HM1 Blog

Monday 30 March 2020

Hi all,
 
Before you read this week’s update, we'd love it if you bookmarked our website (www.hm1.com.au) and put a weekly reminder in your calendar to go to our site every Monday afternoon (at least) to read my blog, and all the other interesting information we want to share with you so you can be as fully informed as possible for everything HM1. For the time being we will continue to email the blog to you, but we are conscious about not filling up people's already full inboxes.
 
And so, to what happened in the last week...
 
We continue to report our NTA to the ASX daily, and update our website with the post current tax NTA and the current share price. This morning our published post current tax NTA was $2.73, up from $2.62 at this time last week. The share price is hovering around the $2.35 mark in trading today, although it touched a low of $2.20 earlier in the day.
 
As the country goes deeper into lockdown, people can now only leave their houses for essential reasons. Hundreds of thousands of people have suddenly become unemployed, unable to meet rent/mortgage payments, and unable to meet socially to console each other. Zoom parties are taking off. Businesses around the world have been forced to shut their doors, and they have no idea when, how, or even whether they will be able to make money 'on the other side' of this horrible outbreak. Every day companies are retracting or downgrading their earnings guidance, saying that they just do not know what is going to happen.
 
Hearts and Minds Investments have been on the front foot with our Managers in this time. All have been asked to give their expert opinions on the 6-12 month economic impact of COVID-19 on their stock picks. The responses have been wide ranging. Not everyone thinks their recommendations will perform in the Brave New World we suddenly find ourselves in like they did when they first recommended them to us. Some feel enthused about the future. Some have recommended new stocks which should not be impacted by COVID-19 but have had share price moves suggesting otherwise. Others think their stocks may have some unexpected leverage to the stay-at-home economy. Where changes have been required, we have acted swiftly. When we reduce a position in our conference portfolio, whether it is booking profits or cutting losses, we can redeploy the proceeds amongst the other conference stocks. We may not buy all of the stocks though (e.g., fear about what Trump might say next, upcoming earnings announcements, etc) in which case we leave some in cash. As always, this is done in consultation with our Managers. This strategy has worked well for us in the past.
 
Instead of a Management fee, 1.5% of the Funds value, as measured by NTA, is donated to medical research institutes each year. Earlier this month, we made a 6-month donation of just over $4m to the current suite of recipients. Our Core Managers each get to direct 10% of the donation amount to the beneficiary(s) of their choice. Why am I telling you this now? The better the Fund performs, the bigger the donation, the happier our shareholders, and the more enhanced the reputations of the Managers who have given us their intellectual property on a pro bono basis. They do not get paid by HM1 for giving us their highest conviction stock ideas. Conference managers stand up in front of 700+ investors and name their single best stock idea. They care very deeply about their recommendations.
 
It is in everyone's interests to see HM1 perform as well as possible, and in these difficult and uncertain investing times, know that the whole team is working as one unit to deliver our shareholders the best outcome we can.
 

Send us an email if you have any questions or want to chat - ir@hm1.com.au

 

Stay safe and please stay home. This is the best way to beat this.

Chief Investment Officer
Hearts and Minds Investments Limited

 


 

Monday 23 March 2020

This morning we reported a post current tax NTA of $2.62, down from $2.82 last week. This is reported daily to the ASX and we keep our website updated live with both the current share price and the most recently reported daily NTA price.

How quickly this has become a one in one hundred year event has surprised everyone. Central banks have cut rates around the world, many countries have gone into lockdown, nearly everyone (HM1 staff included) are working from home, and we can no longer go to the coffee shop and talk with friends about what's transpired in the last month or so. 

I was sent an article today titled "Double Black Swan". The term Black Swan was penned by Nassim Taleb in 2001, but came to prominence during the GFC in 2008-9. It is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, their severe impact, and the widespread insistence they were obvious in hindsight. Could COVID-19 be worse than the GFC?

Quite possibly. Companies around the world are withdrawing their profit guidance, which only adds to the volatility of share prices. These are uncertain times and prices will continue to be volatile. I remember the words of ECB President Mario Draghi back in 2012, when he said that Governments and Central banks would do "whatever it takes". I can't help but think the same will be done with this crisis, however long it takes to overcome. 

