Themes within the fund

Steve Clayton - Fund Manager

20 December 2016

Everyone likes to divide markets and portfolios up in different ways, by size or industry for instance. That can make sense, and you can see the split of HL Select UK Shares by sector on the portfolio breakdown page, but that really tells only half the story.

For instance, as I write this, the breakdown page says that 7.5% of the fund is in Software and Computer Services, which is true, in so far as the weights of Sage Group and Fidessa Group add up to that much. But if we consider Technology in a broader sense, I would suggest that the fund is closer to 30% weighted in this area, because many of the names in the fund are Tech companies in disguise.

Tech in disguise

Names like Autotrader, Just Eat and Rightmove, all of which are in the fund, are officially classed as Media or Leisure businesses, but they are all distinguished by the way they have adopted the possibilities of online communications to transform their industries. Who walks into town to look in estate agent windows anymore, or flicks through the small ad pages of the local rag in search of a new car? Remember the bad old days when you had to take food away from a takeaway, instead of them bringing it to you? Domino’s Pizza was the takeaway chain that did it the hard way, building its own website and apps when rivals had no online order channel at all. They now dominate the pizza sector and receive the majority of orders online.

These four businesses saw the chance to become dominant in their field by taking newly available technology and redefining the customer relationship, creating billions of pounds of value for shareholders along the way.

Consumer brands

Consumer brands are another theme that we have enthusiastically backed in the fund. Consumer giants like Unilever, Reckitt Benckiser and Diageo sell products by the million, around the planet every day, from toothpaste to tequila and especially, Marmite. These businesses spend more than 10% of sales advertising and marketing their brands, driving sales forward and increasing their pricing power. Good brands can last decades, and these companies are full of them. Each has a great track record of dependable growth and whilst not immune to recession, each of them is expected to make at least a billion pounds more profit in 2017 than they did in 2007, before the financial crisis.

Industry Dominance

Dominance of an industry can bring big rewards. Stocks like Autotrader and Rightmove fall into this category too, but we can also add BCA Marketplace, a medium sized company we have added. Their British Car Auctions business controls the majority of car auction sites in the UK. With few new sites likely to come along in future (auction buyers like to get lots of choice, new sites have little volume to attract the buyers with), they should be able to exploit their position over many years to come.

Playtech is another great example of a dominant player. Playtech systems power the back ends of bookmakers and online gaming businesses and they have established an unprecedented market share. Because their products allow the bookies to acquire new customers cheaply, and then keep them for longer, Playtech has pricing power. That leads to fat margins and the ability to keep reinvesting back into growing the business and acquiring niche products to add to the portfolio.

Recurring Revenues

Recurring revenues are another of our favourite qualities in a business and this theme is writ large across the portfolio. We would class over two thirds of the stocks in the portfolio as having substantial quantities of recurring revenues, be it from the sale of branded consumer goods, year in year out to the same consumers (when did you last change your toothpaste brand?), to subscriptions to journals or regular advertising exposures on property portals. In the case of some stocks in the fund, the services they provide are so embedded into their customers daily workflow (Fidessa, or Sage for instance) that the customer is most unlikely to switch provider. We’ll return to the recurring revenues theme in future blogs, highlighting how significant it is for the individual holdings.

View the portfolio breakdown

More about HL Select UK Shares

Read more blog articles