All our 2020 investor insights from our Chief Investment Officer, Rory Lucas
Monday 21 December 2020
Just when it looked like Australians were going to be able to have a relatively normal Christmas, another COVID outbreak, this time on Sydney's northern beaches, has put everyone's plans into jeopardy yet again. I hope everyone has learnt from the previous outbreaks that isolation is the best path to containment, and everyone is remaining updated on which public spots you may have visited now require either a test or self isolation. You can check for yourself right here. Please be vigilant.
As bad as COVID is in our own backyard, it is multiple times worse in Europe and the United States. My sympathies go out to the affected, wherever you are. This is not something that is just going to go away overnight. It seems people can't wait to see the clock strike midnight on Dec 31 quickly enough, as if 2021 is going to see a return to the good old days of pre-COVID. I'm sorry to say, but I just don't think that's going to happen. And what that means is that these habits we are forming during COVID will ingrain themselves in our future lives far more than you probably think.
Fresh food home delivery, furniture buying online, click and collect, tele-medicine, video games - they're all here to stay. And I wrote about a couple of weeks ago, that really was the theme of our conference this year, both in the stocks recommended and the enthralling keynote presentation by Professor Galloway. The share price of Nintendo is up some 25% since the conference, while HelloFresh is now up almost 40%. Investors around the world are waking to the fact that these thematics are not just a 2020 fad, but rather what will most likely be the new world order.
Fund performance for the week was flat, with strength in Bill.com, Nintendo and HelloFresh being offset by weakness in some of the tech stocks. The pre-tax NTA as at Friday night was $4.18; the post current tax NTA $3.97; and the post all tax NTA finished the week at $3.77. By way of comparison, these NTA's at the start of 2020 were $3.18; $3.07; and $2.98. Whilst we are pleased with the investment performance for 2020, that is now the rear mirror for us, and we remain focused on trying to deliver you, the shareholders, the best investment returns we can for the next year and years to come.
This will be my final update for 2020 (I'll be back writing in mid January) so I wish you all the best for a safe and Merry Christmas, cherish what you have, and set some goals for 2021! Listen to the Equity Mates and the Prof Galloway podcasts, enjoy some good books, and put your feet up!
Monday 14 December 2020
Well here we are, the week before Christmas, people are hopefully signing off work for a few weeks, and an end to what has been a tumultuous year to say the least.
I hope you took the time to listen to Hamish Corlett's podcast chat with the Equity Mates guys and myself last week - so many insights from this great investor. Never stop learning I say! If you planned on listening to it later, and forgot about it, here is the link for you; and you can see all of the other interviews Bryce and Alec have conducted, including a cracker with Malcolm Turnbull.
You may be wondering what we're going to do with Hamish Corlett’s pitch from the conference last month, Slack Technologies, which has been bid for by the behemoth, Salesforce. Well, as Hamish said in the podcast, he was actually disappointed to see the takeover announced, as he firmly believed this was just the beginning of a 10 year growth runway which would increase the value of Slack by many multiples, rather than the c60% we have gained in 3 weeks. Whether Salesforce management are able to do what Hamish firmly believes Slack management were on track to do remains to be seen. As a consequence, we have exited the position and kept the proceeds in cash until we decide on how best to re-deploy the proceeds.
Another of our conference presenters, Qiao Ma, from Cooper Investors, also spoke with Equity Mates last week. You can listen here. Wow! The depth she went to in explaining how she looks at stocks, her experience at Lehman Brothers during the GFC, and her explanation of her 2020 pitch, Shenzhou International (the textiles business that provides the fabric for Nike, Adidas, Uniqlo and Puma, amongst others) was fascinating. It's a 'must-listen' episode in my books!
With all the news going on around the world, we've had some winners and some losers in the portfolio lately - CSL decided against progressing with their vaccine candidate, and so has been weaker in the last few days, as has Ping An Healthcare in China, while BILL.com, which automates back office operations in the SME space, and our online fresh food stock, Hello Fresh, have both been extremely strong in the past few weeks. Pleasingly the core portfolio is also contributing nicely, while the stronger Aussie dollar remains a headwind.
I'll finish this update with a mention of one of our keynote speakers from this year’s conference, Professor Scott Galloway. If he isn't one of the smartest people I have ever listened to, I don't know who is! He is a Professor of Digital Marketing at NYU Stern School of Business, and seems to know a helluva lot about e-commerce. He writes a weekly blog that you can read for free, he does a weekly podcast that is mindblowing, and has just released his latest book, Post Corona, where he gives his views on what life will be like post corona, which companies will likely thrive, and who may not, and what he thinks we need to do about it.
Here are some fun facts I took out of it:
- The coronavirus is one four-hundredth the width of a human hair.
- Scott believes the pandemic's most enduring impact will be as an accelerant of dynamics already present in society.
- He believes that in crises, there lies opportunities, and the more disruptive the crisis, the greater the opportunities
- "Nothing can happen for decades, and then decades can happen in weeks"
- E-commerce really began in about 2000, and has grown its share of retail by 1% a year, to 16% at the start of this year. 8 weeks later, that number leapt to 27%, and shows no signs of reverting. A decade of e-commerce growth in 8 weeks.
- It took Apple 42 years to reach $1 trillion in value, and 20 weeks to accelerate to $2 trillion.
- In the US, with COVID cases taking up many more hospital beds than ever before, and warnings to stay away from doctors surgeries if you have symptoms, the forced embrace of telemedicine suggests a sea-change in how the rest of us will use doctors surgeries and hospitals for our ailments going forward.
As I said, he does a podcast (warning, he speaks very very quickly!!); a blog, and has written a couple of books - all worth checking out over the Christmas break!
Monday 7 December 2020
I hope all is well, and you have a well earned break coming up.
A short update this week, as the monthly report is being finalised and will be released to the market, and your inboxes by Wednesday. The NTA for the portfolio was unchanged for the week.
2020 conference attendees, as well as regular readers of the financial press and my updates will be aware that Treasury Wine Estates (TWE. AX) was pitched as a high conviction stock recommendation by Jun Bei Liu of Tribeca Investments Partners. I have been asked by a few of our readers whether the recent news of tariffs being levied on Australian wines, and on TWE in particular, had changed the investment thesis behind HM1 holding the stock. Jun Bei spoke to ausbiz TV last week where she addressed the matter in public. Here it is if you want to watch it for yourself (subscribe for free).
At the time of the conference, it was known that the Chinese government would likely place tariffs on wine and other goods that are sold into China. The quantum of such tariffs was not known. Markets try and price outcomes all the time, and sometimes they are right, and sometimes they are wrong. Given the announcement was imminent, we did not buy the entire position immediately, as with another stock in the portfolio that was in a similar position. This is what you get when you own HM1 - our ongoing interaction with the fund managers, especially around news events. In the case of TWE, the share price fell after the announcement of much larger than expected tariffs (169.3%) on their products. After Jun Bei confirmed that she believed the investment thesis was still very much in place, and most probably even stronger than ever, this allowed us to buy the remainder of our position at more exciting levels. As with all of our managers, both core and conference, regular dialogue allows for more optimal portfolio risk management than investors simply buying and managing the stocks themselves.
Hopefully, many of you have already listened to the Equity Mates podcasts we recorded recently, where Nick Griffin from Munro Partners spoke about why he recommended The Trade Desk at the 2019 conference, and Amazon in 2018, and where I spoke about the journey of HM1 so far. Well last week, I had the privilege of recording further podcasts with Equity Mates and two more of our managers; the first was Hamish Corlett from TDM Growth Partners - he pitched Slack Technologies last month, which has just been bid for by Salesforce, as well as Spotify last year. You can listen to the episode right here. The second was with Qiao Ma from Cooper Investors, who pitched Shenzhou International this year, a textiles business in China that manufactures clothing for Nike, Puma, Adidas and Uniqlo. A fascinating listen, which will be released on Thursday.
As if TDM haven't done enough for HM1 already, last week on their own podcast, Scaling Up, Ed Cowan had a chat with Magellan supremo, Hamish Douglass, who is another of the HM1 core managers. If you want to learn a thing or two from these two gurus, listen here. Scaling Up is a wonderful series (3 in fact) of interviews Ed has conducted with CEOs and Founders who have successfully Scaled Up their businesses from start-up to success story. I particularly enjoyed the Guzman and Gomez story myself.
I promise that you will learn more from listening to the wisdom of guys like Hamish Douglass, Hamish Corlett and Qiao Ma than just about anywhere else!
Next week I'm going to talk about one of our keynote speakers from this year's conference and the book he's just released about the world post corona.
Until then, stay safe.
Monday 30 November 2020
Well here we are - a day away from December already. Cricket is back on TV, Black Friday/Cyber Monday online sales are on, and so the silly season begins yet again.
Stay with me here. I had dinner with some dear friends on Saturday night at a pub on Sydney's North Shore. We're all becoming accustomed to using our phone camera to 'sign in' whenever we go out, and pay for our food and drinks with Apple Pay or Samsung Pay (is that what it's called...sorry, I'm locked into the Apple ecosystem). For the first time ever though, we found a QR scanner on our table which, when tapped with our phones, up popped the menu. We were able to order our steak/duck/fish with just 3 clicks (including how well cooked I wanted my steak). How cool is that?! 12 minutes later our meals arrived (and cooked to perfection I might add).
It got me thinking.
Will places keep using this type of technology when COVID is properly under control and we go back to 'life as we knew it'?
Would I prefer to talk to a waiter/waitress going forward if I had the choice? More importantly, what about the younger cohort? After all, they are the future, and so what the under 30's think and do, is vitally important for the success of many such businesses.
It wasn't that long ago that we all held cash and a credit card in our purses and wallets to pay for various goods. Now we 'tap tap tap' (even for a bus ride) on our phone without thinking about it. It wasn't so long ago that we'd go to the movies for a night out. Now we have Netflix, Stan, Amazon, Google, and Foxtel on demand. COVID has accelerated these and other habit changes in our lives.
I don't think I, or in fact many of us, will go back to many of the old habits we had. It's better and more convenient now. And that's what technology does - it makes life's hassles less of a hassle, so that we can enjoy what we set out to enjoy. Sure, it may be less social to order a steak on your phone compared to talking to a waiter, and yes, many relationships have been forged at pubs and clubs by such social interactions. I do however think that many (especially younger) people will prefer to click to order so that they can spend more time talking and engaging with their friends.
A major theme I took out of many of the presentations at this year's conference revolved around how changes in some of our habits might affect our lives. Look at some of the stocks that were pitched. Hello Fresh delivers quality fresh food to your doorstep, so you don't have to go to Coles or Woolies quite as often. Two managers pitched Tele-medicine companies (one in China - Ping An Healthcare; and one in the US - Teladoc), reducing the need to go to your local doctors surgery. Target Corp in the US is giving customers such a good 'click and collect' experience that its online sales are booming. Yeahka operates a technology platform that provides payment services to merchants and consumers in China like the QR scanner I described using at the pub. Temple and Webster allows you to buy your furniture from the comfort of your own home.
Our habits are changing faster than we realise, and it really feels like we just won't go back to some of these old habits. This is what our managers believe too. The younger you are, the more this applies too. As I drove past a cinema yesterday, I wondered if I'd ever go there again. Sad, but likely true.
In portfolio news this week, we have now purchased most of the names recommended at this year's conference. A couple of the stocks had some important news that was due for release this week and last, and so we held off buying our full amounts. Pleasingly, another of our stocks, pitched so passionately by Hamish Corlett; Slack Technologies (WORK.NAS) looks to have been approached by Salesforce for merger discussions according to the US press. The stock jumped some 40% last week as a result. Our NTA's were pretty flat for the week, as strength in Slack was offset by some pullbacks in other names in the portfolio.
Global equity markets have staged a remarkable rally in November, with comfort over the Biden presidency and positive vaccine results overriding the increasing number of daily COVID cases being reported. How much the rally continues I cannot say. But I do say that many of our habits are changed forever.
