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HL Select UK Income Shares – Q3 2021 Review


HL Select UK Income Shares – Q3 2021 Review

Managers' thoughts

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

25 October 2021

UK Stock Market Review

The quarter saw the stock market inch forward, with the market delivering a total return of 2.2% during the period, derived roughly equal from capital gains and dividends. The overall outcome is modest enough, but it masked strong currents beneath the surface.

Labour shortages, supply chain problems and most recently, a violent squeeze in gas markets have all been playing out in recent months. Economic recoveries have continued, although there are signs that the stresses within national markets may be starting to temper the pace of expansion. Inflation is rising in the UK, Europe and the United States, potentially bringing forward the timing in interest rate increases.

Perhaps unsurprisingly, rocketing energy prices helped the Energy Sector deliver one of the largest sector returns (+14.4%) amongst the major industry sectors, whilst, of the sectors losing in the quarter, Smith & Nephew led the much smaller Medical Equipment sector down 15.37%.

With economies reopened, we are seeing some upturn in Covid infection rates, especially in the UK. But vaccines appear to have broken the link between infections and severe illness or death. So barring the emergence of new virulent strains that can overcome the increasing immunity of vaccinated populations, major economies look set to continue the process of normalisation.

The virus has left huge public debts in its wake, and many corporates have seen severe cash outflows too. Normalising the public finances and bolstering balance sheets will take time, and higher taxes could restrain growth if imposed clumsily. The digitisation of economies will go ahead regardless, and indeed we expect the pace to accelerate. The pandemic exposed previously hidden risks in business models, from overdependence on lengthy supply chains to under-developed digital channels. Fixing these issues will inevitably see further investment into automation and digital capabilities.

Fund Performance Review Q3 2021

The fund delivered a total return of 4.2%* over the quarter, usefully ahead of the market return . Past performance isn’t a guide to future returns. The most significant drivers of the fund's gain in value were our holdings in Information Technology, Healthcare and Energy stocks. Collectively, these three sectors added 3.0% to the value of the fund. Our holdings in the Consumer Discretionary sector proved to be the biggest detractor during the quarter, costing the fund around 0.4%.

Markets are facing the twin forces of enthusiasm stemming from ongoing recovery and pessimism surrounding the risk of rising inflation and post-pandemic disruptions. Much is made by observers of the possibility of a return to favour of Value investing, following a long period when markets have favoured growth stocks. Inevitably, there will be periods when Value, a style often associated with the commodities and financial sectors, has its time in the sunshine. Our style focuses on seeking out long term growth potential from cash-generative companies whose competitive position is strong enough to provide pricing power, critical in an inflationary environment. We believe this is the most consistent way of generating wealth over time.

30/09/2016 To 30/09/2017 30/09/2017 To 30/09/2018 30/09/2018 To 30/09/2019 30/09/2019 To 30/09/2020 30/09/2020 To 30/09/2021
HL Select UK Income Shares A Acc N/A 2.2% 4.1% -11.4% 26.3%
IA UK Equity Income TR 10.7% 3.5% -0.4% -17.3% 32.7%

Past performance is not a guide to the future. Source: *Lipper IM 30/09/2021

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

Significant Winners & Losers


Stock Gain/Loss (%) Contribution to Fund (%)
Paypoint plc 26.9 1.0
EMIS Group 21.9 0.8
Royal Dutch Shell' B' 19.3 0.7
Relx 12.6 0.6
Tritax Big Box REIT 9.1 0.5

Past performance is not a guide to the future. Source: Bloomberg to 30/09/2021

Paypoint took a beating a few quarters ago when it announced that regulator, Ofgem, had taken issue with the exclusive nature of its utility bill payment contracts. The group announced a settlement with the regulator during the quarter that effectively drew a line under the issue. The group can now focus on building upon the value of its Terminals fleet installed in tens of thousands of independent retailers' stores. We would caution that utility suppliers' current upheavals could prove challenging for the bill payments service.

EMIS has proven its worth through the pandemic. EMIS software runs around half the GP practices in England, and it has played a crucial role in organising the Covid-19 vaccination programme. Behind the headlines, we are hugely encouraged by the company's ongoing evolution of its technology infrastructure. We believe that EMIS's primary care expertise and dominant market positions in GP and Pharmacy software markets are increasingly putting it at the heart of the nation's digital healthcare strategy. We believe that top-line growth can accelerate in the years ahead, offering the prospect of attractive dividend growth from this hugely cash generative business.

Royal Dutch Shell is one of the world's largest energy companies, and its strong position in the Liquified Natural Gas market leaves it well-positioned to benefit from the current surge in gas prices. The company also made a major upwards shift in its dividend when it announced its second quarter results, going some way toward reversing the steep cut initiated during the pandemic.

Relx had a strong quarter, backed up by what we felt was a strong trading update. We like Relx for the predictability of their earnings and the growing market opportunities they face. In the near term, they should benefit from their exhibitions business beginning to mount shows as restrictions lift. Perhaps more importantly, we view the company's focus on increasing the value-added by its professional information services, through products such as Decision Tools for medical settings, as creating significant future potential.

Tritax Big Box REIT has delivered capital growth and regular income on a consistent basis, growing to be our largest current position in the fund. Big Box's strategy has evolved from a pure focus on hyper-scale distribution asset ownership to embrace the development of greenfield sites (typically pre-let) and onto investing into and developing urban "last-mile" distribution centres. The portfolio has proven well positioned for the digital age, given the rise of e-commerce which requires retailers, distributors and logistics providers to invest in these assets. We see no sign of this trend changing and believe Tritax remains a core holding for the fund.


Stock Gain/Loss (%) Contribution to Fund (%)
Sabre Insurance -12.7 -0.5
Fuller, Smith & Turner plc -14.1 -0.4

Past performance is not a guide to the future. Source: Bloomberg to 30/09/2021

Sabre Insurance has seen the pandemic move from being a boost to profitability to a drag. Initially, empty roads meant few crashes and surging profits for Sabre. More lately, the group has suffered from reduced levels of new drivers, a core client segment. Sabre continues to earn strong returns on capital, however, it does need to demonstrate that it can fight off the challenges from newcomer businesses like Marshmallow that are focusing on peeling off some of Sabre's higher-value customers.

Fullers gave up some ground during the quarter, despite an encouraging trading statement late in the quarter, which showed sales running at nearing 90% of 2019 levels. The industry is not without challenges though. Staff shortages appear endemic across much of the nation, and cost pressures from rising energy and other costs cannot be ignored. But Fuller's offer of premium food and drink served in prime locations has far better pricing power than the industry average, we believe.

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.