Portfolio breakdown

Description

Medtronic is a global healthcare technology leader, employing more than 90,000 people across 150 countries. It looks to deliver innovate solutions to treat more than 70 health conditions, from Parkinson’s to diabetes.

Why we hold it

Medtronic's business is divided into four segments, each focusing on a specific area of medical technology: Cardiovascular, Medical Surgical, Neuroscience and Diabetes, and most recent data shows it holds the no.1 or no.2 positions in many of the key medical technology markets within these areas.

The medical device industry exhibits resilient structural growth, even amidst the challenges posed by the pandemic, providing a buffer against economic weakness. This growth is driven by aging populations in developed markets and increasing wealth in the developing world. Moreover, the industry is experiencing improvements in staff shortages, with procedure volumes having mostly recovered from the shock of COVID-19.

Medtronic's new CEO has implemented a fresh business structure and strategy, enhancing competitiveness and performance. Additionally, the company's focus on product innovation in areas such as robotics, transcatheter aortic valve replacement (TAVR), and renal denervation holds potential to accelerate revenue growth.

Investing in Medtronic offers several appealing aspects for inclusion within our fund. The company has a favourable valuation compared to its peers, provides a decent dividend yield, and has maintained a strong balance sheet. This positions Medtronic as a defensive, high-quality, low-growth compounder. We believe this makes it an attractive addition to the portfolio.

Description

Adyen is a rising player in the payments industry and operates a global platform that integrates all the steps involved in processing a payment.

Why we hold it

The existing payments technology consisted of a patchwork of systems built on outdated infrastructure. With the aim of helping businesses grow, the co-founders set out to build an end-to-end platform that consolidates all the functionalities within both the authorisation and settlement phases of a payment transaction.

The full-stack platform allows Adyen to analyse payment flow data, with each transaction helping it learn which payment route and formatting of the request offers the highest chance of success. Improving authorisation rates is a key benefit to online merchants, as 15% of e-commerce transactions are declined on average.

Adyen has obtained a lot of relevant local acquiring licenses around the world and has a banking license in the EU and similar in the US. This allows Adyen to connect with card networks directly without having to rely on 3rd party banks, lowering transaction costs for merchants and speeding up settlement times.

Adyen is a highly profitable business, despite being young and high growth. The reason for such high profitability is that 80% of growth comes from the existing customer base, as merchants grow their business, expand into new market and channels, and funnel more of the payment flow through Adyen’s platform.

Adyen is constantly innovating and adding new capabilities to its services, expanding its addressable market. This includes omni-channel solution Unified Commerce, POS terminals, Adyen for Platforms and embedded finance for small and medium-sized businesses.

When emergency services workers need to contact each other, it's usually serious, and often a matter of life and death. This is why police, fire, and emergency medical services don't use mobile phones as their primary method of communicating. They need a network that is much more dependable, a signal that can penetrate buildings equally well and be picked up in rural forests, a handset that is virtually bomb-proof, and one that can be used to make device-to-device calls if the network that normally carries the signal is unavailable.

This is where Motorola Solutions specialises. Motorola Solutions split from Motorola Mobility (the maker of mobile phones) a number of years ago, and it is now a global leader in public communications and safety systems.

As communications technology has leapt forward in recent years, Motorola Solutions has added features such as video, location, records retrieval, evidence capture, access control, and command centre software to its offerings, creating a robust integrated ecosystem. A small but growing part of the business also leverages these skills to sell solutions to other customers such as education facilities and utility companies.

Virtually all of Motorola's customers use its products and services as a mission-critical component of their operation, with many funded by the public purse. This makes for a resilient business, but with growth driven by the fact that its newer products improve safety and save lives. Rising recurring sales of video devices, command centre software, and services are reshaping its business and represent the pillars of its long-term growth strategy. We believe that these factors will drive revenue and margins while improving Motorola's business model – an attractive investment, in our view.

Description

Intuit is the leading provider of small business accounting software and DIY tax solutions for consumers in the US.

Why we hold it

QuickBooks is Intuit’s accounting software brand, serving the self-employed and small-medium businesses, as well as the accounting professionals who advise them. Quickbooks has over 8 million active customers and over 80% market share within the small business accounting market in the US.

Most of QuickBooks’ revenue is subscription based, resulting in predictable recurring revenue. As well as increasing the number of customers it serves, Intuit also aims to increase the ‘average revenue per customer’, as customers grow and have additional and more complex needs. Over 30% of small-medium sized businesses still use paper or spreadsheets for payroll and 50% do time-tracking manually, so there remains a large opportunity for Intuit.

QuickBooks benefits from strong network effects, as accountants and businesses prefer to have compatible software. This means new customers are recommended to use QuickBooks by their accountants, while new accountants train on the QuickBooks software as that is what’s used by most customers.

TurboTax is Intuit’s other large brand, providing products and services to enable people in the US to file their federal and state income tax returns quickly and accurately. TurboTax has an 80% market share of the paid ‘do-it-yourself’ tax return market.

TurboTax offers differing levels of service for different prices, starting with a simple tax return product and ramping up to include investments, rental property, business income and expenses. Intuit introduced TurboTax ‘Live’ in 2017, which offers guidance and reviews from tax professionals for an additional fee. Not only is the share of DIY tax returns growing as a percent of total filings, benefitting TurboTax’s dominance here, but they are also taking share of the ‘assisted’ market thanks to the ‘Live’ offering.

The average federal income tax refund in 2022 was $3,226 and 73% of filers earning less than $100,000 a year get a refund. There is a high perceived risk of filling out the return wrong, plus people want to know they’re maximising their rebate, as it is typically the largest paycheck most Americans get each year.

Description

Leading global credit bureau and data analytics business, which gathers data and turns it into information that banks and retailers can use to guide their lending and marketing decisions.

Why we hold it

Experian gathers raw data and turns it into valuable information that banks and retailers can use. Much of the data is given to it for free, by banks, because they need a broader picture of their customers’ overall financial position than they can see by themselves. Experian processes the banks’ data along with other data to come up with credit scores, which are then sold back to the banks.

The business earns about two thirds of its sales over in the States, and it reports in dollars as a result. When banks are doing well, Experian makes hay. The election of Donald Trump, with his announced intention to loosen bank regulations could bode well for Experian’s US revenue growth.

Because the business is selling data, some of which was obtained gratis, and because its products are data, not physical objects, capital expenditure requirements are modest and Experian generates a lot of cash, at high margins to boot. Customers have a limited number of places they can go to for the data and analytics they need, especially for credit-related matters.

So Experian ticks a lot of our boxes, with pretty unique products, good pricing power and margins, strong cash generation and debts that are well controlled. The group has paid regular, growing dividends for many years and has also returned surplus capital through share buy-backs.

Description

Nvidia, founded in 1993, is a global leader in Graphic Processing Units (GPU) and associated software. We see Nvidia as one of the most important engines of growth for the expanding data economy, with a moat that is very deep and wide.

Why we hold it

As the name suggests, GPU were built to quickly render photo-realistic graphics in video games but have been repurposed to accelerate other types of computing, such as data centres, artificial intelligence, and autonomous driving. Nvidia’s early position in this space gave it a first-mover advantage which remains relatively intact today. This makes it an excellent way to invest in the proliferation of data and analytics.

Datacentre business is now over 50% of sales and is the main driver of growth in the business. We expect this to continue, as most computing workloads are still not done in the cloud. The market size is also expanding, as required computing power increases with new applications such as AI, online gaming and the industrial omniverse. Nvidia sizes its total market at $1 trillion versus current sales of $27 billion, suggesting that there is still plenty of runway ahead.

Software and services are a growing percentage of sales. These are not only high margin but should also increase the proportion of recurring revenue and make the business more resilient longer term. In addition, Nvidia outsources manufacturing of chips to TSMC and Samsung, this helps limit capital intensity, improving long-term return on capital.

Nvidia dominates the market in GPUs (>80% share) due to significant barriers to entry which its closest peers haven’t been able to surmount. Competitor products don’t have the same capabilities, and Nvidia is strengthening its position further by developing a fuller stack of hardware and software. Nvidia’s market dominance and huge scale means it can deliver high margins, while still out-investing competition in R&D.

The anticipated future sales growth, coupled with a dominant and robust market position should drive strong profit evolution at Nvidia which we believe will be reflected in the share price over the long term.

Description

Heineken is the world’s second largest brewer of beer with a history spanning over 150 years. In addition to its famous green bottled lager it owns over 300 other brands and operates in over 190 countries.

Why we hold it

Heineken has many attributes that make it an attractive investment. We think that much of its strength is centred on its strong portfolio of brands, which while spanning multiple price points are focused at the premium end. This is an important quality as in recent years drinkers have been happier to pay more for a superior product while moderating their consumption. A burgeoning set of low and no-alcohol beers are also playing to the theme of moderation and are a strong and growing proportion of Heineken’s sales.

Heineken’s significant presence in faster growing emerging markets in Asia, Africa and Latin America also provide solid long-term growth prospects. This growth, complemented with strong distribution networks, durable brands supported by marketing and scale means growth should prove resilient in what is already a durable consumer category.

We see growing volumes and positive pricing as key drivers of profitability, supported by the company’s ‘Evergreen’ efficiency programme. In addition, a robust balance sheet and Heineken’s family ownership structure means that it is able to make decisions based on optimal long-term outcomes and is insulated to a large extent from short-term pressures.

These are helping the company burnish an already strong execution track record and over the medium term we hope to see further improvements in profitability and robust shareholder returns.

Description

Offers a no-win, no-fee service for legal claims. Burford will assess the case’s merits and offer to finance it if they think it is likely to succeed, in return for a share of the proceeds.

Why we hold it

Assets come in many shapes and sizes. One of the more unusual varieties are law suits. In commercial law, there is typically a large sum of money at stake, with two or more parties claiming the right to it, for any number of reasons. It might be a patent infringement, a claim for breach of contract, or for damage caused to another party’s assets or wellbeing.

Companies can pursue these claims, if they see merit in doing so. But legal expenses are just that, expenses that must pass through the profit and loss account. So pursuing a claim for recovering what is due, means lowering profits in the near term. Quoted companies in particular, don’t like things that lower profits.

So along comes Burford, who essentially offer a no-win, no-fee service. They’ll assess the case’s merits and offer to finance it if they think it is likely to succeed, in return for a share of the proceeds.

Cases can take years and judges are not as predictable as one might wish. So Burford deal in uncertainties, but by having a large portfolio of cases on the go at once, a degree of smoothing is possible.

Historically, Burford has achieved great results. The company claim an average achieved return of around 30% p.a. from their portfolio. With cash generation from successful investments having been strong, Burford have substantially increased the portfolio of active cases, suggesting future income growth could be very attractive, if they maintain their track record of winning in court, or settling on the steps outside.

Burford have been busy in recent years. A merger with their largest rival brought greater scale and brought in a third party funds management arm. Their largest case, against Argentina, who allegedly expropriated an oil company worth billions of dollars a few years ago, has seen outside investors buy stakes in the lawsuit from Burford, at values that imply a huge uplift in value. Another case, again involving Argentina expropriating assets unlawfully has gone Burford’s way, once more generating a potentially large gain for Burford. Returns from large cases like these can be unpredictable. However Burford’s portfolio is well diversified so should not be overly reliant on any one case. We remain excited about the group’s long term prospects.

Description

Professional publisher and data analytics expert, providing high quality technical information and networking to demanding users.

Why we hold it

Relx’s scientific, medical and technical journals, like The Lancet provide forums for top academics, clinicians and scientists to review the latest research, after peers have reviewed it to assure the quality of the work.

