CIO Insights - 27 September

Hi everyone
 
What a weekend of sport hey! NRL and AFL footy finals, a Wallaby 3-peat (first since 2017), a Ryder Cup for the ages, cycling world championships and the Laver Cup in tennis. Wow! The critics questioned having Sergio Garcia paired with Spanish compatriot Jon Rahm – what an inspired move by Captain Padraig when they were always going to be challenged this weekend. Rory disappoints, while DJ shows what he is made of, despite an ordinary season by his standards!
 
But back to business…
 
Last week I told you how we had just made our most recent 6-monthly series of donations to the various medical research organisations we support, totalling $6.4m. Remember that we make this in lieu of a management fee, and it is calculated as 1.5% p.a. of the Net Tangible Asset value for the period. What I didn’t mention was that we have some new beneficiaries this year, by way of our sixth core manager, TDM Growth Partners. TDM has now been with us for over 12 months, meaning they get to nominate beneficiaries for part of our donation. The new beneficiaries are the Walter and Eliza Research Institute (WEHI), which studies a range of complex diseases from cancers to computational biology, and the Pain Management Research Institute (PMRI) which is focused on the science and management of pain. In future updates I’ll provide more details on the projects we’re supporting in partnership with TDM.

The overwhelming response from our beneficiaries is one of extreme gratitude. The pandemic has changed so many things in our lives and really shone a light on the critical importance of medical research. The ongoing support that HM1 is able to give these incredible organisations is really starting to make an impact on so many people around us.
 
With this in mind, I wanted to make mention of our core managers and make sure everyone properly understands just what an integral part they are to the success of HM1. Firstly, in case you aren’t aware of who they are, here they are:

  1. Caledonia Investments
  2. Cooper Investors
  3. Magellan
  4. Paradice Investment Management
  5. Regal Funds Management
  6. TDM Growth Partners


I’m sure you’ve heard of all or most of these managers – they are amongst the best in the industry, each with very long and enviable track records of their own. Not all of them are open for new investments, yet they all support HM1 in a big way.
 
Firstly, their investment recommendations represent 65% of where we invest our portfolio, which is twice the amount we invest in the conference recommendations made each year. Obviously, this shows the relative importance of the core portfolio to the overall success of the portfolio. Each manager gives HM1 their three highest conviction stock recommendations across their own portfolios. Unlike the conference stocks, these positions can and are usually held for far longer than the 12-month maximum holding period of the conference portfolio. Not surprisingly, there are still quite a few holdings that we purchased at inception, way back in late 2018. These are investments where compounding is more able to take place and have business models that should just keep on keeping on over many years.
 
Our core managers provide this intellectual property for no charge at all, as they see that the better the portfolio performs, the bigger the overall donation becomes, and each core manager is able to direct a portion of the donation (just under 10% each) to a medical research institute(s) of their choice. As with all of us, our managers each have some sort of personal connection with an illness or affliction, and so are able to use HM1 as a way of supporting the causes of their choice and using their investment skills to do so. That’s why I say we have such alignment of interests within HM1 – we are not trying to profit by earning management or performance fees, rather we are trying to deliver our shareholders satisfactory investment returns and make a philanthropic impact where we can.
 
Of course, things don’t always play out as we would all like, and things change, whether it be because of the pandemic, Governments suddenly imposing new rules or tariffs on businesses, new competitors emerging, or some other roadblock. These things happen, and that’s investing. And that’s why we cannot and do not sit passively during the year. One of our managers described it well one day when he said “panic early” when something big happens, like, say a government moving the goalposts for an industry. Even though we don’t alter the core portfolio to the same extent as the conference portfolio, we are always in touch with each of our core managers, especially in the more volatile times we see from time to time. They care deeply about the success of HM1, and are doing their absolute best to see that shareholders and beneficiaries get the best outcome possible.
 
Whilst the conference portfolio is a smaller part of the overall portfolio it is nonetheless extremely valuable, as you have seen through many of the amazing returns the stocks have delivered. It aims to give our portfolio some X-factor if you like – stock recommendations where the managers have identified likely catalysts in the nearer term for a share price rise. Of course, like with our core holdings, goalposts shift, and with less time for the catalysts to eventuate, sometimes we see that stocks don’t perform. And this is ok. Without the benefit of a crystal ball, nothing in life (investment or otherwise) is guaranteed, and so each day every investment is re-assessed, and if conviction is lost, or the initial catalyst no longer looks like eventuating, we cut and move on.
 
Simple, but effective.
 
With end of month coming up, I’ll be back with more insights and conference details in a couple of weeks.
 


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.