A lot has happened since the first HL Select fund launched five years ago.
We’ve seen new governments and presidents. A Brexit deal’s been done. And of course, the Covid-19 pandemic has upended ways of living around the world.
All these changes have affected the way markets moved. That’s why we’ve taken a closer look at how stock market changes have impacted the HL Select fund range, and what the future could hold.
This isn’t personal advice. If you are not sure about what’s right for you, please seek advice. All investments and any income they produce can fall as well as rise in value, so you could get back less than you invest. The HL Select funds are run by our sister company Hargreaves Lansdown Fund Managers Ltd.
Brexit’s legacy
This summer marked five years since people in Britain voted to leave the European Union, causing ripples throughout UK markets. The FTSE 100 dropped 7% in early trading on 24 June 2016, and sterling fell in value against the dollar and the euro.
During the aftermath of the referendum, investors grew cautious of UK markets. There was uncertainty around how Brexit negotiations would be handled, and what those negotiations would bring. Could the UK emerge with a deal that protected its future growth?
Now a Brexit deal is done, things have turned a corner. The outlook for the UK has become more positive now than in the past.
Trump’s trade war with China
Shortly after the Brexit referendum there was another headline-worthy vote. In November 2016, Donald Trump won the US presidential election. While there are plenty of memorable events that took place during Trump’s time in office, the trade deal with China was perhaps the biggest scare for markets.
Both China and the US brought in tariffs on imported goods, leading to higher costs for businesses and consumers. Companies around the globe felt the effects of the trade war in 2019. Considering this, the IMF, who promote global financial stability, lowered how much it expected the global economy to grow.
The US and China eventually signed a deal, bringing the trade war to a close.
The impact of the Covid-19 pandemic
The Covid-19 pandemic has had, and continues to have, a marked effect on all of us.
Not only did it impact markets, but our way of life too.
Remote working became the norm, opening opportunities for digitised companies supporting a new way of living. Businesses with a big online presence were well suited to this new economy.
The share price of companies like Zoom, Peloton, Spotify and Ocado rose throughout 2020 as investors saw their value. Remember though, past performance is never a guide to future returns.
A digital transformation in retail
Five years ago, it was clear there was an ongoing digital transformation. Industries were being reshaped and new entrants were challenging the old.
The situation hasn’t changed too much today. Retailers have been in a challenging position when it comes to the evolution of online. Some of the largest names haven’t been able to keep up the pace, and big players in the sector like Arcadia haven’t been able to stay afloat.
We added NEXT plc to Select’s UK portfolios when it fell sharply during the pandemic. NEXT plc has adapted throughout the digital shift, already earning the majority of its income online.
NEXT plc share of sales for the year ending January 2021
Source: Investegate.co.uk. Data from NEXT plc’s results for the year ending January 2021.
When we launched the HL Select UK Income Shares fund, we included the Tritax Big Box Real Estate Investment Trust (REIT). It was another way to benefit from the shift to digital because lots of firms need to occupy the distribution centres Tritax owns and develops.
With the pandemic accelerating the shift to online that was already underway, the need for Tritax’s premises quickened too. They usually house e-commerce operations, or the logistics businesses that bring us our online purchases.
The digital transformation has also created new routes to market. Software companies selling their products as online services are the champions here. Selling Software as a Service (SaaS) can create hugely valuable, durable high-margin revenue streams.
The beauty of intellectual property (IP) is it can be sold over and over again. Digital IP tends to have minimal or zero costs to replicate. If a customer renews their software contract for another year, that could be as much as 100% profit. All of which is cash.
What could the next five years hold?
Politics has triggered some major events in the last five years. A global pandemic has accelerated the need for digital transformation. However, what lies ahead in the path to Net Zero looks to be a major change for many of us.
Net Zero is the state where the amount of greenhouse gas we add is no more than what is removed from the atmosphere. There’s little human activity that doesn’t involve drawing on some other energy source though.
Whether it’s adding fuel to your car, or heating up your home. For economies to shift to Net Zero, just about everything that people, government, and businesses do each day will need to change.
This path is only going to accelerate the switch to a digital age – Net Zero is defined by efficiency, so digital technologies are going to be key to get us there.
What to look for in the next five years
When thinking about what lies ahead, it’s important to find companies that can manage a broad range of uncertainty.
Set out to find businesses that could benefit from a virtuous cycle. These companies would likely have two key things. ‘Top of the range’ products and services, protected by intellectual property and pricing power.
Having pricing power is important to the cycle. Pricing power is being able to set your own prices instead of taking what others give you. This gives companies the chance to grow profit margins and generate more cash.
Cash-generative businesses shouldn’t need to borrow heavily. Meaning they should cope better with ups and downs in the economy. This resilience means companies can reinvest to fund the next round of growth, and so the cycle starts again.
Durable competitive advantages are incredibly valuable. Managed well, they can offer the prospect of more reliable growth and profits. However, like all investments there are no guarantees.
Looking for suitable companies and investing for the longer-term is what we do with HL Select. When we find them, we typically hold on for years.
Discover more about HL Select and how we manage our funds
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.
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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