Relx’s Exhibitions division brings buyers and sellers from 43 industries together. Over 7 million people a year attend Relx Exhibition events, ranging from SinoCorrugated (not one for the casual visitor) to The London Book Fair.

Their Risk and Business Analytics division provides specialist information to insurers and others, helping them to understand the risks they face and to price their policies accordingly. In the legal business, LexisNexis has a suite of products ranging from practise management software to databases which enable lawyers to research their cases better.

Relx provides information and enables the exchange of information between professionals. No factories, no heavy machinery. Just capital-lite publishing and events activities that throw off cash at high margins, often from dominant global positions in Relx’s chosen niches.

Overall, we view RELX as a well-run business with very strong market positions, good growth prospects and defensive, recurring revenue streams. It is a higher quality business now compared to 5-10 years ago, given its reduced reliance on print and advertising and heavy investment in new products. We would expect it to be fairly resilient in an economic downturn, although remember there are no guarantees.

Description

Global leader in alcoholic beverages with a collection of iconic brands, including Johnnie Walker, Smirnoff and Guinness. Its products are sold in more than 180 countries around the world.

Why we hold it

We like businesses that own strong brands, which keep their customers coming back again and again. In our view, Diageo falls firmly into this category. Brands like Johnnie Walker have immense aspirational appeal, not only in developed nations, but increasingly in developing regions, where demand is being supported by rising disposable incomes.

Turning water into wine (or spirits), and charging consumers a princely sum, earns the group huge margins, and means the business throws off cash. This has enabled Diageo to raise the dividend every year since at least 1999, not a reliable indicator of future income.

Despite its many strengths, Diageo’s progress had been relatively uninspiring up until recently, partly due to economic and currency pressures, but also, we suspect, due to weak execution. Recent management changes have resulted in improvements to the distribution model, more emphasis on volume growth and productivity – and increased focus on free cash flow. These changes are now bearing fruit, underpinning our confidence in the group’s ability to grow sales and profit margins, whilst continuing to return cash to shareholders.

Description

LSE owns one of Europe’s oldest and largest stock exchanges. The group also provides information services and data on a subscription basis to its customers.

Why we hold it

LSE has completely transformed its business model over the last decade. 10 years ago, almost two-thirds of LSE’s revenues were generated by traditional exchange activities like trading and issuance of cash equities, fixed income and derivatives. These heavily cyclical activities now constitute less than one-fifth of LSE’s revenues.

Following a number of high quality bolt-on acquisitions, the bulk of LSE’s income is now generated from areas with strong growth potential and high barriers to entry. The clearing business is growing rapidly due to regulatory changes forcing over-the-counter (OTC) transactions in derivatives to be cleared by registered and regulated clearing houses. LSE’s index businesses are meanwhile benefitting from the structural growth in Exchange Traded Funds (ETFs) and benchmarking. This has driven strong growth in revenues and an expanding margin profile.

Outside of the Capital Markets division LSE benefits from strong pricing power and limited competition. Its business is capital light and throws off cash and the marginal cost of providing extra services is practically zero. Operating margins of approaching 50% combined with mid-teens returns on capital provide clear evidence of LSE’s strong market position.

Description

LVMH stands for Moët Hennessy Louis Vuitton. While the initials may be mixed up, the group’s focus on luxury brands is not. It owns an unparalleled stable of labels stretching from Christian Dior to Givenchy, Tag Heuer to Bulgari, in categories from fashion through leather goods and into jewellery, fine champagnes and cognacs.

Why we hold it

LVMH dominates the luxury sector. The group has been built up over more than forty years by Bernard Arnault, whose family own just over half of the group. The business operates globally and many of its brands have over a century of tradition behind them. Fashion and Leather Goods are the biggest earner within the group.

Despite being the biggest player, LVMH has been outgrowing its smaller rivals and financially the group is strong. The virtuous circle of strong margins delivering buoyant cash flow to reinvest back into growing the business has been playing out well at LVMH and we think this can continue for some time to come.

We like the group’s strategy of controlling its own distribution globally for key brands. This allows it to keep control over where its brands are seen, vital to retaining cachet and maintaining price discipline.

Description

Masimo is the leading provider of pulse oximetry technology, which allows medical professionals to monitor their patients’ blood oxygen levels accurately in real time.

Why we hold it

Masimo captured a big slice of the market in pulse oximetry from an industry giant by building a better mousetrap. Older generation technology produced erratic readings when patients moved, or had low blood pressure. Masimo found a better way to record blood oxygen levels, applying clever data processing to readings from the patient’s finger clip.

Low blood oxygen levels can be very dangerous, and medical staff need to intervene if patients’ levels fall too far. False alarms cause needless interventions, which can be expensive and distressing for the patient, whilst failure to signal a problem can lead to severe consequences.

Accurate, timely monitoring of oxygen levels improves patient outcomes and raises hospital efficiency. Masimo are so confident of their superiority that they have offered customers $1m if rival devices could be shown to have the same accuracy. With over a hundred research studies demonstrating Masimo’s superiority, they probably felt on safe ground doing so.

Masimo make their own equipment and also licence their technology to other medical equipment firms to incorporate into their own devices. That allows hospitals to use a single monitor per patient capable of logging data from many measuring devices, one of which is using Masimo technology. Through this piggy-backing, Masimo has been able to gain over 40% market share globally, generating high margin recurring royalty streams in the process.

Masimo’s growth is now also driven by extending usage beyond the intensive care unit and developing new conditions that can be monitored with Masimo technology. Newly launched products measuring oxygen levels in bodily organs and brain function are growing fast. Masimo have also signed a deal to put their latest technology into Philips monitors, and with the Dutch company having a high share globally this should accelerate the adoption of Masimo technology.

Masimo signs sensor contracts with customers and these contracts typically run for years. We value regular recurring revenue streams such as these very highly. We also note that the company’s renewal rate is close to 100%, suggesting that customers clearly also rate Masimo’s products very highly indeed. With net cash on the balance sheet, Masimo is in a strong position.

Description

Coloplast is a Danish medical goods producer with leading global shares in the markets for ostomy and continence support products.

Why we hold it

Coloplast’s products provide vital support to patients worldwide with complex conditions that require exceptionally reliable performance. Ostomy bags and fittings, plus adult continence care are key markets. Coloplast also support mastectomy patients, provide wound healing solutions and skin care.

People suffering from the conditions that Coloplast seek to ease require absolute reliability. A failure to function properly can lead to distress and embarrassment for the patient. The group commits substantial funds to researching these conditions in partnership with professional caregivers and users.

Once doctors and patients have found a solution that works, they rarely switch providers and because the conditions that Coloplast addresses often last as long as the patient does, revenues tend to recur, year after year. The group is highly profitable, with profit margins around 30% and a balance sheet with little debt.

Revenues have grown from $100m to over $2,500m in the last thirty years, largely by organic means. Profits and profit margins have also grown substantially and shareholders have been rewarded with significant gains over the long term. We think the company’s relentless focus on quality and the rising prevalence of the conditions it serves amongst an ageing population position it well for more growth in the future.

Description

Fisher & Paykel (F&P) are one of the world’s leading providers of respiratory support equipment in both the home and hospital environment. Based in New Zealand, the group operates worldwide.

Why we hold it

F&P have two key divisions, homecare and hospital care. In homecare they are the third largest player in the Sleep Apnea market, up against Respironics (part of Philips) and Resmed of the USA. Sleep Apnea is a dangerous condition that’s widely undiagnosed. Although a competitive market, it’s expected to grow strongly due to rising rates of diagnosis and because the condition is influenced by obesity, its incidence is likely to continue rising too.

The homecare division is around 40% of sales, with hospital care delivering almost 60% of the group’s revenues. Here F&P are the leading player in providing humidification support to patients in the intensive care unit. The company has developed a new respiratory support technique, branded Optiflow. This delivers humidified, oxygen-rich air deep into a patients lungs, without requiring invasive ventilation. By increasing the proportion of the patient’s lungs that are effectively oxygenated, these very poorly patients’ prognoses can be improved.

Years of funding clinical research into applications for Optiflow has led to a surge in evidence of the technique’s effectiveness and sales have been growing strongly. Fisher & Paykel’s products tend to consist of machinery that generates flows of humidified air and medical gases, plus the associated hoses and masks that connect the patients to the system. These parts are typically replaced with each new patient. This generates a strong flow of recurring revenues, which make up close to 90% of the total.

Optiflow has applications in the home too. Patients suffering from respiratory diseases like COPD (Chronic Obstructive Pulmonary Disease) can benefit from the higher levels of oxygenation delivered by Optiflow compared to traditional oxygen delivery techniques.

The group’s New Zealand base has not stopped it from creating a global presence. Manufacturing takes place in both New Zealand and Mexico and the end users of F&P equipment are overwhelmingly located outside of NZ. The balance sheet is sound, with the group aiming to be roughly debt-free from year to year. Growth, averaging around 14% in recent years, has been organic in nature.

Description

Chr. Hansen was named the world’s most sustainable business during the 2019 World Economic Forum in Davos. It’s a leading bioscience business, producing enzymes, probiotics and yoghurt cultures for the dairy industry, and others, worldwide. Half of all cheese produced in the world uses a Chr. Hansen product.

Why we hold it

Originally a rennet producer (used to make cheese) in nineteenth century Denmark, the group has grown to be a major global bioscience company, generating over €1bn of revenue a year. Their largest market is in the dairy sector, where they make the enzyme cultures which help turn milk into yoghurts or cheeses. More recently they have expanded into probiotics and natural colours.

A pot of yoghurt will have only a minute volume of Hansen product within it, but that tiny quantity will have an enormous impact on how the product tastes and feels in the mouth. Their certified strains of bacteria allow customers to make probiotic foodstuffs that consumers can be confident only contain known, helpful strains of bacteria.

The group’s strengths in bacterial cultures are enabling it to address healthcare markets, creating strains that are designed to promote specific health benefits for both human and animal populations. Their technology can promote plant health, creating chemical-free agricultural solutions. In the food industry, there is an ongoing shift in favour of natural colours, at the expense of artificial.

The group’s sustainability credentials are undeniably strong. What they do tends to either enhance life and health, or improve environmental outcomes, by using natural bacteria to achieve results that would otherwise have been achieved via chemical use. And these benefits are driving demand growth for their products.

The company estimate that a billion people consume a Chr. Hansen product each and every day, and half of all cheese produced uses the group’s products. Because what they produce is critical to their customers’ product performance, but is only a small part of the finished item, their pricing power is strong. Profit margins are circa 30% and the group generates strong cash flows at very high (30%+) returns on capital. With revenues forecast to grow at high single digits Chr. Hansen looks like a reliable, high quality compounder.

Description

Xylem’s is a water technology company which pumps, cleans and manages water throughout the water cycle. It’s a leading global manufacturer of the equipment and provides management and maintenance servicing.

Why we hold it

There’s growing awareness that we need to manage our world’s resources better, but there’s a long way to go. Water consumption has been doubling every 20 years, driven by population growth, increased urbanisation, aging infrastructure, and increasingly volatile weather. The temperate UK climate means water issues aren’t as acute as in hotter, dryer parts of the world but it’s an increasing issue almost everywhere.

Xylem’s strap line, ‘Let’s solve water,’ encapsulates its mission. It provides products and services to a number of different customers to help manage and conserve water.

Roughly half of Xylem’s customers are public bodies or utility companies, and many of its contracts run for years meaning around half of revenue recurs year-in, year-out. This reduces Xylem’s economic sensitivity.

