CIO Insights - 17 May


Hi everyone

Well, for those of us living on the East Coast of Australia, winter has finally landed!
Let’s get into it...
Last week we released the monthly investment update (here it is if you missed it), where we reported a monthly investment gain of 3.5% for April, which was roughly in line with our benchmark, albeit a touch lower than the more visible S&P500/NASDAQ indices, which investors probably watch more closely than the MSCI World Net TR Index (in AUD).
Many of the responses we received off the back of the monthly were mostly about the share price decline, rather than the underlying performance, and questions were directed at why we thought the share price was weaker, why we didn’t really make much mention of the share price in our reporting, instead referencing changes in the NTA value of the portfolio.
Why do I think the share price has declined since February?

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

With the share price having increased from $2.50 at listing in November 2018, to a high of $4.80 in February 2021 – ie over 90% in 27 months, there were always going to be some investors who wanted to take some profits and invest the proceeds elsewhere. And that is fair enough, especially with new product offerings appearing almost daily. There are people who want or need the funds for something else; a new house either for themselves or their children perhaps; renovations, a new car, school fees – you name it – we all have things we want and need. And that is fair enough too. There will be people who have read the media and heard about the ‘Big Rotation’ out of growth stocks into cyclical stocks (which are meant to do well in times of supposed economic prosperity), opine that our portfolio holds more growth stocks than cyclical stocks, and conclude that HM1 may not fare so well in the near future. Yep, fair enough too. There may be people out there who decide they don’t like the HM1 strategy, or they may not like/rate the managers we have selected. Their choice. Lastly, there are investors out there who don’t like owning Listed Investment Companies (LIC’s) that trade at a premium to their NTA, given the number of LIC’s out there that trade at a discount.
So, there’s a bunch of reasons why some investors may (and probably have) sold their HM1 shares lately. Who buys them? Basically, investors who are, or think the opposite of what I just mentioned above. They like our managers and our strategy, they don’t need the cash right now, they believe quality stocks (growth or otherwise) will continue to compound in most economic conditions, or they simply believe the share price is cheap - in an absolute or relative (to NTA) sense.
What we try to do in these updates is to give as much transparency in how the underlying portfolio is performing. We cannot control whether Fred from Wagga Wagga (made up name) has decided to buy his son a property with the profits from his HM1 shares. If there are no willing buyers at the prevailing market price on the day Fred decides to sell, then Fred will likely instruct his broker to offer his shares at a lower price so that he can realise his proceeds. Similarly, Maud from Vaucluse (also a made up name) may have just been shown a wonderful investment opportunity that alleviates her own concerns about impending inflation on her investments, and so decides to exit her HM1 shares for a handsome profit. In both cases, if there aren’t active buyers on the day or week they decide to sell, the share price will fall.
I hope you can see the point I’m trying to make here. These are perfectly valid reasons to sell shares for these individuals. By regularly reporting the underlying Net Tangible Asset value of the portfolio, investors can make more informed decisions about whether they are buying or selling their investment for a ‘fair’ price. When we were trading at a hefty discount, like in the depths of the pandemic last year, I suspect many advisers recommended to their clients that the HM1 share price was indeed far lower than it should have been relative to the value it represented at the time. For those who held their nerve last year, they have been rewarded.
In October and November last year, the HM1 share price rallied by 8% and then 14% respectively, while the portfolio generated monthly investment returns of 1.5% and 2.5%. Clearly, some investors got very excited about the upcoming conference, and bought our shares quite aggressively, even though the actual returns of the portfolio were marginal. At the time, there probably just weren't very many willing sellers. The price was not as high as it has been in Q1 2021, the inflation story wasn’t spooking investors like it is at the moment, and most likely, people didn’t want to ‘miss the boat’ after seeing the returns from the previous conference recommendations. The consequence of this rapid share price appreciation, without concurrent investment performance was that the share price moved to quite a substantial premium-to NTA, and also quite a high absolute price. And this is why we report NTA performance rather than share price performance. By the way, the share price is freely available to anyone any time anyway! Investors can then assess their share price entry point with the current share price AND the NTA that best suits their financial situation.
Given the NTA has not rallied a great deal in 2021, it should be of no surprise that the share price has had some of the wind (premium) knocked out of its sails. Knowing the value of the portfolio helps investors make better decisions, just like knowing the value of an individual company helps. Share prices are not the best indicator of the value of a company. Rather it is just the price that willing buyers and sellers are happy to exchange their cash for those shares on a particular day. 
As always, we remain in constant contact with our managers, and conviction levels in the stocks we hold remains extremely high, and when pricing opportunities present themselves, we continue to take advantage of them. 
Stay safe

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

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


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DISCLAIMER: This communication has been prepared by Hearts and Minds Investments Limited (ABN 61 628 753 220). 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.