CIO Insights: Transparency

Hi everyone
We were all stunned to hear the news of Australia’s favourite sportsperson Ash Barty announcing her retirement from tennis at the ripe young age of 25. I guess if you lose the will, you quickly lose the way. My guess is that she tries her hand at golf… apparently, she won her local Club Championship in her very first attempt! We love you Ash!!!
But back to markets…
The share price volatility we are seeing these days is unprecedented. The first thing I do each morning is look at the price movements of our offshore stocks and whether, if any stock specific news has been released in any of our companies. No longer am I surprised to see movements of 10% in a session. Think about that for a minute. Can the value of a company really change by 10% (or more) (up or down) overnight? Unlikely hey? Daily share prices are indicators of what investors are willing to pay at a point in time to join the ‘rollercoaster ride’ of that company. I’ve spoken before about the famous Benjamin Graham quote about how in the short term the market is like a voting machine, tallying up which companies are popular or not, while in the long term it's like a weighing machine, and eventually solid fundamentals come out in a company’s share price. Given every single investor has their own view about what constitutes short and long term, this hopefully helps explain why we see the daily volatility we do. Millions of institutional investors, private investors, day traders, and high-frequency traders all hit the buy and sell buttons every single day.
The Net Tangible Asset value of our portfolio had a good week last week, recovering a small part of the previous markdowns we have seen. The pre-tax NTA rose to $3.28, up from $3.07 the previous week, while the post-tax NTA enjoyed a similar increase, rising to $3.32 from $3.17. The share price is trading around $3.00, meaning we are currently trading at about an 8.5% discount to the pre-tax value of the companies we hold. No changes have been made to the portfolio this week.
Since we began just over three years ago, we have made it clear that out of respect we have chosen not to publicise the highest conviction ideas of each of our six core managers. We believe that this is their intellectual property, and it is not our place to disclose such information, especially as they all provide their recommendations to HM1 on a completely pro-bono basis. Of course, we do have a statutory requirement to disclose all of our holdings as at June 30 each year, in our Annual Report (released in late August). What this has meant for our shareholders is that 65% of the portfolio is kind of like a ‘black box’, which is rarely opened. It also means that shareholders don’t know when a core stock holding has been sold, nor what it has been replaced with, which ultimately requires more faith in HM1 management and our managers.

I have spoken with each of our core managers about this recently, and all are of the view that more transparency can only be a good thing for everyone. There is no need to attribute which stocks were recommended by which managers, but we are now comfortable to make more mention of recommendation changes in our monthly updates.  
Our managers care deeply about the performance of the portfolio, and with the turmoil we’ve seen with the pandemic, and now the geopolitical tensions between Russia and Ukraine, and the altered investment landscape we now find ourselves in – namely rising interest rates and inflation (transitory or not, we are yet to really know), we added some commodity exposure to the portfolio late last year, while trimming a long held local resource company at excellent levels in late January. We’ve also recently made changes to the financials/payments holdings we have, while one of the Chinese holdings was quickly sold in July last year when concerns about Chinese government/regulatory oversight started rattling investors in the region.
I don’t think we need to be too historical about the trades we’ve done, rather just understanding that we have made many excellent adjustments in the past and can now be more transparent with future tilts to the portfolio, so that shareholders can make more informed investment decisions.
As usual, I’ll be back with more Insights after the next Monthly Investment report is released in the early days of April.

Until then, 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) and may contain general information relating to HM1 securities. The general information should not be considered financial advice. HM1 is not licensed to provide financial product advice. The information does not consider the investment objectives, financial situation, or particular needs of any individual. The information is current as at the date of preparation and is subject to change. HM1 does not guarantee repayment of capital or any rate of return on HM1 securities. An investment may achieve a lower-than-expected return and investors risk losing some, or all, of their principal investment.  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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