Water infrastructure accounts for around two-fifths of sales, where Xylem works to replace aging water systems in developed countries, and new structures in emerging countries. Approximately a third of the business is aimed at providing technologies to manage water economically, with around a quarter focused on measuring and controlling water in the system through quality testing, metering and analysing the performance of water infrastructure.

We like Xylem’s business model, with its reputation for quality, long-term contracts, and exposure to steady clients, and think it’ll make a good holding for the fund.

Description

CAE is a Canadian company that produces aircraft simulators and provides pilot training services both in the simulator and live flying environments.

Why we hold it

The growth of emerging nations, especially in south-east Asia is generating rising demand for air travel. Aviation is a highly regulated industry and one of its most basic regulations is the requirement for formal pilot training.

Boeing and Airbus have enormous backlogs that will see the volume of jet airliners produced rise substantially in the years ahead and more planes means more pilots. If the airlines want to use the planes they have ordered, they need to have sufficient pilots to keep them aloft. Incidents like the tragic Boeing 737Max software glitch in 2018 only add to demand in the long term as pilots must be trained in any new systems that result. The rise of low cost airlines around the world is a positive for CAE. New start-ups don’t have their own training fleets so are likely to look for an outsourced training solution.

Pilots are getting older. The aviation sector was badly hit by 9/11 and now faces a shortage of First Officers to replace their retiring Captains. This is expected to oblige the industry to push junior pilots through training at an increasing pace. Adding further pressure the US government raised the training requirements a decade ago, obliging new pilots to have a minimum of 1500 hours experience. The coming growth in aircraft numbers could well understate the future demand for training services.

CAE are increasingly a training provider, rather than just the manufacturer of the simulators. They serve the civil airlines, business jet operators and defence forces globally. Training contracts tend to last for years and create recurring revenues for the group. As the proportion of revenues derived from training rise we expect to see profit margins and returns on capital increase.

CAE’s competitors are often the aircraft manufacturers themselves, but CAE can offer training across multiple manufacturers’ airframes. In business aviation customers very rarely have their own simulator facilities. In the defence markets, armed forces typically want to own the kit themselves, and so will buy a simulator outright and then either provide their own trainers or outsource to CAE or a rival.

CAE Inc seems well placed to benefit from these structural demand-drivers and its market position is protected by substantial intellectual property and know-how. CAE’s moat is its IP, reputation and its scale. Without scale, a new entrant cannot manufacture economically, creating a chicken-and-egg situation that works in CAE’s favour.

Description

Raytheon is a leading US defence company, with products ranging from Patriot missile defence systems to cybersecurity services.

Why we hold it

The US Department of Defence is the largest buyer of defence equipment in the world and Raytheon is one of a small handful of prime suppliers to the US military. Demand is determined by the level of perceived threat and the US Government’s willingness to invest in capability.

Raytheon has a long track record of delivering sustainable returns through developing world-leading technologies. Their particular specialism has been missile defence, where Patriot systems have long set the standard.

Over the last thirty years or so, revenues have grown from under $5bn per annum to more than $20bn and earnings per share have risen a little faster. The group makes double digit profit margins and carries little debt. Defence equipment programmes tend to run for long periods of time, with ongoing investment into upgrading the capabilities as threats evolve.

The customer, typically the US DoD, pays defence companies to research technologies and then to convert research into products before finally commissioning the product itself. This de-risks the process for the defence company, although once in production they must manage their costs against the price agreed with the DoD.

Raytheon’s strength in missile technology leaves it well placed to benefit from the growing use of Unmanned Aerial Vehicles. Revenue forecasts have risen strongly in recent years as the company has capitalised on the opportunities available.

In an increasingly uncertain world, the level of defence spending is unlikely to fall any time soon. Raytheon’s track record of growth, exposure to high-demand categories and strong financial position puts it in a good position, we believe. With a large base of recurring revenues already in situ, new contracts should be strongly accretive to growth.

Description

Linde is the largest producer of industrial gases in the world, used in a range of industries from the production of beer to welding.

Why we hold it

The industrial gas industry supplies multiple products that are used across a wide range of industries. Applications include the production of beer, cutting and welding, or providing pure environments for research laboratories. The method of production involves separating the components of normal air, and hence the raw material is free. This is unlike most industrial chemicals companies, where the cost of raw materials is usually the driver of profitability.

Linde’s products are distributed to customers via three methods: on-site, merchant and packaged. If a customer requires a significant volume of gas every day, then Linde will build a large air separation unit on their site. Linde will then sell any excess capacity from this site to other customers via tanker trucks (merchant) or packaged cylinders. Due to the large capital expenditure required to build an on-site facility, these customers sign long-term contracts with Linde (typically 10-20 years), and this reduces the cyclicality of this part of the business.

Industrial gases typically make up a small fraction of a customers’ overall production costs but they are a vital input to ensure operations continue uninterrupted. For this reason, customers are willing to pay up for Linde’s products and they are also unlikely to switch suppliers.

Linde has recently undergone a merger with Praxair, the third largest industrial gases company in the world. We view this as a positive move as the combined entity is likely to benefit from significant cost synergies. Additionally, Praxair has historically earned industry-leading operating margins and returns on invested capital. With the old Praxair CEO taking the helm of Linde, some of these strategies could be applied to Linde’s operating base.

Description

Moody’s is the world’s second largest credit ratings agency. Moody’s provide ratings services to corporate borrowers, alongside risk management, software and data solutions for investors and insurers.

Why we hold it

Moody’s and its main rival, Standard & Poors, control around 70% of the global market for credit rating services. The industry is a natural oligopoly – investors do not trust ratings provided by unknown analysts, so companies looking to attain a rating for their debts naturally turn to the big names in the industry.

Bank lending appetites are lower than before the financial crisis, and debt markets have evolved, with more borrowers issuing bonds. Their banks act as arrangers and distributors of the bonds, rather than lending clients the money themselves. This is great for Moody’s since more bonds being issued means more ratings to be paid for and more retainers for ongoing coverage of those bonds.

The group has two divisions, Moody’s Investor Services, which is the credit ratings business, and Moody’s Analytics, the training, risk management and data services division. Over 80% of profits come from the Investor Services division. Revenue growth is driven by Moody’s market share, the amount of debt raised, the proportion raised in the form of bonds and price increases. Widening the range of borrowers who get their debts rated can also add to growth.

A strong credit rating typically cuts the interest rate that the borrower has to pay by more than the cost of obtaining the rating as it widens the pool of investors that will consider the bond. This gives the group pricing power – their profit margins are around 40%. The initial service of rating a bond is a one-off revenue, retainers then generate recurring revenues. In the Analytics division, many of the services are sold as subscriptions, further lifting recurring revenue.

Moody’s generates strong free cash flows, after all they have little need to spend money on capital investment. So profits are largely available for either paying back to shareholders, repaying borrowings or funding acquisitions of complementary businesses.

With the cost of borrowing looking likely to stay in a low range for some time to come and the significant refinancing needs of existing debt, the conditions for bond issuance look favourable. We think Moody’s market position leaves it very well placed to prosper and expect the business to generate reliable growth in revenues and earnings for some time to come.

Description

Accenture is a leading global provider of management consulting and technology services.

Why we hold it

We’re in the midst of a technology revolution that’s disrupting and transforming businesses and entire industries around the world. Accenture is regarded as a leader in IT services and works with clients to help them navigate the changing tech landscape.

Accenture collaborates closely with its clients in order to improve their efficiency, value and growth prospects. They have a presence in over 40 countries worldwide, where their clients include 94 of the largest 100 companies in the world and over 80% of the largest 500.

And they have a good habit of making themselves indispensable to their clients, demonstrated by the fact that 97 of their top 100 clients have been working with them for over a decade.

By working with the world’s largest and most progressive companies, Accenture can gain early insight into new challenges facing businesses, as well as the leading-edge technologies they are deploying. This allows them to stay ahead of the curve, keeping the firm’s offerings highly relevant in today’s fast-paced world.

All this means Accenture is something of a cash machine, and has converted more than its net income into free cash flow each year for the last 5 years. This cash helps fuel both organic and acquisitive investment in the business, as well as a healthy dividend and share buyback policy.

Total shareholder return (both share price appreciation and dividends) has grown on average 15% per year since 2001. Although this is not a prediction of future performance.

Description

Booking is the world’s leading provider of online travel and related services. Brands include Booking.com, Priceline.com, Agoda.com, Kayak.com, rentalcars.com and OpenTable.

Why we hold it

Booking Holdings is a classic example of a technology disrupter. You don’t need to go to a travel agent anymore, all you need is internet access to research, compare and book your next holiday.

Booking’s brands operate in over 220 countries worldwide and host over 5 million hotels and other accommodations on their sites, representing some 30 million rooms in total. The sheer volume of options generates increasing website and app visits, which in turn leads to the supply of more places to stay, and so on.

This virtuous cycle creates a valuable network effect. Booking is set to continue to benefit from this network effect thanks to its position as market leader and the one way shift of travel bookings from travel agents to websites, now to mobile.

Booking.com is the jewel in the company’s online crown and is a top-10 travel app in 117 markets around the world. The firm’s strong presence in China presents a great opportunity for future growth as the Asia-Pacific region is predicted to represent nearly half of total industry online booking growth over the next 5 years.

Booking’s financial health is extremely sound, despite recently increasing its leverage. Total debt at the end of 2018 stood at £8.65bn, but the company’s profits are enough to pay the interest on the debt 21 times over - so nothing to worry about here, in our view. There is also £2.6bn cash on the balance sheet. The firm currently doesn’t pay a dividend but does buy back shares with the billions of pounds it generates every year.

Description

ServiceNow is a subscription software company which provides cloud solutions to help manage and automate various business functions. Products span IT service management, HR, security and customer service.

Why we hold it

ServiceNow began by spotting an opportunity to disrupt the IT service management industry with the use of ‘cloud’ based technology. Their product, a ticketing tool that tracks companies’ IT issues, wasn’t new, but the way they delivered it was. While the competition offered solutions which had to be installed in offices, ServiceNow used the cloud to deliver the product faster, cheaper and easier. Their winning formula quickly bumped them up to market leader in IT service management.

Following this initial success, the company expanded into other fields, including IT operations management, which allows managers to monitor, control and track the health of their firm’s IT systems, and HR service management, which provides a centralised system for quick and easy access to HR services like payroll, benefits and recruitment.

Offering these extra solutions to customers after they’ve adopted ServiceNow’s IT service management product has provided ample upsell and cross-sell opportunities for the company. Today, roughly three quarters of all customers use more than one of ServiceNow’s products.

By their nature, these products quickly become integral to the inner workings of a business, making it difficult, costly and risky to swap to another competitor. Customers are ‘sticky’ to ServiceNow and they boast best-in-class customer retention of 98%.

All this feeds into ServiceNow’s financials. The business is highly cash generative and its revenue is high quality because customers are signed up on subscriptions, which deliver income year after year. However, as a young business it’s had to spend a considerable amount on establishing a footprint in its industry to win confidence and customers. So far, that’s meant it’s spent more than it’s earned, but we expect that to change in the coming year, as their marketing efforts bear fruit.

Description

Charles Schwab is one of the largest banking and brokerage firms in the United States. It offers an extensive array of products and services including mutual funds, Exchange-Traded Funds and financial advice.

Why we hold it

Charles Schwab is an industry leading financial services provider that has a culture of putting its clients first. And we love that. This has contributed to its impressive scale and today the company services over 14.5 million customer accounts and has approximately $3.5 trillion assets under administration.

