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Three years in – Key themes


Three years in – Key themes

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

6 December 2019

Transparency is one of the key features of all HL Select Funds. You can see every holding on the portfolio breakdown page, so investors know what’s happening with their money.

The HL Select UK Growth fund was launched to find financially strong, high quality businesses, that we believe offer excellent long-term growth potential, and hold them for the long term. We aim to hold around 30 companies so each holding can make real difference to returns, although it’s a higher risk approach.

We have the flexibility to scour the market to find large, medium or higher-risk smaller companies we believe have the most potential. At first glance you’ll see companies from a range of different sectors in the HL Select UK Growth fund, but that only tells half the story.

There’s a number of key themes that have helped drive performance over the first three years.

Annual percentage growth
Dec 14 -
Dec 15
Dec 15 -
Dec 16
Dec 16 -
Dec 17
Dec 17 -
Dec 18
Dec 18 -
Dec 19
HL Select UK Growth Shares N/A† N/A† 22.04% 3.04% 14.64%
FTSE All-Share Index 2.22% 8.69% 13.37% -0.06% 9.03%
IA UK All Companies Sector 5.47% 4.93% 15.37% -2.21% 10.50%

Past performance is not a guide to the future. Source: Lipper IM to 02/12/2019.

N/A† full year data unavailable as the fund launched in December 2016.

Three years is a short time period and past performance is not a guide to the future. All investments fall as well as rise in value, so you could get back less than you invest. This blog post is not personal advice, if you’re unsure an investment is right for you, seek advice.

Profiting from change

The world’s being redrawn in many ways right now but behind a lot of this change is the application of new technologies to old & new problems.

So we like out-and-out technology businesses, there’s around 18% in the fund and digital identity specialist GB Group is our biggest success to date. Technology is not without its risks, Alfa Financial Software was a very disappointing investment, and we sold out as their business model was much less predictable than we had anticipated. We often see the most compelling investments in other industries, where companies are using new technology to lead change in their chosen fields.

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? When was the last time you picked up takeaway food from the shop? Companies like Autotrader, Just Eat, and Rightmove are all distinguished by the way they’ve adopted the possibilities of online communications to transform their industries.

Between them, they’ve added 6.54% to the value of the fund. Just Eat made handsome returns for the fund as it transformed the nation’s dining habits and ultimately received a takeover offer.

Business information groups Relx and Experian have been digitising the knowledge economy, helping their corporate clients gauge their risks, making fat margins and throwing off cash along the way.

Consuming Passions

Consumer facing investments made the biggest contribution as a group to the fund’s performance. Of the nine names held in the last three years only Domino’s Pizza went awry.

Overall, they’ve been a pretty eclectic mix. But what ties them all together is we saw something special within their businesses. We love identifying businesses that have built themselves a structural advantage, call it a moat if you like, that allows them to defend their returns.

Whether that’s a strong brand or intellectual property - if a consumer can’t find it elsewhere, they’ll keep coming back, and recurring revenue can work like a dream when it’s reinvested back into the business.

Consumer giants Unilever and Diageo sell millions of products every day, from toothpaste to tequila. They spend more than 10% of sales on 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. Both have a great track record of dependable growth and have delivered good returns for the fund so far.

Luxury goods have pampered the fund, Burberry’s cash generation was attractive but when its shares became as expensive as its shops, we took the profit and moved our money into rival LVMH, where we saw better value.

Intercontinental Hotel Group was a capital-light cash machine, and did well for us. But we sold out when we saw how Google was raising the transparency of pricing, which we think could ultimately breach IHG’s moat.

We sold out of Playtech when the company revealed weak trading in Asia, but before the worst of its problems came to light. That dodged a bullet, given the stock subsequently halved over the course of the next year or so.

With hindsight we should not have held both Just Eat and Domino’s Pizza, for one was benefiting from increasing people’s takeaway choices whilst the other would suffer if people chose anything other than a pizza. As it was, losses on Domino’s partially offset the gains we made on Just Eat.

Winning in slow motion

The stock market is full of ‘the next big thing’. From exotic mineral exploration groups to real estate projects in far flung corners of the world. There’s always something that someone, often with shares to sell, wants you to get excited about. But as often as not, these things seem to end up being all risk and little reward. There’s a lot to be said for having a good, long term commitment to businesses that just quietly get on with it, day in, day out.

We’ve made strong returns from holding businesses like Compass Group, which serves diners in staff canteens, hospitals, and stadiums each and every day. Their growth has been delightfully reliable. And if one division slows a little, as their European arm is currently doing, the rest of the group tends to march on regardless.

Similarly Rentokil has been a great performer for the fund, rising by over 60% since we bought it. It’s very unlikely that Rentokil’s customers will stop needing pest control. By expanding its range of operations, covering new geographies and different beasties, like mosquitos in the Americas, we see years of opportunity ahead for the group. There’s nothing flash about these companies; they’ve perfected what they do and identified opportunities to do it on a larger stage.

We’re always on the look-out for the next dull thing that offers significant potential, if we just add a large dose of patience.

There’s plenty of other companies that we believe are just unique, with the right qualities to prosper and grow far out into the future.

Check out the full portfolio now to find out why.



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.