Positive results from 3 fund holdings last week

Steve Clayton - Fund Manager

23 January 2017

We're glad to say the stocks in the fund were all good boys and girls last week. It won't always be thus, but we're enjoying it whilst it lasts. It could have been very different, but our focus on quality served us well. We held no Premier Foods (way too much debt, terrible stale old brands like Angel Delight), nor any Mitie, (low margin outsourcing, questionable accounting) which no longer rhymes with mighty, let alone Pearson (educational publisher, teaches but never learns) which put on the Dunce's cap with relish, after revealing that Americans no longer go to college, or at least if they do, they don't buy Pearson's study books any more.

All those stocks put out horrible, horrible trading updates last week. Thankfully, the news from those of our holdings which also reported last week was more reassuring.

Experian - positive noises about Brazil

Experian (4% position in the fund) are making more positive noises about Brazil, where they own the biggest credit bureau in the country. After nearly four years of recession the economy is stabilizing and the government is taking action to stimulate the economy. A proposed law change could accelerate the collection and use of data, to expand access to affordable credit. We would expect Experian to be a major beneficiary, if this law comes to pass.

Experian has sustained strong organic revenue growth in Latin America, despite recession, testament to the strength of its business, and its ability to drive growth through self-help. If the Brazilian economy starts to improve, then growth could really start to motor.

Close Brothers - encouraging half year trading update

Close Brothers, the merchant banking group, also reported an encouraging half year trading update last week. HL Select UK Shares has a 3%+ position in Close Bros. The Banking division generated strong returns and profit growth during the period, with bad debts remaining low. Winterflood, its smaller company market-making division, delivered a good performance, and Asset Management benefited from decent markets and net fund inflows from clients. The outlook statement for the rest of their financial year is also encouraging.

If you're serving cyclical end markets, like Close Brothers is, you need two things to prosper. The first is a strong balance sheet, so that you can weather periods of economic turbulence, and the second is an ability to manage the cycle sensibly. In our view, Close Brothers passes both tests with flying colours.

Unlike many of its banking peers, Close Brothers didn't have to raise money from shareholders in the financial crisis. Not only that, but the strength of its balance sheet enabled it to keep lending to its customers just when they needed it most (and on very favourable terms, to Close Bros, not the customers), when its competitors were in disarray. Now the economy has improved and competitors have come back into the market, Close Brothers has sensibly decided to become more conservative with its lending, so it isn't shooting the lights out currently, but trading is steady all the same. We are perfectly happy with that. Trading on a P/E of less than 12x, and offering a prospective yield of over 4% (not an indicator of future income), we think the shares remain good value.

Burberry - A return to growth in Asia

Burberry gave a reassuring trading update last week. It's another big position for us, currently almost 4.5% of the fund. We like it for its cash generation and long term growth potential; margins are sky-high in luxury retail compared to a frock-seller like M&S, for example and the size of the store estate is still quite modest offering plenty of growth potential longer term.

Chinese "issues" have been holding sales back for Burberry and other luxury brands in recent years, ever since that nation launched a crack down on corruption which left conspicuous consumption distinctly out of fashion. The impact of that seems to be fading and Burberry reported a return to growth in Asia. Even Hong Kong, where many wealthy Chinese take their money for a wash every now and then, saw an improvement in the sales trend.

Burberry is currently being helped of course, by the weakness of sterling, which means that whilst underlying growth at Burberry is about 4%, reported growth, after all those dollars, euros and yen have been converted back into Brexit-enfeebled pounds, is running at over 20%. Overall, it was enough to push the stock higher. Which is always nice.

This fund can fall as well as rise in value so you could get back less than you invest. Information provided about individual companies is our view as managers of the fund. It is not a personal recommendation to invest. If you are at all unsure of an investment's suitability for you please seek personal advice.

Unless otherwise stated 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.

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