Monday 17 November 2020
I hope you’ve had a great week. We sure have, with our 2020 Sohn Hearts and Minds Investment Leaders Conference being 'released' last Friday. If you bought a ticket, you’ll see that the window for viewing the pitches and the keynote presentations has been extended until tonight 11:30pm (AEDT). They are even better the second time, especially Scott Galloway's speech about the state of the world! I didn’t want it to end! There were so many insightful tidbits which I'll try and share with you when I can.
The recurring theme that I took out of many of the presentations was that aside from the tragedy of COVID-19 and the family and friends we have lost to this horrible virus, society has, and will continue to form new habits, which will very likely remain a part of our lives once a viable vaccine has been developed and people no longer fear getting infected when they head into crowded areas.
What sort of habits am I talking about?
Increased comfort in using a tele-doctor, buying more goods online, be it fresh food or furniture, having them delivered or picking them up and not having to get out of your car, advancing technology from cheques to apps for the 6,000,000 SME back offices in the USA, technology so that companies can communicate much better than via antiquated email (yes, I know this is an email!), and of course, 5G technology finally hitting our homes.
And so onto the new stocks, which will become 35% of the portfolio for the next 12 months.
15 stock ideas were pitched, and we have reported that all 15 will be invested into HM1. If you haven’t seen the stories in the media, the stocks (and a quick 1-line description of what they do) are:
As you can see, and probably won't be surprised by, improved healthcare is a major theme in the recommendations. 2020 will forever be remembered as the year COVID-19 changed our lives. Over the coming weeks, I’ll delve into many of the companies and explain what they do, and why our managers believe they will be great investments over the coming 12 months.
Yesterday we reported our most recent NTA’s of $4.10, $3.92, and $3.71.
You will have noticed that in the updates (my weekly insights and the Monthly Investment Report), rarely do we talk about share price performance. Instead we talk about NTA movement and investment return. In fact, on a couple of occasions we have even been criticised for this, as some people see share price gains as the only relevant performance measure. We cannot control what the share price does on a daily, or even weekly basis. There are literally hundreds of thousands of investors who buy and sell shares on the stock exchange every day. They all have different reasons for doing so, whether they have become forced sellers of their shares because they may have lost their job, while others may have inherited some money, and wish to put it to work for them. There are speculators, and there are investors, all of whom have different information, different views, different needs, and different timeframes for their daily share trading. We aim to give our readers the best information available so that they can make the most informed investment decisions with their capital as possible. We strongly believe this is what the Net Tangible Asset (NTA) value provides. Each Monday, we publish HM1’s NTA value on three levels, namely pre-tax, post current tax, and post all tax (realised and unrealised). In previous notes I have explained why we report all three, and how each can be relevant for people in varying circumstances.
In the last few weeks, our share price has run way ahead of our NTA. This is what is meant by ' trading at a premium to NTA’. People often judge the relative value of a Listed Investment Company by its premium or discount to NTA. Many LICs currently trade at a discount, while HM1 is currently at a healthy premium. This is probably (I say probably because it’s just my own personal view, and not advice) because our investment performance has been strong recently, and new investors may have bought into the stock ahead of the conference and expectations of the new stocks performing well.
We want all investors, financial planners, and advisors in HM1, both new and current, to understand as well as possible what they are buying and what they are getting for whatever price they pay. The purpose of these notes, and the weekly reporting of our NTA is for exactly that.
Monday 2 November 2020
Well here we are, November already, US election week, Melbourne Cup, State of Origin, and a week out from the upcoming conference, where the new investment ideas of the great minds we have assembled will be pitched. We have always expected this to be a volatile time, and have tried to brace everyone for that. Who knows whether Trump will pull the proverbial rabbit out of the hat and be returned to the White House? Not me, that’s for sure!
Last week saw the old market jitters return, with US and European markets suffering their worst week since the March selldown. The S&P500, the Nasdaq, and the Eurostoxx all declined by about 5.5%, as coronavirus cases surged once again, and uncertainty about just who will win between Sleepy Joe and The Don saw punters head to the sidelines. As we have always said, any equity portfolio, HM1 included, will always be affected by market sell-offs in the short term, while in the medium to longer term, we hope to deliver above market returns to our shareholders.
We continue to remain pretty active in the portfolio, with many of our conference managers also seeing perhaps more short-term risk than potential for further gains. As a consequence, our portfolio is now sitting with almost 22% cash, and will be higher in the next 2 weeks as we continue to liquidate the conference stocks. With most of our stocks being fairly liquid, we are seeing very little price disruption from our selling. If you are wondering what liquid means, it simply refers to the total value of the buying and selling in any one day in a stock. If $100m in value trades each day in a particular stock, it shouldn't move the share price too much if we need to sell say $10m of that stock. If only $5m trades per day, then to sell $10m worth will prove somewhat more difficult, and we will be subjected to more economic and political led market moves, as it would take literally days to execute that order. This is why HM1 likes to be invested in large liquid stocks. (In my podcast last week, I spoke about "lobster pot" investments - ones that are easy to get into, but extremely difficult to get out of - we don’t like lobster pot stocks at HM1).
So far we have completely exited 3 of the 12 stocks from the 2019 conference (The Trade Desk, Floor and Decor Holdings, and Wizz Air), and have reduced our exposure to a further 5 stocks. This is why our cash holding is as high as it is (22%), which means our equity exposure is not as high as it usually is, which in such times as we currently find ourselves in, will probably provide you with a fair degree of comfort.
The NTA estimates we released to market this morning were $4.03 (pre tax); $3.85 (post current tax); and $3.66 (post tax), which are all up slightly for the month. Our regular monthly report will be released next week, where a more detailed update of portfolio performance will be given, but suffice to say here that a small positive investment performance for the month in light of the 2-3% declines in global indices is a pleasing outcome.
As I mentioned last week, we recorded a follow up podcast last Wednesday with the Equity Mates team of Bryce and Alec, where Nick Griffin, who pitched The Trade Desk to us last year (and Amazon in 2018) gives listeners his views on investing, how Munro finds the hidden gems for their own portfolio, why The Trade Desk was such a high conviction idea, and his advice to new investors looking to find their own gems. One stat that Nick mentioned, which surprised me, was how many of the 25,000 companies that have listed on the American stock exchanges in the last 90 years have gone bust - would you believe it is 14,000?!?! The podcast should be available to listeners on Thursday, so look out for it on Spotify - it’s definitely worth hearing his wise words!
That’ll do for this week, let’s see who wins the Election and what happens to markets, watch the Melbourne Cup and the Origin - and look forward to the exciting set of stocks that will shortly enter the HM1 portfolio in what will no doubt be a fascinating period of our history!
Monday 26 October 2020
Well here we are, nearing the end of October already, with just 60 days left until Christmas, 67 days until 2021, but more importantly only 18 days until the next suite of stock ideas are unveiled at the Sohn Hearts & Minds Investment Leaders Conference!
But I’ll get back to that shortly...
Performance for the week was pretty flat, with our NTA’s declining just under 1%. The share price remains above $4.00, sitting at $4.10 as I write. We have been closing out some of the conference positions in the past week or so, with managers recommending taking profits with less than 3 weeks left until they must be sold. One of these was our digital marketing cloud-based platform stock, The Trade Desk, which is listed in the US. This has been one of the outstanding stocks for HM1 shareholders, as its share price has rallied almost 150% since Nick Griffin, from Munro Partners pitched it last year. You may recall that Nick pitched Amazon to the audience in 2018, which has also obviously been a fantastic investment, and we feel privileged to have Nick returning next month to give us his latest hidden gem, high conviction investment idea. Bring it on Nick!
Last week I did something I’ve never done before, that was so far out of my comfort zone, that I might have been delaying doing it for a little while. I appeared on a podcast!
Bryce Leske and Alec Renehan are two young guys who decided a few years ago that they wanted to learn more about investing. They thought that a clever way to do this would be to chat to people who knew a thing or two about markets and create a podcast to share with other millennial generation investors, first-time retail investors, and anyone else who wanted to listen and learn. And so Equity Mates was born. Fast forward four years, and the guys have now produced 300 episodes, with many notable experts having appeared already, Malcolm Turnbull among them!
You can listen to my chat with them right here. We spoke about my first investment (what a disaster!), what I would teach my younger self about investing, my top three books to read (one was written in 1923, and is a must-read for anyone interested in the sharemarket, while another I called "un-put-downable", as it describes the differences in life between the US and the Nordic countries). Obviously, the crux of the podcast was about HM1 though, where I recounted some of the most memorable stock pitches we’ve seen, how the portfolio has performed, who is speaking this year, and a whole lot more. I may be biased, but I reckon it’s worth a listen for you and your children (and your parents!)
But wait, there’s more - Nick Griffin, whose amazing stock pick I mentioned above (The Trade Desk: up 150% in a year) will be doing a follow up podcast with the Equity Mates boys and myself this week, which will hopefully be released next week. Nick will have the chance to tell listeners what it’s like to pitch your single best stock idea in front of an audience of up to a thousand eager investors, why he feels he has to get it right, and what it means to be a part of the Hearts and Minds family, helping both shareholders and our beneficiaries.
You may have seen we announced last week that Scott Galloway would be our second keynote conference speaker, along with Bill Ackman. Scott is a Professor of digital marketing at NYU Stern School of Business, where he teaches brand management and digital marketing to MBA students. He is a serial entrepreneur, who has founded nine companies, including Red Envelope, which was one of the earliest e-commerce sites. He has also written two fascinating books, "The Algebra of Happiness" and "The Four: The Hidden DNA of Amazon, Apple, Facebook and Google.”
To hear what both Scott and Bill have to say just after the US election will be worth the price of admission alone.
It’s not too late to buy a ticket to the virtual conference - you can do it here and please be aware that it is 87.5% tax deductible. The new speakers who will present their highest conviction stock ideas have been screened by our team, and we are confident they will be up to the standard we’ve set in the past. To see all of the speaker bio’s, click here.
And to finish this week’s note, last week Paul and I went out to the Paediatric Intensive Care Unit (PICU) at Westmead Children’s Hospital to deliver some good news. While we were there, we were lucky enough to be taken on a tour of the ward, where we saw children as young as four days old, being placed on machines to help their little hearts and lungs deal with surgeries they had endured. It was heartbreaking to see. It makes what we do at Hearts and Minds seem all the more special and indeed relevant, in that we are able to support such a special unit as the PICU. As you know, donations like this one, are made from the fund, in lieu of a management fee that you, the shareholder would normally make. So, thank you, shareholders, for being able to make this happen.
Monday 19 October 2020
I hope you are all well.
We released our September monthly report last Monday (hence no weekly blog), where we reported a pretty flat month for September (-0.4%), which was pleasing in light of the 4-5% declines we saw in the leading indices around the world. The NTA numbers we published for the end of the month were $4.01 (pre tax); $3.82 (post current tax) and $3.63 (post all tax).
This morning we published the latest NTA’s for our portfolio, which were $4.23; $4.02; and $3.78.
I keep mentioning all three numbers because different investors like to compare the growth in different NTA’s, meaning some like to compare the growth in pre tax NTA (this is closest to the portfolio's investment return), while others like to compare the growth in post tax NTA, as this represents the cash per share that would be returned in the event of HM1 closing out all positions. This will be a topic I will go into more detail on next week.
By any of the NTA’s you wish to compare, October has been a good month for the HM1 portfolio so far. As I said, the growth in pre tax NTA is closest to the gain in the value of the underlying shares we hold, and this has risen from $4.01 to $4.23, which represents a gain of just over 5% so far. Pleasingly, the share price has responded accordingly, and this morning topped $4.00 for the first time in our short history - remember that we floated at $2.50 in November 2018, so for those that have been along for the entire ride, we hope you are happy with our performance.
You may have seen an announcement regarding some amendments to our investment guidelines that we released via the ASX last Wednesday. If not, you can view it here.
The crux of the amendments revolve around how much of the portfolio (in percentage terms) one stock may represent. As you are probably aware, the portfolio consists of between 25 and 35 stocks at any one time. 65% of the funds are allocated to the recommendations of the six core managers, meaning 18 stocks, and the remaining 35% is allocated to the conference managers, typically 10-15 stocks. Generally, we have allocated c3-4% per stock.
