“The macro anxiety experienced in the past 12 months has been the worst possible environment for this type of company,” he said, referring to worries about the impact of the pandemic, the war in Ukraine, tensions with China, supply chain disruptions and inflation and subsequent interest rate rises.
The bulk of HM1’s portfolio is based on stock picks from its “core managers”, which include Caledonia Investments, Cooper Investors, Magellan Financial Group, Paradice Investment Management, Regal Funds Management and TDM Growth Partners.
Each core manager, who has a five-year term with a six-month notice period on either side, provides three stock picks that are reviewed quarterly, and forgoes management fees, which are then donated to charities. About $30 million has been given to medical research causes.
About 35 per cent of the portfolio is allocated to between 10 and 15 securities based on the annual recommendations from the fund managers who present at the conference.
Last year’s conference stock picks were tech-heavy, and included music streaming service Spotify, where shares are down more than 55 per cent since the start of the year, network service provider Megaport (down 56 per cent), semi-conductor group Onsemi (down 20 per cent), electronic group Techtronic (down 31 per cent), funds management group Pinnacle Investment Management (down 41 per cent) and restaurant delivery group Delivery Hero (down 65 per cent).
“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,” Mr Lucas told investors.
HM1 discloses its portfolio holdings each year on June 30, and back then, its two largest positions were Zillow and Mineral Resources. The fund has also begun disclosing when it exits major positions.
The chairman of HM1 is Chris Cuffe, and its directors include Matthew Grounds, Guy Fowler, Geoff Wilson, Weiss and Michael Traill.
The fund is also backed by some of the market’s highly regarded investors and business people.
Among some of the largest investors in Hearts & Minds are philanthropic foundations, including the Charles and Cornelia Goode Foundation, the Ian Potter Foundation and the Wilson Foundation.
Hamish Douglass’ Midas Touch Investments, Len Ainsworth’s Associated World Investments, philanthropist Jane Hansen and the Stokes family’s Wroxby vehicle were among the fund’s top 20 investors, according to last year’s annual report published in July.
HM1’s Mr Lucas told investors it was impossible to pick when the market sell-off would end.
“Anxiety always sends investors to the ‘sidelines’, with individuals preferring the safety of cash over the volatility of stocks…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,” Mr Lucas said.
He said re-examining the portfolio made sense in this environment.
“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.”
On Friday, HM1’s post-tax net tangible asset backing was $2.99. On Wednesday, shares were trading about $2.44.
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