Your (un)Official Guide to Hearts & Minds 2019

Right now, the biggest names in Australian funds management are descending upon the Sydney Opera house ready to pitch their best investment ideas at the 4th Sohn ‘Hearts & Minds’ Investment Leaders Conference.

Hearts & Minds is the official Australian affiliate of the Sohn Conference Foundation, which was founded in 2006 to raise money for medical research. The concept was originally launched in 1995 as the Ira Sohn Research Conference, in recognition of Ira Sohn, a promising Wall Street professional who died from cancer aged just 29. As of 2018, the Foundation had raised more than $85million.

The Sohn Investment Conference has been labelled by some as the ‘Superbowl’ of investing conferences. Past speakers include heavy hitters such as Bill Ackman, Stanley Druckenmiller, Carl Icahn, Seth Klarman and David Einhorn, who famously used the forum to predict the collapse of Lehman Brothers.

Hearts & Minds draws inspiration from the flagship Sohn Conference by inviting speakers to pitch their best investment idea for the next 12 months in an 8 minute ‘TEDx-style pitch’. The 2019 event is headlined by Ray Dalio from Bridgewater Associates and Howard Marks from Oaktree Capital. The duo will take the stage and share their current thinking alongside Australia’s leading fund managers and aspiring investment talent.

It’s a great event and raises important funds to support medical research. However, it’s a bit of a pressure cooker for the fundies, who’ll be pitching their ideas to the top end of town. You can guarantee there will have been some deep thinking and probably a few sleepless nights as they settled on their nomination for the conference.

With all this talent ready to unleash their collective investment prowess surely it makes sense to have a think about how you might capitalise on the opportunity in terms of backing some of the picks. I’ve had a crack at outlining three different strategies below.

Strategy 1: The Hail Mary

The Hail Mary is not for the faint-hearted. Quite simply the approach entails reviewing all the stock pitches and taking a punt at backing the best ideas from the day. This strategy certainly has the potential to deliver handsomely with the top stock from the 2018 conference up ~120% in local currency.

However, the risks are high. While 11 of the 16 ideas presented in 2018 are in positive territory less than half have delivered performance above the 18.4% return from the MSCI World Net TR Index (AUD). The worst performing idea is down 33%, so there’s also a risk that you could dust a fair chunk of your capital if you're just backing a single idea.

There is some good news for those of you who still like The Hail Mary. The fundies with the two best performing ideas from 2018 are set to take the stage again in 2019. Local stock picker Jun Bei Liu from Tribeca enters the event with red hot form and global tech specialist Babak Poushanchi from Cota Capital is back after delivering the goods in 2018.

Below is a table showing the performance of the investment ideas from 2018 in Aussie dollars.

(click on the image to enlarge) 

Data provided by Bloomberg

Strategy 2: The Scatter Gun

If trying to single out the best few ideas isn’t your thing then one approach could be to hedge your bets and back each idea that gets presented. An equal-weighted investment across all ideas from the 2018 conference would have delivered local investors a 27% return (before costs) if they held the stocks for 12 months.

The Scatter Gun is far less volatile than The Hail Mary, gives you exposure to the best ideas but the upside potential is capped. Probably the biggest detractor from the strategy is that it is a pain to implement for the average investor. Many of the stocks are listed globally which comes with currency headaches, not to mention all the brokerage fees.

Strategy 3: Hearts & Minds Investments (ASX:HM1)

Holding the Hearts & Minds Investments LIC is the third strategy and was launched as part of the 2018 conference. In simple terms, it is a listed investment company that gives you exposure to most of the ideas presented at the conference. It sounds a bit like ‘The Scatter Gun’ but there’s more to it.

The HM1 portfolio allocates capital across two separate sets of stock ideas labelled ‘core’ and ‘conference’.

The Core Managers are Caledonia, Cooper Investors, Magellan, Paradice Investment Management and Regal Funds Management. 

Each of these firms is given 12% of the capital to allocate to their three best ideas. Fifteen ideas at roughly 4% per stock.

The remaining 40% of the capital is allocated to stocks that are pitched at the Hearts & Minds Investment Leaders Conference and are refreshed with new ideas each year. That works out to be between 10 – 15 ideas and when combined with the stocks nominated by the core managers HM1 ends up investing in between 25 – 30 stocks.

Rory Lucas is the Chief Investment Officer of Hearts & Minds Limited and, with the assistance of a well-credentialed investment committee chaired by David Wright from Zenith, is responsible for actively guiding the portfolio.

Liquidity screening is one of the first filters that is applied to the managing stocks pitched at the conference. With position sizes in excess of $15 million, getting in and out of a stock is an important consideration. For example, the portfolio did not invest in Austin Engineering, an illiquid stock with a market cap of ~$150 million that was pitched by Alex Waislitz from Thorney Investments.

Once stocks from the conference are included in the portfolio Lucas maintains a regular dialogue with the fund managers. If stocks run hard, he gives the manager the option to hold, reduce or cut their position. Jun Bei Liu nominated New Oriental Education (EDU.US) as her pick for the 2018 conference. The stock smashed through her 40% upside target within three months. When contacted by Lucas she took the opportunity to review the thesis which resulted in an increased price target, however, the position size was halved. The stock continued to rally, and the position was ultimately closed out in July. Lucas reckons he was able to capture about 75% of the upside created from the idea.

There will inevitably be stocks that don’t perform, it’s a fact. Things change, new information emerges, and the investment thesis can be broken. This is the case with Yangtze (6869.HK), which is down 33.8% in local currency terms. Lucas says this is one of two stocks that were cut from the portfolio and in the case of Yangtze the position was closed at breakeven, limiting the drag on performance.

Cash proceeds generated from selling positions are readily deployed. This can be done by asking if the managers want to add to their existing positions, which he reckons is a good sign of the conviction. Alternatively, a manager can choose to cut and replace their stock if the thesis is broken.

The October investment update for HM1 reports a portfolio return of 23.7% since inception on 14th of November 2018. That compares to an 18.4% return from the MSCI World Net TR Index (AUD) over the same period.

HM1 shares were issued at $2.50 each and currently trade at $3.12, effectively adding 24.8% for holders from the IPO. Interestingly, shares in HM1 have not suffered from the deep discount to net tangible assets (NTA) being experienced by many equity-focused LICs on the Australian market.

The other unique feature of Hearts & Minds Investments is that the vehicle also has a charitable goal. By waiving the typical investment fees Hearts & Minds Investments is able to donate a percentage of the Net Tangible Asset value (NTA) to charities that support medical research.

You see, it is possible to do good and make money.  

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