Market Review
Markets enjoyed a recovery during the quarter as it became clear that the US/Israeli conflict with Iran would not escalate into a wider regional war. The focus of investors returned to second-guessing the impact of AI adoption, with market leadership increasingly dominated by the semiconductor industry.
The MSCI World index, with its greater exposure to technology companies, generated a return of 13.0% over the quarter. The influence of AI upon investment returns is stark. Software companies have reversed all of their relative gains of recent years in recent quarters as investors bet that AI will erode the value of traditional software businesses. Even so, Technology was the strongest sector globally in Q2, but this was very reliant upon Semiconductor names. The Philadelphia Semiconductor Index rose by almost 90% during the quarter, far outpacing the 33.5% gain recorded by the wider Technology sector.
In the UK, where technology stocks are only a minor component of the broader market, the All Share Index still managed to generate a return of 4.7% over the quarter, quite a number behind other major markets. Banking names were prominent amongst the winners over the quarter, whilst the biggest drag on the index came from the Energy sector, which surrendered most of the gains that had been made upon the outbreak of the conflict in the Middle East.
The US posted returns of over 14%. Surprisingly unfazed by the ongoing conflict with Iran, the world’s largest economy continued to show resilience with unstoppable capital expenditures directed towards data infrastructure supporting the AI boom.
On the continent, Europe delivered 12.3% for the period. With tensions easing somewhat in the middle-east, the de-escalation allowed for the region to breathe a sigh of relief.
Emerging markets also had a strong run for the period with a remarkable gain of 23.3% in GBP terms. The index has significant exposure to tech hardware and benefited greatly from the quarters trend.
Commodities on the other hand was out of favour. The weakness of oil prices as the Middle Eastern conflict cooled meant that Energy sector weakness was a global phenomena in Q2, with the sector acting as the biggest drag on the global index too. Precious metals such as gold also underperformed, falling by 13.4% as investors continued to lean towards growth stocks with a risk-positive attitude.
Fund Performance
30/06/2021 To 30/06/2022 | 30/06/2022 To 30/06/2023 | 30/06/2023 To 30/06/2024 | 30/06/2024 To 30/06/2025 | 30/06/2025 To 30/06/2026 | |
|---|---|---|---|---|---|
HL Select UK Growth Shares A Acc | -8.5% | 6.9% | 11.5% | 5.0% | 7.6% |
FTSE All-Share TR | 1.6% | 7.9% | 13.0% | 11.2% | 21.9% |
IA UK All Companies NR | -8.7% | 5.9% | 12.6% | 8.5% | 12.2% |
Winners and losers
The following information is supplied by the Fund’s appointed Investment Managers Blackrock Investment Management (UK) Limited and reflects activity or performance over the period since taking on the management of the Fund.
Description | Portfolio Weight | Total Effect |
|---|---|---|
COMPASS GROUP PLC | 5.01% | 0.66% |
STANDARD CHARTERED PLC | 6.11% | 0.65% |
BP PLC | 1.15% | 0.37% |
NEXT PLC | 5.09% | 0.37% |
LONDON STOCK EXCHANGE GROUP PLC | 0.00% | 0.23% |
BABCOCK INTERNATIONAL GROUP PLC | 1.48% | -0.33% |
SMITH & NEPHEW PLC | 2.94% | -0.35% |
BARCLAYS PLC | 0.00% | -0.35% |
SERCO GROUP PLC | 1.37% | -0.37% |
BRITISH AMERICAN TOBACCO PLC | 0.00% | -0.41% |
Compass Group was the largest contributor to relative returns over the quarter. The global catering company recovered as investors refocused on its resilient earnings profile, and long-term structural outsourcing opportunity.
Standard Chartered was a positive relative contributor to performance across the quarter as investors refocused on the bank's improving operational momentum following the weakness seen in Q1. Higher interest rates, disciplined capital allocation and attractive shareholder returns continued to support the investment case, and we remain positive on its exposure to structurally faster-growing Asian and Middle Eastern markets. The decisions not to own Barclays detracted as the bank continued to outperform. Whilst we acknowledge the improving momentum across parts of the banking sector, we continue to favour businesses with stronger long-term growth prospects and prefer Standard Chartered within the internationally focused banks.
Next again demonstrated the strength of its business model through resilient trading, international expansion and disciplined capital allocation, reinforcing our view that it remains one of the UK's highest-quality retailers.
Against these positives, Shell was a stock-specific detractor although this was offset by the underweight in BP. Defence-exposed holdings Serco and Babcock also detracted. While the long-term backdrop for defence spending remains supportive, the sector gave back some of its earlier gains during the quarter. Smith & Nephew also underperformed as weakness in its US Orthopaedics franchise offset progress in other divisions.
Activity
We initiated two new positions during the quarter: United Utilities and Cranswick. We participated in United Utilities' equity raise to support an attractive expansion of its regulated asset base, enhancing long-term earnings and cash-flow growth within a defensive business model. Cranswick was added as a high-quality food producer, which we believe continues to benefit from structural market share gains, vertical integration and disciplined capacity expansion, in our opinion, making it a natural fit with our focus on businesses capable of consistently compounding earnings.
We exited Intermediate Capital Group. Although we continue to regard the business highly, we have become more cautious on the near-term outlook for private credit and chose to reallocate capital towards opportunities offering a more attractive balance of risk and prospective return.
Elsewhere, we trimmed SSE, Halma and Diploma following strong share price performance, managing position sizes where we believe valuations had become more demanding whilst maintaining conviction in each investment.
Outlook
The geopolitical backdrop remains fluid and we believe that markets are likely to remain sensitive to developments in the Middle East, trade policy and fiscal decisions across major economies. Whilst easing energy prices have reduced some of the immediate inflationary pressures seen earlier in the year, the outlook for interest rates remains finely balanced. Central banks continue to navigate the challenge of returning inflation sustainably to target without unnecessarily slowing growth, suggesting that expectations for policy easing are likely to remain volatile.
Alongside these macroeconomic considerations, the rapid evolution of AI continues to reshape investor sentiment across a broad range of sectors. Whilst markets will continue to debate the ultimate beneficiaries, we believe the greatest long-term opportunities will accrue to businesses with proprietary data, durable competitive advantages and the financial resources to invest through the cycle. Our focus remains on identifying those companies rather than attempting to predict short-term market rotations.
We believe that the UK market continues to offer an attractive combination of reasonable earnings growth and compelling relative valuations compared with international peers. Political uncertainty has increased following Sir Keir Starmer's resignation and the expected appointment of Andy Burnham as Prime Minister, with investors seeking greater clarity on fiscal policy and the government's long-term growth agenda. However, in our opinion, fiscal discipline is likely to remain an important constraint regardless of the change in leadership. More importantly, the majority of earnings generated by UK-listed companies originate overseas, leaving corporate performance more closely linked to global economic conditions than domestic GDP. The UK's persistent valuation discount continues to attract strategic and financial buyers, reinforcing our constructive long-term view.
Against this backdrop, we remain focused on businesses capable of compounding earnings across a wide range of economic environments. We continue to favour companies with durable competitive advantages, strong balance sheets, high returns on capital and disciplined capital allocation. Whilst market volatility is likely to persist, it also provides opportunities to increase exposure where valuations become disconnected from long-term fundamentals.