Schwab’s sheer scale gives it a cost advantage versus its rivals. It also benefits from a low cost of funding in its banking arm, with much of the banking arm’s funds provided by depositors. Its lending activities have a relatively low risk profile, often collateralised by the securities held by the borrowers in their Schwab accounts. Even in the depths of the financial crisis, Schwab’s credit quality remained high.

Schwab operates in a constantly changing industry, not only from a technology perspective but also products and regulation, however they are one of the few companies that can keep pace and make new offerings in a timely and profitable manner. For example digital advice and exchange-traded products.

The company has a long, impressive track record and both revenue and net income have compounded strongly over 25 years. Over the same time period the company has also paid out a stable or increasing dividend every year to date. With the retirement gap, the difference between what has been saved for retirement versus what is needed, looming over most of the developed world, the long term outlook for savings and investment demand is positive for a business like Schwab.

Founder Mr Charles Schwab retired from the Chief Executive Officer position in 2008 but remains the company’s Chairman and the largest shareholder.

Description

Shiseido is one of the oldest cosmetic companies in the world, founded in 1872 in Tokyo, Japan. Shiseido’s portfolio is made up of products spanning high-end beauty, skincare, makeup and personal care.

Why we hold it

Companies, like Shiseido, which sell high-end beauty products are able to command substantial pricing power because customers want proven formulas and a trustworthy brand. Their products also drive buyers to shops, leading to strong relationships with retailers, adding yet more support to the value of their brand and pricing power they hold.

But while most of their products are still sold in department and speciality stores, digital channels are becoming a more important part of the industry. Particularly for brand discovery, think adverts to youngsters on Instagram, and engagement during and after purchase, for example how-to-videos and personalised recommendations on YouTube.

So we’re pleased to see Shiseido investing in these digital capabilities, having recently acquired MatchCo, which offers customised make-up via smartphone app and Giaran, an artificial intelligence technology.

Financially, we’re also pleased to see the business executing their strategy well. In 2014, they launched ‘Vision 2020’ under new CEO Masahiko Uotani. The focus was on consolidating Shiseido’s portfolio of brands, enhancing its prestige brands, and bringing what they term next generation cosmetic products to market. So far, the strategy is going well, with the company hitting its Y1bn revenue target 3 years earlier than expected.

Description

Carsales.com is the largest online car sales business in Australia.

Why we hold it

Historically, car advertising was done in regional print magazines or newspapers. Buyers would have to independently research differences between cars, contact individual sellers separately, and then physically travel to the car to see more than a small grainy image. It was a lengthy process and all too often, a poor experience.

The internet brought online marketplaces that could consolidate cars for sale in one place, supply photos with adverts and give consistent information on cars for comparison purposes. The greater choice and experience attracted buyers, and as buyer numbers grew this attracted more sellers. This virtuous circle benefited the first movers, like Carsales.com, which now holds a dominant position in the Australian market.

As well as taking a small cut from car sales initiated via their website, Carsales also makes money by providing extra services. For example, they harness the data from their website and use it to help dealers manage inventory and improve profitability, for a fee. These value added services represent the greatest growth opportunity in their home market of Australia.

Carsales has also expanded overseas, providing opportunity for higher growth from faster growing economies. Brazil and South Korea are the largest and highest quality opportunities at the moment.

With the business being wholly online, Carsales has little need for capital expenditure. Instead they spend their money on IT staff and software, most of which is expensed day to day, so profits mostly turn into cash flow as the company grows.

Description

Amphenol designs, manufactures and sells electrical and fibre optic connectors and cables.

Why we hold it

Electric vehicles, 5G mobile technology, the Internet of Things and industrial automation are just some of the industries where you’ll find Amphenol’s connectors and cables. And, while the winner in each of these areas is yet to be decided, Amphenol bears little risk to how it all plays out over the coming years because almost all of the businesses vying to win use their products.

As connectors are an integral part of the finished good, but make up only a fraction of the cost, customers apply little pricing pressure to Amphenol and focus more on their reputation, quality and consistency. Additionally, once connectors are designed into large systems it’s very challenging for manufacturers to switch.

Amphenol has been partly built through acquisitions and runs a decentralised operating structure, essentially meaning acquired businesses are left to their own devices with their own general managers, profit and loss accounts and corporate functions. This has created a more entrepreneurial and agile business culture, which helps provide shelter in a downturn.

Description

Adobe is a multinational computer software company, focused in the areas of multimedia, creativity and digital marketing.

Why we hold it

Adobe is the number one choice in all its markets and its strong market positions are supported by brand reputation and technical know-how.

Creative software was one of the business’s original focuses and these products have now become the gold standard in areas such as graphic design, web development and photography. One of its well-known applications has even evolved into a commonly used verb – to photoshop.

Over time, and with the help of acquisitions, Adobe has also built up what they call the ‘experience cloud’. This offers products and tools that allow customers to build personalised marketing campaigns. These products are tied directly to customers’ revenue-generation, meaning they’re hugely valuable, raising the barrier for any customer to switch away from Adobe.

Adobe has transitioned from a one-time purchase business model, where their products are just installed onto customers’ computers from a disc, to a cloud-based subscription model – effectively renting its product to its clients. This shift has created recurring revenues, reduced cyclicality and ultimately expanded operating margins. It also serves to curb piracy concerns.

Finally, and importantly, unlike many of its cloud-based software competitors, Adobe is robustly profitable thanks to the maturity of its creative software offerings. Financially the business is in a strong position, with net cash on its balance sheet.

Description

Alphabet is an internet technology giant, and is the holding company of brands such as Google, Android and YouTube.

Why we hold it

Sellotape, Astroturf, Frisbee, Biro, Tupperware, Cashpoint – all brands that are synonymous with a product. Google may have surpassed them all though, by becoming a verb: to Google. This is the kind of brand strength we like, but the business has a number of other great branded products, such as Android, Chrome, Google Maps and YouTube.

Google accounts for 99.5% of Alphabet’s sales, and within the Google business, 88% of revenues are made from advertising in one form or another.

For example, companies pay Google to appear at the top of the search page. The coveted top 5 links on the first page of search results receive nearly 70% of clicks, with the next 5 trailing far behind, receiving less than 5%. Google search success is clearly vital to the success of some companies, so not paying up to Google isn’t an option. With every search and click made, Google learns more and more, improving its search results and improving it’s already market-leading position.

The bulk of Google’s remaining business is Google Play (its media store), cloud computing and hardware (e.g. mobile phones and smart home devices). These are all growing strongly and help reinforce the company’s network effect.

Outside of Google, the remaining 0.5% of Alphabet’s sales is made up of ‘other bets’ – yep, that’s literally what it calls them. This includes businesses that might make a huge impact in the future, such as Waymo, their self-driving car project. With Alphabet’s sheer scale, and net cash on the balance sheet, it can continue to invest in its core business as well as these ‘other bets’ without significant impact to its financial position.

Description

Amazon.com is an American technology company that focusses on e-commerce, cloud computing and artificial intelligence.

Why we hold it

Amazon’s disruption of the retail industry is well documented, but aside from the well-known e-commerce platform, the company continues to find ways to evolve its business model further afield.

A major advantage for Amazon is its distribution capabilities, which satisfies consumer demand for quick and cheap (often free) delivery. Within its online shop Amazon also benefits from a strong network effect as its competitive pricing and breadth of products attracts millions of customers, which in turn attracts more merchants. And the virtuous cycle continues.

Amazon is also developing a hardware/software ecosystem (e.g. Kindle, Echo, Fire TV stick). These items help generate additional subscribers for its Prime memberships, improve engagement levels and create a positive halo effect on general merchandise sales.

Unbeknown to most, Amazon also has a massive (and hugely profitable) cloud computing offering in Amazon Web Services (AWS). AWS is a secure cloud computing platform, offering flexible computing power, information storage, content delivery and other functionality.

AWS is one of the largest suppliers of cloud computing and possesses more than 3 times the computing capacity than the next 10 largest providers combined. Businesses will continue to look to cloud providers in order to help them scale and grow whilst managing their information technology expenditures, and Amazon is becoming a preferred name for this.

Description

Microsoft provides software solutions to businesses, including Office, Windows products and cloud computing services. They also own LinkedIn and Xbox.

Why we hold it

Since the appointment of CEO Satya Nadella in 2014, Microsoft has reinvented itself. It’s shifted products such as Microsoft Office from a one-off model (buy the disc and install it) to a subscription model (download the software and pay regularly).

This has led to more predictable revenue streams and has improved operating margins in recent years. These products, like Excel, are usually critical to business processes and it’s almost unthinkable for any company to replace them with something else.

Microsoft has also emerged as a cloud leader, becoming one of the two largest providers who can deliver a wide variety of solutions to other firms at scale. The other being Amazon. Microsoft Azure, its cloud platform, offers flexible computing power, database storage and other functionality to customers.

As many enterprises already have a strong Microsoft presence in their IT systems, this foothold can help make a transition to the cloud much easier as everything remains in the same Microsoft environment.

Across Microsoft’s many products and services, including LinkedIn and its gaming segment, the company benefits from a network effect, whereby the vast and increasing number of users across the globe increases the value of the offering itself.

Much of what Microsoft is doing now is aimed at providing an integrated one-stop-shop for a business’ IT needs, which is only going to become more valuable given the technological transformation happening in businesses throughout the world today.

Description

Ubisoft is the developer behind the Assassin’s Creed franchise of video games.

Why we hold it

Once a gamer, always a gamer. Well, sort of. If you’ve grown up playing video games, there’s a good chance you’ll play throughout your life. This, plus growth in emerging markets, means video gaming is set to be the largest and fastest growing segment in entertainment.

The bulk of Ubisoft’s business is focused on PC and console games, which are attractive areas for investment, in our view. Technology is also allowing Ubisoft to generate higher quality revenues, using downloads to sell games without a physical disc and increasing recurring revenues from subscriptions and in-game purchases.

The dawn of increased connectivity between gamers has made network effects much more important because gamers swarm to a smaller number of games so they can play with or against each other. This means smash hits, while still relevant, are much rarer. The market is much more driven by the success of renewing and developing the latest iteration of a franchise. We like that because it reduces risk and revenue volatility.

Combined with the staggering cost of developing a modern game, this has led to a dramatic decline in the number of gaming companies over the last decade. With franchise ownership and know-how held in increasingly concentrated hands, the competitive positions of the companies that remain has been strengthened dramatically.

We think these changes will continue to improve the quality of the business. In the future, we can see further upside from streaming and eSports, but the potential we see today is enough to warrant Ubisoft’s position in the fund.

Description

Tencent is one of the world’s largest technology companies and a behemoth of online activity in China.

Why we hold it

Tencent dominates much of online life in China. While comparisons across borders are often simplistic, it’s fair to say Tencent is China’s Facebook, WhatsApp, Netflix, Spotify, and PayPal all rolled into one. Its WeChat social and shopping network is the most visited app in China with over 80% of the population using it every month. It also has a leading position in Chinese gaming.

Tencent’s scale and dominance give it the kind of competitive strength we like, because all this functionality on one platform is an extremely powerful proposition for both consumers and advertisers. Visitors drive more content which drives more visitors – a virtuous circle, which is evident in gaming too. Its success attracts players, which in turn attract the best ideas from developers, which lead to more players and so on. You get the picture.

Much of the revenue generated from Tencent’s social/shopping networks and gaming activities are generated through subscriptions and in-app purchases, but advertising plays a part too. However, Tencent displays adverts much more sparingly than many similar platforms, giving it greater room for growth without impacting the user’s experience.

