HL Select 8 years on – the successes, failures and what’s next

Our first HL Select fund launched in December 2016, and in the eight years since then an awful lot has changed.

We’ve seen two US presidents, one of whom is coming back, seven chancellors and five prime ministers, with three of them serving in the same year.

A pandemic arrived in 2020, briefly wreaking havoc on global stock markets. The recovery that followed was quite extraordinary, with global markets quickly registering new all-time highs and has, so far, continued to trend upwards.

America’s technology giants led the way. The ‘Magnificent 7’ was coined to describe Apple, Amazon, Alphabet, Nvidia, Meta, Microsoft and Tesla and together have accounted for much of the gains on Wall Street in recent years.

Back in the UK, it’s fair to say that politics rarely lost the top billing.

Meanwhile, the HL Select range expanded to three funds, investing across the world, with just over £1bn of HL clients’ money.

But throughout these changes, what’s done best, worst and what could be next?

This article isn’t personal advice. If you’re not sure what to do, ask for financial advice. All investments and any income from them fall as well as rise in value, so you could get back less than you invest. Past performance isn’t a guide to future returns.

Investing in funds isn’t right for everyone. You should only invest if the fund’s objectives are aligned with your own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

What worked well?

The business information group, Relx, has been the most successful investment for the HL Select UK Income fund. Their strength of cash flow and steady underlying growth, combined with diversified revenue sources stood them in good stead, even when the pandemic wreaked havoc with their Events business.

As long-term holders ever since the launch of the fund, we’ve more than doubled our original investment, having collected dividends along the way.

Relx has also been a hugely successful position for the first of the three HL Select funds to launch, UK Growth Shares fund.

This fund has seen strong returns from other long-term positions in Experian, Diploma, and NEXT plc. In every case these top-returning holdings have been consistent generators of cash flow.

For our HL Select Global Growth Shares fund, the healthcare industry has provided the stocks that made some of the best contributions to the value of the fund.

West Pharmaceuticals makes specialist packaging for drugs and we made some well-timed purchases and sales, generating meaningful gains.

What didn’t work well?

The healthcare industry also provided stocks that made some of the worst contributions to the value of the HL Select Global Growth Shares fund.

Medical technology provider Haemonetics was the most damaging investment of all the Select funds. Their loss of a key customer came out of the blue and we were slow to recognise the degree to which this would impact on Haemonetics.

For the HL Select UK Income Shares fund, a disastrously botched corporate re-organisation at Provident Financial, now Vanquis Banking Group, inflicted a hefty blow to the stock’s value.

We exited swiftly which limited the damage. Since then, the stock has lost further ground, proving that sometimes a fall in price is not an opportunity.

Less successful for the HL Select UK Growth Shares fund was an investment into XPS Pensions Group, which provides actuarial advice and pension administration services.

In 2019, we sold out after a series of negative events caused a sharp fall in profitability and the share price. We were too cautious here, for the problems proved short-lived and we should have hung on.

How has the HL Select fund range performed?

What lessons have we learnt from the last eight years?

For all the arguing about what form a Brexit should take, the UK stock market hit new highs in 2024. That just goes to show the truth of one of the principles we talked about when we were setting HL Select up. Politics rarely actually matters.

Politicians do throw all sorts of stuff out of the pram, but companies just pick it back up and get on with trying to make money.

Another of our principles that’s been proved again and again is the importance of being able to generate cash. Where we’ve invested in stocks with faultless cash generation and financial strength, they’ve done better than those earlier in their development.

For example, Microsoft is one of the most cash generative businesses the team has ever known. That cash flow has allowed it to develop hugely valuable new divisions like their Azure cloud computing division.

Our investment in Phreesia has been a different story.

It has the great products that we look for – their software that helps medical practices manage their patient admissions and billing is widely regarded as class leading. But their immaturity has meant that sales growth is yet to be matched by cash generation.

Microsoft has delivered strong returns since we invested, while Phreesia has yet to move into the black.

Investors must keep their eyes on the future, not the here and now.

The difficulty is knowing what a business’s cash flows might turn out to be down the line. But if you think of a company as worth the sum of a long run of future cash flows, it’s easy to see that this year’s outcome is most likely only a tiny proportion of the total.

A bad quarter, even a bad year can have little impact on the true worth of a business.

Consistent and unmanageable problems, like permanent loss of market share are very different, because they impact many years. Identifying the sort of problem a company faces tells you whether you’re looking at a buying opportunity or an urgent selling need.

Looking ahead

The major themes that the HL Select team will be watching include artificial intelligence, which is likely to lead to major changes in how businesses operate.

Meanwhile, the path to net zero looks less clear than it did a year ago. Emissions continue to rise around the world, and political support for tackling climate change looks weaker today, especially with an upcoming second Trump term. We expect to hear more calls from businesses seeking clarity on what’s expected of them.

Interest rates look set to fall, but perhaps not by very much, and not that quickly either. They certainly won’t fall as quickly as they rose while inflation and jobs data remain unpredictable.

Whatever happens, companies will keep innovating, populations will keep rising and, we believe, profits will tend to keep growing, with some interruptions.

This is the recipe which has kept stock markets rising over the past few decades.

We see little chance that this human desire for progress and growth will falter, and so remain long-term bulls of stock markets around the world. Of course, remember though that nothing is ever guaranteed in investing.

Want to find out more about HL Select?

The three HL Select funds focus on a small number of stocks that we believe have long-term growth potential. They’re all managed by a team of experts, who continually review and monitor the holdings with the aim of maximising returns.

While the fund contains a diverse range of investments, it’s concentrated. This approach means each investment can contribute significantly to overall returns, but it can increase risk.

The HL Select funds are run by Hargreaves Lansdown Fund Managers Ltd., part of the Hargreaves Lansdown Group.