Given some of the share price corrections we have experienced in the last month, with Tesla down over 50%, Mineral Resources -35%, some of the large US technology companies down 25%, our NTA has been hit pretty hard. We have been in touch with all of our managers during this sell-off, trying to understand the economic ramifications 6-12 months down the road for every single one of their stock selections. All remain confident that their stocks will survive this crisis. Some will thrive, while others will need to re-think their business models. Where we don't see a positive outlook, we already have, and will continue to act to mitigate that risk appropriately. Now is the time for prudent risk management of portfolios, and HM1 is working harder than ever to ensure we best preserve the capital of our shareholders during these incredible times.   

 

Send us an email if you have any questions or want to chat - ir@hm1.com.au

Chief Investment Officer
Hearts and Minds Investments Limited

 


Monday 16 March 2020

This morning we reported a post current tax NTA of $2.82, down from $3.08 a week ago. In case you haven't seen it, last week we started reporting our NTA to the ASX on a daily basis, with a view to keeping our investors better informed of our performance in these volatile times. We will continue doing this until markets steady once more.

Equity markets are not moving on company fundamentals. They haven't for over a month now, and most likely will continue not to do so for at least another month or two. Today ANZ bank is down 10%. Since late February (3 weeks ago) its value has fallen by about 38%. The fundamental value proposition of ANZ has not, in my opinion anyway, fallen by 38% in just 3 weeks. Perhaps it was overvalued before, but a 38% fall? Derivative markets have also played a part in the moves we are experiencing. Traders who have been 'short volatility' via the selling of option premium, have been forced sellers in downturns, which has served to exacerbate share price moves. We can expect this to continue when the bounce finally happens also.

Everyone is scared. The media have seen to that. People are scared because of the unknown, and that is fair. People are working from home. Cinemas, sporting events, restaurants and some schools are closing for the time being. The economic impact of this will hurt. Let's not deny that. Governments and central banks are doing everything they can, cutting interest rates and delivering rescue packages in particular. We will get through this. 

This morning I saw some interesting figures regarding coronavirus and influenza. During the 2018-19 season, 42.9 million people in the US alone were infected by influenza, of which 647,000 were hospitalized and 61,200 died. To date Covid-19 infections globally are less than 1% of this number. What we have is a major, concerted effort to prevent a true pandemic from occurring, rather than an actual pandemic. In China, daily infections peaked late last month at over 5,000 per day. Within a month, this number has fallen to under 100. Food for thought.

When we see company fundamentals again driving share prices, investors can expect a V-shaped recovery in the prices of quality companies who haven't been as exposed to the virus as their share prices are currently suggesting.

Send us an email if you have any questions or want to chat - ir@hm1.com.au

Chief Investment Officer
Hearts and Minds Investments Limited

 


Monday 9 March 2020

Today we reported a post current tax NTA of $3.08, down from $3.18 last week. Our share price finished the week at $2.96 on Friday. 

This morning we woke to see oil prices down 30% (yes, 30%) after having already fallen 10% in trade on Friday night, after talks broke down between OPEC countries Saudi Arabia and Russia over production cuts triggered an all out price war, putting oil into freefall. Equity markets are in turmoil, with the ASX-200 down some 330 points, which represents a 5.3% decline, the largest fall since the global financial crisis. Our share price has also fallen in line with this today.

As we have been saying for the last few weeks, no-one knows how long this will last, and what the end game will be. Investors are getting out of equities as an asset class, regardless of the fundamentals of the underlying companies they own and fleeing to the relative safety of cash. Many companies will be hurt by coronavirus shutdowns, and/or much weaker oil prices, and some have come forward already, giving estimates of the expected impact to their profitability. We remain in regular contact with all of our managers, who are constantly re-assessing the risks of the stocks they have recommended. 

In case you didn't see our monthly report, in line with our philanthropic objective, last week it gave us great pleasure to make our first financial contributions to a host of leading Australian medical research organisations. This will help with the development of new medicines and treatments and drive a new generation of medical research in Australia. When completed, this (six monthly) donation will amount to just over $4.1m. Overall, HM1 will be donating 1.5% of its net tangible assets per annum. The designated charities we are supporting are: Victor Chang Cardiac Research Institute; Black Dog Institute; The Florey Institute of Neuroscience and Mental Health; MS Research Australia; Orygen; RPA Green Light Institute; Swinburne's Centre for Psychopharmacology; Charlie Teo Foundation; and Brain and Mind Centre (USyd). We would like to thank our participating fund managers and service providers for their outstanding and continued generosity since listing.