Tencent does have a few other interests. It has entered the cloud computing arena, effectively leasing computing power to those who prefer to rent rather than buy, and has a number of investments in companies such as electric vehicles, car hailing, a digital literature library amongst others. At the moment none of these ventures is big enough to make a material impact on the company, but they could hold promise for the future.

Tencent has been a fantastic performer over recent years, which is not a guide to the future, but given its strong market positions and exposure to the Chinese economy, whose growth rate continues to outstrip most developed markets, we think it will remain an appealing investment for some time to come.

Description

Philips has sold many of the businesses that once made it a diversified conglomerate. It’s now a focused health technology business, positioned to benefit from the shift towards data driven and connected care.

Why we hold it

Philips is over a century old, with a deep heritage and a history of innovation. It has many of the attributes we look for when choosing quality companies to invest in. Its competitive position is reinforced by strong market positions and cutting edge technology, which make switching costs high and mean customers keep coming back.

Increasingly, when patients visit a hospital, technology is involved. Not only does Philips have some great medical technology, but it’s focused on areas that make a huge difference to both patients and doctors – like imaging for both diagnostics and treatment, and digital and connected healthcare information systems. While this equipment doesn’t come cheap, it can actually reduce overall costs for hospitals.

Philips also sell respirators, grooming, skin and oral care and other products to consumers. The company has leading brands in these areas, which add useful profits, but, if it were to streamline its business further and focus exclusively on medical technology at some stage in the future, we think it could be positive for the share price.

Description

DiaSorin is a global leader in testing blood and tissue samples to diagnose illnesses.

Why we hold it

DiaSorin’s tests punch well above their weight. They’re relatively inexpensive but help doctors make important decisions as to how they’ll treat their patients.

In total DiaSorin has over 100 different tests, which generate a meaningful revenue stream of a few hundred million dollars. While that seems like a lot of money, it’s not enough to warrant too much competition from the bigger players in the sector. Plus, there’s a lot of technology and know-how which protects DiaSorin from potential rivals.

The firm provides equipment to laboratories and signs them up in a long-term contract to buy the compounds needed for each test. This creates a flow of small, yet recurring revenues, which we like.

Add the large pile of cash that the company holds, which ought to shelter it during any downturns, and a management team with a large shareholding to align their interests with ours, and we think DiaSorin could make a great contribution to the fund.

Description

PayPal is a digital wallet supplier and helps firms process payments online.

Why we hold it

Most of you will have seen the PayPal button when buying that holiday, new pair of jeans or doing the weekly food shop online. But if you’ve ever used PayPal, you’ll appreciate the benefits: simplicity (one password to access your differing payment options), and security (your card details aren’t shared with the website you’re using, and your purchase is likely to be insured against loss or damage).

This, however, is only part of the equation. Companies like PayPal because customers are significantly more likely to complete their checkout if PayPal is an available option.

The number of PayPal customers, both businesses and consumers, has continued to grow strongly, supporting a network effect that strengthens its competitive position.

PayPal is also the engine behind payment processing at many other websites, where you won’t see its logo. It also owns iZettle, the offline payments system you might have seen in shops, and Venmo, the social payments system that’s proving popular with American millennials, in particular.

Another reason we like PayPal is we believe it has defended its leading position through many tech and industry changes, and has remained at the forefront of development. As an example of what they’re doing to try and future proof the business at the moment, PayPal are increasingly focused on value-added services and becoming a solutions company rather than simply a button on a website checkout page, e.g. helping merchants identify high-value prospects and turn them into buyers.

We don’t know exactly how the payments system will evolve over the next 10 years, but we believe PayPal can stay at the front of the pack. And given ecommerce is still only a small fraction of global retail, we expect this area of the economy to have the wind behind it for some time to come.

Description

ANSYS are specialists in developing software, which simulates real world objects – a really useful thing for firms that need to design and test complex products.

Why we hold it

ANSYS helps firms make all sorts of products. Examples include medical devices, smartphones, cars, planes and even architectural structures. It does this by providing software that can tell designers and engineers how a design is likely to work in real-life.

A great example is crash testing of cars. For a carmaker to build a prototype and crash it into a wall costs lots of money, and only gives the carmaker information about impact at one speed, one set of tyres, one set of road conditions and against one type of object etc.

By using ANSYS’s software to simulate a crash the carmaker can repeat the experiment at different speeds, weather conditions etc over and over, making changes to the design as it goes to improve the results and all the time checking other factors, such as aerodynamics in a virtual wind tunnel.

This can help the carmaker produce a better car at a lower cost and in a shorter time period, which counts for a lot. And as a bonus, it improves the environmental footprint of testing too.

Products are becoming more complex as technology and data expand the boundaries of what’s possible. This trend, the benefits of using ANSYS’ services earlier in the design process, and for predicting maintenance of costly machines, should see simulation become more widespread.

ANSYS has world-class technologies, and is embedded in a broad spread of customers’ research and development departments. We think this makes the revenue stream high quality and, combined with good profitability and a strong balance sheet, the future looks bright to us.

Description

Align is the world’s leading supplier of clear aligners, an increasingly popular alternative to traditional teeth braces.

Why we hold it

As populations become better off, more and more money is being spent on physical appearance. The other large influence we can’t ignore is the pervasiveness of the cameras on smartphones.

In years gone by, straightening wonky teeth invariably meant getting braces of the metal brackets and wires variety. These often required regularly adjustment by a dentist or orthodontist, and it’s probably not an understatement to say that patients didn’t relish the ‘metal mouth’ appearance of this traditional treatment.

Back in the late 1990’s a start-up called Align Technologies was formed by a handful of entrepreneurs to develop a more palatable (pun intended!) alternative using modern technology.

Align now runs one of the world’s largest 3D printing operations making clear aligners under the Invisalign brand which has become synonymous with the method. Clear aligners appeal for a number of reasons – an improved appearance and greater comfort, plus they can be removed for eating, sport or that all important business meeting or date. And fewer visits to the dentist are generally required.

Align uses proprietary technology in design, materials, and manufacturing to make its aligners a favourite with dentists and orthodontists in over 100 countries, and Invisalign’s aligners have been used by millions of patients since its launch. Despite the huge progress so far, we think the company has great prospects given the potential opportunity is many multiples of current sales.

Description

Mastercard manages a network that facilitates payment between two parties. Banks that issue credit cards use Mastercard’s network to connect to the retailer’s bank so payment can be made.

Why we hold it

How much cash do you carry when you leave the home? Chances are it’s much less than it was a decade ago. And, how much shopping do you do online? Probably more than you did. The volume of money spent online, including items from abroad, has grown dramatically and doesn’t look set to slow down. These factors are the driving force behind the growth in electronic payments.

Mastercard owns a very valuable network. The more shops that accept Mastercard, the more shoppers will use it, and the more shops will accept it – a virtuous circle. Using Mastercard provides buyers and sellers with a very valuable service at a surprisingly low price.

You won’t be surprised to hear that there’s a data story here too. Knowledge of shoppers’ spending habits is hugely valuable to retailers and Mastercard is increasingly helping them take advantage of it.

Obviously, competition exists, mainly from Visa and Amex, but we think the market is big enough for all to flourish. In particular, we think Mastercard’s sturdy balance sheet, great profitability, plus the capacity to make great returns from new customers with minimal extra investment are a real boon.

Description

West Pharmaceuticals are a major global manufacturer of elastomer components (the rubber end of an injectable drug vial) and other components used in the packaging and delivery of injectable drugs.

Why we hold it

Historically the business focused on standard components such as stoppers, seals, tip caps and systems for administering IV’s but increasingly it’s shifting towards more complex products and processes which add extra value.

In its traditional market, West has a dominant market position, 3 times larger than its nearest competitor, at 70% market share. In newer markets, like biologics, West has an even bigger 90%+ market share.

But even perched on a pedestal this size, its defenses look sound. It’s extremely expensive for West’s customers to switch away from them – should they want to, they have to submit a drug application to regulators, where the cost of filing is the same as 1.3 million units of West products.

The business also has the weight of history behind it because it’s been behind every major advancement to-date. West’s drug master file is one of the single most referenced document in the FDA (regulator) archives, meaning the company’s intellectual property and tech capability will intimidate any potential competitors.

West Pharmaceuticals products played a substantial role in packaging of COVID vaccines. We think it will be more resilient than businesses exposed to testing, as there is a trend from multi-dose to single vial dosing for vaccines. So even if there is a fall in the number of vaccines, this may be offset by an increase in the number of vials produced, a positive for volumes at West Pharmaceuticals.

Description

An Exchange Traded Fund (ETF), which can be bought and sold in large quantities, which aims to track the performance of the MSCI World index.

Why we hold it

We hold this ETF tracker as a source of dry powder. As we look to invest in new or existing holdings, we would rather stay invested than build up large cash positions. Stock markets have a tendency to rise over time, so holding cash in a fund is more likely, we believe, to end up acting as a drag on performance.

Description

Live Nation Entertainment is the world’s leading live entertainment company, made up of four market leading businesses; Ticketmaster, Live Nation Concerts, Artist Nation Management and Live Nation Media/Sponsorship.

Why we hold it

Somewhere in the world, every 20 minutes there’s a Live Nation event. In 2018, the company put on a show for 250 million fans at 180,000 events across 44 countries.

Live Nation’s events attract four times as many fans as their nearest competitor, meaning artists call Live Nation first when they want to tour or promote a show. By attracting superstars, who sell the most tickets, Live Nation can afford to invest in cutting edge technology to create the best experience for fans, which leaves them wanting more from artists who, in turn, ask Live Nation to set up more shows.

In 2010, Live Nation merged with Ticketmaster, the world’s biggest ticketing business, in a move which we think bolstered its business model. Ticketmaster itself has 30% global market share and has expanded from 15 to 25 countries over the past eight years. It’s a powerhouse in its own right and allows Live Nation to capture more profit per fan at one of their events.

Finally, we believe Live Nation has a huge advantage versus other consumer businesses looking to expand into international markets because local demand for their product already exists. They don’t need to promote the Rolling Stones or Madonna or Drake, they just need to organise the event and bring the artist.

Once they have enough events in one country they can lease a venue, acquire local suppliers, bring in their own ticketing operations and begin to recreate their business model at a local scale. No other competitor can replicate this currently. That’s why we see Live Nation as a long term winner in this industry.

Description

GoDaddy is a website hosting company and domain name giant.

Why we hold it

Go Daddy is the world’s biggest domain name company. It has over 78 million web addresses under management, and over the last few years has used this footprint to expand into other services that small and medium sized businesses need in order to build and maintain their online presence.

Domain names is GoDaddy’s origin, and it’s successfully become the market leader, but we were attracted to GoDaddy because it has evolved its business model and, in doing so, we believe has structurally improved the quality of the company.

Rather than focus solely on selling and managing domains, it now uses them as a funnel to bring customers into its ecosystem at relatively low cost, after which it can provide other applications and services which are more valuable to both GoDaddy and its customers.

By bolting on services or applications to their traditional domain proposition, GoDaddy has created a unique business model amongst its peers, and importantly for us, has created a virtuous cycle which supports growth and reinforces its barriers to entry.

The breadth and quality of GoDaddy’s services and applications creates value for customers, enabling it to charge more, which generates free cash flow which can be used to develop and improve products and create more value for customers.

Investor awareness of GoDaddy is still low, with the majority underestimating its financial strength. Because GoDaddy was bought by private equity in 2011 and IPO’d in 2015, it has accounting complexities which hide the underlying profitability of the business.

