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HL Select Funds

Rising like a Phoenix

HL SELECT UK INCOME SHARES

Rising like a Phoenix

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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.
Charlie Huggins

Charlie Huggins (CFA) - Fund Manager

28 September 2018

Back in February we revealed that one of our holdings, Fidessa, had been subject to a takeover bid. After several months of back and forth, the acquisition completed in August and we have reinvested the proceeds in a new stock.

Fidessa – a reminder of events

The initial offer from Temenos Group came back in February and valued Fidessa at £35.67, excluding dividends. Soon after, other bidders emerged with Fidessa’s Board eventually agreeing to an improved offer of £38.70 from ION Capital. This offer was accepted by Fidessa’s shareholders, with the acquisition completing in August.

We sold around 40% of our holding prior to the acquisition completing, reinvesting the proceeds in existing positions. Cash for our remaining holding was received on 17 August when the acquisition completed. The average sale price achieved was £38.46, resulting in a 49% gain on our initial investment, excluding dividends.

From Fidessa’s ashes

We have used the Fidessa acquisition proceeds to build a 3.2% position in Phoenix Group, a consolidator of life insurance companies.

The UK and European life sectors contain a large number of closed-book funds, no longer writing much, if any, business and typically running-off to the point where the last policy matures. This can be years or decades away.

Phoenix exists to consolidate these orphaned assets onto their low cost administration systems, reducing the cost of operations and allowing the reserves within the funds to be released over time, to the benefit of shareholders.

The result is a highly cash generative business model with excellent dividend-paying potential. The company pays two equal biannual dividends each year, which grow as and when the business acquires new portfolios of business. The current yield is 6.5% (variable, not guaranteed and not a reliable indicator of future income).

Phoenix acquires its assets at a discount to their fair value, because the owners are struggling to manage them efficiently, or because they wish to redeploy the capital committed into other areas of their business. Opportunities to acquire are plentiful.

Big catch

Phoenix recently completed a deal with Standard Life Aberdeen (SLA) that has given them a major increase in scale and future cash generation. SLA have taken a 20% stake in Phoenix with the balance of funding provided by new equity and debt. Phoenix have ended up with most of the non-fund management businesses of Standard Life, with long term agreements between the two groups covering future business. Thus Phoenix should see some ongoing new business flows from the SL businesses acquired.

Phoenix paid a total of £2.93bn and the acquired assets are expected to generate £5.5bn of future free cash, the difference explained by discounting the timing of the flows.

With a strong balance sheet and cash flows underpinned by the recent Standard Life deal, we believe Phoenix could be a reliable dividend-payer for many years to come.

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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.