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HL Select Funds

Switching Mastercard for Visa

HL SELECT GLOBAL GROWTH SHARES

Switching Mastercard for Visa

Fund changes

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

9 January 2020

We have switched the HL Select Global Growth fund’s investment from Mastercard into Visa Inc. There are lots of similarities in the two businesses, indeed we suspect most card users would struggle to explain any difference beyond their logos. But beneath the surface there are ways in which the two companies diverge from one another. One of these is their stock prices and in recent months Mastercard’s shares have risen to trade at a significantly higher earnings multiple to that of its rival. Visa also offers the greater exposure to the vibrant US economy. In our view this combination of value, alongside growth potential looks irresistible.

Why Visa?

Visa’s position in the world of electronic payments is unparalleled.

It processes roughly twice as many transactions as its closest competitor, Mastercard, and holds over 50% market share (by purchase volume) in the U.S., Europe, Latin America, and the Middle East/Africa.

This dominance is reinforced by a powerful network effect. The more consumers that are plugged into a payment network, the more attractive that payment network becomes for retailers, which in turn makes the network more convenient for consumers. It’s exactly the sort of virtuous cycle we look for.

The growth prospects for Visa and Mastercard look very strong indeed. Despite rapid growth in digital payments over the last decade, cash is still the most established way to pay in the world. Even in Europe cash represents 78.8% of all transactions in volume and 53.8% in value, suggesting the shift from cash and cheques towards electronic payments still has many years left to run.

Unlike banks, Visa doesn’t take on any credit risk because it’s just facilitating the transaction. Every time a transaction passes through its network, it takes a tiny slice. The more transactions flowing through its network, the more money Visa makes; yet the costs of operating the network are largely fixed. This makes the business enormously scalable leading to very high margins and cash flows.

Replicating Visa and Mastercard’s global payments network would be extremely challenging. For this reason the majority of new payment models are choosing to partner with the card networks, rather than bypass them. So whether you’re paying by phone, card or online; it’s likely that either Visa or Mastercard are taking a cut.

We aren’t the only investors to have noticed these qualities, meaning Visa’s shares do not come cheap (trading on a forward P/E of 29x). But the valuation is lower than that of Mastercard (on 33x earnings) and in our view is fully justified given the prospect of double-digit earnings growth.

A full rationale for all of our holdings can be viewed on the portfolio breakdown page.

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.