At first glance, GoDaddy has low earnings per share and a high price-to-earnings multiple, which could put investors off. But this low obvious profitability hides a business that’s generating exceptional levels of free cash flow, and has been growing consistently for year .

At HL Select, we believe free cash flow per share growth, not earnings per share, is a key driver of long-term value creation. Earnings per share is an accounting measure which can be easily manipulated, where free cash flow per share shows the actual cash generated over and above what’s required to keep the company in business.

We believe GoDaddy can keep growing free cash flow, and so long as it does, it will have more money to reinvest back into the business, acquire new businesses or return to shareholders. All of which should keep GoDaddy at the forefront of its industry over the long-term.

Description

Autodesk is a leading provider of computer aided design software. Their products have wide and varied uses, from the refurbishment of Big Ben to special effects in the film Avatar. In all, they serve more than 200 million customers across industries such as construction, manufacturing and media.

Why we hold it

Autodesk is moving from a perpetual license business model, where customers pay when they want the latest software, to a subscription business model, where they make repeated payments and receive updates as and when they’re ready.

This change has significant benefits for growing the number of users and revenue per user, key metrics that drive long term revenue growth. The other key benefit from a subscription business model is it reduces the economic cyclicality of the business as customers can’t delay software purchases, even in a recession.

Autodesk has eighteen million active users but only four million of them are currently on a subscription contract. Less than two million are still on old perpetual licenses who are likely to upgrade as the need for updated software and functionality increases. The remaining twelve million are using pirated copies of the software!

Autodesk’s management have a long-term plan to coax customers into subscription plans, and while the cadence of new user additions will vary, we’re excited by the growth opportunity for new users. And once new subscribers are on-board, revenue per user should increase because Autodesk won’t need to offer the same level of discounts to turn old users into new subscribers.

Autodesk also has some unique characteristics which increase its barriers to entry. It provides free software to higher education covering an estimated 200 million students. Collectively these factors create a strong network effect as students choose software that the industry uses and the industry adopts tools that most graduates know well.

In addition, Autodesk spend more on R&D than peers, which creates value for customers, enabling them to increase prices, which increases profitability and grows the funds available for further product development.

This virtuous cycle fits well with Autodesk’s strategy of developing software that offers 80% of the functionality but at 20% of the price. Collectively this means Autodesk can offer a strong and growing value proposition to customers.

Description

Visa operates one of the world’s largest payments networks. The company connects consumers, businesses, banks and governments in more than 200 countries, enabling them to pay or be paid digitally instead of by cash and cheques.

Why we hold it

How much cash do you carry when you leave home?

Chances are, much less than you did a decade ago.

And, how much shopping do you do online?

Probably more than you did. The volume of money spent online, including items from abroad, has grown dramatically and doesn’t look set to slow down. These factors are the driving force behind the growth in electronic payments.

Visa owns a very valuable network. The more shops that accept Visa, the more shoppers will use it, and the more shops will accept it - a virtuous circle. Using Visa provides buyers and sellers with a very valuable service at a surprisingly low price.

You won’t be surprised to hear that there’s a data story here too. Knowledge of shoppers’ spending habits is hugely valuable to retailers and Visa is increasingly helping them take advantage of it.

Obviously, competition exists, mainly from Mastercard and Amex, but we think the market is big enough for all to flourish. In particular, we think Visa’s sturdy balance sheet, great profitability, plus the capacity to make great returns from new customers with minimal extra investment are a real boon.

Description

Aon provides insurance broking and HR consulting services to businesses worldwide.

Why we hold it

Over the years, Aon and its closest competitors have evolved their businesses into two main areas: insurance broking and HR consulting.

As insurance brokers, Aon helps other businesses insure the risks they face. They act as middlemen between clients and insurance companies, and take a percentage of the premiums their clients pay once they buy insurance. As HR consultants, Aon helps companies with retirement support, pension plan design and admin services, as well as health and benefits plan management and salary benchmarking. They tend to charge hourly for these services.

Aon has recently restructured to unify these two business areas, leading to improved efficiency, scalability, flexibility and enhanced client experience. We see this as a positive step, building on what was already a strong foundation.

Businesses can’t (or shouldn’t) ignore or stop the amount of time and money they spend on risk management, retirement or healthcare benefits, meaning a high proportion of Aon’s revenue repeats every year. Additionally, brokers and consultants build long-standing relationships with clients over the years, so clients tend to become loyal to Aon for their professional business needs. And finally, Aon’s global scale and low fixed cost base (no machinery, factories and little equipment required) means they are good at converting revenue into profits, and we think this should continue to improve as Aon grows.

One of the main drivers of Aon’s growth is the increase in client demand for their services. Risks are increasing in complexity and new risks continue to emerge (like cyber security), which, in general, are not well understood or catered for, hence the need for Aon’s expertise. On the HR consulting side, employers are typically underspending on retirement and overspending on healthcare and so need help to overcome problems like underfunded retirement plans and rising healthcare costs.

Description

Pernod Ricard is the second largest spirits manufacturer in the world. Its top 10 products account for 70% of sales and include brands such as Martel, Absolut, Jameson and Chivas.

Why we hold it

We believe that the global spirits industry is the most attractive area within consumer staples. It offers strong margins and cash flows, supported by high barriers to entry and is well placed to capture value from the rising affluence of consumers in Asia and beyond.

Consumers in developed markets are drinking less but are spending more on what they drink, this is called premiumisation and has been supporting growth in the alcohol industry for the last decade.

Aged spirits such as Whisky or Cognac are natural beneficiaries of premiumisation as the same brand can have multiple different price points depending on rarity and age. This means that as consumer wealth increases they can easily trade-up to a higher priced product of a brand the consumer already knows and trusts.

Spirits have one of the highest gross margins of all consumer goods. High margins enable the business to invest in advertising and promotion to grow sales and increase their brand value.

Pernod Ricard’s key brands have on average existed for over 170 years, this gives the brand value and shows that they can grow across multiple generations.

Over 60 % of spirits have restrictions on the origin of their ingredients, manufacturing or ageing. For example Tequila and Cognac must come from defined regions in Mexico and France respectively. This makes it a lot harder for local competitors to start their own brands as they need to have infrastructure in the country of origin.

Currently less than 4 % of spirits consumed in China are international brands. Baijiu, a local grain based spirit, is the largest alcohol category in China. We believe the influence of western TV and film along with international travel will help international spirits increase their market share in China. This should help support above GDP growth for the foreseeable future.

Description

IDEXX Laboratories is the largest animal diagnostics business in the world. It serves the market through point-of-care tests at veterinary surgeries and a network of large outsourced laboratories.

Why we hold it

Pet ownership and the amount owners are willing to spend on their pets has been increasing for decades. Increasingly people see a pet as one of the family and where possible want to give it the same standard of care that any other family member would receive. IDEXX Laboratories has played an important role here, as its broad suite of diagnostic tests help inform veterinarians leading to better treatment outcomes.

The animal diagnostics industry is growing faster internationally than in the US. As spending on diagnostics is increasing to the levels already seen in the US. In emerging markets this faster growth is combined with rising rates of pet ownership. We see a very low probability of these factors reversing their trend and agree with IDEXX Laboratories’ management that it could support industry growth of 8%+ for the next 20+ years.

The majority of revenue is from selling the chemistry used in every diagnostic tests. This business model creates a predictable recurring revenue stream. As they add new tests to existing equipment the proportion of recurring revenue has increased from 81% of sales in 2010 to 89% of sales today.

IDEXX Laboratories is the market leader and invests 5% of its sales in R&D every year, raising the hurdle for competition. The absolute investment in R&D is more than all of its other competitors combined so we think it is unlikely that competition increases over time.

All animal health treatments are paid for privately, either out-of-pocket or through pet insurance claims. This means IDEXX Laboratories avoids the risk of price deflation; one of the main risks that is likely to impact the rest of healthcare over the long term.

Description

Cryoport is the global leader in managing logistics for cellular therapies. Cellular therapy involves injecting living cells into patients. It is one of the biggest breakthroughs in therapeutic research for decades as it has very broad applications such as cancer treatments, cures for genetic disease and stem cell therapy.

Why we hold it

There are currently over 1000 clinical trials using cellular therapy technology, of which Cryoport has around 40 % market share. As a clinical trial progresses through the different stages towards regulatory approval the number of treatments increases and so does the revenue to Cryoport.

With over $12 billion spent annually on cellular therapy R&D the early stage trials which fail will be replaced with new therapies, while every successful approval significantly increases the long term addressable market for Cryoport. We believe this has created a unique portfolio of over 400 recurring revenue streams with different probabilities of commercial approval.

Cryoport has invested in infrastructure to support these launches. These costs mean the business currently is loss making, but the capital required for growth is low and with over 50% gross margins we expect that as the number of commercially approved therapies increases we should see a significant improvement in margins, returns on capital and strong free cash flow; key attributes of an HL Select business.

Cryoport’s combination of services and software create a “chain-of-compliance” which monitors location, temperature and shock along with multiple other variables for every delivery.

Reinforcing every aspect of Cryport’s barriers to entry is its customer base which is notoriously risk averse. Therapeutic companies spend on average $800 million developing a new treatment so customers are unwilling to take chances with unproven competitors.

Cryoport’s technology and digital focused strategy differentiates it from peers and constantly raises the bar of customer expectations. For these reasons we are confident that longer term Cryoport will continue to play a key role in the logistics of cellular therapies.

Description

Texas Pacific Land Trust own 900,000 acres of land in Texas. The majority of the business is driven by royalty income from oil and gas extracted from their land. The rest of the business is from fees received to build infrastructure on the land and the sourcing and disposal of water.

Why we hold it

The royalty business model Texas Pacific Land Trust operate has exceptionally high margins, is profitable at a $20 oil price and has very low capital requirements. These characteristics make it unique in the energy sector, limit the risk from a prolonged period of low oil prices while retaining optionality to a recovery in oil prices.

Its 900,000 acres are primarily located in the Delaware basin, one of the lowest cost areas of production in US shale with resources that are expected to last for a long time. This means that even in a low growth environment it will increasingly take share from other regions of production.

The water business was started in 2017. Revenue is from selling clean water used in the drilling process as well as the storage of waste water from producing wells. This is an interesting way to monetise its acreage as it has a sustainable advantage over competitors who have to negotiate access from private landowners.

Texas Pacific Land Trust’s ownership of 900,000 acres in West Texas makes it one of the largest landowners in the US; to replicate today would be extremely costly and challenging. Its portfolio was uniquely acquired as it dates back to the 19th century and the bankruptcy of a railway which owned large tracts of land.

Ownership of this land in the most important oilfield in the US means virtually all operators will at some point need to interact with it to access or drill on their land. This makes it an invaluable partner throughout the whole lifecycle of oil production and means it can operate on an equal level to their counterparties despite being a fraction of the size.

Description

Vulcan materials is the largest aggregates business in the US. Aggregates are gravel, sand and crushed rock which are used heavily in infrastructure as well as residential and commercial construction.

Why we hold it

US infrastructure is old and in need of replacement with the American society of civil engineers grading it a D+. There is wide acceptance of the need to increase spending on infrastructure with 89% of proposals for tax increases to fund infrastructure passing at the most recent election. This unmet need should help support higher levels of growth in the future.

The price of aggregates has consistently increased above inflation. For example even when demand fell 30% during the financial crisis the price of aggregates was essentially flat. This makes it unique within the majority of building materials which typically have volatile pricing and volumes.

The majority of Vulcan materials revenue is from US states with faster GDP growth than the average. We think this should help the business grow faster than the industry as a whole.

