CIO Insights - 22 March

Hi everyone 

With the deluge currently hitting the East coast of Australia, I hope this finds you and your families safe and well. I heard a statistic on the news last night, saying that the overflow from Warragamba Dam was the equivalent of one Sydney Harbour per day – hard to fathom hey!

A relatively quiet week for us here at HM1 this past week, with no changes to the portfolio or any real change in portfolio value, which as we’ve said in the past is fine. So, today’s note will be briefer than usual.

I got an email from a shareholder last week asking why our cash holding in the portfolio was sitting at 17%, given we said we are a high conviction and concentrated fund that remained essentially fully invested at all times.

Great question John!

And worthy of explanation to our greater audience as I said to you in our email exchange.

The HM1 portfolio remains fully invested in the stock recommendations of our underlying managers (Core and Conference), except for our liabilities, namely capital gains tax, donations payable to the beneficiaries, the recent dividend we announced, and the minimal operating expenses of the business.

As you should know by now, the maximum holding period of the conference recommendations is 12 months. 35% of the capital we manage is allocated to these stocks. From the November conference just four months ago, we have already realised the gains from two stocks, namely Slack Technologies  (WORK.NAS) and Yeahka Limited (9923.HK), both of which delivered large profits to the portfolio. Whilst the proceeds have been mostly reinvested, we have indeed accrued further capital gains tax. Likewise, last year’s conference delivered the portfolio roughly 65% in gains, all of which is taxable. The tax due on these gains is payable in instalments, but it is prudent to keep upcoming liabilities covered by our cash holding.

Similarly, the recently announced dividend of 12c/share means that we will shortly be paying out up to $27m in cash, depending on the take up of our Dividend Reinvestment Plan. The other major regular cash outlay is the donation we make to our beneficiaries. As this is paid on a 6-monthly basis, we keep cash aside for this as well.

Perhaps we should be reporting our cash holding as a percentage of investable funds, which would alleviate any concerns as to how fully invested the portfolio is at any point in time. Regardless, know that your capital is as invested in the high conviction ideas our investment managers provide as much as possible. The only period when this is not the case is in the 3-month period leading up to the annual conference, when we do not reinvest the proceeds of realised positions back into the other names.

On a lighter note, I read a really insightful book over the weekend while it poured with rain, The Obstacle is The Way by Ryan Holiday. What a read! It’s about how we can turn life’s obstacles into opportunities, and recounts stories from the Ancient Greek philosopher Marcus Aurelius to Amelia Earhart to Steve Jobs. Well worth a read I say!

“The impediment to action advances action. What stands in the way becomes the way”  Marcus Aurelius (121-180 AD).

 

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.