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HL Select Funds

The one that got away

HL SELECT UK GROWTH SHARES

The one that got away

Managers' thoughts

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.
Steve Clayton

Steve Clayton - Fund Manager

16 November 2016

ARM Holdings plc is a great example of the sort of business that we want to own. Sadly, Softbank of Japan thought so too, and made a knock-out takeover bid for them earlier this year. ARM's attractions though were clear.

Driving the mobile web

The company designs the processors that power mobile phone’s silicon chips, and sells these as licenses to chip and phone manufacturers who then pay ARM a royalty for each chip they make. So good are the designs, that ARM dominates the market, with over 85% of smartphones using chips containing ARM's designs.

There are lots of other applications for ARM's technology and billions of chips a year are made, generating hundreds of millions of pounds of royalties each year, on top of the licence fees. ARM has no factories, just very, very, very bright computer scientists, so it doesn’t have to invest in expensive plant and machinery.

Invest in the product, collect the cash

The products are so good, that ARM sells them for high margins, which helps the company throw off cash. At their last results they had almost £700m of cash in the bank, and even after spending 29% of sales on research and development, they still reported operating profit margins of over 40%.

That pattern of exceptional products, leading to strong margins and cash flows and the ability to invest back into the next generation of products to keep growing the business was incredibly attractive. It wasn’t just Softbank that thought so either, even before the takeover approach was made, ARM had risen more than tenfold in the previous decade, with Softbank’s offer adding a further 40% increase on top.

Exceptional products, exceptional returns

They can't all be like ARM, and doubtless there will be some bumps in the road along the way, as we won’t get it right every time. ARM is a very good example of the type of company that we look for, businesses that have a virtuous circle of great products, great finances and the ability to reinvest back into the business hopefully generating further long term growth.

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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.