HM1 Investor Update

Monday 13 July 2020

Hi everyone,
 
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.

Have a good week,

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

 

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Monday 29 June 2020

Hi everyone,
 
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!
 
Until then, have a great week, and stay safe.

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

 

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Monday 22 June 2020


Hi everyone
 
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.

Stay safe,

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

 

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Monday 15 June 2020

Hi everyone
 
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 ir@hm1.com.au (this email) and I’ll get it straight to you. You can also add our email address (ir@hm1.com.au) 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 - ir@hm1.com.au


Stay safe

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

 

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Monday 1 June 2020

Hi everyone
 
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:

  1. Leave it sitting in cash until the next conference;
  2. Redeploy it equally across the remaining conference recommendations; or
  3. 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 - ir@hm1.com.au
 
Have a good week and stay safe

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

 

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Monday 25 May 2020

Hi everyone
 
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.
 

 

Send us an email if you have any questions or want to chat - ir@hm1.com.au

Have a great week!

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

 

If you would like to receive these weekly updates direct to your inbox each Monday, sign up here.


 

Monday 18 May 2020

Hi everyone
 
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.

 

Send us an email if you have any questions or want to chat - ir@hm1.com.au
 
Have a great week,

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

 

If you would like to receive these weekly updates direct to your inbox each Monday, sign up here.


 

Monday 11 May 2020

Hi everyone
 
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”.
 

Send us an email if you have any questions or want to chat - ir@hm1.com.au
 
Until next week,

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

 

If you would like to receive these weekly updates direct to your inbox each Monday, sign up here.


 

Monday 4 May 2020

G’day everyone,
 
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!

 

Send us an email if you have any questions or want to chat - ir@hm1.com.au
 
Have a great week, 

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

 

If you would like to receive these weekly updates direct to your inbox each Monday, sign up here.


 

Monday 27 April 2020

G’day everyone,
 
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.

 

Send us an email if you have any questions or want to chat - ir@hm1.com.au
 
Have a great week, 

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

 

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Monday 20 April 2020

Hi everyone,
 
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.
 

Send us an email if you have any questions or want to chat - ir@hm1.com.au

 

Have a good week,

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

 


 

Tuesday 4 April 2020

Hi everyone

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.

 

Send us an email if you have any questions or want to chat - ir@hm1.com.au


 
Stay safe and stay home,

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

 

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Monday 30 March 2020

Hi all,
 
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.
 

Send us an email if you have any questions or want to chat - ir@hm1.com.au

 

Stay safe and please stay home. This is the best way to beat this.

Chief Investment Officer
Hearts and Minds Investments Limited

 

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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.   

 

Send us an email if you have any questions or want to chat - ir@hm1.com.au

Chief Investment Officer
Hearts and Minds Investments Limited

 

If you would like to receive these weekly updates direct to your inbox each Monday, sign up here.


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.

Send us an email if you have any questions or want to chat - ir@hm1.com.au

Chief Investment Officer
Hearts and Minds Investments Limited

 

If you would like to receive these weekly updates direct to your inbox each Monday, sign up here.


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.

Send us an email if you have any questions or want to chat - ir@hm1.com.au

Chief Investment Officer
Hearts and Minds Investments Limited

 

If you would like to receive these weekly updates direct to your inbox each Monday, sign up here.

 


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.

Send us an email if you have any questions or want to chat - ir@hm1.com.au

Chief Investment Officer
Hearts and Minds Investments Limited

 

If you would like to receive these weekly updates direct to your inbox each Monday, sign up here.


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.

Send us an email if you have any questions or want to chat - ir@hm1.com.au

Chief Investment Officer
Hearts and Minds Investments Limited

 

If you would like to receive these weekly updates direct to your inbox each Monday, sign up here.


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.

Send us an email if you have any questions or want to chat - ir@hm1.com.au

Chief Investment Officer
Hearts and Minds Investments Limited

 

If you would like to receive these weekly updates direct to your inbox each Monday, sign up here.