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HL Select UK Income Shares – Q2 2021 Review


HL Select UK Income Shares – Q2 2021 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

15 July 2021

Market Review

The UK stock market's 5.6% return in the quarter continued the rally that began late last year when news of successful vaccines first broke. With the UK's vaccine programme having stolen a march on many other developed nations, optimism surrounding the domestic economy is buoyant.

Citizens hoarded cash through lockdowns, perhaps because of a lack of opportunities to spend it. With lockdowns falling away, there is plenty of potential for a consumer-driven recovery. The hospitality trade has reported strong demand, where it has been allowed to open its doors. Retail sales have also been robust, both on and offline.

Of the major sectors, pharmaceuticals led the way, up 16.4%, with strong performances from Beverages and Home Builders too. Banks were the only major sector to lose ground, with a decline of 0.2%. There was a degree of travelling and arriving; despite hospitality's robust trading in the real world, the Leisure sector lost 7.3% in value.

HL Select UK Income Shares Q2 2021

The fund returned 5.9%* during the quarter, a little ahead of the broader market. Our strongest individual contributors were Ascential, Diageo, Sanne Group, AstraZeneca, Tritax Big Box and Pennon Group, each adding over 0.5% to the fund's value during the quarter. Please note past performance isn’t a guide to the future.

It was a quarter when detractors to performance were few and far between. Indeed the only significant single drag on the fund came from Phoenix Group, where an almost 5% drop in value knocked 0.1% off the overall portfolio value.

Dividends of 0.25p per income unit were declared each month during the quarter. These are variable and not a guide to future income.

You can read more about the events behind the significant winners and losers in the fund during the quarter in the section below.

30/06/2016 To 30/06/2017 30/06/2017 To 30/06/2018 30/06/2018 To 30/06/2019 30/06/2019 To 30/06/2020 30/06/2020 To 30/06/2021
HL Select UK Income Shares N/A 3.0% 2.0% -9.0% 17.2%

Past performance is not a guide to the future. Source: *Lipper IM 30/06/2021

N/A = data for this period is not available.

Significant Winners and Losers


Stock Gain/Loss (%) Contribution to Fund (%)
Ascential plc 23.8 0.8
Sanne Group 29.0 0.8
AstraZeneca 19.8 0.7
Diageo 15.8 0.6
Pennon Group 16.5 0.6
Tritax Big Box REIT 10.3 0.6
GlaxoSmithKline 11.7 0.4

Past performance is not a guide to the future. Source: Bloomberg to 30/06/2021

Ascential the digital subscriptions and events business, enjoyed a strong recovery this quarter. During the quarter the company further bolstered its exposure to digital commerce with the acquisition of Perpetua, which helps third-party brands optimise their performance on Amazon. We believe this deal is attractive and will further accelerate the growth of Ascential's e-commerce business.

Ascential is a very different business now to a few years ago. While the group still owns the Cannes Lions and Money 20/20 franchises, the company is less reliant on physical events than it once was. Meanwhile, the pivot to digital subscription assets has significantly improved both the group's growth prospects and earnings quality. Overall, we think management have done an excellent job of repositioning the business and believe the prospects have never been so strong. We added further to our holding during the quarter.

Sanne received a takeover offer during the quarter, causing the shares to leap higher. The bid came from private equity firm Cinven, who have so far made five approaches that we are aware of, with the Sanne board having agreed to enter into negotiations with Cinven after an indicative value of 875p was proposed. No agreement has been reached at the time of writing, and Cinven could yet walk away or be rebuffed by Sanne's board.

For our part, we shall be sad to see Sanne go, should it end up in Cinven's clutches, as we believe Sanne has excellent potential. New business tends to repeat because Sanne administers specialist funds from the cradle to the grave. Whilst there have been some operational mishaps along the way, Sanne has been a robust growth story nonetheless, and it will be hard to replace it with a business of equal potential.

Diageo's performance was helped by a strong trading update in May, in which the group said it expects organic operating profit growth to be at least 14% in the fiscal year 2021. Performance was particularly strong in North America reflecting resilient consumer demand, the breadth of Diageo's portfolio and innovation. The group also announced a resumption of its capital return programme. Overall, we have been pleased with the resilience shown by Diageo during the pandemic and expect the business to benefit as more economies re-open.

Pennon finally revealed their plans for reinvesting the £3.7bn they received from the sale of their recycling and green energy business back in 2020. Pennon have agreed to acquire Bristol Water and will also be returning funds to shareholders and topping up their pension fund. The dividend is rebased up by a couple of pence per share, and the ongoing policy of raising the payout each year by CPIH +2% leaves the group offering an attractive dividend, set to rise in real terms. However, please remember that dividends are variable and not guaranteed.

Bristol Water should create plenty of opportunities for optimising profitability if Pennon's experience is any guide. The group previously created significant value with the acquisition of Bournemouth Water, where they were able to reduce controllable costs.

The pandemic saw a shift in demand from High Street to online Tritax, of course, specialises in the giant distribution centre buildings used to support logistics and e-commerce. Demand for these buildings has been predictably strong, from prospective and existing tenants, at the same time as investors have sought to gain exposure to this exciting asset class. An AGM trading update revealed solid rent collections, with 99.8% of FY20 rents collected and over 95% of the latest quarter's rents already in the bank.

We see excellent prospects for Tritax Big Box. The shift to e-commerce is boosting demand for their existing properties, and with a large development pipeline, the future value of the portfolio looks well placed to grow.

GlaxoSmithKline (GSK) has seen an activist investor, Elliott Management, arrive on the share register and begin agitating for change. At a time when GSK was pursuing substantial changes. Both management and Elliott have recognised that the status quo at GSK has not delivered the hoped-for outcomes to date. The disagreements about how to proceed are, in truth, not that large, but Elliott are essentially saying that GSK should proceed more firmly, possibly with different executives in charge.

We see a lot of value potential in GSK, but it does need to improve execution both in Consumer Healthcare and the Pharmaceuticals business to release this. Their recent capital markets day revealed a pipeline of new drugs that, if approved, could generate substantial new revenues by the end of the decade.

GSK is demerging its consumer health division, Elliott or not, and the combined dividends in 2022 will be lower than the current level. The fund will not necessarily see its income reduced though, for if the group's break-up does succeed in increasing the value of the group, then those increased funds can be reinvested into new dividend-paying holdings.

AstraZeneca - In truth, the vaccine that the rest of the world loves to hate is not especially significant to AZN's value , as they have been supplying it at cost. Far more important is the value of AZN's oncology and cardio-vascular pharmaceutical portfolios, and the news from these has been broadly encouraging. Products have received approvals in new markets, and AZN has reported success in clinical trials aimed at gaining wider market applications for products.


Stock Gain/Loss (%) Contribution to Fund (%)
Phoenix -4.8 - 0.1

Past performance is not a guide to the future. Source: Bloomberg to 30/06/2021

As we mentioned above, Phoenix was the only stock to have any meaningful negative impact on the fund's value, costing 0.1%.

The story at Phoenix is little altered. The group acquires books, often closed, of Life Assurance business and then integrates them onto a common platform, driving costs down. Investment risks are hedged as far as possible, leaving a predictable stream of cash flow generated over the life of the policies, so long as Phoenix controls the cost of servicing them. Phoenix has been blowing hot and cold over Europe, first stressing the potential for expansion over there, then contemplating disposal when approached by a potential bidder. Those discussions came to nothing. Meanwhile, the group has plenty of integration work to progress, as it beds in recent significant acquisitions.

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.