Hargreaves Lansdown fund manager Steve Clayton has added global bank HSBC to the firm’s UK growth fund after selling down some of its holding in Intercontinental hotels group.
Clayton said he has also sold out of advertising giant WPP in both the HL Select UK Growth and HL Select UK Income fund.
The £262.7m growth fund was launched in November 2016 while the £234.1m income fund was rolled out to investors in March this year.
The funds aim to offer increased transparency, allowing investors to see every share held, not just those in the top 10, something that caught the eye of FE Trustnet editor Gary Jackson at the time.
He said: “I appreciate that other fund groups are already doing this – you can see some funds’ full portfolios through professional tools such as FE Analytics while a small number of groups like Woodford Investment Management publish a full portfolio breakdown of their own accord.
“But Hargreaves Lansdown appears to have gone a step further by planning real-time updates on when changes are made to the portfolio.”
Since launch, the HL Select UK Growth fund has risen by 21.53 per cent, while the income fund is down by 3.19 per cent.
Below, FE Trustnet looks at the latest portfolio positioning moves.
Sold – WPP
“More and more evidence is emerging to suggest that the larger advertising groups are struggling to hold their positions in an increasingly digital world,” Clayton said.
As such, he has sold out of WPP, which he held across both the income and growth funds.
The company, run by the outspoken Martin Sorrell, has been on a strong run over the last half-decade, rising by 87.74 per cent, as the below chart shows.
Performance of stock over 5yrs
Source: FE Analytics
However, it has struggled more recently and is down by 25.36 per cent so far this year as it has been forced to cut its earnings guidance for the third quarter as its clients have slashed advertising budgets.
Investors have also grown concerned about the threat from the giant internet companies, such as Google, Facebook and Amazon, who are offering services to brand owners that would historically have been seen as advertising agencies’ territory.
Clayton noted: “At the same time, there is a growing distrust between the agencies and brand owners, who fear the agencies have been over-charging them for advertising slots they have bought for them.
“It is showing up in a deceleration in the pace of growth for advertising business globally. At the moment, for all their undoubted creativity, it does not seem that the industry has an answer to the problems.
“If the trend continues, then the scope of downgrades in the media sector could become distinctly uncomfortable and as the world’s leading media agency, WPP is in the firing line.”
The company has been acquiring rivals in an attempt to accelerate a shift toward developing nations and digital services and buying back stock to reward shareholders with cash returns but the manager warned that this has just stretched the balance sheet.
“These deals and buy-backs have taken the balance sheet to a position that whilst not over-stretched, could easily become so if earnings were to suffer a significant further setback,” he said.
As such, Clayton decided to sell out of the position, which has seen the HL Select UK Growth fund decline by 0.5 per cent and HL Select UK Income fall by 0.9 per cent.
Sold down – Intercontinental Hotels Group
From the HL Select UK Growth Shares portfolio, Clayton has also taken profits from his holding in Intercontinental Hotels Group (IHG) – owner of the InterContinental and Holiday Inn brands – although he retains a position in the stock.
“We have taken profits on a big slice of our position in IHG, which we first bought in the early days of the fund at around 3,230p. Now, with the stock trading comfortably over 4,100p we have decided to reduce our exposure,” Clayton said.
Indeed, as the below chart shows, the stock has risen 39.19 per cent over the last year despite a slight wobble over the summer.
Performance of stock over 1yr
Source: FE Analytics
While the firm’s business model of franchising and managing hotel brands – rather than owning the properties – has delivered strong returns for many years, the manager said the growth has not reflected its potential.
“Our concern is that despite favourable economic conditions, the group is not achieving the levels of RevPAR [revenue per available room] growth that we might have expected to see from a group driven by the US and Chinese markets,” he said.
“We believe there is a shift going on, one which IHG are attempting to counter, but where we think the jury is very much out.
“In IHG’s vision of the world, customers come to their properties after booking via the group’s online reservation system. When a customer makes IHG’s app the starting point, they are only ever going to end up in an IHG hotel.”
However, he warned that this may not be the case as the rise of online booking agents such as booking.com and Trivago have made it easier for consumers to review a number of hotels.
"We think this increased transparency will cap hotel pricing more and more and could be behind the modest growth in RevPAR,” Clayton said.
Bought – HSBC
Not all the capital raised by the HL Select UK Growth Shares fund has been reinvested with some currently resting in the iShares FTSE 100 ETF to keep the monies in the market.
However, for the HL Select UK Income Shares fund the money has been used to invest in global banking giant HSBC.
“The bank has spent the last few years busily restructuring its operations in the US and preparing for the UK ring fence,” Clayton said. “Having fixed the broken stuff the bank is now targeting growth as it seeks to become the leading player in global trade finance.”
Since the financial crisis, the stock has been one of the best financial investments, returning 47.87 per cent over the last decade, compared to a 23.67 per cent loss for the FTSE 350 Banks sector.
Performance of stock over 10yrs
Source: FE Analytics
While the bank was not blameless throughout the financial crisis, Clayton believes most of the “dirty laundry” has now had a public airing and restitution has been paid. As such, the strength of the balance sheet leaves them well placed to absorb any further impacts.
Also important is its emerging market exposure, with the bank focusing on the China’s Pearl River delta, where so much of the world’s manufacturing activity now takes place.
The manager added: “HSBC’s Hong Kong roots have long given it strength in financing cross-border trade and facilitating payments between the trading parties. This leaves it well placed to grow in China. Recent results have shown signs that the strategy is working.”
Additionally, the group’s exposure to investment banking is quite low (around a quarter of revenues), reducing the potential for volatility.
“HSBC’s focus on retail and commercial banking should lower its risk profile, whilst the pivot to Asia ought to raise its growth potential,” Clayton said.
“The bank pays quarterly dividends and offers a yield of over 5 per cent. We have begun a position in the stock, and expect to add to it further when trading opportunities arise.”