CIO Insights - 23 Aug

Hi everyone

With the massive spike in COVID infections in NSW last week meaning the stay-at-home orders will likely last another couple of months, thankfully we still have our sport to watch on TV to help maintain our sanity. Footy finals time has arrived, the Vuelta a Espana bike race is on, the Fed Ex playoffs are here, the Paralympics start tomorrow, the US Open tennis is around the corner, and the Ryder Cup is almost here. Something for everyone!

Oh, and only one week of winter to go!

I haven’t mentioned our NTA’s for a while – they are published to the ASX every Monday morning and obviously we report them in the Monthly Investment Update as well. This morning the reported numbers were $4.35 (pre-tax); $4.15 (post current tax); and $3.96 (post all tax). The share price as I write is sitting at $4.32, so it is trading around the value of the portfolio on a pre-tax basis and at a slight premium to post-current and post-tax NTA.

Last week I talked about how I felt the biggest uncertainty facing investors at the moment revolved around what the Chinese Government is doing. They announced a sweeping overhaul of the education tech sector (a $100B industry), and they’ve stepped up scrutiny of the nation’s insurance technology platforms, widening the ‘regulatory dragnet’, which is roiling global investors.

You may recall that one of the stocks pitched at our 2020 conference was the locally listed Treasury Wine Estates (TWE. AX), owner of the premium wine brand, Penfolds, amongst others. Not long after the conference, the Chinese government imposed huge tariffs on Australian wines being exported to China, which obviously drew the ire of some shareholders, questioning why we would keep Treasury Wines in our portfolio, and that it was certain to fall in share price given the expected decline in sales to the region.

If we fast forward nine months back to the present, how has TWE performed? Pleasingly, the share price is up just over 40%, and in its most recent profit release, the company was able to announce a much higher dividend (up 62.5% to 13c/share) on the back of a slight increase in full-year net profit despite the challenges of losing its billion-dollar Chinese market (due to the tariffs) and all the supply chain disruptions caused by Covid-19.

This is what good (great) companies do. When faced with unexpected challenges to their business model, they re-invent, re-direct and re-emerge. In the case of TWE, some smart asset sales, and the new divisional split based on brand portfolios rather than regions have worked like a treat. And, with dollars that might have ordinarily been spent on holidays, it seems one of the changes consumers have made is to buy more luxury and premium wines, while other regions have gobbled up the wines that would have previously gone to China. Jun-Bei Liu from Tribeca Partners told the audience in November that she felt the share price had already factored in whatever tariffs might be imposed, and such was the quality of the brands they held, the demand for their wine would be there regardless – and this is exactly what has played out.

The other observation I wanted to make was about how commentators often use very short-term price fluctuations to make a story. The latest one all over the papers concerns the iron ore price, and how it has ‘capitulated’ / ’plunged’ / gone into ‘freefall’ in the last month or so. Yes, it has fallen, and seemingly quite a lot. But, and this is my point, take a look where it was a year ago, and three years ago, and it’s a very different picture – up about 25% over the last 12 months, and well over 100% over three years, despite the ‘massive correction’ of the past few weeks. I’d say they are still pretty good returns! The same applies to the bellwether stocks of the local index; BHP Limited and Commonwealth Bank of Australia (and many more of course, even HM1): fantastic one and three year returns, despite having not performed greatly in the calendar year 2021.

Next time you see a headline talking about how much has been wiped off the index on a particular day, or how something is in ‘freefall’, take a step back and have a look at the bigger and longer picture. Has the share price (or index, or commodity) perhaps simply run ahead of itself, and is just coming back a bit? Looking at a couple of different time frames (I think one & three years are pretty good) will often tell a different story, and probably calm your nerves at the same time. Regular contact with our expert managers involves discussions about whether new news released about a company is actually a game changer, or in fact, just noise. Most of the time it’s the latter.

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.



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