Hi everyone
 
When HM1 was created back in 2018, after two successful conferences in 2016 & 17, we told potential investors that our portfolio would be populated with the highest conviction investment ideas from our two sets of managers – Core and Conference. Our five (now six) Core fund managers would each give us three medium to long term stock recommendations, while our Conference fund managers would each present their highest conviction investment idea that they believed would deliver a solid 12-month return to the portfolio. As you know, the conference recommendations are refreshed each year. We also told our audience that we would always be fully invested, apart from the lead-up to each annual conference, during which time we would be liquidating the remainder of the conference portfolio, which represents 35% of the capital allocated.
 
For the first three years of our existence, everything worked more or less like clockwork. Returns were impressive, despite some stocks going awry, with some conference recommendations delivering triple digit single year returns for our shareholders. With very little portfolio construction, other than weighting core vs conference, and factoring liquidity into position sizing, HM1 was performing pretty well.
 
As we all know, the last 12 months have been extremely difficult. I saw a great descriptor this morning – “macro anxiety” – which pretty much explains what is going on in markets right now. The ever-changing pandemic, the war in the Ukraine, tensions with China, and the supply chain disruptions which have caused inflation to spike heavily, which has caused interest rates to rise have all hit investors at once, with seemingly overvalued, yet-to-be-profitable ‘spec-techs’ bearing the brunt of the action.
 
Anxiety always sends investors to the ‘sidelines’, with individuals preferring the safety of cash over the volatility of stocks. And this is totally understandable. Different people have different timeframes, and when they see their gains evaporating before their eyes, many will take what’s left of their capital and put it in the bank. When everyone rushes for the exit (so to speak) at the same time, prices will distort, or overshoot. Every time. How many more people still want out this time? Your guess is as good as mine. Maybe we’re near the end of this sell-off, or maybe there is another wave of selling to come. No one knows just yet. What I do know is that the very best investors always come back to the fundamentals of the companies they invest in, and once again, we are in reporting season in the US – where we get to go ‘under the hood’ of our businesses to see how things are. This week we’ve seen many of the tech giants report – Alphabet, Amazon, Microsoft, Visa and Facebook… and Apple overnight. So far these companies have shown good health, which may be a catalyst for some sort of change in sentiment. Watch this space.
 
Drawdowns hurt though.
 
We have not been immune to this. Our investment performance for the last 12 months has been very disappointing. I have mentioned this before, so I’m not going to go on about it, other than to remind readers that our share price is now trading at a discount to the Net Tangible Asset value of the portfolio we hold.
 
So what have we done about it?
 
As I announced in my last note, and demonstrated in our last monthly update, we are now showing greater transparency in our core portfolio holdings. We reported that we had exited Netflix and Tyro Payments, and replaced them with Visa and Block (formerly known as Square). The recent update, and ensuing selloff in Netflix hopefully gave some comfort to investors that when our managers lose conviction in an investment, we do something about it. The Visa update this week has also pleased investors.
 
Regarding our conference portfolio, we also mentioned in the monthly that our current model had resulted in an increased concentration of mid-cap emerging technology companies. The macro anxiety experienced in the past 12 months has been the worst possible environment for this type of company. In response to this, we have formed a separate Fund Manager Selection Committee, who are tasked with finding and recommending a broader selection of fund managers in terms of investment styles and sector focus. Before the conference in November this year, the recommendations will be analysed for various risk factors, correlations and sector exposures, as a stand-alone portfolio. If we see excessive risk characteristics from the analysis, we may recommend that a manager recommend a different stock.
 
Whilst this will not change the overall investment strategy of HM1– it will still be a portfolio of high conviction recommendations from respected fund managers – there will now be more science applied, which should, hopefully, lower the extent of future drawdowns in our portfolio.
 
This morning I read a fantastic update from one of the members of the HM1 ‘family’. They too spoke about drawdowns, and how they are a natural part of any investment journey. They quoted from Morgan Housel’s book, The Psychology of Money - “Volatility is the price of admission. The prize inside is superior long-term returns.”
 
I strongly recommend you have a read of this excellent article from Chris Demasi at Montaka. It really is quite prescient for the times we find ourselves in right now.

 

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.