We can, and indeed have, had two managers occasionally recommend the same stock. Think about that for a minute. Two of the best fund managers in the world both have ultra high conviction in the same stock! When this has happened, our mandate has allowed for us to have a larger position in that stock, and I’m sure you are happy to hear that we have done that. The only downside to this is that it means there will be fewer stocks in the portfolio the more this occurs. Whilst we are a concentrated high conviction portfolio, we feel we still must have a minimum number of stocks in the portfolio. We think this number is 25.
So how large should a position get before it becomes “too big”?
Warren Buffett, as you would expect, has some interesting views here.
Some years ago, after a period of extraordinary outperformance from Coca Cola, the stock represented 40% of Berkshire Hathaway’s portfolio. It led to many comments that Warren was over exposed. Buffet’s observation was brilliant. He essentially said that having to sell Coca-Cola because it had performed so well was like the Chicago Bulls having to trade Michael Jordan because he was too good!
As I have said many times before, we constantly 'check in' with all of our managers to see whether the conviction in their recommendations have changed. Obviously there are two reasons this could happen. First, that the investment thesis has now played out, and the stock is now trading at what it is worth, or secondly, that something unforeseen has occurred, and the original theory is no longer likely to play out. Often the prevailing share price will tell us whether either of these scenarios is playing out.
Within our portfolio, we've had a few stocks that have played out brilliantly. Everyone has seen what Tesla has done. We’ve also had a couple of stocks in the core portfolio, that we’ve held for almost two years now, perform so well that they have become a larger than expected part of the portfolio. When I have spoken with those managers, they still have just as high conviction in the stock, perhaps even higher than when the share price was far lower, and believe that there remains further substantial upside in holding onto the stocks concerned. I think this is akin to asking MJ, when he has scored 60 points in a game, who still feels good, and the game isn’t won, should we take him off? Do you retire Don Bradman in a game to give someone else a bat?
As a consequence, our Investment Committee has decided that a single stock holding may now have a maximum weighting of 15% before it must be reduced. For a high conviction portfolio that consists of only the best ideas from the brightest fund managers we can find, I think this is a very appropriate weight.
This is a quality problem to have - what to do when one or more of your stocks has performed so well. We want to let the returns from our best stocks continue to compound for as long as possible, so that our team can score as many runs as possible for our biggest supporters, you, the shareholders.
Monday 28 September 2020
You may remember back at the start of the month, I mentioned that September was traditionally the worst month of the year for equity markets globally. Of course, 2020 has seen COVID-19 wreak havoc on markets and economies around the world, and obviously February and March were painful months for equity investors. With three days of trading to go this month, it appears that September will hold true to form, and be the only month (so far) outside of February & March to register negative returns. For context, the broad based US S&P500 is down almost 6%, the tech heavy NASDAQ is down just over 7%, while the Aussie index is down 1.5%. We will release our month end NTA’s early next week (it’s a public holiday on Monday in NSW, but equity markets will be open), and our monthly report later next week. The NTA’s released today (with 3 trading days to go for the month) were $4.01; $3.82; and $3.63, which indicates a pretty flat investment return for the portfolio for the month so far. Our share price is down 0.8% for the month as I write.
In portfolio news this week, you may have seen the much touted Tesla Battery Day was held in the US last Wednesday. Elon managed to disappoint investors, who had pushed the stock up 74% in August (yes, you read that correctly) ahead of what many expected would be some industry game-changing announcements. They didn’t happen, and so yes, the share price has corrected in September, as investor and analyst expectations have diminished somewhat following what was (and was not) revealed at the Battery Day. We reduced our Tesla position size during the rally in August, as our recommending manager was not able to justify holding a full size position after such a super-normal return. To have our managers consistently engaged with us to discuss the risk management of the holdings has proven to be extremely beneficial to the returns of our portfolio.
Just this morning, A2 Milk, another of our conference recommendations, gave a trading update, where they reported that the daigou market (the market for buying things on behalf of residents in mainland China) had collapsed due to COVID-19. The stock today has fallen 10% in trading today. Again, regular dialogue with our recommending manager saw HM1 reduce our exposure to A2 Milk following the strong rally earlier in the year. So whilst we still have exposure to these stocks that have declined recently, we have not experienced the same losses that a more passive approach would have generated.
I said last week that I’d tell you about a couple of our new managers that will be presenting their best investment ideas at our virtual conference on November 13. We are pleased to have secured William Curtayne, from Milford Asset Management (NZ), who helps run a 28 person investment team with extensive global experience. The funds he co-manages have consistently outperformed their benchmarks, and I am personally very excited to see what he presents to the audience. We also have Josh Resnick 'coming along' (virtually) - Josh is the founder and managing partner of Jericho Capital (USA), a hedge fund focused on investing within the global telco - media - technology sector. With his prior experience in media venture capital, and Fox Entertainment Group, you can be sure it will be fascinating to hear what stock he has in store for our portfolio!
That's it from me this week - there won’t be the usual Monday update next week as I’ll be working on the Monthly Report.
Monday 21 September 2020
I hope the last week has been kind to you.
You should have received a detailed email last week about our November conference, which, as I mentioned in my most recent newsletter, will be virtual this year.
The Australian Financial Review and The Australian also published articles (here, here and here) announcing the conference launch and the announcement of one of our keynote speakers - Bill Ackman, from Pershing Square Capital Management. This is a major coup for those of you who ‘attend’ the conference this year. If you haven’t heard of Bill, go and look him up - he is a titan of the industry. He made headlines back in March, at the peak of global fear from the initial COVID-19 outbreak, for what must surely be one of the best trades of all time, where he turned a US$27 million Credit Default Swap protection play into US$2.6 billion. His fund performance this year has been c44%. Incredible.
You’ll also see that we have announced the first batch of speakers who will give their single highest conviction stock idea to the audience and will subsequently be invested into the HM1 portfolio. We are extremely excited to have Cathie Wood, from ARK Invest (yep, she pitched Tesla) return to present another idea from her disruptive technology portfolios. Personally, I can’t wait to hear what she has to say.
But that will only be one stock - we’ve also got Babak Poushanchi from Cota Capital coming back. Their funds are very specialised, focusing on enterprise software - something you just don’t get exposure to when your investing universe is constrained to the local market. You may recall that in 2018, Babak pitched DocuSign - which ended up being one of the years stellar picks. Not only that, but as an investment, it has continued to deliver their shareholders an amazing return, having increased a further 200% since November last year. This is the power of having sector specialists as part of our team - they deep dive into stocks like no-one else. His 2019 recommendation, Smartsheet, Inc is another great idea, providing a cloud place platform for better execution of work. You just don’t get this stuff locally!
Another returning manager is Beeneet Kothari, from Tekne Capital Management, and we are just as lucky to have him. His 2019 recommendation, GDS Holdings Limited, has performed incredibly well, as did his 2018 one, PagSeguro. Both stocks that many local investors would have even heard of, but we’ve had the good fortune to be invested in a Brazilian payments processing platform, and a Chinese cloud infrastructure building business, both of which have delivered excellent returns in our portfolio.
Local legends of the funds management industry, Jun-Bei Liu from Tribeca Investment Partners, and Nick Griffin from Munro Partners are also back, and with the performance of their previous recommendations (New Oriental Education and A2 Milk from Jun Bei, and Amazon and The Trade Desk from Nick), it’s going to be great to see what they have in store for us this year!
I’ll talk more about the new managers we’ve been able to lock in next week, as this update is already getting a bit lengthy.
Our NTA’s were pretty flat last week, reporting $3.88 as our pre tax NTA; $3.71 for post current tax; and $3.54 for post tax NTA. Tesla will have its long-awaited battery day this week, where Elon will announce how their technology has progressed in the last year or so - whatever he says, it’s sure to be interesting!
Monday 14 September 2020
As I’m sure you know, the Hearts and Minds Investment portfolio is made up of what we call our Core portfolio and our Conference portfolio. 65% of our capital is deployed amongst each of our Core managers (there are six of them) three highest conviction stock ideas, while the remaining 35% is invested in the recommendations at the annual Sohn Hearts & Minds Investment Leaders Conference, which is held in November of each year.
I haven’t made mention of what’s happening with this years conference - until now. It’ll probably come as no surprise, but there is sadly no way we can conduct a physical conference, as we had planned for Tasmania in 2 months time. So this year we intend to make the most of virtual world we find ourselves in and host our first ever online conference as part of the global SohnX series. The event, called Sohn Hearts & Minds_Instigator, will still have many of the elements you’ve come to expect from what we believe is the premier investment conference in Australia.
So, with that said, please put November 13, 2020 into your diaries!
This is when the new list of stocks will be pitched by our amazing new suite of speakers, as well as what I’m sure will be some incredible insights from our keynote speakers. One of the advantages of being virtual this year is that we have been able to access a few presenters that ordinarily would not be able to make the trip down to Australia. Whilst I can’t tell you just now who we have speaking, trust me, you will want to hear what they have to say!
On top of this, our conference is just 10 days after the US Presidential election, where either Trump will return to power for four more years, or Democrat Joe Biden will become the 46th POTUS in history. These are unprecedented times as we all know, and to hear the insights of some of the smartest people on the planet, as well as the highest conviction stock recommendations for the next 12 months is simply something not to be missed.
We're in the process of finalising our stock presenters, which will be a combination of new and returning managers, global and domestic, male and female, tech focused and not tech focused, sector specialists and sector agnostic managers. Look out in the press later this week for who we have secured already. We also have our own conference website (sohnheartsandminds.com.au), which will be updated as we release who will be speaking. Of course, you can also buy tickets to the virtual conference on the site should you wish to listen to the insights and pitches.
We’re excited about what will be put forward this year, given just how much the world has changed in such a short space of time. People say that companies have advanced five years in their technology just as a result of COVID-19... won’t it be great to hear from the best in the business who they think are the best in the business!
The NTA values we lodged with the ASX this week were $3.91; $3.66; and $3.50, down about 2% from last week, which was a pleasing outcome given the nervousness we saw in global markets. Our share price tracked our NTA for the week, and also fell 2%, to close the week at $3.46.
Have a good week and watch out in the media this week for further information on our Conference!
Monday 7 September 2020
Here we are in September already - traditionally the worst month of the year for Wall Street, and unless you’ve been hiding under a rock, you would have seen that the indices did indeed see some large falls late last week.
And this is why we are in such regular contact with all of our managers, all of whom are disciplined investors, and monitor the investment landscape very closely. Volatility scares people, but also provides opportunities. Our holding of cash right now is higher than normal, and represents about 15% of our portfolio. As I have said in previous updates, when our managers have seen larger than expected returns on our stocks, in what has become an increasingly uncertain world (the upcoming US Presidential election, fresh waves of the COVID-19 pandemic, interest rates pushing towards negative levels, the highest unemployment levels in generations, yet markets at all time highs) we have reduced our position sizes by taking some profits, and leaving the proceeds in cash. Our managers and our management both believe this is the best way to manage the capital entrusted to us.
With the falls we saw in the US last week, the NTA’s we reported today were 2-3% lower than last week, and were $3.98; $3.71, and $3.55. We do not expect our portfolio valuation, or our share price, to increase in value every week. Obviously our valuation, and therefore share price is dictated by the underlying share price moves of the stocks we hold. We remain disciplined in our risk management in volatile times like now, and also in quiet times.
As our Monthly report will be released later this week (looking like Wednesday morning), I’m going to stay brief today, and leave you with an interview with our Chairman, Chris Cuffe, who spoke with Elysse Morgan on ABC’s The Business last week about the charitable side of Hearts and Minds Investments, and the greater philanthropic “Cash for Causes” that occurs in our industry.
Click here to listen to Chris.
Remember also that this Thursday is "R U Ok Day", so please check in with your loved ones to make sure they are indeed ok. The world we find ourselves in has seen mental illnesses such as anxiety and depression hit far more people around the world than probably ever before. Just checking in often goes a long way.
Have a good week and stay safe
From all of us at HM1, thank you for remaining a part of our family. I hope you feel as proud as we do.
