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Coronavirus and the stock market – HL fund manager's view on high-quality businesses

HL Select fund manager, Steve Clayton, looks at how investing in high quality businesses could help provide shelter from the current market storm.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Steve Clayton
HL Fund Manager

Published on 13 March 2020

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

These are difficult times to be an investor with coronavirus causing stock market turmoil. Share prices have tumbled around 20%. Businesses are disrupted by lack of demand for their products and the supply of their inputs.

And as usual when stock markets are falling, investors have fled to safe havens, meaning the price of government bonds has risen to record levels.

This is quite different from any market I’ve come across in over 30 years of investing. Most cash accounts are now offering very low returns, while many government bonds have negative yields, meaning that even if you hold the bond to maturity, you’ll still get back less than you invested.

We face the choice of accepting the current market volatility, or accepting these token or negative yields in return for relative safety.

I’ve always believed that shares in great businesses are compelling investments for the long term. They let us benefit from the growth in economies around the world and if markets hit a bump in the road, there is time for them to recover.

But most of all, I try to reduce my risks by investing in high quality businesses. This is how we run the HL Select funds.

This article isn’t personal advice. If you’re unsure where to invest, please ask for advice.

How we spot quality

We focus on businesses with highly sought-after products and services, which often means they can increase their prices without losing too much demand. This should deliver fat profit margins and high returns on capital – a powerful recipe for generating cash.

And if a company generates lots of cash, there should be little need to borrow much – keeping it out of trouble when the market winds turn colder.

We also look for firms that can generate recurring revenues, for example through subscriptions. When revenues recur, the future is more certain and new customers can grow the business, not just replace lost clients.

A company with a powerful competitive advantage always stands out from the crowd. A strong USP can help differentiate from rival firms and make for more reliable growth. This means when challenges occur, they can stay on their feet in the long run.

There are risks of course and in the stock market you could get back less than you invest, especially if you need your money back at short notice.

Five quality examples

Unilever – In our UK Growth Shares and UK Income Shares funds, we hold stocks like Unilever, whose portfolio of household name brands, like Dove soaps or Marmite spread will be used day in, day out regardless.

The UK Growth Shares fund owns Ideagen, a software business that helps companies conduct internal audits and compliance programs. Regulation will remain firmly in place and we think Ideagen’s customers will continue to need its products.

The HL Select UK Income Shares portfolio has a holding in Primary Health Properties, which owns a portfolio of doctor’s surgeries in the UK and Ireland. The rents are paid by the NHS and the Irish HSE, and if current events prove anything, it is that more healthcare facilities are needed.

Microsoft – In the HL Select Global Growth Shares fund we have a big holding in Microsoft. We doubt Windows, or Office will see their competitive position changed in the long run, even if the short term is a little bumpy.

Our holding in Masimo looks well placed too. Its pulse oximetry technology is a world leader and allows medics in the intensive care unit to monitor patient oxygen levels. They could even see trading improve in these difficult times.

Our Select funds are portfolios of high quality companies that we believe can have success over the long run. The coronavirus outbreak will affect their share prices in the short term. But in the long run, the compounding growth of quality companies can be an extraordinarily powerful way to generate wealth. Prices today are lower than they were, which we see as an opportunity for those who can accept the risks.

Find out more about the HL Select funds

Thoughts for income

For income-seekers, lower share prices mean higher yields. Investors looking for yield should always tread carefully, for very high yields can be a warning sign – the market may be telling you that the dividend is at risk.

But when markets have deep lurches, babies can get thrown out with the bath water. We’ve been adding to some of our positions in the HL Select UK Income Shares fund, taking advantage of the chance to buy quality shares at attractive yields.

The fund pays dividends every month, which are variable and not guaranteed. We think the fund offers an opportunity to boost investors’ income, with the scope for longer-term capital gains too. Like all investments it can fall as well as rise in value so investors could lose money.

Find out more about HL Select UK Income Shares

HL Select UK Income Shares Key Investor Information

HL Select UK Growth Shares Key Investor Information

HL Select Global Growth Shares Key Investor Information

Important - The value of these funds 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.

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 disclosure for more information.

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