HM1 Weekly Investor Update

Monday 11 May 2020

Hi everyone
 
By now you’ll have hopefully read the latest HM1 Monthly Report. If not, here it is. I hope you enjoyed the insights on market conditions direct from a few of our Managers, as well as what’s been going on at some of our nominated charities. Please feel free to share your feedback with us.
 
So, what has happened in the last week? Pleasingly, our post current tax Net Tangible Asset value increased again and finished the week at $3.24. This is up from $3.08 a week ago, which represents a gain of just over 5%. This afternoon, the share price was hovering just below $3. You may also have noticed that we have reverted to a weekly disclosure of our NTA to the Australian Stock Exchange. Hopefully we have seen the worst of COVID-19’s effect on markets, the daily moves in share prices certainly suggest this, with volatility now almost back to normal levels again. Of course, if there are any larger than normal moves in the value of our portfolio, we will report them to market as and when they occur.
 
I thought that this week I’d explain the effect exchange rates have on the value of our portfolio for anyone who isn't exactly sure.
 
HM1 holds stocks in six different countries, namely Australia, the U.S, U.K, Japan, Hong Kong and Canada. This means that whenever we buy a stock anywhere other than in Australia, we first have to convert some of our Aussie dollars into that country's currency so that we can buy the stock. When we eventually sell the offshore stock, we receive foreign currency back, and then at some stage convert it back into Australian dollars. If the currency has moved one way or the other, it will impact the Australian dollar return the portfolio makes (or loses) on that stock.
 
Let’s use Tesla as an example. Say we decide to buy A$10m worth and the exchange rate is 70c. That means we’d get US$7m for our A$10m, which can then be used to buy Tesla shares. Let’s say we bought them at US$350 per share. That gets us 20,000 shares. Now, let’s assume the share price doubles. Our 20,000 shares would now be worth US$14m. So, do we think we’ve made a 100% return on our investment?
 
Well, say the $A has fallen to 63c. At 63c, our Tesla shares are actually worth US$14m/0.63 = $A22.22m. Remember we started with $A10m? Our return would actually be 122% rather than 100%, with that extra 22% solely due to the move in the exchange rate.   
 
So, a falling Australian dollar helps the value of offshore stocks, while a rising dollar will hinder the performance of international stocks for a local investor. Hopefully this better explains when I talk in the monthly report about our performance “despite the strengthening dollar” or “thanks to a weaker dollar”.
 

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

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

 


 

Monday 4 May 2020

G’day everyone,
 
With the month finishing on Thursday last week, it means the next monthly update is due out this week, so I won’t write too much here and instead will work on getting the monthly out asap. 
 
For the week, the NTA rose from $3.01 to $3.08, and our share price increased by a similar amount. Tesla reported another solid quarter, which led to a strong rally in the share price the next day, and then Elon strangely tweeted that he thought the shares were overvalued, which of course sent the price back down. It is still about 100% higher than when Cathie Wood from ARK Funds bravely stood before the Conference audience last November and explained why she thought it was such a great investment. Spotify was another stock to report solid earnings last week, with its price rallying about 11% on the day. Some of our core stocks have also reported very respectable earnings, and with our sector tilt towards IT/communication style stocks, you can see why it has been a good week and month for HM1 shareholders.
 
In this month's investment update, we’re going to change it up a bit and have more stock detail in the investment commentary, and instead of doing a ‘Stock of the Month’ profile, we’re going to tell you a bit about the beneficiaries we support. I’m sure everyone is well aware by now that in lieu of a management fee, HM1 donates 1.5% of our Net Tangible Asset value to a host of medical research institutes. In March, we donated $4,133,750 (a six month amount) across 10 nominated charitable organisations. We’ll tell you a bit about the difference it’s making, how it’s decided which charities receive a cheque from HM1, and why those charities have been nominated.
 
Hopefully we will get the monthly out in the next few days, but until then May the 4th be with you!

 

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

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

 


 

Monday 27 April 2020

G’day everyone,
 
As you get to know my writing, you’ll see that I’m one of those people who, when there is very little to say, will say very little. This is one of those weeks for investors and watchers of HM1. Our share price rallied from $2.57 to $2.68 over the week, while our published NTA fell slightly, from $3.06 to $3.01, reflecting the fact that perhaps holders are less willing to sell the stock at such a discount to its Net Tangible Asset value.
 
One stock that did have a nice little bounce was The Trade Desk (TTD.NAS), which rallied about 12% for the week. TTD is a self-service, demand side platform (DSP) for advertising agencies and brands to purchase ad inventory available across several ad mediums. This is a company that has experienced above average growth over the last few years as a result of structural growth in the digital advertising space. The reason I mention this stock is that it’s a great example of a stock that investors get exposure to via HM1, who otherwise might be buying banks, resources or property trusts. More on TTD in our April monthly report next week.
 
Otherwise, reporting season continues in the US, while locally it’s all about which companies still need to raise fresh capital to shore up their balance sheets, with NAB hitting the GO button this morning. Reporting season and capital raisings often provide catalysts for mispricing in stocks (HM1 names and others) and so our Managers remain on constant lookout for any such opportunities that can enhance shareholder return. With our portfolio having realised some gains of late, we have cash ready to deploy should any such opportunities present themselves.