Monday 31 August 2020
Our portfolio value was pretty much unchanged this week, while our share price rallied 16c, or 4.5% to close the week at $3.65. We released our Annual Report last Wednesday (you can read it here), and as I have mentioned in previous updates, this is the only time we show our portfolio holdings for the year. Do note that if you have a look (you should, there is a lot of information in there for you) that the holdings are as at June 30 of this year, and have changed slightly, as we have just gone through local and US reporting seasons in July/August, which led to a couple of our managers making fresh recommendations, and we have trimmed some of our existing positions. What you see in the Annual Report is a pretty good indication of what we are holding right now.
Today I want to write about why you can feel proud to be a shareholder in Hearts and Minds Investments. I say proud, because I’m going to share with you some of the details of the donations we are making this week to medical research institutes across Australia.
Before I do that though, I want to acknowledge a very special group of people, who, without their input, none of what makes HM1 so special (and successful) would be possible.
Our fund managers.
Firstly, our six Core managers who have each provided us their 3 highest conviction money making ideas, and remain in regular contact with me as we navigate one of the most uncertain investment landscapes in modern history. 65% of your capital is invested here. A massive thank you to Will Vicars and Michael Messara from Caledonia Investments; Peter Cooper and his team from Cooper Investors; Hamish Douglass and his team from Magellan; Philip King and his team from Regal Funds Management; David Paradice and his team from Paradice Investments; Hamish Corlett and Tom Cowan from TDM Growth Partners.
And our current conference managers: Jun-Bei Liu from Tribeca Investment Partners; Andrew Macken & Chris Demasi from Montaka Global Investments; Allen Goldstein from Cooper Investors; Beeneet Kothari from Tekne Capital Management (US); Emma Fisher from Airlie Funds Management; Philip King from Regal; Babak Poushanchi from Cota Capital (US); Hamish Corlett from TDM; Cathie Wood from ARK Invest (US); Nick Griffin from Munro Partners; Markus Bihler from Builders Union (UK); and Seth Fischer from Oasis Management (HK). These are the men and women who stood up in front of 700 people at the Sydney Opera House last November and pitched their single best investment idea to the audience, and ‘manage’ the other 35% of your capital.
Without these incredible minds we would have no portfolio, our shareholders would not have earned the returns on their capital that they have, and we would not be able to make our second 6-monthly donations this week to our suite of beneficiaries. Our fund managers all operate on a pro-bono basis. They do not get paid from us. They do this so that their intellectual property can benefit others.
What a special group of people our managers are.
So this week Hearts and Minds Investments will be donating just over $5.1m across 10 beneficiaries: The Victor Chang Cardiac Research Institute; The Florey Institute of Neuroscience and Mental Health; Swinburne’s Centre for Psychopharmacology; RPA Green Light Institute; Black Dog Institute; Orygen; Charlie Teo Foundation; MS Research Australia; Kids Critical Care at Westmead Hospital; and the Brain and Mind Centre within the University of Sydney. This is in addition to the $4.1m we donated in early March. Almost $10m in the year that COVID-19 changed the world. Wow.
The responses we received from the beneficiaries was incredible. The appreciation they have, and the difference this will make is truly heart-warming.
Here are just a couple of them:
"We again express our immense appreciation for the support of Hearts and Minds and Cooper Investors. As you would imagine, and has been widely reported in the media, the pandemic has had particularly significant impacts for young people. Work and education for young people has been hit hard and may take some time to recover placing additional stressors on young people. This provides even more impetus for Orygen to succeed in our work. Your support is one of the key enablers in assisting us to do this.”
"Your continued contribution to Black Dog Institute will help us to improve the lives of people living with mental illnesses such as depression, anxiety and bipolar disorder. With your support, we can continue our ground-breaking research to develop better clinical treatments and prevention programs, as well as expand our education programs to reach more communities, schools and health professionals. A hearty and sincere thanks from all of us here at Black Dog, to Hearts and Minds, David and everyone in the Paradice team.”
So you, the shareholders of HM1, have also made this possible, by choosing to buy our shares in the first place. Remember that we make this donation instead of a traditional management fee, and that your Board, and the majority of our service providers act on a pro bono basis for which we are extremely grateful.
From all of us at HM1, thank you for remaining a part of our family. I hope you feel as proud as we do.
Monday 24 August 2020
I hope you’ve had a good week - COVID numbers are hopefully starting to move the right way, there's plenty of good sport to watch, and we in Australia are now less than 2 weeks away from springtime again.
The portfolio had a pretty good week, reflected in the NTA’s we released this morning, which were $4.08 (pre tax); $3.80 (post current tax) and $3.62 (post all tax). Last week, they were $3.94; $3.69, and $3.52. Despite this, the share price fell from $3.55 to $3.49 over the week. In early trading today it is back around the $3.57 level.
Last week I was asked by an investor for my thoughts on why HM1, and other Listed Investment Companies (LICs) report performance based on Net Tangible Asset valuation, and not based on increases in the value of the shares over the period. They were also interested in better understanding whether looser regulatory requirements allowed LICs to report in the most favourable manner they liked, compared to Managed Funds, which disclose the true net return of the investment, as opposed to the increase in the underlying assets.
The implication here was that perhaps LIC's don't give investors a true reflection of their profits (or losses) when reporting ‘performance'. For the 12 month period to June 30, we reported investment gains of 26.1%, while our share price only increased by 5.4%. So some investors might be wondering why they haven’t made as much money as they thought they had.
The only people who move a share price are the investors (or machines) that physically buy and sell the shares each day. When COVID hit markets in late February, investors sold share prices down heavily, and our share price fell much harder than the inherent value of our shares. The role of a management team in a LIC is to give people who buy and sell shares as much information as possible to facilitate informed investment decisions. We feel it is more informative to report our performance based on changes in our NTA (on 3 levels), rather than how our share price has moved.
Our decisions impact NTA. Investor decisions impact the share price.
Unlike ordinary shares (BHP, Westpac, Coles, JB Hi-Fi, etc), the NTA of a LIC tells you what the shares are actually worth. Do you know what a Westpac share is actually worth? That’s what analysts do - try and work out a valuation based on what they think expected future earnings, cashflows, balance sheet strength etc will be. However, each analyst invariably comes up with a different worth of Westpac (or other) shares, because they all make different assumptions that they put into their valuation model. So you can, and often do, have one analyst saying that Westpac shares are worth (say) $15, while another analyst might argue that they are worth $25. Who is right? I don’t know, but it’s not both of them!
When we report the HM1 NTA’s, how the various analysts value the individual stocks in our portfolio does not actually matter. The NTA is the sum of the most recent actual value of the shares we hold, plus the value of the cash we hold. I’ve written about the difference between the three NTA numbers before, so please have a look at this investor update if you want a refresher.
The share price of a LIC is freely available to anyone who has a computer (or a smart phone). You just log on to the Australian Stock Exchange website, or any number of other free pages/apps that report share prices, and type in the ticker code (ASX: HM1). The ASX feed doesn't tell you what the companies are all worth, just what price you can buy more of or sell what you have. By giving you the NTA value, you can buy or sell shares in HM1 (or any other LIC) knowing what they are worth, which is easier than looking at different analyst reports of the same company and wondering which one is right?
At the end of the day, it is true, all that really matters to an investor is whether they make money on their investments. Obviously, this is the price at which you sell the shares, less the price you paid for them originally, plus any dividends that are paid to you.
On top of more share price performance commentary, we will continue to give our investors (and anyone thinking about buying our shares) as much information as possible so they can make the best decisions possible. As I said above, the only factors that move share prices are the physical buyers and sellers, and so the more informed more of them are, the better.
Monday 17 August 2020
I hope you are well, and are following the guidelines being advised to contain this wretched COVID-19 virus.
We released the July monthly update last Monday (hence no weekly), so if you missed it, didn’t get it, or plain forgot to read it, here it is again for you.
The portfolio valuations we released to the public today (we do this via the Australian Securities Exchange announcements board) were $3.94 (pre tax); $3.69 (post current tax) and $3.52 (post all tax, including unrealised). These were unchanged for the week, and since July 31, they have all increased by about 10c/share, which represents a gain of about 3% for the month. Pleasingly, you will see that the share price has been moving up nicely as well, and as I write, it is trading at $3.53, which is up from $3.44 at the start of the month.
We’ve been reasonably active in the past couple of weeks, reducing some of the position sizes in the Conference portfolio, especially where we have seen large share price appreciation. There has been some action in the Core portfolio as well, as a few of our managers have found a couple of higher conviction ideas than they had previously recommended. As you will recall, we don’t disclose our core manager holdings, other than as a regulatory requirement in the Annual Report (which will be released later this month). These ideas are the intellectual property of our core managers, who all work with us on a complete pro-bono basis, and it is their prerogative, not ours, to inform investors of their best investment ideas. When you see the Annual Report, understand that the holdings reported are as at June 30, and so any changes made after then will not be shown.
You might have seen in the news last week that Elon Musk has decided to split each share in Tesla into 5 smaller shares. An investor who currently holds 1,000 shares, trading at c$1,500/share, will shortly hold 5,000 shares, trading at c$300/share. The value of your holding will not change as a result of this, just the number of shares you hold, and the value of each share. Lots of companies do this. In fact, Apple have also recently announced a similar share split. It’s not clear why companies do this, perhaps the company believes more people will buy Tesla shares when they cost $300 a share instead of $1,500 a share (even though you get exactly the same proportion of the company for the same amount of money outlaid), or maybe there’s some other more scientific reason, I do not know. But I do know that the share price rallied almost 20% after it was announced!
You will recall that I have been saying that reporting (or earnings) season is upon us, both in the US and in Australia. US companies report every quarter, while locally, Aussie companies report semi-annually. Some have June 30 year ends (meaning the current announcements are "full-year reports”), while others close their books on December 31 (and so the announcements for these companies are "half yearly"). For whatever reason, the big banks (except CBA) work on a March/September basis, and therefore report in May & November.
So what exactly does a company tell you when they ‘report’?
You get a bunch of ‘headline’ numbers, such as whether the company actually made a profit, what their revenue growth and earnings per share (EPS) growth has been, their return on equity etc etc. You’ll also get an updated Balance Sheet and Profit and Loss Statement, as well as a Cashflow statement. I like to see the cashflows of businesses, and whether they are positive or negative, even if they report a profit. Most importantly, companies will usually give guidance, or an outlook statement, which is where they try and give investors an idea of what they think the next year will bring, relative to the current one. This is where the fun sits. Will they “talk it up”, or "urge caution" with some "likely headwinds"? Steady as she goes, or about to step up to the next level? Analysts love this stuff, and this is when they review their own forecasts, and adjust them up or down, depending on what their interpretation of what the companies actually say.
But before this, ‘algorithmic' traders (ie artificial intelligence/computer-driven trading - which represents more than half of each day’s volume traded), have scoured the reports way faster than any human can, latched on to certain words or numbers, and tried to predict what investors are likely to do. They then buy or sell the stock immediately (and often very aggressively). This is why you often see such large moves so quickly after a company reports. They aren’t always right of course, and this can come out later, when management explains things in greater detail (at the ‘briefings’, which the computer-driven traders don’t get to attend of course!). Eventually prices should reflect the news that is released, but hopefully now you can see where some of the volatility comes from!
I’ll close today with a cool fact I saw from a colleague today. Warragamba Dam is now at capacity. Just six months ago it was at 42%, which makes this the fastest fill rate since the 1960’s!
Monday 27 July 2020
Good afternoon everyone,
I hope you had a good weekend and are taking the COVID restrictions and instructions seriously.
The number of videos I have seen where people say that the rules don’t apply to them, or that it is some sort of breach of human rights to be asked to wear a mask is crazy. The more everybody follows the protocols, the safer everyone will be.
The NTAs we released this week were $3.83 (pre tax); $3.58 (post current tax); and $3.44 (post all tax), which were ever so slightly down on last week's ($3.85/$3.60/$3.45).
Another brief update this week, while the month concludes, and the more comprehensive monthly report follows. Thanks for all of your emails after last week's update - it’s really starting to feel like a HM1 family, where you, the shareholders, feel more comfortable asking questions about your portfolio, and financial markets in general. I try to reply to all of the questions directly, and some are worthy of a fuller explanation to our broader audience or family. So keep the questions coming!
