneca didn’t deliver any noteworthy news but benefitted from an improvement in sentiment.
On the other hand Unilever, which only fell 1.65%, reported solid interim results this month, with accelerating growth across all divisions. Unilever’s markets have never been more competitive, with the internet and social media having opened up the playing field to smaller and more agile competition.
Unilever has significantly upped its game in response, launching more new products, and at a faster pace. We are pleased to see these efforts now starting to bear fruit.
There were solid trading updates from HSBC, Lloyds, Sabre Insurance and GlaxoSmithKline; with all these businesses performing broadly in line, or slightly ahead of expectations.
Stock | Contribution to fund’s return | Actual return |
---|---|---|
Paypoint | -0.55% | -14.76% |
Sanne Group | -0.36% | -12.50% |
Phoenix Group | -0.36% | -10.87% |
Ascential | -0.33% | -9.86% |
Reckitt Benckiser | -0.32% | -9.73% |
Compass | -0.31% | -9.73% |
Standard Life Aberdeen | -0.28% | -10.60% |
Royal Dutch Shell | -0.21% | -4.61% |
GB Group | -0.18% | -13.06% |
Past Performance is not a guide to the future. Bloomberg 01/10/2018 ‐ 31/10/2018.
Investors reacted negatively to Reckitt Benckiser’s third quarter results. While most parts of the group are performing well, a problem in their European baby milk plant cost them £70m in lost sales. The problem looks self-inflicted and appears to be isolated to one factory, but there will be knock-on effects; new mothers who could not find Mead Johnson products on the shelf will have switched to competitor brands and probably won’t come back. While disappointing, full year sales targets were maintained and it does not change our positive long term view.
GB Group weakened despite announcing the acquisition of Vix Verify Global for £21.2 million in cash. The business helps clients in Australia and New Zealand validate the identity of their own customers and looks to be a good fit for GB. The group also announced a first half trading update confirming that the business is performing in line with expectations.
Declines in the other names in the table were purely sentiment-driven, with no news on trading.
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