CIO Insights - 20 September

Hi everyone
 
As we inch closer to our respective ‘Freedom Day’, I hope this finds you well, that your footy team has had a good season (some still going of course) and that the golfers amongst you are getting excited for what will be a cracking Ryder Cup next weekend. Golf is such an individual sport, so it’s fascinating to observe team dynamics for this one week – you’ll either love your favourite player even more or go the other way and find a new one!
 
We’re now just over two months away from the 2021 Sohn Hearts & Minds Investment Leaders Conference, which, as you know, means 12-15 fresh companies will enter the HM1 portfolio, replacing the 2020 cohort. The conference will be held virtually on December 3, so put it in your diaries! HM1 shareholders will be offered a special discount rate which will be shared when the event launches next month.
 
I’m often asked about how the conference part of the portfolio is managed, especially when stocks are exited earlier than the maximum 12-month holding period that a stock can remain in the portfolio. As we are now in the final three months of the current portfolio, I thought now would be a great time to recap just what we do.
 
Working backwards, if there is less than three months until the next conference (ie September-November) and a speaker/manager believes the share price likely won’t increase much in the short term, or has an upcoming catalyst that may concern them (eg fresh earnings announcement) then we sell the position and keep the proceeds in cash. The gain or loss is therefore locked in. The most recent example of this was Bill. com, which had a massive gain in August, and was indeed up just over 180% since Babak Poushanchi recommended it to our audience in November last year. So, that gain is now locked in and sitting in cash. What an awesome recommendation from Babak, and we are truly privileged to have fund managers of his calibre making investment recommendations to us all.
 
If a stock has either a supernormal gain, or something happens in a stock such that it no longer appears likely that the original thesis will play out, and there are more than three months until the next conference, we still close out the recommendation and realise the profit or loss that ensues. However, what we do with the proceeds is different, because there is enough time to justify having as much of the funds available for investment actually invested.
 
The way we do this is through our regular dialogues with all of the conference managers. By talking to them during the year, we know whether their conviction has increased or decreased with the share price moves in the stocks. For example, if a stock was recommended at (say) $10 in November and a positive catalyst has been announced to the market such that the stock has increased in value by 25%, a manager will often have more conviction at the higher price because there has been some confirmation of the original investment thesis behind why the stock price should increase. Similarly, share prices can be weaker on no new news and simply due to overall market weakness. Oftentimes, we see managers with more conviction in this situation too. Of course, the contrary scenarios also happen – where a weaker share price can suggest that the thesis might be flawed; and a stronger price on no new news could suggest that the ‘rising tide’ of markets is the reason for the rally, and again, maybe there is a flaw in the thesis. We’ve seen all of these situations in the past, and the only times we increase the size of a current conference holding is when the conviction in the idea is indeed higher at the current market price. If only half of the remaining managers have more conviction in their recommendation when we sell a holding, then only half of the proceeds will be deployed. This way, our portfolio is only invested in high conviction ideas while the manager maintains high conviction, which is what we aim to provide our shareholders.
 
In the unlikely event that a recommendation plays out extremely early in the 12-month period, as in the first month or two – say, due to a corporate takeover, then we do have a provision that allows the manager to recommend a fresh stock for the portfolio, which can only be held until the next conference.
 
What you should now understand is that for the final three months of ‘our year’ (conference to conference) we have a far higher cash holding (which earns nothing at zero interest rates of course) than for the rest of the year. If you take a look at the HM1 share price action in that three-month period you will see that from 31 August 2020 to 30 November 2020, HM1.AX increased from $3.62 to $4.50, which is a 24% gain. This no doubt was new investors buying shares in anticipation of the new conference portfolio, even though the fund was gradually increasing its cash holding up to almost 35% in that same period. So, whilst the 2021 calendar year share price has been disappointing, I would venture that perhaps some of the anticipated 2021 investment performance was baked into the share price in the last few months of 2020. Inspection of the premium that the share price trades compared to the NTA of the fund supports this too; in late 2020 the share price was trading roughly 20% above the NTA, whereas now it is trading pretty much at the NTA.
 
In what is one of the coolest parts of working at HM1, in the last couple of weeks we have informed our medical research beneficiaries of the latest 6-month donations we will be making. For the first half of 2021, the total amount was $6.4m! This would not be possible without our unbelievably good investment managers, both core and conference, our service providers, many of whom work with us on a pro-bono basis, and the HM1 shareholder family, who chose to invest in our product in the first place.
 
Stay safe,

 

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.