One question asked last week was why HM1 isn't included in the ASX-300 index, as that might cause the discount that our share price trades to our NTA to contract. Listed Investment Companies as a whole cannot be included in any of the ASX indices, in the same way that convertible stock, bonds and warrants cannot. Only common and equity preferred stocks (not of a fixed income nature) are eligible for inclusion. So even though the market capitalisation of HM1 is larger than many stocks in the indices, unless the ASX changes its rules, which is highly unlikely, no LIC’s can be included in an index.
Our most talked about, most controversial, and best performing stock, Tesla, reported its quarterly earnings late last week. It exceeded analyst expectations, provided the 4th consecutive quarterly profit required for consideration for S&P 500 index inclusion, and didn’t rally. How come? My guess is that it rallied so hard into the result that perhaps the good numbers were already factored into the share price ahead of the report, and so some investors decided to take profits.
As you know, we are in constant communication with our managers, especially over reporting season. We're in the middle of the US season now, and the local season is about to commence. In the current environment, most of our managers recommend taking some profits after large moves in their share prices. As a consequence, we've followed their suggestion in many of the names we hold. Doing so has seen our cash balance increase, which is probably a good thing in these more nervous times we are experiencing due to the spread of COVID-19.
I've just finished a great book, called Bezonomics, which, as the name implies, is the story of how Jeff Bezos (the founder of Amazon) created the world dominating business model, and what its competitors are doing to try and imitate or outfox them. Central to his success has been his ‘flywheel', where each new initiative attracts more customers to Amazon’s websites. Once there, those customers can be induced to try other offerings, pushing more transactions through Amazon’s servers and thereby creating economies of scale that lower the company’s costs and attract more customers. It's definitely one of the best books I’ve ever read, and this flywheel concept is central to the success of many of the companies we hold. If you attended our 2019 conference, you may recall Hamish Corlett describing the Spotify flywheel, which is another of our portfolio stocks that has enjoyed stellar share price gains since November last year. You can watch Hamish's full presentation on the TDM website here.
Perhaps the HM1 flywheel is you, the shareholders and potential shareholders, reading our updates, becoming curious, and asking us questions. In so doing you are stimulating conversation in the broader community by creating more topics for us to write about, thereby arousing even more curiosity and understanding, leading to more people talking about HM1; and that can only be a good thing for everyone.
Stay tuned for the monthly report sometime next week, and please, stay safe and follow the COVID guidelines.
Monday 20 July 2020
I was asked a fascinating question last week, from someone interested in HM1- ‘So why isn’t HM1 more popular?'. In the context of why the question was asked, I had to answer it straight away, so I defaulted to how I think about things generally and tried to enunciate my thoughts in a chronological way. Here are some of those thoughts, and as always, I welcome any feedback.
Back in October 2018, the Hearts and Minds roadshow began, where the founders and management travelled to Brisbane, Melbourne and Sydney to pitch the fund to retail brokers and their clients. We hoped to raise between $300-500 million in our Initial Public Offering over the 3 weeks. After just 3 days, we had demand for $500 million, and over $1 billion in demand after a week. I’d call that popular! The choice we faced was to accept more money from eager investors, or keep it ’tight’ and ‘cap’ it at $500m. We chose b), thinking the funds popularity would keep demand in the stock after listing.
Until COVID struck in late February, our share price was trading at or around our Net Tangible Asset (NTA) value, which was a factor of good performance and I suspect, ongoing popularity of our concept, given how different our portfolio is to other LIC’s. As COVID devastated markets and struck fear into the hearts of investors, our share price fell, along with almost every equity market vehicle. At the low of the market, our share price was at almost a 25% discount to our NTA, which seemingly ended the popularity we enjoyed.
As you all know, markets bounced off their lows, as did our share price and NTA, and pleasingly our NTA is back towards all time highs. Our share price is currently sitting at a discount of about 10% to this. And so, it seems our popularity has rallied somewhat.
Then I got to thinking about who actually buys HM1 shares now that it is up and running. Well, to buy them, you have to know about them. Those who have already bought them I suspect tend to hold them, unless they become forced sellers (to raise cash) or think there might be a better return on their money elsewhere.
So, do people who don’t already own them, even know about them to consider buying them? I think the answer to this is actually a no, which is why I was probably asked the question, and why perhaps, HM1 isn’t as popular as I might have first thought.
Anyone who knows about HM1, can buy our shares, as they are listed on The Australian Stock Exchange, right next to Harvey Norman shares, and alongside all the other names you know and probably hold (BHP, CBA, CSL, Woodside, QBE, etc). But does your broker or financial adviser tell clients about HM1? Some do, some don’t, and some cannot.
You see, many advisers, especially for superannuation investing, can only recommend financial products that are on their ‘Approved Product List’, which often require, say, a 3 year track record of performance, and a ‘rating’ from one of the Ratings Agencies (eg Morningstar, Zenith, Lonsec), before they can recommend a fund to their clients. So, even though every one of our managers have long, impressive track records, and strong ratings of their own, by virtue of our relative infancy, many advisers cannot recommend our product to their clients. With now over 18 months and a full financial year of performance, hopefully we can increase our popularity again with some fresh discussions with advisers who are able to look at our product.
Regarding the portfolio this week, we saw a small drop in our NTA and share price, as investors try to anticipate the upcoming earnings season in the US. Tesla announce their profit result on Wednesday night, where we will see whether they have done enough to warrant consideration for inclusion in the S&P 500 index, which is a big reason for the recent share price strength.
Monday 13 July 2020
I trust you saw the monthly report we released last week, where we were able to show you how we have performed for the financial year to June 30. If not, here it is. This week our post current tax NTA was $3.67, up from $3.54 last week. Our share price is $3.34 this morning.
Over the coming weeks the press will show lots of league tables showing how the various fund managers have performed over the last 12 months, both in absolute terms and relative to the benchmarks they use. Managers who only invest in Aussie stocks will compare their performance to the Aussie indices (ASX-200 and ASX-200 Accumulation - the Accumulation index includes dividends, and so is a better index to compare I think). Global managers compare their performance to one of the MSCI World indices (we do this) or the S&P 500 if they are mainly US focused. To remind you, HM1 generated an investment return of 26.1% for the 12 month period, which compares nicely to our benchmark return of 4.8%. Remember that investment returns for all funds and benchmarks are both before taxes and operating expenses are deducted. For the record, the ASX-200 was down 10.9% for the year, and the S&P 500 was up 5.4%.
The question I probably get asked most right now is whether or not I think markets are expensive. At risk of sounding like an economist, on the one hand it could be argued that share prices may well have run ahead of themselves given we are still in the midst of a global pandemic, and the price-to-earnings ratio is historically high. On the other hand, policy makers are committed to providing untold levels of fiscal and monetary stimulus to support businesses, and with interest rates set to stay at or near zero for the foreseeable future, earning perhaps 5% from your share portfolio is actually quite good.
Lower interest rates have provided equity markets with an apparent valuation boost. If you’ve heard of discounted cash flow analysis and net present value, you’ll remember that companies are often valued by discounting their expected future years' earnings back to their present value, using a discount (interest) rate. A lower discount rate mathematically makes for a higher valuation ($100/1.05% = $95.23 versus $100/1.01% = $99).
And this is why equity markets have been rallying in my opinion. If company valuations are suddenly higher because of this lower interest rate, then share prices will appear cheaper than they were before. If you see or hear that an analyst has upgraded their valuation of a company, it probably means they’ve lowered the interest rate they use in their model.
The thing is though, that interest rates are lower because many of the companies aren’t doing so well, and need the ’stimulus’ that lower borrowing costs are meant to offer. That could mean that future years earnings are actually less certain rather than more certain, and perhaps a higher rate (to reflect higher uncertainty) should be used by analysts and indeed investors to value companies.
I’ve always looked at the expected earnings growth of a company. Simplistically, if a company can keep earning more and more each year, over time its share price will most likely follow suit. The stocks in the HM1 portfolio all have solid expected earnings growth prospects in the medium to long term. Some stocks have appreciated far quicker than our managers expected, and where they see the share price already factoring that future earnings growth, they are recommending we reduce those positions. After all, uncertain times by definition means that future earnings may not necessarily eventuate, and so locking in some of the profits is always prudent.
I know this is probably a bit confusing for some of you, and I’ve tried to make it as simple as possible. There has been a lot of mention in the media about some of the incredible share price increases of late. There are definitely people out there buying shares because they think they are cheap because of the low interest rate environment we find ourselves in. I read today that local retail investors have bought net $9 billion worth of shares since March. Now more than ever is the time to own high quality companies with consistent earnings growth.
Monday 29 June 2020
Here we are, June 30 (well June 29 but close enough) and the end of the financial year yet again. Where did those 6 months go?!
I was asked a great question after last week's update. It was about how we calculated our reported investment return, which was 43% since our inception in November 2018.
When we talk about our investment return and how it compares to our benchmark (or other indices you see on the nightly news) it represents how much the shares in our portfolio have appreciated (or depreciated). If every stock in our portfolio was up 15% for the year, then our investment return would be 15%. This is how any index return is calculated, so we are comparing apples with apples.
Simple, right? Well, what about if we sold some of them during the year? The tax office comes knocking on the door, of course. So, while our investment(s) may have gone up by 15%, we have to hand over some of those gains (and pay running expenses like insurance, salaries, and donations to medical research institutes), which makes the end return smaller than the 15%.
Think of investment return like your gross salary - let's say you earn $100,000, you don’t actually get the whole $100,000 to spend, do you? That is why we talk about NTA - net tangible asset value. These three numbers tell you: how much the shares in the portfolio have increased before any expenses are paid, what they are worth after the current expenses have been deducted (realised profits and donations etc) and then, what your shares would be worth if we sold every stock in the portfolio, paid the additional tax that we would owe, plus any leftover expenses (post tax NTA). Make sense?
So today, those three NTA values were $3.65 (pre tax), $3.42 (post current tax), and $3.31 (post all tax). Using the pre tax NTA you can work out that the investment return is now 46% since we began ($3.65 vs $2.50). Our focus is on delivering NTA growth to our shareholders, by delivering the best investment returns possible and keeping our expenses as low as we can. Shareholders are often only interested in total shareholder return (share price rise + dividends). I think NTA growth is another great metric to keep an eye on.
I said last week I’d tell you about one of our conference stocks that I’m sure almost all of you would never have heard of - GDS Holdings. They are a company that manages data centres in China. How’s that for a company that isn’t a bank, resource company, or property trust?
To say that GDS ‘manages data centres’ doesn’t really do the company justice. What GDS really does is provide the essential infrastructure to cloud service providers. We all use the cloud to store stuff on our iPhones and computers these days, even if we don’t really understand what that means. If you can look at your photos on your phone and also on your computer at home, it’s because they are all stored on the cloud, whether it’s Amazon (Amazon Web Services), Apple (iCloud), or Microsoft (Azure). The cloud is a massive piece of virtual real estate where a whole lot of data is stored by everyone, and GDS build this stuff in China. They’ve got 70% market share, and their clients are the big e-commerce guys - like Alibaba, TenCent and JD .com. Cloud services are an integral part of everyday life and business these days, and GDS are the leaders of this technology infrastructure in the region, with easily the biggest growth opportunity, China.
I won’t be sending out an email next week, as we’ll be doing the monthly report, which will also be the end of financial year update, but check out this short podcast on how batteries are powering ahead for the electric vehicle industry - it’s fascinating!
Monday 22 June 2020
Well here we are, the last full week of the financial year, and halfway through 2020 already. How time flies!
We can report some better performance for our portfolio this week, with our post current tax NTA rising just over 4% to $3.46 for the week. The share price closed at $3.07 and is trading there as I write. For those of you that like to know how we tracked against local and US indices, the local ASX200 was up 1.6% for the week, while the S&P 500 increased by 1.9%. These are the well-known and well-advertised indices that we see on the news each night, and invariably how most people who invest in active funds compare their performance.
