Monthly Listed Investment Trust Report – Aug 2024

Australia | Aug 12 2024

A Listed Investment Company (LIC) is a listed investment vehicle that offers investors access to a diversified portfolio of shares in other companies also listed on the stock market.

Note: For comprehensive comparative data tables for LICs and ETFs please see attached (logon required).

Hearts & Minds Investments Limited ((HM1))
During the month we completed a review of Hearts & Minds Investments Limited (ASX: HM1). HM1 is designed to provide exposure to the highest conviction ideas of a select group of fund managers.

The Company was established on the back of the Sohn Hearts and Minds Investment Leaders Conference, an annual conference in which participating fund managers provide their highest conviction investment idea for the year. Funds raised from the Conference are donated to medical research organisations.

In the initial years of the Conference, the investment ideas performed extremely well and HM1 was created to provide a vehicle for investors to gain exposure to these investment ideas while providing a vehicle to raise additional funds for medical research.

The investment strategy of HM1 is unique with the portfolio constructed from recommendations from two groups of fund managers: (1) Conference Fund Managers (35%) fund managers that present at the annual Sohn Hearts and Minds Investment Leaders Conference; and (2) Core Fund Managers (65%) select group of fund managers that provide their three highest conviction ideas.

HM1, while an investment vehicle is also a philanthropic vehicle with all participants, except for the management team, donating their time to the Company. The donation of time from the Board members, the Investment Committee and fund managers means there are no management fees paid by the Company. An amount equivalent to 1.5% p.a of the average monthly post-tax NTA is contributed to the designated medical research organisations on a semi-annual basis.

After a strong start in the initial years, market volatility and a lack of portfolio construction oversight delivered weak relative performance with a number of the stocks in the portfolio falling significantly shortly after the Conference in November 2021. This has resulted in a number of changes with regards to portfolio construction processes and more active oversight of the portfolio and the Conference Portfolio stocks.

IIR has assigned HM1 a Recommended rating (previously Recommended Plus). The change in the rating largely reflects the performance of HM1 which has suffered as a result of timing of investments and the structure of the portfolio. The Company has sought to increase portfolio oversight and engagement with fund managers as well as provide a greater level of diversification of fund manager styles to improve the diversification in the portfolio. This is designed to have a positive impact on the volatility of the portfolio as well as reduce drawdowns in future.

HM1 provides a unique investment proposition, however the high conviction nature of the portfolio means the Company is heavily reliant on the performance of the stock pickers and engagement of the fund managers. The sizable discount has been a drawback for investors however we continue to believe the elevated discount provides an attractive entry point for those investors seeking exposure to the Company with a narrowing of the discount providing the potential for enhanced returns. This will likely be driven by the portfolio delivering improved risk-adjusted returns.

Global Masters Fund Limited ((GFL))
GFL is a listed investment company (LIC) that seeks to achieve medium-to-long term capital growth through investing in a portfolio of global investments. The Company listed in 2006 with the goal of pooling capital to invest primarily in Berkshire Hathaway Inc. ("Berkshire"), a multinational holding company and conglomerate listed on the New York Stock Exchange.

Over time the Company has pursued other investments without diluting the Berkshire exposure by utilising capital raising events, such as the rights issue in 2017 and the convertible notes offer in 2021.

The additional investments have sought to provide an actively managed element to the portfolio to complement the passive investment in Berkshire. The capital raised from the Convertible Notes issue in 2021 has been invested in the ECP Global Growth Fund, a relatively new unlisted fund managed by EC Pohl & Co Pty Ltd.

The ECP Global Growth Fund seeks to invest in a portfolio of global equities with a focus on quality growth stocks. The Fund employs the same investment process and philosophy the Manager employs for its funds with a domestic equity focus to the global market. GFL has a management services agreement with EC Pohl & Co Pty Ltd for the provision of investment management services and administrative services.

There are no fixed management fees and no performance fees payable to the Manager for the administration of the Company. The Company has historically invested in cash and/or cash equivalents and dividend paying securities to cover the costs of operating and administering the Company. There is however fees payable for the actively managed components of the portfolio, including fees incurred through the investment in managed funds (listed and unlisted) and fees incurred for the management of the investment in the portfolio of UK securities.

IIR has maintained the Recommended Plus rating for GFL. The Company provides domestic investors access to Berkshire, something which can be difficult for retail investors to access given the significant price at which Berkshire shares trade. GFL has a favourable fee structure with fees only being charged on the actively managed investments in the portfolio.

The addition of the ECP Global Growth Fund provides exposure to an actively managed portfolio of global securities, providing an element of diversification to the GFL portfolio with little portfolio overlap between Berkshire and the fund. GFL is effectively providing the seed capital to the ECP Global Growth Fund. In turn for this, GFL has invested in fee free units in the fund, meaning investors will benefit from the full performance of the fund minus expenses.

We note further investments in the fund will likely be in fee paying units. GFL provides a differentiated exposure to global markets and has performed well, with investors benefiting from the longterm performance of Berkshire. A key drawback of the Company is the lack of liquidity with just 10.7 million shares on issue and the Investment Manager owning 47.5% of shares on issue, resulting in a low level of free float for investors.

We note that GFL has delivered positive share price growth over the long-term and the stability of the discount over certain periods has resulted in the portfolio and the share price moving largely in step at times. However, the discount remains an issue that needs to be addressed for the long-term benefit of investors.

For more: see attachment above.