Aggregates have a low value per ton making them expensive to move by truck, so the transportation costs limit competition to local markets. If Vulcan Materials has a dominant position in a local market it can better manage competition to help improve pricing and margins.

It is incredibly hard for new quarries to open, regulation and permitting can take years and few local populations want a quarry. This limits new supply to the market and helps protect pricing and market share.

With 80 years of production still in the ground we believe that at current aggregate prices Vulcan materials has a significant asset value not recorded on its balance sheet. Given the history of price increases above inflation we think that in the longer term the value of these assets will increase in real terms. This underlying hidden value helps put a floor in valuation and improves the risk reward of owning the business.

Description

One of the world’s leading Fast Moving Consumer Goods (FMCG) companies, the Anglo-Dutch group’s products fill yard after yard of supermarket shelf space across the world. From Indian tea to soap from Port Sunlight on the Wirral, the Unilever portfolio is vast. Brands include Domestos and Dove, Knorr and Hellmans, Magnum and of course, Marmite, surely the world’s greatest product.

Why we hold it

As if making Marmite were not enough, the numbers stack up too. First off, the business is spread far and wide across the planet, with a high exposure to faster growing emerging markets, not least because of a huge Indian subsidiary, dating back to the days of plantations and Empire. So no one economy is likely to derail Unilever, and with much less than even a quarter of sales earned in the UK, the business should be largely immune to the challenges of Brexit.

Operating profits have grown steadily, from £1.5bn in the late 1980’s to almost £8.0bn in 2017. Unilever rarely delivers giant strides in profits, it just edges ahead on a pretty consistent basis, with the dividend following along behind. It’s a get rich slowly sort of situation. Not too much debt, just over 1x EBITDA, which is unlikely to be troublesome for a business that makes items that people buy week in, week out.

Over time, the business has delivered great returns, and it generated free cash flow of over £5bn last year, leaving plenty of scope to reinvest back into growing the business. This cash generation attracted the attention of a potential suitor in 2017, when Kraft Heinz, backed by Warren Buffet made a tentative approach, quickly rebuffed by Unilever’s board. This was followed by an announcement of a restructuring programme designed to boost profit margins over the next few years.

Unilever also announced a shift up in the rate of dividends at that point. If only the dividends could be paid in Marmite.

Description

Zebra provides a wide range of products that help retailers, logistics and healthcare providers identify and track their inventory. These include barcode scanners, printers and mobile devices.

Why we hold it

Industrial automation is an increasingly important theme in the supply chain of many industries, as companies look for more speed, accuracy and efficiency when managing the movement of their goods.

Zebra has more than 40% share of the market it operates in, supplying retail, manufacturing, logistics and healthcare industries with asset tracking tools and applications. For example, in the retail environment, Zebra’s barcode printers are used to label online delivery parcels and its mobile devices are used by shop assistants to help check if a product is in stock.

Mega trends including online shopping and the ‘internet of things’ are driving the underlying growth of Zebra’s business. The pick-up in e-commerce for home delivery and ‘collect from store’ increases the demand for more parcel labelling, scanning and tracking applications to allow for optimised movement along the supply chain.

The ‘internet of things’ and cloud computing have enabled ‘smart’ devices to capture more information than before and communicate in real-time. Zebra’s cloud based data analytics are allowing companies to make better business decisions based on the insights gained from the data, for example, when to order new stock if you’re running low, how to layout goods to maximise sales and how to minimise theft.

Amongst its peer group, Zebra spends the most on R&D and this has led to the broadest and most innovative product portfolio on the market. This strengthens the relationship with third party resellers who account for most of Zebra’s sales and provide wide market access that Zebra would struggle to achieve alone. In turn, this bolsters Zebra’s market position and pricing power, creating strong margins that can be spent on further R&D. This is exactly the type of virtuous circle that we look for.

Description

Elekta are the second largest radiotherapy business in the world. Radiotherapy is a cancer treatment that uses high doses of radiation to kill cancer cells and shrink tumours.

The most common form of radiotherapy involves using a device called a linear accelerator to deliver x-ray beams from outside the patient’s body. Through multiple generations of new equipment, the accuracy of treatment has improved significantly. As precision of radiation therapy increased and side effects fell the number of indications it could be used in has increased.

Why we hold it

The need for radiotherapy continues to grow every day. According to the WHO the number of diagnosed cancer cases is expected to grow almost 3% per annum for the next decade. This is due to population growth, ageing demographics and increased diagnostics in emerging markets.

We believe the radiotherapy industry will grow around 6% per annum because of increased utilisation of radiotherapy outside of the United States. For example in the UK around 30% of cancer patients receive radiotherapy, less than half what is perceived to be medically optimal. The fastest growth is from emerging markets where we estimate current penetration of radiotherapy at around 15%.

Alongside every equipment sale there is a long term revenue stream of software and services so as the industry grows its installed base, it is also growing a large higher margin recurring revenue stream, improving the margins and return on capital of the industry. Software sales are growing faster than the industry due to investment in artificial intelligence, data analytics and other services to help with treatment planning and accuracy.

Elekta have spent the last two decades developing their Unity product, which is a combination of a linear accelerator and an MR scanner. The outcome has created an amazing product which could be revolutionary for patients as it can now accurately locate tumours and deliver precision radiotherapy while in real-time monitoring the tumours movement during treatment.

We believe Unity will help Elekta grow faster as they take market share by expanding the addressable market into new treatment areas which aren’t suitable for traditional radiotherapy. For example Elekta’s management believe Unity could expand the number of patients receiving radiotherapy by 25%.

Description

Elekta are the second largest radiotherapy business in the world. Radiotherapy is a cancer treatment that uses high doses of radiation to kill cancer cells and shrink tumours.

The most common form of radiotherapy involves using a device called a linear accelerator to deliver x-ray beams from outside the patient’s body. Through multiple generations of new equipment, the accuracy of treatment has improved significantly. As precision of radiation therapy increased and side effects fell the number of indications it could be used in has increased.

Why we hold it

The need for radiotherapy continues to grow every day. According to the WHO the number of diagnosed cancer cases is expected to grow almost 3% per annum for the next decade. This is due to population growth, ageing demographics and increased diagnostics in emerging markets.

We believe the radiotherapy industry will grow around 6% per annum because of increased utilisation of radiotherapy outside of the United States. For example in the UK around 30% of cancer patients receive radiotherapy, less than half what is perceived to be medically optimal. The fastest growth is from emerging markets where we estimate current penetration of radiotherapy at around 15%.

Alongside every equipment sale there is a long term revenue stream of software and services so as the industry grows its installed base, it is also growing a large higher margin recurring revenue stream, improving the margins and return on capital of the industry. Software sales are growing faster than the industry due to investment in artificial intelligence, data analytics and other services to help with treatment planning and accuracy.

Elekta have spent the last two decades developing their Unity product, which is a combination of a linear accelerator and an MR scanner. The outcome has created an amazing product which could be revolutionary for patients as it can now accurately locate tumours and deliver precision radiotherapy while in real-time monitoring the tumours movement during treatment.

We believe Unity will help Elekta grow faster as they take market share by expanding the addressable market into new treatment areas which aren’t suitable for traditional radiotherapy. For example Elekta’s management believe Unity could expand the number of patients receiving radiotherapy by 25%.

Description

Varian are the largest radiotherapy business in the world. Radiotherapy is a cancer treatment that uses high doses of radiation to kill cancer cells and shrink tumours.

The most common form of radiotherapy involves using a device called a linear accelerator to deliver x-ray beams from outside the patient’s body. Through multiple generations of new equipment, the accuracy of treatment has improved significantly. As precision of radiation therapy increased and side effects fell the number of indications it could be used in has increased.

Why we hold it

The need for radiotherapy continues to grow every day. According to the WHO the number of diagnosed cancer cases is expected to grow almost 3% per annum for the next decade. This is due to population growth, ageing demographics and increased diagnostics in emerging markets.

We believe the radiotherapy industry will grow around 6% per annum because of increased utilisation of radiotherapy outside of the United States. For example in the UK around 30% of cancer patients receive radiotherapy, less than half what is perceived to be medically optimal. The fastest growth is from emerging markets where we estimate current penetration of radiotherapy at around 15%.

Alongside every equipment sale there is a long term revenue stream of software and services so as the industry grows its installed base, it is also growing a large higher margin recurring revenue stream, improving the margins and return on capital of the industry. Software sales are growing faster than the industry due to investment in artificial intelligence, data analytics and other services to help with treatment planning and accuracy.

Varian are the largest radiotherapy business in the world, which gives them an advantage in marketing, distribution and R&D. This means they can maintain higher margins than peers, while still investing 60% more in R&D and new growth opportunities.

After a strategic review in 2016 Varian refocused its R&D on software, AI and data analytics to improve the capabilities and efficiency of existing core technology. Varian management have highlighted $1.8 billion of additional revenue if the current installed base paid for all available software upgrades.

Description

Phreesia is a healthcare IT business which improves the operational efficiency of care providers and delivers a better experience to patients.

Its main product is a patient intake software which automates many stages of the process which are traditionally completed manually using pen and paper. The second largest business is a payment processing solution which enables the collection of patient’s payments. Its life sciences business delivers targeted advertisements and surveys to patients on the behalf of pharmaceutical companies.

Why we hold it

Phreesia is a beneficiary of some of the strongest secular trends in US healthcare, we believe this should support high industry growth rates for the foreseeable future.

Phreesia estimate its addressable market at $7 billion, with only $120 million of revenue this year it could continue to grow revenue over 20% annually for the foreseeable future. Its main competition is legacy manual and paper-based systems with a recent survey suggesting less than 30% of solutions are digital.

As a software platform Phreesia can add additional products and services, increasing their value to customers enabling them to increase its average selling price.

Software businesses have low marginal costs for supplying additional copies of software, this means they typically have strong operating leverage. This combined with high gross margins currently means we believe Phreesia will generate significant amounts of cash at maturity, despite the low levels of profitability today.

Phreesia are the largest and highest regarded patient intake software business, shown by the fact that it retains over 90% of its customers year after year. Additionally, its investments in R&D and focus on innovation mean that the hurdle to compete against them is constantly rising.

A combination of culture and expertise means that few of Phreesia’s competitors are well positioned to directly compete with it. The largest healthcare IT companies are focused on improving the efficiency of healthcare treatment for sophisticated users such as doctors, they have no expertise in improving the patient or administrator’s user experience. While payment and software peers tend to lack the specialist healthcare knowledge required to succeed.

Description

TriNet helps small and medium sized businesses across the United States with various HR related functions, including payroll services, employee benefits and regulatory compliance.

The business operates as a professional employer organisation (PEO), meaning TriNet becomes the employer of record for administrative and regulatory purposes, while the client remains responsible for day to day management of their employees.

Why we hold it

In the US, as each state, county or city can have different regulations and tax codes, businesses have a considerably complex task in managing HR compliance. These challenges hit small and medium sized businesses the hardest as they typically lack dedicated and specialised HR personnel. PEOs offer a service to reduce that burden. The addressable market is currently only 20% penetrated and we expect PEO growth to be around 8% per year.

TriNet is the largest standalone PEO, with around 9% market share. Its largest competitors run much larger payroll software businesses, which we think will be dilutive to growth and distract management.

TriNet has invested heavily in its technology platform over recent years, providing online tools that allow clients and employees to store, view and manage HR information. This central platform means that as TriNet grows it should benefit from operating leverage, as there are little additional costs associated with each new employee added to the platform.