So why do people compare performance at all? For many, the reason is that you can buy an Index fund to get similar returns to what you see on the news. Index fund returns mirror the index return you choose, and cost a whole lot less in fees than active funds. Index funds cost about 0.1% a year, while active funds cost anywhere from about 0.7% to 2% a year. The reason you invest in an active fund over an index fund is because you get the fund manager expertise in stock picking and risk management, which, in theory, should produce better returns for you.
Hearts and Minds Investments is an active fund, and so investors should expect better than index returns given the larger than index ‘cost’ of investing in HM1. As I mentioned last week, since we began in November 2018, HM1 has generated investment performance of about 43%, more than double what our index benchmark (MSCI World Net TR Index AUD) has returned. Additionally you will recall that our ‘management’ fee is a bit different to other active management fees, in that we donate it to the medical research institutes nominated by our managers, with the bulk of our other running costs provided on a pro bono basis by our very generous service providers. Nevertheless, our donation, in lieu of our management fee, at 1.5%, is greater than the cost of an index fund, so we have to deliver our investors better returns.
I hope this helps some of you understand why comparisons are made to ‘index’ benchmarks by us and other active managers.
The biggest news in our portfolio over the last week was the two podcast deals announced by one of our conference stocks, Spotify. One was with Kim Kardashian West, who, would you believe, is studying to become a lawyer, and has been quite outspoken on criminal justice and prison reform. She recently pleaded a first-time non-violent drug offender’s case to the White House, which resulted in a woman who had served 21 years in jail having her sentence commuted by Donald Trump. People want to listen to Kim K’s criminal podcast! The other deal Spotify announced was with DC Comics and Warner Brothers, who have agreed to produce and distribute an original set of scripted podcasts for Spotify.
Back in November, when Hamish Corlett of TDM Growth Partners pitched Spotify to the audience, he told us that the podcast market would be the catalyst for Spotify to jump ahead of its competition. Here we are 6 months later, and Spotify have signed deals with Joe Rogan Experience (one of the top ranked podcasts); Kim Kardashian West, and DC Comics/Warner Brothers. For the record, Spotify stock was up 28% last week alone, and has surged from just under $150 in November last year to just over $230 last week.
Next week, I’ll talk about one of our lesser known and understood stocks - GDS Holdings, which is listed in the US and operates data centres in China. It has performed exceptionally well for us, returning over 50% since being added in November last year. It’s another great example of the diversification you get in the HM1 portfolio, both in the types of stocks we own and indeed the managers who recommend them. Beeneet Kothari, from Tekne Capital in New York pitched GDS to our audience, returning to the Conference stage after presenting Pagseguro Holdings, the Brazilian merchant payment business in 2018.
Until then, have a great week, expect to see more volatility in markets around the world as fears of a second wave of COVID-19 make headlines, Donald Trump telling the crowd how lucky they are to have him as their President (yes, he did say that!), and year-end shenanigans and tax loss selling move share prices around.
Monday 15 June 2020
We sent out our latest monthly report last Tuesday morning. I was told over the weekend that some of our readers didn’t receive it. Whilst I’m not the most tech-savvy person around town (being over 50 is my excuse) I’m sure it goes out to everyone who has signed up. So, if you are reading this, then the Monthly should be somewhere in your inbox. If you use Gmail or Outlook, check your ‘other inbox’ (e.g. Promotions, Updates, Social, Other and failing those, your Spam folder) – it’ll be there somewhere! If you still can’t find it, email us at firstname.lastname@example.org (this email) and I’ll get it straight to you. You can also add our email address (email@example.com) to your contact list to prevent this automatic filtering from happening on future updates.
So far this month, our performance has been pretty flat, and that’s ok I think. There is a heap of market volatility right now, caused by the recent protests in the US, the way Trump has responded; fears of a second wave of COVID-19; economies gradually re-opening for business; and some opportunistic merger and acquisition activity with cashed up companies trying to take advantage of depressed share prices of competitors. Sometimes flat performance over the short term is good. Remember, we aim to deliver solid investment returns to our shareholders over the medium term, which is 3-5 years. Since we kicked off in November 2018, 20 months ago, our portfolio has generated investment performance of about 43%, which is more than double what our index benchmark has returned.
In portfolio news this week, the star call of our 2019 conference, Tesla, traded over $1,000 for the first time (before falling back late in the week as COVID-19 fears rattled markets again). Two other stocks in the conference portfolio also hit record highs; GDS Holdings (GDS NAS), and The Trade Desk (TTD NAS). On the other hand, since I last wrote, Smartsheet (SMAR NYS) reported quarterly earnings which disappointed investors, leading to a 20% share price decline, which erased our gains since investing in it back in November.
The core portfolio has also performed fairly well of late, in particular the technology focused companies we hold. However, the strengthening Aussie dollar, which briefly traded back over 70c last week, has pared back our performance.
Investors are always told to try and hold a diversified portfolio, so that one sector suddenly going awry isn’t too damaging to their wealth. Some people have said to me that they think of HM1 as a single stock in their diversified portfolio. Well, in one way I guess it is, since buying HM1 is exactly the same as buying BHP, CBA, Apple, or any other stock listed anywhere in the world.
What is important to understand though, is that by buying even a single share in HM1, you are actually buying a tiny piece of 30 different companies listed all over the world. If 1, 2 or even 10 of our stocks go down, but others don’t, your wealth should be somewhat insulated. Of course, in times of global meltdowns like the one we just experienced, almost every investment in every asset class will fall, HM1 included. No one is immune from that. But do remember that by buying HM1, you are getting exposure to the best ideas from almost 20 different managers, all of whom have different investment styles, sector specialties, regional focus, and disruptive technology understanding. Our team spent a long time picking the managers for this very reason.
This is why every shareholder of HM1 owns a stake in companies that operate data centres in China (GDS Holdings); that run a cloud based platform that allows buyers to manage and optimise data driven digital advertising campaigns (The Trade Desk); a mining services company (Mineral Resources); one that sells A2 protein type branded milk around Asia-Pacific, the UK & US (A2 Milk), and a host of other very diversified businesses.
To me anyway, that’s a whole lot more diversified than owning three banks, a few resource companies, Coles or Woolies, perhaps some insurance companies, and a couple of small cap miners or biotechs.
Send us an email if you have any questions or want to chat - firstname.lastname@example.org
Monday 1 June 2020
I hope you had a good weekend and got to enjoy the more relaxed social distancing restrictions.
The NTA’s we released this morning were $3.47 (pre tax); $3.32 (post current tax) and $3.19 (post all tax), which will also be our month end pricing levels when we measure our performance in the upcoming monthly update. At the start of the month these were $3.26, $3.12, and $3.04 respectively. Our share price continues to trade around the $3 level.
As we’re at month end, I’m only going to be brief today, while we prepare our more detailed monthly investor update. This will land in your inbox next Tuesday morning, after the long weekend.
I often get asked whether we increase the cash holding of the portfolio if we get nervous about markets, like other managers do. The simple answer to this is no. We remain essentially fully invested in the investment ideas for most of the year (we do have to keep some cash aside to pay the donation to the beneficiaries, plus tax and operating liabilities). The core portfolio (18 ideas from our 6 managers) is always fully invested. The conference stock recommendations are for a 12 month period only.
Sometimes the conference stock ideas will play out quicker than expected, and the Manager will recommend booking all (or some) of the profits. On other occasions a recommendation can go wrong and the position is cut for a loss. Either way, there are times when we realise cash during the year. So, what do we do with that money?
There are 3 choices:
- Leave it sitting in cash until the next conference;
- Redeploy it equally across the remaining conference recommendations; or
- Speak with each manager to see how much they believe the current share price is indicative of how much their original investment thesis still has to play out.
HM1 chooses option C. If a thesis is 90% of the way to its target price we would be very unlikely to invest more in that stock. If none of the idea has played out, then we will probably invest more into that stock. But, and this is important, we will only invest a portion of the proceeds into each stock where the manager believes there is substantially more upside, and then we leave the rest in cash. Simply, if half of the managers are keen for us to buy more, and half are not, then we will only redeploy half of the original sale proceeds. Once November comes around, the conference stocks that haven’t been sold are closed out and replaced with the new conference recommendations.
HM1 is an equity exposure investment, and as such we try to remain as fully invested as possible in the highest conviction ideas our managers recommend to us. We don’t try to ‘pick’ market moves, but rather give investors access and exposure to great ideas.
Send us an email if you have any questions or want to chat - email@example.com
Monday 25 May 2020
Over the last week our NTA (remember from last week, that is the total value of our shares plus the cash held in the bank, less tax and other liabilities) rose 2%, as did our share price. Our post current tax NTA is currently at $3.30. To put this in perspective, the highest it has been since inception is $3.44, back in late February before COVID-19 wreaked havoc on equity markets around the world. Our portfolio value has recovered all but about 4% of its peak value. The share price has not recovered as much and is trading some 15% below its peak value.
Why is that?
Here’s what I think…
People buy shares because they think the prices will go up, and they can make more money than leaving it in the bank, especially with interest rates at or near zero, like they are now. Most also know that shares are a riskier investment than cash in the bank, and that is why the expected return needs to be higher than the interest rate for someone to buy shares.
Why do people sell shares?
This is where it gets interesting. Logically, if you buy shares because you think they are going up, you sell them because you think they are going down. This is true, but what if you lose your job? You still have to pay your bills, right? With no income coming in, what do you do? Well, if you happen to own some shares, and you have no other means to pay those bills then you will probably be forced to sell your shares. Will you look really closely at the underlying valuation of your shares if you need the cash right now, or will you just sell the shares? Likewise, if you put some money into shares to pay for future school fees, when the first fee invoice arrives, do you look at what the shares are worth when you sell them? If they are in substantial profit, do you even really care? You’ve made good money, you can now pay for your kid’s education, so you almost certainly wouldn’t go through the process of saying to yourself, “these shares we bought at $1.00 ten years ago are now trading at $3.00, but they are worth $3.60, so I’m not going to sell them here”.
I could go on, but I think you get the picture. Many (but not all) people sell their shares when they need or want that money for something else. It could be income replacement to pay the mortgage, ‘the next great tech stock' the taxi driver told you about at 11:30pm on Friday night, or a new car, or engagement ring or whatever else.
The other reason people sell shares is for fear of capital erosion. If you think that the prices of the shares you own are indeed going to fall and therefore you will hold onto your existing wealth better by keeping more of it in cash, then that is absolutely a good reason to sell shares.
Remember this: capital preservation is sometimes more important than capital accumulation.
COVID-19 saw all of these scenarios play out at once. Many people have sadly lost their jobs (but still have bills to pay), companies are re-inventing themselves to survive in the New World we live in and suddenly look appealing to investors, and lots of people decided to preserve their wealth by selling all of their shares when the nightly news continually spoke of the dire outlook for the world, day after day after day.
This is why share prices often fall much faster than they rise - people ‘rush for the exit’ when they get nervous. Some investors in HM1 did that, and that is understandable. If you need cash, or you are worried about wealth destruction, you will sell your shares quickly, and often pay little attention to the valuation of those shares.
There are plenty of professional investors out there, many of whom try to take advantage of perceived pricing dislocations between a company’s share price and its valuation. We have no control over the short-term fluctuations in the share price of HM1, since that is affected by a combination of emotional and rational decisions made by investors. This is why we let you know what we think HM1 shares are actually worth by publishing our NTA weekly (and daily during the peaks of COVID-19), so that when the time comes for you to sell your shares, you can make the most informed decision for you and your family’s wealth based on your own circumstances.
Of the stocks recommended at last year’s conference that sit in the HM1 portfolio, Spotify has rallied quite strongly of late, increasing some 20% over the last week or so, after reporting an excellent set of numbers in its latest quarterly update. To see the profile we did on Spotify in February, click here.
Monday 18 May 2020
Thanks for the feedback last week on our Monthly Report - it's all appreciated, and we use it to try and make the update a better and more informative read for everyone.
The Post Current NTA we posted this morning was $3.23, more or less unchanged from last week's $3.24. The share price finished the week at $2.86, down slightly from last week.
We've had a few readers tell us they don't really understand what NTA means, let alone the difference between the three numbers we publish to the ASX each Monday (daily during the COVID-19 peak).
