HL Select UK Growth Shares: June Review

Charlie Huggins (CFA) - Fund Manager

7 July 2017

June has been a slightly more difficult month for the fund, not helped by a falling market (the FTSE All Share Index ended June 2.5% lower), sector headwinds (Materials outperformed, whereas Consumer Staples underperformed, for example), and some stock-specific weakness. Overall, however, results from our companies have continued to be encouraging, with solid updates from the likes of Bunzl and WPP; and full year numbers from Auto Trader, GB Group and BCA Marketplace, showing profit growth ranging from 19 to 38%.

Below we highlight the biggest positive and negative contributors to the fund in June. However this is over a very short period and past performance is not a guide to future returns.

Biggest positive contributors

Only two of our holdings made a positive contribution to the fund this month:

Past performance is not a guide to the future. Source: Bloomberg.

Medica is a new position for the fund and we are very excited about its long term prospects. The group is the leading provider of Teleradiology services to hospitals - an NHS doctor will take a scan and send this to a Medica radiologist working at a remote location, who will then interpret the scan, and send the results back to the hospital.

The volume of scans is increasing at a double digit rate, driven by ageing populations and an increase in the number of conditions requiring diagnostic imaging. There is a recognised shortage of Consultant Radiologists in the UK to meet this rising demand and an increasing need for specialist reporting, making it more difficult for hospitals to resource their radiology departments to the optimum level. This is creating a demand-supply imbalance for radiology services throughout the NHS, meaning more hospitals are turning to companies like Medica, particularly for busy periods, or out-of-hours care (you can read more about it here).

Buford Capital, the litigation finance specialist, consolidated its recent gains after announcing a further secondary sale in its Petersen claim. Burford has now recouped a total of $106m for 25% of its stake in the Petersen claims, versus its initial investment of $18m, representing a 489% return on invested capital. We think it is a sensible move for Burford to lock in some gains from this case, the outcome of which is still uncertain. It has committed to retaining at least a 50% stake meaning it still has much to gain if the case goes its way.

Biggest negative contributors

Past performance is not a guide to the future. Source: Bloomberg

Having been the best performer in April and May, GB Group was our worst performer in June. This was despite posting very strong full year results, with revenues and adjusted operating profits rising by 19% and 27%, respectively. The shares have come a long way in a short space of time so it is not surprising to see some profit taking. We remain enthused by the group’s long term prospects, given ever tighter regulations around ID verification and the rapid growth of e-commerce.

Sentiment towards Ascential, the owner of Cannes Lions, weakened after media giant Publicis said it will not enter work or attend award shows and festivals, including Cannes, in 2018, while it invests in a new technology platform. This looks like a one-off decision, specific to Publicis. Cannes Lions is too important an event for creative talent to ignore, with Sir Martin Sorrell, CEO of WPP, describing it as the “Oscars of our industry”. We suspect Publicis will be back before too long.

Auto Trader fell despite posting strong full year results, which showed revenues rising by 9% and underlying operating profits up by 19%. Investors are worrying about a potential decline in used car transactions, but while the new car market has seen a bit of a wobble, so far, the used car market is holding up fine. The company is guiding for at least £130 growth in average revenue per retailer, per month, in the coming year, suggesting that it remains confident. That level of pricing power speaks volumes about the enormous value Auto Trader creates for its customers.

Merlin Entertainments weakened after its trading statement on 13 June. While trading to date has been broadly in line with group expectations, recent terrorist incidents in Manchester and London have led to slowing domestic demand and caution about foreign visitation trends. Given the increased uncertainty over near term trading, we decided to trim our position.

There was no news concerning Burberry during the month, although the recent strengthening of sterling is unhelpful if sustained, with the majority of profits earned abroad.

Summary

The UK election result has had relatively little impact on the markets or our funds. Although we invest in UK stocks, holdings like Unilever, Diageo and Reckitt Benckiser earn the vast majority of their income abroad. A number of our holdings benefit from technological trends, like the rise of e-commerce and data intelligence; which will continue regardless of who is in power. As such, we remain very happy with how the portfolio is positioned.

View the portfolio breakdown

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Please note the author or his connected parties own shares in Ascential.