 

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

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

 


 

Monday 20 April 2020

Hi everyone,
 
Our latest post current tax NTA (net tangible asset value) reported to the market was $3.06, up from $2.88 just after Easter. The share price is currently trading at $2.60, which is a 15% discount to the published NTA.
 
Markets continued to rally last week, with talk of a potential viable vaccine out of Chicago providing further confidence that a low might be in place. Incredibly, the S&P500 has already bounced 25% off the low, set on March 25, a mere 3 weeks ago.
 
The question we have been asked most of late has been what we can do/are doing about the discount to the NTA that our share price is trading at. It’s a fair question too. For the majority of our listed ‘life’ since November 2018, the HM1 share price has traded either at a premium or small (2-3%) discount. Only since COVID-19 has the discount been so wide.
 
Why do Listed Investment Companies (LICs) trade at premiums or discounts? In my opinion it revolves around investor confidence in the likely ongoing investment performance of the portfolio. I think two factors come into play here - past performance, and transparency. When the returns of a LIC have been good, investors believe they will continue to perform well, and so the share price holds up. Likewise, when returns are poor, investors tend to think they might not be able to turn it around and exit the LIC, regardless of where it is trading relative to the NTA. This is where transparency is important. If the manager can provide confidence to its shareholders about what is being done when markets are in turmoil, there should be less ‘panic' selling than otherwise might be the case when market shocks happen. 
 
This is why HM1 has been reporting our NTA to the public on a daily basis since COVID-19 rattled global markets. It is also why we have been sending this weekly update direct to your inboxes. Legislation only requires LICs to report their NTA on a monthly basis. Many do so more frequently, but not many provide it on a daily basis. We try to be as transparent as we possibly can with what we hold and do in our portfolio. We have always stated that it is not our place to disclose the highest conviction stock ideas of our core managers, other than in the Annual Report. With our conference stocks, we profile one of them each month, and we continually report on their performance. Where appropriate, we comment on how we manage risk around taking profits, cutting losses, and staying fully invested. 
 
This pandemic caused an across the board shift out of equities and into the safe haven of cash. This is of course totally understandable. Equity markets have delivered super normal gains for many years since the GFC, and many investors wanted to keep as much of their gains as possible. So, they sold what they had, including their HM1 shares. For a while, no one was willing to buy equities at all, and so ‘good' stocks were sold along with ‘bad’ stocks just to raise cash. Eventually stocks got to levels where people started to again believe they were ‘cheap’, and so markets have bounced again. Whether we have seen the lows, no one really knows. What we do know is that the HM1 portfolio only has the highest conviction ideas of some of the finest fund managers in the industry. We have been actively managing our risk in consultation with those managers and believe that our portfolio is in a very sound position right now. 
 
Because we are a closed end fund, we haven’t had to sell stocks to fund redemptions, but rather have been able to purchase stocks where our managers thought they were oversold. This is a major benefit of our structure compared to other managed funds.
 
By way of a brief look at our history, when the HM1 post current tax was last reported at the $3.06 level in November 2019 (i.e. todays level), the share price was trading at $3.10. Today it is trading at $2.60.
 

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

 

Have a good week,

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

 


 

Tuesday 4 April 2020

Hi everyone

I trust you enjoyed the Monthly Report we sent out last week in place of my weekly update. If not, you can check it out here. Today we posted a post current tax NTA of $2.88, up from $2.72 last week. Pleasingly, the share price has rallied from $2.31 to be at $2.46 this morning, although this is still a 14.5% discount to the published NTA.

Markets had a nice bounce last week, with the “COVID curves” appearing to flatten somewhat. Talks have now shifted to being more about potential easing of restrictions rather than what more can be imposed upon our communities. Companies continue coming out with revised guidance, with Westpac this morning announcing a $1.4B write-down due to the Austrac matter and COVID-19. The bank said it was struggling to accurately forecast what provisions it would need to take from credit losses arising from the COVID-19 crisis other than to say they would be "significant" and it would update the market before May 4. More companies have come to market seeking fresh investor capital, with QBE and Virgin the latest to do so today.

A few of the stocks in the HM1 portfolio had some solid bounces, as markets start to think perhaps we may have seen the worst of the crisis. Tesla rallied some 13% last night (yes, US markets were open on Easter Monday – they never close for more than 3 straight days), and 35% for the week, while Wizz Air (a European airline stock that was pitched at the last conference) rallied 26% over the week. Whilst it hasn’t been a fantastic performer for the portfolio so far, by checking in with our managers regularly, and understanding the investment proposition in the new climate we find ourselves, we were able to take advantage of the price move. Last months profiled stock, A2 Milk also continues to thrive in the current environment. The stronger Aussie dollar has been a detractor to our valuation this week given our exposure to offshore companies, while overall it has obviously been a positive for us. Some of the new core stocks have also performed well, noting that they were recommended on the basis of their profitability not being impacted by COVID-19.
 
No one knows when we will return to a state of normality again, or what that will even look like, but we do know it will be different.

 

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


 
Stay safe and stay home,

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited


 

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