NTA stands for Net Tangible Assets. For a Fund, the only two tangible assets that exist are the shares we hold, and the cash sitting in the bank account. Net Assets means the liabilities incurred to get those assets need to be deducted. The main expense in any Fund is tax, followed by operating expenses (in the case of HM1 the semi-annual donation we make to medical research is an expense of the Fund, which we make instead of taking a management fee).
This week, our Pre Tax NTA was reported at $3.37 per share. This means that the total market value of the shares we own as at Friday night, plus the cash we have sitting with our Custodian, amounted to $3.37 per share issued. When HM1 was floated in November 2018, there were 200 million shares issued to shareholders. In December 2019, we issued a further 25 million shares at $2.50 to fund our newest Core Manager, TDM Growth Partners, so there are 225 million HM1 shares on issue today. At $3.37 this amounts to just over $750m of portfolio value.
The second number we report is the Post Current Tax NTA. This is the one I most frequently refer to in my updates. Current tax is the tax payable on all realised gains in the investment portfolio and on any operating profits. We actually go further and deduct the unrealised tax liability on the conference portfolio of stocks we hold. We do this because these stocks will only be held for a maximum of 12 months before we sell them. When those stocks are realised we don't want to show a sudden fall in the value of the portfolio as the tax liability increases, so we provision for it as it happens.
The third number we show is the Post Tax NTA, which by now, I'm sure you can define! It deducts the tax on both the realised and unrealised gains in the total investment portfolio, or more simply, how much cash per share we would have if we sold all of the shares, paid all of the tax due, as well as all other expenses owing.
So, which is the most relevant number to look at? Investors all have differing views on this, and no one number is the 'best' number in my opinion. Benchmark returns are all reported on a pre-tax basis, so when we compare our performance to a benchmark, we think it best to compare like-with-like, and this is why our comparison charts use Pre Tax NTA. As I said, I like to refer to Post Current Tax. Knowing what gains we have realised already means we know what the tax will be, and so we set this amount aside in an interest bearing cash account, and invest the rest. Post Tax NTA is the actual absolute cash value of the Fund if we were to liquidate all of the shares and therefore is also very relevant to shareholders when looking at the value of their investment. During the market sell-off in March, you will see that investors sold their HM1 shares well below their 'cash' value, such was the fear investors suffered during that time. So, when you see discount to NTA mentioned, this is what it means.
I hope this helps many of you better understand how the valuation of the portfolio is calculated.
In other news, you may have seen over the weekend that our favourite tweeter, Elon Musk from Tesla has been teasing investors about the next generation of batteries to be used in electric vehicles. Well, it looks like they have been designed to last for 1 million miles (that's 1.6 million kilometres!) of use and should allow Tesla to sell their cars profitably for the same price or less than a petrol powered vehicle. As you know, Tesla sits in the HM1 portfolio, and we profiled it in our January. This is one of the core premises of Cathie Wood’s investment thesis and helps explain the dramatic moves we have seen in the share price this year.
Monday 11 May 2020
By now you’ll have hopefully read the latest HM1 Monthly Report. If not, here it is. I hope you enjoyed the insights on market conditions direct from a few of our Managers, as well as what’s been going on at some of our nominated charities. Please feel free to share your feedback with us.
So, what has happened in the last week? Pleasingly, our post current tax Net Tangible Asset value increased again and finished the week at $3.24. This is up from $3.08 a week ago, which represents a gain of just over 5%. This afternoon, the share price was hovering just below $3. You may also have noticed that we have reverted to a weekly disclosure of our NTA to the Australian Stock Exchange. Hopefully we have seen the worst of COVID-19’s effect on markets, the daily moves in share prices certainly suggest this, with volatility now almost back to normal levels again. Of course, if there are any larger than normal moves in the value of our portfolio, we will report them to market as and when they occur.
I thought that this week I’d explain the effect exchange rates have on the value of our portfolio for anyone who isn't exactly sure.
HM1 holds stocks in six different countries, namely Australia, the U.S, U.K, Japan, Hong Kong and Canada. This means that whenever we buy a stock anywhere other than in Australia, we first have to convert some of our Aussie dollars into that country's currency so that we can buy the stock. When we eventually sell the offshore stock, we receive foreign currency back, and then at some stage convert it back into Australian dollars. If the currency has moved one way or the other, it will impact the Australian dollar return the portfolio makes (or loses) on that stock.
Let’s use Tesla as an example. Say we decide to buy A$10m worth and the exchange rate is 70c. That means we’d get US$7m for our A$10m, which can then be used to buy Tesla shares. Let’s say we bought them at US$350 per share. That gets us 20,000 shares. Now, let’s assume the share price doubles. Our 20,000 shares would now be worth US$14m. So, do we think we’ve made a 100% return on our investment?
Well, say the $A has fallen to 63c. At 63c, our Tesla shares are actually worth US$14m/0.63 = $A22.22m. Remember we started with $A10m? Our return would actually be 122% rather than 100%, with that extra 22% solely due to the move in the exchange rate.
So, a falling Australian dollar helps the value of offshore stocks, while a rising dollar will hinder the performance of international stocks for a local investor. Hopefully this better explains when I talk in the monthly report about our performance “despite the strengthening dollar” or “thanks to a weaker dollar”.
Monday 4 May 2020
With the month finishing on Thursday last week, it means the next monthly update is due out this week, so I won’t write too much here and instead will work on getting the monthly out asap.
For the week, the NTA rose from $3.01 to $3.08, and our share price increased by a similar amount. Tesla reported another solid quarter, which led to a strong rally in the share price the next day, and then Elon strangely tweeted that he thought the shares were overvalued, which of course sent the price back down. It is still about 100% higher than when Cathie Wood from ARK Funds bravely stood before the Conference audience last November and explained why she thought it was such a great investment. Spotify was another stock to report solid earnings last week, with its price rallying about 11% on the day. Some of our core stocks have also reported very respectable earnings, and with our sector tilt towards IT/communication style stocks, you can see why it has been a good week and month for HM1 shareholders.
In this month's investment update, we’re going to change it up a bit and have more stock detail in the investment commentary, and instead of doing a ‘Stock of the Month’ profile, we’re going to tell you a bit about the beneficiaries we support. I’m sure everyone is well aware by now that in lieu of a management fee, HM1 donates 1.5% of our Net Tangible Asset value to a host of medical research institutes. In March, we donated $4,133,750 (a six month amount) across 10 nominated charitable organisations. We’ll tell you a bit about the difference it’s making, how it’s decided which charities receive a cheque from HM1, and why those charities have been nominated.
Hopefully we will get the monthly out in the next few days, but until then May the 4th be with you!
Monday 27 April 2020
As you get to know my writing, you’ll see that I’m one of those people who, when there is very little to say, will say very little. This is one of those weeks for investors and watchers of HM1. Our share price rallied from $2.57 to $2.68 over the week, while our published NTA fell slightly, from $3.06 to $3.01, reflecting the fact that perhaps holders are less willing to sell the stock at such a discount to its Net Tangible Asset value.
One stock that did have a nice little bounce was The Trade Desk (TTD.NAS), which rallied about 12% for the week. TTD is a self-service, demand side platform (DSP) for advertising agencies and brands to purchase ad inventory available across several ad mediums. This is a company that has experienced above average growth over the last few years as a result of structural growth in the digital advertising space. The reason I mention this stock is that it’s a great example of a stock that investors get exposure to via HM1, who otherwise might be buying banks, resources or property trusts. More on TTD in our April monthly report next week.
Otherwise, reporting season continues in the US, while locally it’s all about which companies still need to raise fresh capital to shore up their balance sheets, with NAB hitting the GO button this morning. Reporting season and capital raisings often provide catalysts for mispricing in stocks (HM1 names and others) and so our Managers remain on constant lookout for any such opportunities that can enhance shareholder return. With our portfolio having realised some gains of late, we have cash ready to deploy should any such opportunities present themselves.
Monday 20 April 2020
Our latest post current tax NTA (net tangible asset value) reported to the market was $3.06, up from $2.88 just after Easter. The share price is currently trading at $2.60, which is a 15% discount to the published NTA.
Markets continued to rally last week, with talk of a potential viable vaccine out of Chicago providing further confidence that a low might be in place. Incredibly, the S&P500 has already bounced 25% off the low, set on March 25, a mere 3 weeks ago.
The question we have been asked most of late has been what we can do/are doing about the discount to the NTA that our share price is trading at. It’s a fair question too. For the majority of our listed ‘life’ since November 2018, the HM1 share price has traded either at a premium or small (2-3%) discount. Only since COVID-19 has the discount been so wide.
Why do Listed Investment Companies (LICs) trade at premiums or discounts? In my opinion it revolves around investor confidence in the likely ongoing investment performance of the portfolio. I think two factors come into play here - past performance, and transparency. When the returns of a LIC have been good, investors believe they will continue to perform well, and so the share price holds up. Likewise, when returns are poor, investors tend to think they might not be able to turn it around and exit the LIC, regardless of where it is trading relative to the NTA. This is where transparency is important. If the manager can provide confidence to its shareholders about what is being done when markets are in turmoil, there should be less ‘panic' selling than otherwise might be the case when market shocks happen.
This is why HM1 has been reporting our NTA to the public on a daily basis since COVID-19 rattled global markets. It is also why we have been sending this weekly update direct to your inboxes. Legislation only requires LICs to report their NTA on a monthly basis. Many do so more frequently, but not many provide it on a daily basis. We try to be as transparent as we possibly can with what we hold and do in our portfolio. We have always stated that it is not our place to disclose the highest conviction stock ideas of our core managers, other than in the Annual Report. With our conference stocks, we profile one of them each month, and we continually report on their performance. Where appropriate, we comment on how we manage risk around taking profits, cutting losses, and staying fully invested.
This pandemic caused an across the board shift out of equities and into the safe haven of cash. This is of course totally understandable. Equity markets have delivered super normal gains for many years since the GFC, and many investors wanted to keep as much of their gains as possible. So, they sold what they had, including their HM1 shares. For a while, no one was willing to buy equities at all, and so ‘good' stocks were sold along with ‘bad’ stocks just to raise cash. Eventually stocks got to levels where people started to again believe they were ‘cheap’, and so markets have bounced again. Whether we have seen the lows, no one really knows. What we do know is that the HM1 portfolio only has the highest conviction ideas of some of the finest fund managers in the industry. We have been actively managing our risk in consultation with those managers and believe that our portfolio is in a very sound position right now.
Because we are a closed end fund, we haven’t had to sell stocks to fund redemptions, but rather have been able to purchase stocks where our managers thought they were oversold. This is a major benefit of our structure compared to other managed funds.
By way of a brief look at our history, when the HM1 post current tax was last reported at the $3.06 level in November 2019 (i.e. todays level), the share price was trading at $3.10. Today it is trading at $2.60.
Tuesday 4 April 2020
I trust you enjoyed the Monthly Report we sent out last week in place of my weekly update. If not, you can check it out here. Today we posted a post current tax NTA of $2.88, up from $2.72 last week. Pleasingly, the share price has rallied from $2.31 to be at $2.46 this morning, although this is still a 14.5% discount to the published NTA.
Markets had a nice bounce last week, with the “COVID curves” appearing to flatten somewhat. Talks have now shifted to being more about potential easing of restrictions rather than what more can be imposed upon our communities. Companies continue coming out with revised guidance, with Westpac this morning announcing a $1.4B write-down due to the Austrac matter and COVID-19. The bank said it was struggling to accurately forecast what provisions it would need to take from credit losses arising from the COVID-19 crisis other than to say they would be "significant" and it would update the market before May 4. More companies have come to market seeking fresh investor capital, with QBE and Virgin the latest to do so today.
A few of the stocks in the HM1 portfolio had some solid bounces, as markets start to think perhaps we may have seen the worst of the crisis. Tesla rallied some 13% last night (yes, US markets were open on Easter Monday – they never close for more than 3 straight days), and 35% for the week, while Wizz Air (a European airline stock that was pitched at the last conference) rallied 26% over the week. Whilst it hasn’t been a fantastic performer for the portfolio so far, by checking in with our managers regularly, and understanding the investment proposition in the new climate we find ourselves, we were able to take advantage of the price move. Last months profiled stock, A2 Milk also continues to thrive in the current environment. The stronger Aussie dollar has been a detractor to our valuation this week given our exposure to offshore companies, while overall it has obviously been a positive for us. Some of the new core stocks have also performed well, noting that they were recommended on the basis of their profitability not being impacted by COVID-19.
