Hearts and Minds but no ratings

Listed impact investment vehicle Hearts and Minds Investments has returned more than 26% on a 12-month basis, while also donating $4.1 million to medical research. Yet, the fund has faced major roadblocks when it comes to receiving a rating.

The investment company offers shareholders the opportunity to benefit from the highest conviction ideas from prominent fund managers on a pro bono basis, including Caledonia Investments, Cooper Investors, Magellan Financial Group, Paradice Investment Management, Regal Funds Management and TDM Growth Partners.

It seems to be working; since its listing on the ASX in November 2018 the fund has returned 51.3%. Over the past six months alone it has returned 15.9%. In comparison, the MSCI World Net Total Return Index has returned 18.2% and -3.8% over the same periods.

Hearts and Minds also provides significant support to some of the country's leading medical re-search organisations, with 1.5% of its net tangible assets donated to beneficiaries such as the Victor Chang Cardiac Research Institute, the Black Dog Institute, the Charlie Teo Foundation and West-mead Children's Hospital.

However, since its IPO launch the investment company has seen little growth in awareness.

Perhaps, this can be chalked up to advisers only being able to recommend financial products that are on their licensee's approved product list. These products often require a rating from an agency such as Zenith, Morningstar or Lonsec, as well as a three year track record.

Independent research house Zenith, in particular, cannot rate the listed investment company, as its founder is also Hearts and Minds' Investment Committee Chair; a clear conflict of interest.

"I've got a little bit of a bugbear that to get on an approved list for financial advisers you've got to have particular reviews done of you," Hearts and Minds Investments chief investment officer Rory Lucas told Financial Standard.

"When we spoke to some of these ratings agencies, we said 'Look, we don't have a three-year track record, but Caledonia do, Magellan do, Paradice do, and we've got their best ideas' - but they struggled to look at it like that.

"Perhaps it's just a square peg in a round hole and we just have to wait."

Ratings agencies are not charities; they will either charge investment funds fees in return for a rating (often upwards of $50,000), charge licensing fees to use their logo in marketing collateral, or charge fees for funds to be featured in their industry database.

Hearts and Minds do not want to fork out for a rating, Lucas said, as he believes this money would be better spent by the company's beneficiaries.

Another ratings roadblock faced by the investment company is that its construction does not meet the typical portfolio "mould".

While 65% of the portfolio features the best ideas from prominent fund managers, the remaining 35% of the portfolio is made up of Australian and global stock picks from "conference" managers.

Every year, this portion of the portfolio is replaced by eligible long recommendations from the next Sohn Hearts and Minds Investment Leaders Conference.

"Because of this, it's not a replicable portfolio; so a lot of the research houses struggle to see that it has a long-term track record because it's not a fund that has been around for long enough and its fundamental investment construction sits outside their usual cookie cutter framework," Lucas said.

"It doesn't fit into the current mould; it's sort of an outlier when it comes to how they review funds, so that has been a challenge for us."

Even so, the average stock recommended during the conference will rally 50% within 12 months, he said.

"But it is difficult to communicate that to ratings houses," Lucas said.

"We are now putting together a list of financial planners just to go and talk to them about it; just to say, this is what we do, this is how it works, this is how the portfolio is constructed, this is how it has performed so far."

Otherwise it's just a waiting game, he said.

Hearts and Minds does have one rating from Independent Investment Research. It was assigned a "recommended plus" rating pre-IPO in 2018 as well as the subsequent year.



This article was first published on Financial Standard here.

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