Steve Clayton 22 February 2018
When we decided to launch the HL Select funds we laid out a clear philosophy. Invest in great businesses, with strong finances, competitive advantages, and robust cash flows.
These businesses are rare, but their products and services are able to deliver pricing power and fat margins. It makes for healthy cash flows which keeps finances strong and leaves the businesses well placed to reinvest into growth opportunities. And the cycle repeats.
It’s times like now, when the markets have a collective loss of faith, that a focus on strength is important.
Shaky stock markets can be a sign of trouble ahead for the real economy. But as the saying goes, the markets also have a track record of predicting seven out of the last two recessions.
The effect of interest rates
Recent economic data has generally been pretty supportive, with growth firming up around the globe. But the Achilles Heel for the markets has been the extraordinarily low level of interest rates.
A healthy economy would normally have interest rates perhaps a couple of percent above the expected future rate of inflation. In the UK, the Bank of England is tasked with keeping inflation at or around 2%, so a rate sitting between 3% and 5% might seem “normal”. But a “normal” state of affairs would need a hefty interest rate rise from today’s level of just 0.5%.
Markets know that economies could struggle if such a rise came in a hurry. So they fret that with news on growth, the more chance of central banks feeling forced to move faster and further in lifting rates.
It’s made for a strange state of affairs. The markets think the “Goldilocks” position is for economies to have rather miserable growth rates, allowing interest rates to remain low.
But step back from the fantasy world and no-one would say prolonged miserable growth would be “just right”.
How we find strength
Populations are sending a message that they want to see more growth, less austerity and rising living standards.
Central banks are trying to keep the pressure in the kettle under control, whilst they tip-toe back toward “normality”. Investors are fretting that balance can’t be maintained.
Focusing on the fundamental strength of companies is more important than ever.
If economies race away, interest rates will follow in hot pursuit. Businesses with little or no debt will fare best if rates move a lot.
If economies slow down, regardless of where interest rates have got to, companies with powerful internal growth drivers will fare better than cyclical players that need a boom to prosper.
In the HL Select UK Growth Shares fund we have a collection of businesses that we feel are in charge of their own destiny.
Some are technology leaders who take advantage of the ongoing shift toward the digital economy. Businesses like Domino’s Pizza and Just Eat have used online channels to transform the home-delivered food industry. Rightmove has captured the lion’s share of the property advertising market. GB Group is facilitating trust in ecommerce by providing immediate proof of a customer’s identity to online vendors.
Consumer brands can survive for decades if well nurtured. And we have plenty of their manufacturers in the portfolio, ranging from Unilever, to Reckitt Benckiser and Diageo, giving investors exposure to a brand portfolio ranging from Dove Soaps, to Strepsils throat lozenges and Guinness. Not to be taken all at once!
And then we have unique businesses, like Burford Capital, which has helped to create, then gone on to dominate a new industry. It supports legal disputes in return for a share of the proceeds. Or Ideagen, whose software helps companies achieve and monitor regulatory compliance, which ends up deeply embedded in their customers’ day to day operations.
We don’t know which way the economy will go. But we do believe that investing in companies which are strongly financed, robust cash generators and with growth drivers independent of the economic cycle makes sense, whatever the outcome. As with all investments, there are no guarantees – the fund can fall as well as rise in value so you could get back less than you put in.
HL Select UK Growth Shares is managed by our sister company Hargreaves Lansdown Fund Managers.
This fund can fall as well as rise in value so you could get back less than you invest, especially over the short term. Information provided about individual companies is our view as managers of the fund. It is not a personal recommendation to invest. If you are at all unsure of an investment’s suitability for you please seek personal advice. The HL Select UK Shares Fund is 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.