Independent Investment Research, "IIR", is an independent investment research house based in Australia and the United States. IIR specialises in the analysis of high quality commissioned research for Brokers, Family Offices and Fund Managers. IIR distributes its research in Asia, United States and the Americas. IIR does not participate in any corporate or capital raising activity and therefore it does not have any inherent bias that may result from research that is linked to any corporate/ capital raising activity.

IIR was established in 2004 under Aegis Equities Research Group of companies to provide investment research to a select group of retail and wholesale clients. Since March 2010, IIR (the Aegis Equities business was sold to Morningstar) has operated independently from Aegis by former Aegis senior executives/shareholders to provide clients with unparalleled research that covers listed and unlisted managed investments, listed companies, structured products, and IPOs. IIR takes great pride in the quality and independence of our analysis, underpinned by high caliber staff and a transparent, proven and rigorous research methodology.

INDEPENDENCE OF RESEARCH ANALYSTS

Research analysts are not directly supervised by personnel from other areas of the Firm whose interests or functions may conflict with those of the research analysts. The evaluation and appraisal of research analysts for purposes of career advancement, remuneration and promotion is structured so that non-research personnel do not exert inappropriate influence over analysts.

Supervision and reporting lines: Analysts who publish research reports are supervised by, and report to, Research Management. Research analysts do not report to, and are not supervised by, any sales personnel nor do they have dealings with Sales personnel

Evaluation and remuneration: The remuneration of research analysts is determined on the basis of a number of factors, including quality, accuracy and value of research, productivity, experience, individual reputation, and evaluations by investor clients.

INDEPENDENCE ACTIVITIES OF ANALYSTS

IIR restricts research analysts from performing roles that could prejudice, or appear to prejudice, the independence of their research.

Pitches: Research analysts are not permitted to participate in sales pitches for corporate mandates on behalf of a Broker and are not permitted to prepare or review materials for those pitches. Pitch materials by investor clients may not contain the promise of research coverage by IIR.

No promotion of issuers' transactions: Research analysts may not be involved in promotional or marketing activities of an issuer of a relevant investment that would reasonably be construed as representing the issuer. For this reason, analysts are not permitted to attend "road show" presentations by issuers that are corporate clients of the Firm relating to offerings of securities or any other investment banking transaction from that our clients may undertake from time to time. Analysts may, however, observe road shows remotely, without asking questions, by video link or telephone in order to help ensure that they have access to the same information as their investor clients.

Widely-attended conferences: Analysts are permitted to attend and speak at widely-attended conferences at which our firm has been invited to present our views. These widely-attended conferences may include investor presentations by corporate clients of the Firm.

Other permitted activities: Analysts may be consulted by Firm sales personnel on matters such as market and industry trends, conditions and developments and the structuring, pricing and expected market reception of securities offerings or other market operations. Analysts may also carry out preliminary due diligence and vetting of issuers that may be prospective research clients of ours.

INDUCEMENTS AND INAPPROPRIATE INFLUENCES

IIR prohibits research analysts from soliciting or receiving any inducement in respect of their publication of research and restricts certain communications between research analysts and personnel from other business areas within the Firm including management, which might be perceived to result in inappropriate influence on analysts' views.

Remuneration and other benefits: IIR procedures prohibit analysts from accepting any remuneration or other benefit from an issuer or any other party in respect of the publication of research and from offering or accepting any inducement (including the selective disclosure by an issuer of material information not generally available) for the publication of favourable research. These restrictions do not preclude the acceptance of reasonable hospitality in accordance with the Firm's general policies on entertainment, gifts and corporate hospitality.

DISCLAIMER

This publication has been prepared by Independent Investment Research (Aust) Pty Limited trading as Independent Investment Research ("IIR") (ABN 11 152 172 079), an corporate authorised representative of Australian Financial Services Licensee (AFSL no. 410381. IIR has been commissioned to prepare this independent research report (the "Report") and will receive fees for its preparation. Each company specified in the Report (the "Participants") has provided IIR with information about its current activities. While the information contained in this publication has been prepared with all reasonable care from sources that IIR believes are reliable, no responsibility or liability is accepted by IIR for any errors, omissions or misstatements however caused. In the event that updated or additional information is issued by the "Participants", subsequent to this publication, IIR is under no obligation to provide further research unless commissioned to do so. Any opinions, forecasts or recommendations reflects the judgment and assumptions of IIR as at the date of publication and may change without notice. IIR and each Participant in the Report, their officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. This publication is not and should not be construed as, an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Any opinion contained in the Report is unsolicited general information only. Neither IIR nor the Participants are aware that any recipient intends to rely on this Report or of the manner in which a recipient intends to use it. In preparing our information, it is not possible to take into consideration the investment objectives, financial situation or particular needs of any individual recipient. Investors should obtain individual financial advice from their investment advisor to determine whether opinions or recommendations (if any) contained in this publication are appropriate to their investment objectives, financial situation or particular needs before acting on such opinions or recommendations. This report is intended for the residents of Australia. It is not intended for any person(s) who is resident of any other country. This document does not constitute an offer of services in jurisdictions where IIR or its affiliates do not have the necessary licenses. IIR and/or the Participant, their officers, employees or its related bodies corporate may, from time to time hold positions in any securities included in this Report and may buy or sell such securities or engage in other transactions involving such securities. IIR and the Participant, their directors and associates declare that from time to time they may hold interests in and/or earn brokerage, fees or other benefits from the securities mentioned in this publication.

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