HL Select turns 7 – what we’ve learned and what’s next

Steve Clayton | 1 December 2023

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HL Select turns 7 – what we’ve learned and what’s next

The world was a different place at the end of 2016. Donald Trump was elected President of the US, the UK wasn’t long out of the Brexit referendum, and on 1 December our first HL Select Fund launched.

Cut to now, and despite economic and geopolitical headwinds, the HL Select range has expanded to three funds, investing all over the world, with just over £1bn of HL clients’ money.

That first fund, HL Select UK Growth, now accounts for almost £300mn of clients’ money.

More about the HL Select fund range

This article isn’t personal advice. If you’re not sure what to do, ask for financial advice. All investments fall as well as rise in value, so you could get back less than you invest.

HL Select UK Growth - how have we managed it?

Our aim has always been to look for high-quality growth businesses, that can deliver rising financial returns over the long term.

We see a kind of virtuous cycle in these companies. It starts with great products and services, backed by intellectual property, that serves up pricing power and strong profit margins from lower-cost business models. That drives cash flows strong enough to limit dependence on banks for funding and allow continual reinvestment into the business’s competitive moat.

Has it worked?

At the time of writing, the unit price has risen from 100p to almost 160p. It ranks in the top 7% unit trusts in its peer group and, with a 59.37%* total return, is comfortably outpacing the stock market. In the same period, the FTSE All-Share has risen 42.19% and the IA UK All Companies by 32.15%. Past performance isn’t a guide to the future.

Performance since launch

	Dec 16 - Dec 17	Dec 16 - Dec 19	Dec 16 - Dec 21	Dec 16 - Dec 23
HL Select UK Growth	22.04%	44.16%	64.72%	59.37%
FTSE All-Share	13.37%	23.53%	33.18%	42.19%
IA UK All Companies	15.37%	24.64%	38.76%	32.15%

Past performance isn’t a guide to future returns. Source: *Lipper IM, to 30/11/2023.

Scroll across to see the full chart.

Annual return

	Nov 18 – Nov 19	Nov 19 – Nov 20	Nov 20 – Nov 21	Nov 21 – Nov 22	Nov 22 – Nov 23
HL Select UK Growth	15.61%	1.54%	11.63%	-5.61%	3.24%
FTSE All-Share	11.00%	-10.28%	17.40%	6.54%	1.78%
IA UK All Companies	12.54%	-6.85%	17.11%	-4.02%	0.49%

Past performance isn’t a guide to future returns. Source: *Lipper IM, to 30/11/2023.

What we’ve learned

Not all has gone our way, and we have learned to be wary of the greater volatility of smaller companies. Building materials producer Marshalls is a prime example.

We went in for its cash generation but were surprised to see it engage in a major deal to acquire Marley Roofing Systems. This left it more exposed to the ups and downs of the construction sector just before interest rates began their surge. With little sign of an early recovery, we decided to cut our losses and sold the share.

When companies make moves that you didn’t expect, it can be better to sell and review from a distance instead of counting the losses as they mount up.

Overall, the fund’s success has come from stock-picking. Identifying great businesses with solid competitive advantages and then backing them for the long haul.

The information provided is the fund manager’s view and not individual stock recommendations.

Three of our most impactful shares

Our focus on growth has tended to steer us towards digital businesses which can be great cash generators.

1. Fidessa

Before its eventual acquisition by Ion Group, this specialist financial software provider supplied the electronic ‘pipework’ that links banks, brokers and investors globally.

Fidessa had huge control over its cash flows because of its ‘dug-in’ positions with clients, who would then struggle to migrate to rivals. In the end, the company attracted multiple takeover approaches before Ion Group, leading to a substantial return on our investment.

2. Ideagen

This software company supplied products for industrial and commercial customers performing regulatory and governance duties. Its disciplined approach to sales delivered strong expansion while their transition to a cloud-based model offered the prospect of high cash margins. Again, the company was eventually taken over, crystallising our gains.

3. Relx PLC

This market stalwart has a hugely powerful set of long-term growth drivers backed up by a massively cash-generative business model. Despite a pandemic that temporarily shuttered its events division, the business continued to grow its other divisions and came out of the other side stronger than it went in.

What’s next for HL Select?

The next seven years are looking to be very different from the last. The disruptive forces of AI are being unleashed, but I’m excited about what that’ll bring.

Major economies, especially the UK, have been stuck in a productivity rut for some time now, AI could be the catalyst that pulls us out.

Then there’s the path to net zero where vast expenditures will be needed. Some see costs, I see opportunities with the companies that provide the best paths forward. Efficiencies have never been bad news for businesses.

Politics always blows the markets around, but barring actual revolutions, this tends to be more important for newsreaders than businesses. The HL Select team will be spending more time reading balance sheets than parliamentary sketches in the years ahead.