No one knows when we will return to a state of normality again, or what that will even look like, but we do know it will be different.
Monday 30 March 2020
Before you read this week’s update, we'd love it if you bookmarked our website (www.hm1.com.au) and put a weekly reminder in your calendar to go to our site every Monday afternoon (at least) to read my blog, and all the other interesting information we want to share with you so you can be as fully informed as possible for everything HM1. For the time being we will continue to email the blog to you, but we are conscious about not filling up people's already full inboxes.
And so, to what happened in the last week...
We continue to report our NTA to the ASX daily, and update our website with the post current tax NTA and the current share price. This morning our published post current tax NTA was $2.73, up from $2.62 at this time last week. The share price is hovering around the $2.35 mark in trading today, although it touched a low of $2.20 earlier in the day.
As the country goes deeper into lockdown, people can now only leave their houses for essential reasons. Hundreds of thousands of people have suddenly become unemployed, unable to meet rent/mortgage payments, and unable to meet socially to console each other. Zoom parties are taking off. Businesses around the world have been forced to shut their doors, and they have no idea when, how, or even whether they will be able to make money 'on the other side' of this horrible outbreak. Every day companies are retracting or downgrading their earnings guidance, saying that they just do not know what is going to happen.
Hearts and Minds Investments have been on the front foot with our Managers in this time. All have been asked to give their expert opinions on the 6-12 month economic impact of COVID-19 on their stock picks. The responses have been wide ranging. Not everyone thinks their recommendations will perform in the Brave New World we suddenly find ourselves in like they did when they first recommended them to us. Some feel enthused about the future. Some have recommended new stocks which should not be impacted by COVID-19 but have had share price moves suggesting otherwise. Others think their stocks may have some unexpected leverage to the stay-at-home economy. Where changes have been required, we have acted swiftly. When we reduce a position in our conference portfolio, whether it is booking profits or cutting losses, we can redeploy the proceeds amongst the other conference stocks. We may not buy all of the stocks though (e.g., fear about what Trump might say next, upcoming earnings announcements, etc) in which case we leave some in cash. As always, this is done in consultation with our Managers. This strategy has worked well for us in the past.
Instead of a Management fee, 1.5% of the Funds value, as measured by NTA, is donated to medical research institutes each year. Earlier this month, we made a 6-month donation of just over $4m to the current suite of recipients. Our Core Managers each get to direct 10% of the donation amount to the beneficiary(s) of their choice. Why am I telling you this now? The better the Fund performs, the bigger the donation, the happier our shareholders, and the more enhanced the reputations of the Managers who have given us their intellectual property on a pro bono basis. They do not get paid by HM1 for giving us their highest conviction stock ideas. Conference managers stand up in front of 700+ investors and name their single best stock idea. They care very deeply about their recommendations.
It is in everyone's interests to see HM1 perform as well as possible, and in these difficult and uncertain investing times, know that the whole team is working as one unit to deliver our shareholders the best outcome we can.
Monday 23 March 2020
This morning we reported a post current tax NTA of $2.62, down from $2.82 last week. This is reported daily to the ASX and we keep our website updated live with both the current share price and the most recently reported daily NTA price.
How quickly this has become a one in one hundred year event has surprised everyone. Central banks have cut rates around the world, many countries have gone into lockdown, nearly everyone (HM1 staff included) are working from home, and we can no longer go to the coffee shop and talk with friends about what's transpired in the last month or so.
I was sent an article today titled "Double Black Swan". The term Black Swan was penned by Nassim Taleb in 2001, but came to prominence during the GFC in 2008-9. It is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, their severe impact, and the widespread insistence they were obvious in hindsight. Could COVID-19 be worse than the GFC?
Quite possibly. Companies around the world are withdrawing their profit guidance, which only adds to the volatility of share prices. These are uncertain times and prices will continue to be volatile. I remember the words of ECB President Mario Draghi back in 2012, when he said that Governments and Central banks would do "whatever it takes". I can't help but think the same will be done with this crisis, however long it takes to overcome.
Given some of the share price corrections we have experienced in the last month, with Tesla down over 50%, Mineral Resources -35%, some of the large US technology companies down 25%, our NTA has been hit pretty hard. We have been in touch with all of our managers during this sell-off, trying to understand the economic ramifications 6-12 months down the road for every single one of their stock selections. All remain confident that their stocks will survive this crisis. Some will thrive, while others will need to re-think their business models. Where we don't see a positive outlook, we already have, and will continue to act to mitigate that risk appropriately. Now is the time for prudent risk management of portfolios, and HM1 is working harder than ever to ensure we best preserve the capital of our shareholders during these incredible times.
Monday 16 March 2020
This morning we reported a post current tax NTA of $2.82, down from $3.08 a week ago. In case you haven't seen it, last week we started reporting our NTA to the ASX on a daily basis, with a view to keeping our investors better informed of our performance in these volatile times. We will continue doing this until markets steady once more.
Equity markets are not moving on company fundamentals. They haven't for over a month now, and most likely will continue not to do so for at least another month or two. Today ANZ bank is down 10%. Since late February (3 weeks ago) its value has fallen by about 38%. The fundamental value proposition of ANZ has not, in my opinion anyway, fallen by 38% in just 3 weeks. Perhaps it was overvalued before, but a 38% fall? Derivative markets have also played a part in the moves we are experiencing. Traders who have been 'short volatility' via the selling of option premium, have been forced sellers in downturns, which has served to exacerbate share price moves. We can expect this to continue when the bounce finally happens also.
Everyone is scared. The media have seen to that. People are scared because of the unknown, and that is fair. People are working from home. Cinemas, sporting events, restaurants and some schools are closing for the time being. The economic impact of this will hurt. Let's not deny that. Governments and central banks are doing everything they can, cutting interest rates and delivering rescue packages in particular. We will get through this.
This morning I saw some interesting figures regarding coronavirus and influenza. During the 2018-19 season, 42.9 million people in the US alone were infected by influenza, of which 647,000 were hospitalized and 61,200 died. To date Covid-19 infections globally are less than 1% of this number. What we have is a major, concerted effort to prevent a true pandemic from occurring, rather than an actual pandemic. In China, daily infections peaked late last month at over 5,000 per day. Within a month, this number has fallen to under 100. Food for thought.
When we see company fundamentals again driving share prices, investors can expect a V-shaped recovery in the prices of quality companies who haven't been as exposed to the virus as their share prices are currently suggesting.
Monday 9 March 2020
Today we reported a post current tax NTA of $3.08, down from $3.18 last week. Our share price finished the week at $2.96 on Friday.
This morning we woke to see oil prices down 30% (yes, 30%) after having already fallen 10% in trade on Friday night, after talks broke down between OPEC countries Saudi Arabia and Russia over production cuts triggered an all out price war, putting oil into freefall. Equity markets are in turmoil, with the ASX-200 down some 330 points, which represents a 5.3% decline, the largest fall since the global financial crisis. Our share price has also fallen in line with this today.
As we have been saying for the last few weeks, no-one knows how long this will last, and what the end game will be. Investors are getting out of equities as an asset class, regardless of the fundamentals of the underlying companies they own and fleeing to the relative safety of cash. Many companies will be hurt by coronavirus shutdowns, and/or much weaker oil prices, and some have come forward already, giving estimates of the expected impact to their profitability. We remain in regular contact with all of our managers, who are constantly re-assessing the risks of the stocks they have recommended.
In case you didn't see our monthly report, in line with our philanthropic objective, last week it gave us great pleasure to make our first financial contributions to a host of leading Australian medical research organisations. This will help with the development of new medicines and treatments and drive a new generation of medical research in Australia. When completed, this (six monthly) donation will amount to just over $4.1m. Overall, HM1 will be donating 1.5% of its net tangible assets per annum. The designated charities we are supporting are: Victor Chang Cardiac Research Institute; Black Dog Institute; The Florey Institute of Neuroscience and Mental Health; MS Research Australia; Orygen; RPA Green Light Institute; Swinburne's Centre for Psychopharmacology; Charlie Teo Foundation; and Brain and Mind Centre (USyd). We would like to thank our participating fund managers and service providers for their outstanding and continued generosity since listing.
Monday 2 March 2020
Today HM1 reported a post current tax NTA of $3.18, while our share price closed at $2.95 on Friday, and has been weaker again today.
Last week was a horrible week for equity markets. Before this, the S&P 500 had fallen 10% in one week just four times since the end of WW2. They were October 1987 (87 Crash), April 2000 (start of the Tech Wreck), September 2001 (9/11), and October 2008 (depths of GFC). And now February 2020.
Over the weekend we got Chinese PMI numbers that reflects the corona impact. It dropped to a record low of 35.7 in February, from 50.0 in January, below the 38.8 figure reported in November 2008. The non-manufacturing PMI – a gauge of sentiment in the services and construction sectors - also dropped to 29.6 from 54.1 in January, the lowest since November 2011
What we are seeing is clearly an asset reallocation event out of equities and back into safe haven assets i.e. cash. Investors would seemingly rather earn zero (or negative) interest on their money than own equities.
This has happened before, and it will happen again. Equities are a riskier asset class than cash - and so it demands a higher return for someone to take on the added risk. As I said last week, HM1 will not be immune to such moves. Our share price fell quite heavily last week, as some investors decided they would prefer to have their money sitting in cash rather than our portfolio. The media hasn't helped the investor cause, as they tend to sensationalise and dramatise market falls much more than market rallies.
We don't know the endgame of this coronavirus. We won't for weeks, and probably months. HM1 is invested in quality companies which should perform better than the overall market in the medium term.
Monday 24 February 2020
Today we posted a post current tax NTA of $3.44, up from $3.36 last week. Our share price is weaker today with coronavirus fears gripping global equity markets. Confirmed worldwide cases rose to 78,919 with 2,466 deaths after China’s Hubei reported 630 new cases and 96 deaths on Friday. In times of fear, investors will always sell equities and go to the safety of cash. HM1 will not be immune to such investor action, as our portfolio is a global equities portfolio.
Tesla resumed its 'up-crash' last week, rallying some 15% to again be back above the $900 level. In June last year, Tesla shares were exchanging hands at just $200. Another of our conference recommendations, Floor and Decor, which operates as a multi-channel specialty retailer of hard surface flooring and related accessories reported earnings and rallied some 8.5% over the week.
One of our core holdings also reported during the week, and as with Floor and Decor, its surpassed analyst expectations, and we saw a favourable price reaction in this stock as well.
As always, we remain in regular contact with our managers. Some are quite nervous about coronavirus, as we all should be. There remains so much unknown about this virus that we should expect cautionary investor behaviour to continue for the time being, at least until we know what we are dealing with.
Monday 17 February 2020
The blog is back!
Today we lodged a post current tax NTA of $3.36 and the share price is sitting at $3.50. This NTA number is slightly different to last years NTA, insofar as we are now including a provision for unrealised tax on the conference portfolio, which will be realised by November 2020. We do this so that we don't report a sudden drop in the NTA when all of the gains are realised.
Hopefully by now you have seen our monthly report for January, where we showed an investment gain of 5.6% for the month. In the report you will see a profile of Tesla and the views of ARK Funds founder and CIO Cathie Wood. A controversial pick, but one that has been extremely successful, with the stock having rallied from $350 in November to around $800 now.
Other notable performers in the conference portfolio have been GDS Holdings (GDS.US); The Trade Desk (TTD.US); and Mineral Resources (MIN.AX).
The core portfolio is also performing nicely, and our new Core Manager (TDM Growth Partners) have given us their 3 highest conviction stock ideas which have been added to the portfolio.
The fund now holds 30 stocks, with roughly 30% in locally listed companies and 70% in offshore names (predominantly in the US).
We have also created a Hearts and Minds LinkedIn page where we will actively share our monthly updates, weekly blog and other relevant content. Be sure to give the page a follow to stay up-to-date.
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