CIO Insights: The World Has Changed

Hi everyone
 
I really hope this week’s note finds you well. I mean that. On the east coast of Australia, we’ve just seen some of the worst floods in living memory, which have literally washed away towns, and sadly, innocent lives have been lost. Geopolitical tensions are at extreme levels; we have no idea what to expect, how long it will last, nor how many more innocent lives will be taken. The footage of the paediatric oncology ward in Ukraine, where kids on life-saving chemotherapy need to be rushed to bomb shelters is something I will never be able to reconcile. And now the Omicron BA.2 strain is spreading like wildfire – I’ve been in isolation this week myself, after my son contracted it from his school classrooms.
 
Is there any good news out there?
 
On Wednesday, in China, The Financial Stability and Development Committee of the State Council held a special meeting to study the current economic situation and capital market issues. Officials said they would introduce more market-friendly policies and commit to keeping capital markets running smoothly. The Hong Kong Index rallied some 9%, while, would you believe, the NASDAQ Golden Dragon China Index (Chinese-focused companies with listings in the US) jumped 33% in the session, and tech giant Alibaba was up 37%! Also, the US Federal Reserve announced their first rate rise since 2008 and pencilled in a further six rate rises over 2022 which would get the benchmark Federal funds rate up to 1.875%. Why is this in the good news camp? Because it should reduce some uncertainty and therefore some speculation. Up until now investors have been pondering just how far they expect the Fed to raise rates to curb inflation – will they do enough, or will they fall short? Judging by the moves we saw in the indices, but especially in tech stocks, maybe this was the Goldilocks scenario?
 
As I’ve said before though, only time will tell. But at least it looks like we’ve seen some shoots of positivity – perhaps…
 
Many of you will have seen that Yen Liow, one of the 2021 Sohn Hearts & Minds Investment Leaders Conference speakers, last week announced the closure of his own fund Aravt Capital. Yen’s recommendation, Gitlab, has been caught up in the technology sector sell off, where very few stocks have proven to be immune. Tech heavyweights such as Google and Microsoft have fallen 15-20% from their highs in January. In my many discussions with our stock-pickers since December, they have spoken of how this sell-off has centred on the seemingly overpriced nature of the entire (let’s say) “yet to be profitable” tech sector. When Gitlab announced their results this week, their numbers were better than analyst consensus and the share price has jumped by over 20% since reporting. Nevertheless, our position is still heavily down from December and remains under review. As always, we will keep investors updated as to if and when we dispose of Gitlab or any of our other conference holdings.
 
Whilst having had “yet to be profitable” high-growth tech companies such as Tesla, Bill.com and DocuSign in the portfolio in previous years delivered us supernormal gains, so far in 2022 exposure to this group of companies has contributed to a decline in our Net Tangible Asset value. As I said at the outset of this note, the world has changed. We are working on developing some updated guidelines to try and ensure more balance in our conference picks without stymying the independence of those picks or the innovation that a concentrated effort on a single and best idea can bring.
 
This week we had the pleasure of notifying our medical research beneficiaries of our half yearly donation payments. Total donations for the six-month period amounts to over $6m. Here is what some of them said,
 

  • Thank you from the bottom of our hearts for this astounding donation. We are deeply grateful for your support, especially Paradice Investment Management for selecting Black Dog Institute and championing vital mental health research and evidence-based support tools. These funds will go a long way to helping us research and deliver the latest technologies in supporting Australians experiencing a mental illness, especially at a time when government support is shrinking.
     
  • Thanks so much for your incredible support of Matt and Melissa Call’s research into improved cancer immunotherapy. The commitment and support of HM1, TDM Foundation and TDM Growth Partners is truly game-changing for this research and is already helping to provide leverage with others.
     
  • We are so very grateful. This is allowing incredible world first research to take place.
     
  • Having this support from you has helped us to expand our research to include two new labs. Congratulations to your team for all you have contributed to the Institute and medical research more broadly. With the ongoing challenge of securing grant funding expected to continue, the support received from HM1 enables us to implement longer term planning and provide strong support to our early and mid-career researchers, who we expect will be the next generation of leaders in cardiovascular research. We are all very grateful, thank you.

  
These are tough times, probably the trickiest investment landscape I’ve seen in my 30+ years in equities markets. With your ongoing support, we know we can continue to make a big impact on people’s lives through the donations we make in lieu of any management fees. We are obviously disappointed with our investment performance of late, and we are making changes to our strategy to address this.
 
In life, it is said that there are successes and lessons. The last 12 months have been a gut-wrenching and painful lesson for investors everywhere – HM1 included. We cannot undo the past, rather what matters most is what we have learned and what we actually do about it. 
 
 
P.S.   I’m reading a great book that I think is very relevant to what’s happening in the world right now – “This Is How They Tell Me the World Ends – The Cyberweapons Arms Race”, by Nicole Perlroth. Simply un-put-down-able!

 

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) and may contain general information relating to HM1 securities. The general information should not be considered financial advice. HM1 is not licensed to provide financial product advice. The information does not consider the investment objectives, financial situation, or particular needs of any individual. The information is current as at the date of preparation and is subject to change. HM1 does not guarantee repayment of capital or any rate of return on HM1 securities. An investment may achieve a lower-than-expected return and investors risk losing some, or all, of their principal investment.  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.