Meet the fund manager

Funds are a great way to take the hard work out of picking shares.

HL Select is a group of three funds focused on a small number of shares with long-term growth potential. Our focussed approach means each holding makes a meaningful contribution, but it can increase risk.

Steve Clayton is Head of Equity Funds at Hargreaves Lansdown and created the HL Select fund range.

FIND OUT MORE ABOUT HL SELECT FUNDS

HL SELECT UK GROWTH KEY INVESTOR INFORMATION

The HL Select funds are run by our sister company Hargreaves Lansdown 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.

Steve Clayton has managed the HL Select team ever since the fund range launched in 2016. Watch this video to learn more about him, as well as how he and the experts in the HL Select team manage the funds.

The video opens with an introductory clip of Steve speaking, with uplifting music in the background. Steve Clayton, Head of Equity Funds at HL, and Susannah Streeter, Head of Money and Markets at HL, are sat at a table speaking. Throughout the video, the camera switches between seeing both Susannah and Steve sat at the table, an individual shot of Steve speaking and an individual shot of Susannah speaking.

Steve: We live to find great businesses and to know that we are making good investment decisions for the long term. We know how important that is for people's lives, and that's an incredibly rewarding thing.

The music becomes louder and the introductory sequence begins. We see a series of shots of the exterior and interior of Hargreaves Lansdown’s flagship office. The shot changes to show Steve Clayton walking through the office, speaking with a male colleague. The music fades slightly as we see Steve and Susannah sat at the table again. During the question and answer that follows, Steve and Susannah’s full names and titles are shown on the screen:

Susannah Streeter - Head of Money and Markets, HL

Steve Clayton – Head of HL Select, Equity Funds

Susannah: Can you give me an overview of your background as a fund manager?

During Steve’s next answer, we see a series of shots of Steve in the office, working with a male colleague. They are speaking with each other while looking at a market overview on Steve’s colleague’s computer screen. Steve points at areas of the screen to draw his colleague’s attention to specific markets.

Steve: I've been working in the equity markets since 1987, so that's about 36 years. And in that time, I've been an investment analyst. I've been a stockbroker and I've also been a fund manager. I think the most important thing for any investor is to be in the market. Think about the last 25 years: we've had tech booms and busts, we've had pandemics, we've had wars in the Middle East, we've had political crises. And markets, historically, they've always gone up over the long run.

The music volume lifts momentarily.

Susannah: What qualities would you say are essential for a successful fund manager? And how do you embody those qualities in your work?

During Steve’s next answer, we see a series of shots of Steve in the office, having a small informal meeting with two colleagues: a man and a woman.

Steve: You've got to be curious. You have to want to know what makes things work. It's that thirst for understanding that delivers the knowledge which allows you to make the right decisions and know when to change things. We’ll look at reports and accounts, we’ll have regular meetings with the management of the companies that we're invested in. So that gives us a chance to ask our questions and try and probe. And make sure that we are happy that the business is as strongly positioned as we believed it was when we first invested.

The music fades and changes track as we see Steve walking around the office with a male colleague, speaking with him.

Susannah: What do you find the most rewarding about your job as a fund manager? And what's the most challenging aspect of your work?

During Steve’s next answer, we see him sat at his desk, looking at a computer screen showing market performance.

Steve: When you see your analysis turning into a successful investment, and you know that by spending all those hours sifting the information, you've ended up with a profitable investment that is going to enrich your clients’ lives in the years ahead. What's most challenging is when the future doesn't play out exactly as you thought it would. We're dealing with an uncertain future, we're always trying to make our best assessment of where things are going to go. And the best fund managers are those that can look in the mirror and go: “You got that wrong. Change it.”

The music volume lifts momentarily as we see Steve in a boardroom with colleagues. They are in a meeting and Steve is pointing to a diagram demonstrating the portfolio breakdown of one of the HL Select funds.

Throughout the rest of Steve’s answer, we continue to see a series of shots of Steve in the office: smiling during a team meeting in a boardroom and discussing something with a colleague who’s sat at a computer.

Steve: This isn't a job, it's a passion. And all my team, we live to find great businesses and to know that we are making good investment decisions for the long term. Because, we know how important that is for people's lives. And that's what gets us up out of bed every day to go and crunch those numbers.

The Hargreaves Lansdown logo appears on the screen with a blue background. The logo then fades and is replaced with a disclaimer screen containing the following important information:

This video is not personal advice. If you’re not sure what’s right for you, speak to a financial adviser. Investments can rise and fall in value so you could get back less than you invest. The Hargreaves Lansdown fund range is managed by our sister company Hargreaves Lansdown Fund Managers Ltd.