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How HL fund managers invest in shares

HL’s Head of Equity Funds, Steve Clayton, explains how his team aim to maximise their success investing in companies.

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 is head of managing the HL Select funds. He has more than 30 years’ experience working with investments. He’s managed money for big institutions and retail investors alike, as well as providing leading fund managers around the world with advice on stock selection.

Great investors rarely make new investments. But they think of little else.

They revisit their past investments, and analyse the lessons learned along the way. They think about how their current investments are faring, and how a changing world might impact them. They scan the horizon constantly trying to find threats and emerging opportunities in equal measure.

Only once they’re sure that everything is aligned do they commit. And when they do, it has tended to be for a long of time.

Invest, don’t speculate

Great investors spend a lot more time thinking about the businesses they’ve chosen to back than about their share prices. For markets move each and every day. Most of it is mood music – is the world looking a cheerier or gloomier place today? That sets share prices, moment by moment. But in the long run, the value of a business is set by its underlying performance.

Betting on short term share price movements is just that, a bet. Markets can spin on a sixpence, turning winners to losers, and vice versa, with no warning. Some investors would say that this creates opportunities, and we agree – it creates opportunities to lose money on a regular basis!

Think long term, cut costs

Every trade carries costs with it. Commissions must be paid to deal. You have to pay stamp duty on UK shares, and then there’s the market “spread” – the difference between the price a share can be bought and sold at any moment. Individually these costs may seem small, but if you trade often then the charges are incurred again and again. Over the course of a year or two, the cost of constant trading creates a substantial headwind, the strength of which can easily wipe out any underlying gains.

Much better then, is to make investments for the longer term. You’ll pay less in costs, and the underlying performance of the business will have time to impact the share price.

Test your investment case

HL Select launched its first fund, HL Select UK Growth Shares, just over four years ago. From the outset, we’ve been at pains to try and take the long view. We look for companies where we can see good prospects for reliable growth stretching far out into the future. We hold onto them for as long as we have that confidence.

Looking at the portfolio today, I can see a dozen or so names we bought on the very first day. And they look likely to still be there for years to come.

We get the confidence to hold shares for the long run by exploring a company’s ability to generate free cash flow. It’s hard to get into too much trouble while throwing off cash. We look to the markets they operate in to understand how demand for their products might change in the years ahead. And we look at the strength of their positions within their chosen markets. Only once we’ve built a case to see if the business will be able to grow reliably do we think about making an investment.

Part of that investment case is about trying to predict what could go wrong, and how we might manage the holding if it did. Some events justify a sale, others are temporary headwinds that can just be leant into. Planning for adversity is a great way of reducing its impact if it happens.

No-one gets every investment decision right. After all, investment is about managing uncertainties in pursuit of rewards. Crystal balls are only as good as the fortune tellers that use them, and there’s a reason the circus leaves town after a few days.

Great businesses aren’t necessarily great investments. Pay too much and it could take a long time to see a return. So we always combine our fundamental analysis of what a company does, with an examination of the valuation it commands. If we can’t see enough cash generation ahead to justify the price, we put the stock back down and hope that one day we’ll get a chance to invest at a better level.

Own businesses, don’t trade them

As an investor, taking the long view can be the most liberating choice you make. Trading the market for short term gains requires intense concentration and nerves of steel.

Taking the long view lets you research carefully. It gives you the time to evaluate properly, rather than forcing quick decisions. When you understand what’s driving an investment’s course, you can step away from the noise and leave the worrying about the short-term news flow to others.

We take the long view, so we don’t change our positions that often. Which means we pay less in dealing costs.

See everything we own and why

Our fund managers and analysts also write blogs explaining what we’ve done and the drivers behind performance.

HL Select blog

We take the hard work of researching and managing the investments for our investors. If you want to benefit from the growth potential of stock markets over the long run, HL Select could be a great place to start.

Find out more

HL Select funds are managed by HL Fund Managers Ltd.

This article is not personal advice. If you’re not sure if an investment is right for you, please seek advice. All investments fall as well as rise in value, so you could get back less than you invest

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.

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