CIO Insights - 19 July

Hi everyone
 
What a weekend for the sports lovers, with two new and very young superstars of their sports winning on their respective biggest stages. Congratulations to 24-year-old Collin Morikawa on winning his second golfing major, and first Claret Jug (in his first attempt); and also to 22-year-old Tadej Pogacar for winning his second Tour de France in such a dominant fashion (he was also crowned King of the Mountains and Best Young Rider of the Tour). To win one ‘major’ is amazing, but it is often said that winning the second is even harder than the first! Congratulations must also go to Mark Cavendish on winning the TDF Green (sprinters) jersey, given he wasn’t even picked in the team until a week before the race! Chapeau lads!
 
Anyways…
 
The fund finished the financial year with a solid month in June, delivering investment performance of 7.3% for the month, and a 28% return for the year. As mentioned in the monthly report, the share price increased by 38.9% over the financial year, and also paid a 12c dividend, bringing the total 12-month shareholder return to 42.7%.
 
In the monthly report we mentioned that we sold a poor performing core portfolio holding at a significant loss. This led to a great question by one of our readers about whether we deploy our own stop losses in the portfolio when positions go awry. I thought it was worthy of a comment to our broader audience. We regularly reference how we remain in regular contact with all of our managers. When companies make larger announcements that move the share price, I am pretty quick to check in with the recommending manager to see whether this new news changes the conviction in the thesis. This is the same for both good and bad news, because in a market where algorithmic and computer-based trading accounts for over half of each and every days turnover, share prices will over overreact to announcements. We have seen plenty of instances when a quarterly earnings announcement includes (say) a revenue ‘miss’ of a few pennies, and the share price falls by 20% on the day. A stop loss would nearly always be triggered in this (fairly common) case. Our managers have conducted deep fundamental analysis into all of the companies they recommend and they themselves are in regular contact with the company management. They live and breathe their portfolio companies. We feel it best for our shareholders that they decide when their thesis is flawed, or the sector landscape has changed such that share price appreciation is now less likely. The worst-case scenario for us would be to sell a holding when our recommending manager believed the share price had overreacted, and they were buying for their own shareholders while we were selling for ours.
 
This obviously involves strong faith in our managers. And we have that faith. You will recall that each of our core managers are invited to direct a portion of our annual donation to various medical institutes around the country. Every manager has a connection or story behind who they channel the donation toward, and the size of the donation is directly related to our investment performance. The better we perform, the bigger the donation. Simple. So our core managers want our performance to be as strong as possible.
 
Our conference managers are totally aligned to our goal also, even if they don’t get to direct any of the donation themselves. They stand in front of the audience and present a single stock recommendation at the conference. It is out there for everyone to see. They get judged by that. And they have a 12-month time frame to work with, which is shorter than most fund managers use. They have to find a stock with a catalyst for performance, which is tough! Needless to say, they work really hard to find such a company to recommend, knowing full well it can make (or break) their reputation. I can’t think of a better incentive to get it right.
 
In the three conferences we’ve conducted since HM1 came to life, we’ve had a pretty good success rate. Not 100% of course, but we’ve also had plenty of instances when positions have been cut quickly when share prices have either overreacted to the upside or the landscape has changed. Yeahka and Slack Technologies are two good examples of this – Yeahka’s share price almost tripled within 3 months with no real fundamental news, and has since retracted, while Slack was taken over by Salesforce within weeks of being pitched in November last year.
 
So, while many would say that a stop loss (or profit) policy should be a part of our risk management, our managers make the final call on when we close a position out, such is the faith we have in their expertise, and the alignment of interests we all share towards our shareholders and beneficiaries. Their stop loss is our stop loss.
 
Next week I’ll tell you about our latest meeting with one of our beneficiaries, The Black Dog Institute, and what it means to them to be a part of the HM1 family. Until then, stay safe, stay home, and get vaccinated. 

 

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

Reminder: these are simply my general views and should not be taken as investment advice

 

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DISCLAIMER: This communication has been prepared by Hearts and Minds Investments Limited (ABN 61 628 753 220). In preparing this document the investment objectives, financial situation or particular needs of an individual have not been considered. You should not rely on the opinions, advice, recommendations and other information contained in this publication alone. This publication has been prepared to provide you with general information only. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. Past performance is not a reliable indicator of future performance. This document may not be reproduced or copies circulated without prior authority from Hearts and Minds Investments Limited.