HL Select UK Income Shares - Q3 2025 Review

James Jamieson - Fund Manager

14 November 2025

Market review

The post-pandemic bull market continued strongly in the third quarter, with the UK market delivering a total return of 6.9%. Tariff regimes seemingly being implemented without immediate economic shocks occurring buoyed sentiment, as did signs that the conflict in Gaza might be edging toward some sort of conclusion.

Evidence of the UK government’s challenging fiscal position did not deter a market fixated by the fast-developing AI technology revolution and the prospect of lower interest rates on both sides of the Atlantic in the years ahead.

Of the major sectors, Banks delivered the strongest return of 15.1%, whilst Other Financial Services was the weakest, losing 17.5%, partly due to a weak performance of London Stock Exchange Group’s own shares. The ongoing rally in the price of Gold helped the Precious Metals Mining sector deliver an extraordinary 49.9% return during the quarter.

Interest rates were reduced by a quarter point during the period, which supported the stock market, but provided little help to the Gilt market where yields rose at medium and longer maturities. This is a very helpful backdrop for banks, for the rates that they must pay on deposits are falling, whilst the return for investing or lending money further out is going up.

The UK does not boast anything like the stable of massive technology companies that can be found across the pond. No surprise then that the UK market, although strong has been lagging Global Equities. During the quarter we saw investors beginning to query whether data-driven businesses might find themselves cut out of the loop by Artificial Intelligence applications. This is not a view we subscribe to, but it has been quite damaging to some of the UK’s leading stocks in recent months.

Fund review

During the quarter the fund delivered a total return of 3.2%, somewhat below the wider market. This was heavily influenced by the performance of those data-driven businesses we referenced above, especially RELX, which until now has been amongst the fund’s most successful investments over the longer term.

The winners

HSBC delivered a very strong quarter, buoyed by an apparent easing of US/China tensions, despite ongoing tariff negotiations. HSBC’s business is very focused on Asia and China in particular. Signs that the Chinese economy might be on the mend helped to support investor sentiment toward HSBC. Their interim results also showed strong cost control and a benign level of bad debt.

AstraZeneca had been a weak performer in the previous quarter, so in some ways this quarter’s strength is simply a bit of mean reversion. But there were also fundamental supports that arose, including solid Q2 results and tariff outcomes that were seen as a manageable result for the industry. AstraZeneca also announced that its shares will be fully listed on the New York Stock Exchange next year which could broaden the group’s investor base.

Rio Tinto benefitted from that improving sentiment toward the Chinese economy and a broadly positive metal pricing backdrop, with both copper and iron ore prices making gains during Q3. One of our more recent additions to the portfolio, Antofagasta is of course a major copper producer and they too benefited from strength in the price of copper, where supply is considered to be relatively fixed, whilst demand is set to grow as the world becomes increasingly electrified.

Lloyds Banking Group delivered a strong performance as the market focused on that positive background for commercial banks mentioned earlier. They also benefited from a Supreme Court ruling in the ongoing Motor Finance situation that was supportive in that it reduced the likelihood of very large compensation becoming payable. This issue remains ongoing. We are conscious that the upcoming UK budget could contain risks for the banks, given the Treasury’s increasingly fraught financial position.

The losers

RELX, one of our largest positions, suffered a tough quarter as the market mulled over the impacts of AI across industries. This new technology is undoubtedly capable of many things, but we challenge the market’s current notion that it will be able to disintermediate data-driven businesses, like RELX. AI can process data and highlight trends and opportunities in real time. Indeed, we are already seeing firms like HSBC use this to sharpen their trading edge in the bond markets. But we do not believe that AI can simply bypass the need for the underlying data, nor obtain it without proper contractual agreements. We regard the movement in recent months as a potential opportunity, albeit a painful one in the near term.

Haleon has suffered from sentiment wobbles off the back of the latest trading update. Organic Sales growth slowed over H1, but we see this as part of the general cut and thrust within their portfolio, with weakness concentrated in specific brands and locations. Furthermore profit guidance was raised. We remain very relaxed about the potential for the Group’s unmatched portfolio of consumer health brands to deliver growth over the longer term.

Sage surrendered 12% over the quarter which we find bemusing. Their results were strong and having already announced the UK’s first AI income tax agent, the company could even be an early beneficiary of the technology. However, quality growth stocks like Sage are currently somewhat out of favour in what is a very value-driven market, which is undoubtedly a headwind.

Games Workshop has done nothing wrong, nor has it given much to the market to play with. Announcements tend to be brief and limited in detail. Those details come out in splendidly well-written annual reports. In a world where investors are accustomed to being thrown regular meat to chew upon, the GW approach can lead to the stock being blown around a bit in between. We see the move in recent months as nothing more than that.

Kerry's interim results were a little below expectations and the stock has been punished as a result. But the fundamental drivers remain positive and we expect regulatory changes to create opportunities for the group. An example is the removal of artificial colourings from US ice cream in 2028 which creates chances to sell natural alternatives into a new market. We remain confident in Kerry’s potential, but will be watching carefully to see that the H1 miss was not the signal of any ongoing weakness in execution by the group.

Portfolio Activity

We exited from Schroders in the quarter. The firm is operating in an increasingly challenged industry where fees are under pressure, not least from the rise of Passive investing. Although implementing a strategic pivot, we are unconvinced on the path back to predictable growth in the foreseeable future, hence our exit. New holdings include aero engine manufacturer Rolls Royce, Barclays Bank, Unilever and Discover IE. You’ll find our Rationales for adding these names on the website.

The Outlook

Stock markets are at high levels around the world, especially in the US where the AI technology boom has propelled the valuations of some very large companies to extraordinary levels. So far, these valuations have been supported by subsequent revenue growth, which has kept the wheels going around.

The UK market is only obliquely exposed to AI; UK-listed companies will be users, not creators of the technology. But should anything come along to seriously challenge the concept that AI will be uniquely valuable in the context of stock market and economic history, it would be naïve to imagine that UK stocks would be unaffected.

That aside, the outlook is reasonably positive. Economic growth has held up better than many predicted, here and abroad. Tradewars have not yet brought anything to a grinding halt and earnings have held up reasonably well. It is not all plain sailing though. Far from it. Inflation is proving quite persistent, for which reason we expect interest rates to fall, but slowly, perhaps glacially. UK domestic earnings are pressured by the Government’s tax rises, perhaps even more so depending on what Chancellor Reeves will announce in the Budget next month.

Longer term, there is a worrying weakness in the nation’s finances, which must be addressed, but we have a shortage of politicians willing, let alone able to do so. On balance, we see more reasons to be cheerful than despondent. But it’s a wary sort of cheerfulness for there is much that could go awry.