CIO Insights - 1 February

Hi everyone 
Well, there goes another January – that was pretty quick hey!

As you probably know by now, we publish our end of week NTA’s to the Australian Stock Exchange every Monday morning, so they are freely available to anyone with an internet connection. These are estimates, which are independently confirmed by our Fund Administrator, Citco Fund Services by Tuesday afternoon on the same week. If there were to be a material error in our estimate, a correction notice would then be lodged. Fortunately, we have not had to do this so far.

The NTA estimates for last Friday, which also serve for the end of month performance calculations, were $4.28; $4.00; and $3.84, against the previous months numbers of $4.13; $3.93; and $3.74. A calculator will give you a rough guide of our performance for January, which will all be confirmed in the upcoming Monthly Investment report, which will come out early next week.

In portfolio news, the biggest move we have seen in the conference names has undoubtedly been one of the Hong Kong stocks that was pitched by Beeneet Kothari from Tekne Capital Management in New York. Yeahka (9923. HK) has rallied 110% since the New Year. I’ll write more about this in the Monthly update, but suffice to say, moves like this, along with Beeneet’s ongoing advice about the stock, hopefully give our investors some comfort in the crazy investment world we find ourselves in right now. Obviously not everything has performed as well this month, and in particular, the stocks that derive revenues in USD are lacking investor support right now. As I said a couple of weeks ago, we’ve made a couple of exciting changes to the core portfolio and look likely to make another 1-2 shortly. All of our managers, both core and conference, remain highly engaged with us, as they all understand and appreciate the tricky navigation required in the current environment.

The other topic I will give my 2c worth on this week (and please note that this is not investment advice, rather just my own personal views) is on what has been happening in the US recently with GameStop, Reddit, platform providers, and whether retail investors should be restricted from trading, when hedge funds and other professional fund managers are free to buy and sell whatever they like. I’ll use GameStop as a proxy for all the names that the contentious trading has been conducted in. Hedge funds have done some fundamental research into whether they think GameStop can be a sustainable business. They believe that it most likely cannot compete in the current operating environment and conclude that the share price will decline. And so, they short sell the stock, and then wait for their investment thesis to play out (ie see the share price fall).

Sometimes the professionals are right, and sometimes they’re not. That’s a fact of life in markets. The difference with short selling is that when a position goes wrong, the position actually becomes a larger portion of the portfolio, unlike a ‘wrong long’ position. In the age of disclosure, short positions that have been placed are now readily accessible to the public. If a stock is not highly traded, its share price can move around quite a bit even with no new news. So, if a public forum (Reddit) tells its readership that there is a big short position in a company called GameStop, and if a large group of retail investors/punters were to all start buying that stock, its share price would no doubt rally in the short term, regardless of the fundamentals of the company. If there was no more short selling around, the price move could be quite violent, which it was. As the now ‘losing short’ position has become a larger part of the short sellers portfolio, risk management protocol might dictate closing or reducing the position, which would likely serve to drive the share price higher again, enabling the retail investors/punters to close their positions for a handy profit. And this is what has happened.

If this all sounds fair enough, consider these points. The retail guys have bought what appears to be a fundamentally poor/unviable investment based on expert balance sheet/P&L analysis; probably been given ludicrous amounts of leverage to buy a position size that they could not afford to buy and with little/no background checks as to whether they could afford any losses should their (very levered) positions go bad. If you can buy a $100,000 position and only have to stump up $5,000 of cash, and the position falls 50%, not only have you lost your entire equity of $5,000, but you now have an additional debt of $45,000.

How many of these retail guys do you think are aware of that? My view? Not many. It’s all great when the guys on Main Street are making money off the Wall Street guys, but we all need to remember that those Wall Street guys have done the hard work/analysis on the companies they short sell. Like I said before, sometimes they are right, and sometimes they aren’t. But buying a poor company just because a collective herd may temporarily move the share price against the professionals doesn’t sound like a good way to invest your money to me. As we learnt as children playing musical chairs, when the music stops, sometimes there just aren’t enough chairs for everyone to sit on.

I’ll back the pro’s, like the managers in the HM1 family, any day of the week.


Stay safe,

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

Reminder: these are simply my general views and should not be taken as investment advice


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



DISCLAIMER: This communication has been prepared by Hearts and Minds Investments Limited (ABN 61 628 753 220). In preparing this document the investment objectives, financial situation or particular needs of an individual have not been considered. You should not rely on the opinions, advice, recommendations and other information contained in this publication alone. This publication has been prepared to provide you with general information only. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. Past performance is not a reliable indicator of future performance. This document may not be reproduced or copies circulated without prior authority from Hearts and Minds Investments Limited.