Send us an email if you have any questions or want to chat - ir@hm1.com.au

Chief Investment Officer
Hearts and Minds Investments Limited

 


Monday 2 March 2020

Today HM1 reported a post current tax NTA of $3.18, while our share price closed at $2.95 on Friday, and has been weaker again today.

Last week was a horrible week for equity markets. Before this, the S&P 500 had fallen 10% in one week just four times since the end of WW2. They were October 1987 (87 Crash), April 2000 (start of the Tech Wreck), September 2001 (9/11), and October 2008 (depths of GFC). And now February 2020.

Over the weekend we got Chinese PMI numbers that reflects the corona impact. It dropped to a record low of 35.7 in February, from 50.0 in January, below the 38.8 figure reported in November 2008. The non-manufacturing PMI – a gauge of sentiment in the services and construction sectors - also dropped to 29.6 from 54.1 in January, the lowest since November 2011  

What we are seeing is clearly an asset reallocation event out of equities and back into safe haven assets i.e. cash. Investors would seemingly rather earn zero (or negative) interest on their money than own equities. 

This has happened before, and it will happen again. Equities are a riskier asset class than cash - and so it demands a higher return for someone to take on the added risk. As I said last week, HM1 will not be immune to such moves. Our share price fell quite heavily last week, as some investors decided they would prefer to have their money sitting in cash rather than our portfolio. The media hasn't helped the investor cause, as they tend to sensationalise and dramatise market falls much more than market rallies. 

We don't know the endgame of this coronavirus. We won't for weeks, and probably months. HM1 is invested in quality companies which should perform better than the overall market in the medium term.

Send us an email if you have any questions or want to chat - ir@hm1.com.au

Chief Investment Officer
Hearts and Minds Investments Limited

 


Monday 24 February 2020

Today we posted a post current tax NTA of $3.44, up from $3.36 last week. Our share price is weaker today with coronavirus fears gripping global equity markets. Confirmed worldwide cases rose to 78,919 with 2,466 deaths after China’s Hubei reported 630 new cases and 96 deaths on Friday. In times of fear, investors will always sell equities and go to the safety of cash. HM1 will not be immune to such investor action, as our portfolio is a global equities portfolio. 

Tesla resumed its 'up-crash' last week, rallying some 15% to again be back above the $900 level. In June last year, Tesla shares were exchanging hands at just $200. Another of our conference recommendations, Floor and Decor, which operates as a multi-channel specialty retailer of hard surface flooring and related accessories reported earnings and rallied some 8.5% over the week. 

One of our core holdings also reported during the week, and as with Floor and Decor, its surpassed analyst expectations, and we saw a favourable price reaction in this stock as well.

As always, we remain in regular contact with our managers. Some are quite nervous about coronavirus, as we all should be. There remains so much unknown about this virus that we should expect cautionary investor behaviour to continue for the time being, at least until we know what we are dealing with.

Send us an email if you have any questions or want to chat - ir@hm1.com.au

Chief Investment Officer
Hearts and Minds Investments Limited

 


Monday 17 February 2020

The blog is back!

Today we lodged a post current tax NTA of $3.36 and the share price is sitting at $3.50. This NTA number is slightly different to last years NTA, insofar as we are now including a provision for unrealised tax on the conference portfolio, which will be realised by November 2020. We do this so that we don't report a sudden drop in the NTA when all of the gains are realised.

Hopefully by now you have seen our monthly report for January, where we showed an investment gain of 5.6% for the month. In the report you will see a profile of Tesla and the views of ARK Funds founder and CIO Cathie Wood. A controversial pick, but one that has been extremely successful, with the stock having rallied from $350 in November to around $800 now. 

Other notable performers in the conference portfolio have been GDS Holdings (GDS.US); The Trade Desk (TTD.US);  and Mineral Resources (MIN.AX).

The core portfolio is also performing nicely, and our new Core Manager (TDM Growth Partners) have given us their 3 highest conviction stock ideas which have been added to the portfolio. 

The fund now holds 30 stocks, with roughly 30% in locally listed companies and 70% in offshore names (predominantly in the US).

We have also created a Hearts and Minds LinkedIn page where we will actively share our monthly updates, weekly blog and other relevant content. Be sure to give the page a follow to stay up-to-date.

Send us an email if you have any questions or want to chat - ir@hm1.com.au

Chief Investment Officer
Hearts and Minds Investments Limited