CIO Insights - 26 July

Hi everyone

From the Tour de France and the British Open, sports viewing goes into overdrive for the next two weeks, with the 28th Summer Olympics finally kicking off. I heard an interesting variation for the traditional Olympic motto of “Citius - Altius - Fortius”  (Faster - Higher - Stronger) for this year’s edition….. Faster Higher Stranger! And how strange it is to see the medallists putting on their own medals! Such is the world with COVID-19. Congratulations to Richard Carapaz for winning the Men’s Road Race, just a week after his podium finish at TDF, in what was described as the toughest Olympic Road Race of all time. Congrats also to Anna Kiesenhofer from Austria, for taking out the Women’s edition yesterday. Commiserations to Ash Barty after losing in the first round – surprising after her stunning Wimbledon victory.
As you know, we have six core managers whose collective 18 investment recommendations make up 65% of our portfolio. We are so privileged to have on our team Caledonia, Cooper Investors, Magellan, Paradice, Regal and TDM Growth Partners, all of whom do their absolute best to help HM1 deliver on our investment goals. Given we have just finished the financial year, most fund managers will be releasing their own Annual Reports, Updates to investors, and updated annualised 1,3,5,10-year performance numbers. Magellan's Chief Investment Officer and Lead Portfolio Manager - Global Equities, Hamish Douglass, published his latest Annual Letter to investors last week, which you can read here. I have to say it was just fantastic, so I thought I’d share some of his comments in this note, as they are all relevant to HM1 shareholders and what we hope to deliver.
First of all – the title – The Importance of Remaining Rational. Brilliant. If ever there was a time that this mattered, it must be when equity markets are at all-time highs, interest rates are at all-time lows, and the world is gripped by the biggest pandemic of the last 100 years. Hamish mentions the great Charlie Munger of Berkshire Hathaway – “If you are not a little confused by what’s going on, you don’t understand it” – and that now is not the time to be overconfident.
Secondly, he mentions that while there is a strong case for today’s robust market conditions continuing over the next 12 months (economies reopening, accommodative fiscal/monetary policy etc); there is also a strong case for a major market correction (inflation re-appears, new vaccine resistant mutations of the virus, bubbles bursting etc). His view on what transpires? He says he doesn’t know. And how can he, or anyone really know? Time will tell. He believes that a more concentrated portfolio of high-quality companies that can thrive in different market conditions should outperform over the medium term (3-5 years) and that no company is immune to the short-term gyrations of equity markets.
He also explains why, even though fund managers performances are generally compared to benchmarks, with most global managers using one of the MSCI World Indices (we use the MSCI World Net Total Return Index in AUD), only some attention should be paid to the relative performance. This is because MSCI World Indices have up to 1,600 companies included in the calculation, compared to the 25 in Hamish’s global portfolio, or the 30 in the HM1 portfolio. Most benchmark indices contain companies from all sectors of the economy, while concentrated portfolios do not. So, in the short term, treat them as a bit of a guide, but generally take more notice of 3- and 5-year rolling returns and how these look compared to the stated objectives.
Hopefully you’ve recognised some of these insights in relation to HM1 as well – we try not to talk too much about short term performance and emphasise that our goal is to provide satisfactory returns over a 3–5-year period. Indeed, our performance in the 2021 calendar year has been less than our previous years, but via our regular contact with all of our managers, we believe our portfolio continues to be managed in the most rational way possible, given all of the uncertainty going on in the world right now. When circumstances change within a sector, or for a specific company, and it appears permanent, we do not hesitate to close out exposures to those companies.
And finally, vale to John Cornell, aka ‘Strop’ who passed away late last week after a long battle with Parkinson’s disease. I grew up watching the Paul Hogan Show (and sport of course) and have so many memories of the great man, especially those skols Hoges made him do!! What is less known about him was his influence in bringing World Series Cricket to life, and that he helped produce Crocodile Dundee.
R.I.P Strop.
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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