HM1 Weekly Investor Update: 29 March

Hi everyone

How spectacular is that full moon early in the morning at the moment?! I think Sunday mornings version could well be the most spectacular one I’ve ever seen.

Easter is upon us, and we’re almost through the first quarter of 2021 already. Wow.

Anyway…

As I’m sure our shareholders all know by now, post the February Board meeting we announced our first ever dividend. Eligible shareholders at the record date (8 April) will be entitled to a fully franked dividend of 12c per share. This can be taken either as a deposit into your nominated bank account, or you can participate in our Dividend Reinvestment Plan (DRP) where you will be allocated shares at a 2.5% discount to the volume weighted average price of the four days following the ex-dividend date (7 April).  Ladies and gentlemen, if you haven’t already nominated how you would like to receive your dividend and provided your bank details, can you please click here and let our friends at Boardroom Limited know through the online investor portal? If you don’t make an election, funds will be withheld until banking instructions are received. If you need assistance, you can email Boardroom at enquiries@boardroomlimited.com.au.

Today I’d like to talk a little about portfolio management. I’m pretty sure most of you are already comfortable that HM1 has a fairly ‘hands-on’ approach to the management of the 30-35 positions held in the portfolio. However, a discussion I had the other week warranted talking a little bit more about what we do with our managers.

The discussion went along the lines of “when we have reviewed HM1 in the past, we were concerned about the portfolio management process, which seemed more akin to a collection of high conviction stock picks from their respective partners, with a limited portfolio management overlay”. When I read this, I immediately asked when they had spoken to anyone at HM1 about how we manage our portfolio. Given we have just three employees, it was pretty easy to confirm that indeed no-one at HM1 had been involved in this so-called review. Maybe I’m old school, but if someone is out there expressing concerns about our portfolio management process, surely they would have spoken to us first, to find out what actually goes on, wouldn’t they?

So, it made me think that if this person thinks we have a ‘pretty limited portfolio management overlay’, how many others think the same? And does it mean potential investors are being talked out of buying shares in HM1?

Our six core fund managers each provide us with three investment recommendations, and 65% of the portfolio value is allocated to these 18 stocks. Each manager was allocated 1/6th of this amount at the outset, and they then suggest the proportion each of their three stocks should receive. Each manager has a formal quarterly review, where we discuss the performance of each stock and whether market moves meant the allocations were no longer optimal for the upcoming period. As well, whenever there is a market announcement or profit update in a stock, we do a live time review, where a position may be closed out, reduced or increased (which would be funded by reducing one of the other two holdings).

Our annual conference fund managers are allocated the remaining 35% of the portfolio value, as you would know. Given the maximum 12-month holding period, and depending on the underlying liquidity, each stock will be allocated an equal amount of capital each November. If the managers don’t articulate a 12-month target price during their presentation, then we seek out what they believe may materialise should their investment thesis and associated catalysts play out. As with the core managers, whenever there is a market announcement/profit update, we check in with the respective manager to assess whether their thesis has been affected by the update. If a target price is reached early in the period, then the manager is also contacted for review. This has obviously happened many times over the three sets of conference stocks that have been invested in so far. We’ve had numerous occasions where the target has been reached, but the manager firmly believes the catalysts haven’t even occurred and suggested holding onto the entire position with an amended target price. We’ve also had announcements that have materially changed the landscape and managers have told us they no longer believe the target is attainable. In these situations, we have closed the position out immediately. Just last December, we had one of our recommendations become the target of a takeover (Slack Technologies was taken over by Salesforce in the USA). Needless to say, there were discussions with the manager about whether it was optimal to participate in the takeover and take up Salesforce shares for the remainder of the 12-month period or take the proceeds in cash and reinvest elsewhere. As I’ve mentioned recently, Yeakha Limited had a substantial share price move in January/February, whereby the stock increased by 200% in the three months since Beeneet Kothari pitched it at the conference. Again, many discussions took place as to what was best for HM1 shareholders in this instance, and the recommendation to close out the entire position proved to be the right one so far, with the share price having re-traced a large part of the gain.

HM1 has an Investment Committee, which oversees and ratifies all decisions made by the Company. The Committee meets each quarter where a detailed review is undertaken of all facets of the portfolio. The portfolio management of HM1 is detailed and thorough, such that it is not uncommon for the manager to have commented on how quickly we have reached out to them for discussion of market moving announcements. In a world of heightened volatility where market moves seem far more severe than ever before, opportunities abound, and regular communication with our managers, all of whom are thoroughly committed to giving our shareholders the best outcome they can, ensures that we have what I believe is an extremely robust portfolio management overlay.

Thank you to the two readers who pointed out the error in my note last week, where I said that Marcus Aurelius was a Greek philosopher. In fact, he was a Roman Emperor who practised the Greek philosophy known as Stoicism.

 

Happy Easter, and stay safe,

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

 

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