TriNet management focus on client industries that have high growth, highly skilled employees requiring good benefits packages and complex operations, e.g. across multiple states. These typically ‘white-collar’ employees represent nearly 80% of TriNet’s employee mix and a higher proportion of these employees reduces cyclicality and increases revenue per employee, as the pricing is higher for white-collar vs blue-collar clients.

TriNet’s go-to-market strategy is unique compared to peers, as their sales team is organised by client industries. The sales reps become experts in their fields and are well versed in regulatory technicalities that are common to particular end-markets.

Description

Teleflex is a US based medical technology business focused on vascular, interventional, anaesthesia, surgery and urology markets. Over the last decade it has used acquisitions and divestitures to transform from a multi-industrial conglomerate into a fast-growing medical technology business.

Why we hold it

Teleflex sell a diverse range of products but is overwhelmingly focused on those used in a critical care setting and products with a low average selling price. This places it in a better position than most competitors, as critical care procedures have less cyclicality and the low selling price means less risk from price deflation, which we think is increasingly likely in the US healthcare market over the long-term.

A combination of cost saving initiatives, in-sourcing distribution and business mix should support continued margin expansion over the next 3 years. We believe margins can increase to above 30% improving free-cash-flow and return on capital.

Teleflex management have used acquisitions to improve the revenue growth, margins and barriers to entry of the business. This increases our confidence in their ability to reinvest in the business and create value for shareholders.

Urolift was acquired by Teleflex and is one of their most important products. Urolift is used to treat enlarged prostates, a common condition in older men. The product is 10 years ahead of the competition, is growing very quickly and has much higher margins than the company average. We believe they are still very early in the growth cycle for this product and that it will be an increasingly important growth driver for Teleflex over the next decade.

Description

Haemonetics is the global leader in blood and plasma management solutions. It provides equipment, consumables, software and services to each part of the blood supply chain. Its main product is tied to the collection of human plasma, an irreplaceable ingredient in multiple therapeutics.

Why we hold it

The plasma industry has been growing 8% per annum for the last 5 years and we expect this to continue as the number of patients increases, plasma used per patient increases and new therapeutics are approved (Over 750 new plasma-derived therapeutics currently in clinical trials). This supports high industry growth rates for Haemonetics’ largest business.

Plasma collection requires sophisticated devices to be installed at a clinic and then containers, collection equipment and other consumables are used for every donation. Haemonetics business model has very high recurring revenue as the majority of devices are given to customers for free and then monetised through long term contracts for consumables and software. At Select we value these business models highly as they have historically shown very consistent results and the large installed base of equipment helps strengthen barriers to entry.

Haemonetics have a new product called NexSys, which along with their software improves the yield of plasma from each donation and reduces the time taken per donation. This should improve plasma clinic profitability so Haemonetics are looking to charge an additional fee per consumable for this technology. We believe the additional revenue and high gross margin contribution from these sales will be transformative for Haemonetics’ profitability over the next 5 years.

Haemonetics’ main competitor in plasma is Fresenius, they are a much larger company but are primarily focused on dialysis. In plasma, Haemonetics are more than twice their size. We are attracted to businesses that have dominant market share and a main competitor whose strategic focus is elsewhere.

In 2016 a new CEO completely changed Haemonetics’ long-term strategy and replaced many of the executives. Since then their execution has been excellent and the focus on operations, free cashflow and return on capital leaves us with increased confidence in the management team.

Description

Fiserv are an important part of payment ecosystems, supplying software to banks and financial institutions as well as enabling payment networks.

Why we hold it

As a vital part of the payment ecosystem, Fiserv will benefit from the growth in electronic payments globally. We believe the growth in electronic payments is inevitable, making this a very powerful and persistent theme.

Fiserv’s payments and software business models both have high fixed costs and significant operating leverage. This means the business will increasingly benefit from scale.

These economies of scale, along with other barriers to entry give us confidence that Fiserv can continue to generate large amounts of cash. We expect this will be used to acquire new technologies, further consolidate the industry or be returned to shareholders through share repurchases.

Emerging markets are growing quicker due to faster GDP growth, a higher mix of cash and industry consolidation. For example, in India almost 90% of transactions are still cash based. We believe Fiserv can take the sophisticated services and analytics solutions from the US and bring these to international markets to increase its market share.

Digital disruptors are a threat, but Fiserv and peers have been through it before, are aware of them, have a growing set of alternative solutions and invest heavily to ensure they retain their market position. For example, Clover is Fiserv’s solution for small and medium business’ payment needs, it is now the largest in the US and growing faster than peers.

A combination of coronavirus impacting in-person payment volumes and the fear of disruption created an attractive entry point for the stock. We believe as growth recovers and free cash flow improves the quality of the business will be recognised by investors and Fiserv has the potential to outperform its peers.

Description

Diversey is one of the leading global players providing cleaning, hygiene and infection prevention products and services to healthcare, retail, hospitality and food & beverage markets.

Why we hold it

Two companies lead the global cleaning and hygiene market, Diversey and Ecolab, and together they represent around a third of the market, with the rest of the market highly fragmented.

There is significant health, financial and reputational risk associated with inadequate cleaning, and therefore customers highly value Diversey’s products and services. Diversey’s solutions are also essential to customers’ abilities to meet health and safety regulations, which means the economic cycle has a limited impact on the business.

Diversey operates a ‘razor - razorblade’ business model, providing proprietary dispensing machines and equipment upfront that only work with Diversey cleaning products. This creates a recurring revenue stream and long-standing customer relationships.

Over Diversey’s nearly 100-year history, it has undergone many ownership structures, being bought by businesses such as Sealed Air Corp, Unilever and SC Johnson. Now the company is a stand-alone entity, it’s better positioned to grow revenue and improve margins. Diversey is growing share in infection prevention, a fast-growing area of the market which has benefitted from increased standards for cleaning and hygiene due to the Covid-19 pandemic. The business is also looking to expand wallet share of ‘global strategic accounts’, who typically have higher brand risk, value the energy and water savings Diversey can offer and are faster growing than other players.

To improve margins, Diversey is focusing on pricing actions, operations savings and supply chain and sourcing savings. For example, they are working to minimise the impact of rising raw material costs and building a new factory in the US to reduce reliance on contract manufacturing.

Sustainability is core to the value proposition provided to customers and Diversey designs solutions that enable customers to meet their efficiency, effectiveness and sustainability goals. Diversey declare that their products are so deeply engrained in customers’ operations that they can help improve almost all key environmental areas, including reducing water, transportation, energy, greenhouse gas, packing, waste and chemical usage. A simple example is ensuring that the proper chemicals are used with the correct water amount and the optimal equipment.

Diversey trades at a significant discount to Ecolab, and we believe there is scope for additional share price improvement to be made as investors better understand Diversey’s growth potential and sustainability story.

Description

GXO are the largest pureplay contract logistics company in the world. They are involved in the initial planning and design of a supply chain, to warehousing, transportation and collection of orders.

Why we hold it

Historically, contract logistics was a relatively simple outsourced service, where containers of products would be received, broken down into pallets and then shipped onwards to retailers.

The growth of e-commerce has increased the complexity of logistics. For example, ASOS ships 30 million units, across 700,000 unique items, and dispatch needs to be made within 2 hours of the order being placed to fulfil its delivery commitments. Up to a third of delivered items will then be returned by the customer, so they need to be processed, repackaged, and then shipped to a new customer.

Technology, automation and analytics are the only ways companies can manage this complexity. GXO’s leading position means we think it will likely continue to take market share, while the greater complexity of operating logistics should accelerate outsourcing.

GXO have a capital light business model, enabling them to generate high returns on capital, funding their organic growth and future acquisitions.

We think investors underappreciate the persistency of growth in the business and the growing barriers to entry, and as a result, we see the potential for excellent long-term returns.

Description

Amedisys are a leading home health and hospice care provider in the US. These are outsourced healthcare services aiming to help a patient’s recovery or manage end of life care.

Why we hold it

Patients often prefer home health because they can maintain greater independence and higher quality of life. It can lead to better patient outcomes, lower costs and frees up inpatient capacity for other treatments. Additionally, home health can be safer than inpatient treatment, reducing the risk of catching other illnesses in the hospital setting, for example Covid-19.

The senior demographic is set to be the fastest growing segment of the population for the next 30 years, while the US government is actively encouraging consolidation of healthcare service providers, given the efficiency savings and improvement in quality of care. We believe this makes Amedisys an attractive investment opportunity over the long-term.

Scale, technology and quality of care enable Amedisys to achieve higher margins than the industry average. The US government sets pricing, but lower industry average margins means that cost inflation is added to price. So, although margins are capped, we are confident they are sustainable.

Description

Kornit Digital are a leading manufacturer of digital printing technologies for the clothing and textile industry.

Why we hold it

The global textile market is worth over $1trn per annum, with traditional analogue (aka screen printing) accounting for 95% of the output. The textile industry is the second most polluting industry in the world, accounting for 10% of carbon emissions and wasting 29 trillion litres of water per year. Analogue printing has long, inflexible design cycles and supply chain, with design and manufacturing taking several months. 30% of textile production is never sold, ending up in landfill or incinerators.

Kornit are the global leaders in digital textile printing, dominating the ‘direct-to-garment’ market. Compared to analogue printing methods, digital printing uses around 5% of the water and causes a fraction of the pollution, while more efficient, demand-led supply chains reduce waste. We believe companies will need to move to digital printing solutions to meet their net zero commitments, and that increasingly consumers won’t choose brands who aren’t operating sustainably.

Kornit’s early move into the digital printing space and subsequent success has enabled them to invest heavily in R&D, continually launching new products, which improve quality, throughput and expand their addressable market. Kornit also sell the inks and other consumables for their printers, and as quality and throughput increase, so too do the consumables required per system. this is positive for both margins and return on capital.

Kornit have developed a proprietary ‘wet-on-wet’ printing process and neo-pigment inks, which are protected by multiple patents. The new KornitX software fully digitises the supply chain, maximising the value of Kornit’s global fulfilment network by providing an outsourced procurement solution to creatives and designers, increasing barriers to entry further. Kornit’s customers already include Amazon, Nike and Fanatics.

Description

Aptiv is one of the largest component suppliers to many of the world’s car manufacturers. It specialises in two areas: electrical systems and active safety products. The design of cars is going through something of a revolution, and these are both crucial for the industry to transition to electric cars and achieve autonomous driving.

Why we hold it

Firstly, consumers and governments are increasingly looking to electric cars rather than petrol- or diesel-powered cars to get them from A to B. As car powertrains shift from fossil fuels to batteries, the amount required, and robustness of, car wiring, will likely increase.

Secondly, while safety improvements are nothing new, the race among manufacturers working on more automated vehicles has accelerated. The level of automation on most older cars is currently relatively low, many will have anti-lock brakes and cruise control, but more frequently we are seeing intermediate levels of automation, such as active breaking and lane control in newer cars, as well as autonomous cruise control in higher value new models. As computer power has grown, we believe this pursuit of safety is set to rapidly evolve over the coming decade.

The auto sector has been very cyclical, but new car sales are currently depressed due to the semiconductor shortage impacting the industry. We believe that this means that volumes will be more resilient than in previous cycles, increasing our comfort in making an investment with strong secular growth, despite the potential for industry headwinds from a recession.

Aptiv has strong and long-standing partnerships with its car-making customers. It has also been collaborating with them for a number of years already on how to approach these challenges. Its scale and accumulated skills and technologies mean it is well positioned to continue to offer its customers the great products they demand. We believe these factors put Aptiv in an ideal position to benefit from the growth we see ahead.