CIO Insights - 18 January

Hi everyone 

I hope you had a good Christmas/New Year’s period and got to do some of the things you’ve been wanting to do in your time off. 

Since we signed off for 2020, our Net Tangible Asset value are little changed, and were reported to the ASX this morning at $4.17 (pre-tax); $3.92 (post current tax); and $3.78 (post all tax, ie the cash value per share if we closed all positions and paid all taxes due).  

Since mid-December, the Australian dollar has continued to appreciate, which hurts our investment performance. By way of example, our Bill.com position, as recommended by Babak Poushanchi of Cota Capital, is up 30% in US dollars since November, while in Australian dollars we are up just over 22%. While clearly still a fantastic return in 2 months, it’s important to understand the impact and quantum of Australian dollar moves on the portfolio. In 2019, when the dollar was falling against the US and other currencies, this provided a cushion to our returns. From March 2020 the dollar has rallied from a low of USD56c back to 77.5c, which makes the calendar 2020 HM1 investment return of 35% a very solid performance indeed. 

As you know, we don’t disclose the holdings of our core portfolio out of respect to our Core managers. Their highest conviction stock ideas are their intellectual property, and it is their business to disclose those should they desire to do so. What I can tell you is that over the past month we have made three changes to
our Core portfolio, all of which are extremely exciting investment ideas. In the coming month, it is likely that we will make 1-2 more, as our Core managers are seeing even more compelling investment ideas with the changed investment landscape we find ourselves heading into this year.

A quick reminder of how our Core managers interests are aligned with those of our shareholders. Whilst they do not receive any compensation from HM1 for providing us with their best investment ideas, each Core manager gets to direct 10% of the total annual Donation amount (1.5% of NTA) that HM1 delivers, to a medical research organisation/s of their choosing. As I am sure is the case with most of our readers, all of our Core managers have a medical story close to their hearts; be it losing a loved one to a heart attack, family members (or themselves) dealing with mental health problems, or any number of medical traumas. The higher the NTA of the portfolio, the larger the donation we make to our beneficiaries. This year we expect it to be just over $12 million dollars. And this, quite simply, is why our Core managers, who are responsible for how 65% of our capital is deployed, want to see HM1 perform as well as possible. 

You will notice that in our weekly and monthly investor updates we talk mostly about NTA performance and rarely about share price performance. In mid-2020, not long after the fiscal year ruled off, I was asked to explain why this was the case, as the investor had been led to believe that Listed Investment Companies often ‘hide’ behind NTA returns when share price movement is the true measure of investment performance.  

A great quote by Warren Buffett’s mentor, Benjamin Graham, is that “in the short run, the market is a voting machine but in the long run it is a weighing machine”. And this is at the heart of why we talk about NTA instead of share price. Share prices often fluctuate wildly on a daily basis, even though the underlying value of the companies hasn’t changed much (look at Tesla for instance). When stocks are popular, people jump in, and similarly, when they go out of vogue, people run for the hills.  

It’s a popularity contest in the short term. Managements job is to keep investors as abreast of company developments as is possible, so that they (you) can make the best investment decision for your individual circumstance. And this is what regular publishing of our NTA gives you – a true indication of the inherent value of your shareholding (on three levels). When you compare this to the share price, you will get an idea of how ‘popular’ the stock is at a given point, and the faith that investors have in management to deliver on the potential investment performance that led you to buy in the first place.  

So, in the short term, share prices move with popularity (often what is reported in the media), momentum (another form of popularity), what high frequency traders are doing, margin calls and the like. Over the longer term, the share price performance of a listed investment company should track the NTA performance, which, as we reported in our December monthly update, HM1 was able to do over the full year of 2020.

 

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.