HL Select Global Growth Shares - Q4 2024 Review

Gareth Campbell - Fund Manager

18 February 2025

Market review

We see 2024 as largely a repeat of 2023, with AI, large-cap technology and varying expectations around inflation as the main themes that impacted market returns. With that in mind, it’s no surprise that growth and momentum were the biggest drivers of returns.

The US election had a significant impact on the markets, and share prices quickly reacted to its implications for interest rates, inflation and regulation. This, combined with persistently strong economic data, meant long-term bond yields rallied in Q4, despite the Federal Reserve cutting short-term interest rates.

Market breadth remains a concern with an equal-weighted index delivering less than half the annual return of its market cap-weighted equivalent. Nvidia continued its strong run of performance, and the Magnificent 7 (the 7 largest US tech companies) collectively accounted for 45% of market returns over 2024.

Unsurprisingly, this has heightened the debate around US exceptionalism, with some calling for a sharp reversal in recent winners. We aren’t convinced it is that simple, as many of these companies are delivering exceptional growth that support their strong share price performance. Optimism and the implications of AI (and its related infrastructure spend) is hard to fully capture in just a spreadsheet.

Our focus is on identifying quality companies that can compound profits at a high rate sustainably, without overpaying for this growth. With that in mind, we think some of this performance is more justified than others. Apple revenue is unchanged for 2 years, and Tesla delivered less cars in 2024 than 2023. But thanks to very strong multiple appreciation, both stocks have outperformed for the last 2 years.

This comparison could be expanded to many other large-cap holdings. This makes us optimistic around 2025 performance, as we think relative market opportunities look increasingly attractive.

Performance review

The HL Select Global Growth fund returned 8.54%* during Q4, compared to the FTSE World Index return of 6.46%. This results in a 2.08% outperformance versus the benchmark.

Global market returns were largely flat in Q4, with the majority of UK-based investor returns driven by a strong dollar.

Despite a strong end to the year, 2024 performance was -4.8% relative to the FTSE World Index. Since launch, the fund has delivered a total return of 83.71% compared to the FTSE World Index return of 95.96%. Past performance isn’t a guide to future returns.

Positive and negative contributors

Our relative performance was led by outperformance in North America. Information Technology, Financials and Materials were our main positive drivers of performance, largely from stock selection. Healthcare and Consumer Staples detracted from performance.

Not owning Energy, Real Estate or Utilities contributed positively to performance as they all underperformed in Q4.

Positioning within the Magnificent 7 remains a challenge and was a -0.89% drag on performance, as Apple and Tesla both had a very strong quarter. This may soon be expanded to the Magnificent 8, as Broadcom reached a trillion-dollar market cap after its 40% rally in December following positive commentary by their CEO on its AI opportunity.

Strong stock performance across a range of names, discussed below, helped offset these challenges and deliver a strong quarterly result.

Selected positive contributors

GoDaddy has benefitted from AI product launches that accelerated the adoption of value-added services. We trimmed the position in November, as it had become very large after a 148% increase since our add in 2023. We think they are still early in this transition, and so are comfortable with the increased multiple.

Fiserv fundamentals remain incredibly consistent, and the market has begun to appreciate that more in 2024. We trimmed the position in November, but it remains one of our largest holdings.

Visa’s slightly better than expected results, and an absence of any new negatives, were enough for the stock to benefit from a slight rerating. We trimmed the position in December to fund new ideas.

Alphabet disclosed a breakthrough in quantum computing which helped drive the shares higher in December. This is still very early, but does highlight the hidden value within its R&D investments. We trimmed the position to manage our overall exposure within the Magnificent 7.

Amazon delivered strong results and continued margin expansion, as AWS and advertising tailwinds persist. We added to our position in Q4.

CAE surged after a faster than expected recovery in defence margins spurred a strong rally from its lows. We unfortunately had trimmed the position due to concerns around manufacturing issues at Boeing impacting civil guidance.

Selected negative contributors

Teleflex results were largely in-line with expectations, but persistent issues with UroLift and a new headwind in the OEM division led to a sharp derating. There is likely long-term value in the business, but we expect the issues with UroLift to persist, limiting its ability to compound. These problems combined with other recent issues meant we exited the position, as we can no longer justify Teleflex's inclusion in the portfolio.

Elevance mispriced its insurance risk, leading to a spike in medical losses and significant downgrades to near-term earnings. We think the longer-term earnings power of the business should not be impaired, but negative news flow following the US election limits near-term catalysts.

Heineken and Pernod Ricard continue to disappoint investors. We may be nearer the end of this negative revision cycle (and their brands have true longevity), but we still trimmed our position in Pernod Ricard as our confidence in its long-term growth rate has declined.

GXO rallied early in the quarter, on rumours that the company was for sale. During its subsequent results, the CEO announced his retirement. This ended speculation around the bid and caused a sharp reversal in the shares. The shares have since fallen below the pre-rumour price, which we don’t think is justified given the proven resilience and growth of the business.

New positions

Marsh & McLennan is a financial services firm with a large insurance broking and consulting business.

API Group is an industrial services business focused on fire protection, HVAC and security. These are all mandatory services, limiting cyclicality. Its low capital intensity should allow it to consolidate a highly fragmented industry.

Xylem is the global leader in equipment and technology to support water infrastructure. It was an original holding at launch of the fund, but we sold the position in 2021 over concerns around relative valuation. The business has since derated, and we think the current price underappreciates the long-term secular growth within water infrastructure.

Sold positions

During the year, we made significant changes to the portfolio as we more firmly tilted to high-quality businesses with a high rate of compounding. Over the long term, we believe this will translate to higher share price returns.

We have had to sell some businesses where although valuation may seem attractive, our conviction in compounding had shrunk, and our thesis had become more driven by a low valuation and hope. These businesses don’t meet the HL Select philosophy, and more importantly if they are compounding at low rates, then our long-time horizon starts working against us.

Cryoport was a huge positive driver of fund performance a number of years ago, but the shares have seen a material loss as cell and gene therapy industry growth hasn’t materialised, and profitability suffered as the hangover of excess demand from COVID has persisted. Our main lesson was after a rally in 2022, we should have trimmed our position to reflect the risk/reward at the time. This would have limited the capital loss to the fund.

Our Teleflex thesis was built on a key product, UroLift, enabling growth and margin expansion, which justified a premium valuation. Market share was stable, but we missed the impact of reimbursement cuts negatively impacting overall procedure volumes, which led to large negative revisions. The main learning was if a thesis is predicated on a key product, if there are even signs of issues, then the position should be reduced or sold, as there is limited valuation support when a thesis shifts from quality growth to value.

TriNet saw weak results as higher medical utilisation impacted profitability within its insurance business. This complexity in the business model was underappreciated as pricing took far longer to offset these higher costs. Our main lesson learned is to focus on simplicity, and that business model beats narrative.

Aon was sold due to our low conviction in a recent acquisition and the persistence of its improvement in organic growth. The improvement in fundamentals had closed the valuation gap to peers, enabling us to switch our position into Marsh & McLennan.

Portfolio changes

In addition, we trimmed Autodesk, Booking, Vulcan Materials, Motorola Solutions and Sartorius Stedim, and we added to CarSales, Adobe, Medtronic, Phreesia and Linde. These were done largely to reinvest proceeds in ideas with higher expected returns and manage portfolio level risks.