Weekly Market Commentary By H.E.R.O. (2 to 6 Nov 2020)
The Portfolio of Dividend-Yielding Global H.E.R.O. Innovators maintained her overall outperformance against major world indexes for the 9th consecutive week since her recent inception on 28 August 2020.
- During the week ended 6 November 2020, MSCI ACWI All World index surged +7.4%, S&P 500 +7.3%, NASDAQ +9%, DAX +8%, Euro Stoxx +6.7%, STI +6.3%, Gold (physical spot in USD) +3.9%.
- Over the same corresponding period since her inception on 28 August 2020, MSCI ACWI All World index +1.3%, S&P 500 flat, NASDAQ +1.7%, Stoxx -0.7%, DAX -4.2%, FTSE -0.9%, Hang Seng index +1.1%, Shanghai Composite index -2.7%, and Gold (physical spot in USD) -0.7%, while Microsoft is still down -2.3%, Apple -4.9%, and Amazon -2.7%.
The separate equity portfolios of H.E.R.O. Innovators of our clients generated around +53% in average returns, as at 6 Nov 2020, since the H.E.R.O. research methodology was provided for and implemented in March 2020, vs MSCI ACWI All World index +33.1% and Singapore STI index +2% over the same corresponding period.
- Key contributors during the week were led by: (1) Nordic Global Leader in Pet Health & Nutrition (+26.5%); (2) Nordic Global #1 Leader in Sauna & Spa Tech (+22.3%); (3) Pioneering Inventor & Nordic Global Leader Specializing in Helmet-Based Rotational Motion Safety and Brain Protection (+20.3%); (4) NVIDIA, Global #1 Fabless IC Designer Leader In GPU Chips For Gaming, Data Center Servers, A.I. & Advanced Applications (+16.2%); (5) U.S. Global Leader in Simulations & Modeling Software for Drug Discovery & Development (+15.7%); (6) “Sweden’s Twilio” & Emerging Global Cloud Software Leader in Communication Platform as a Service (CPaaS) (+15.4%); (7) Japan's #1 Cloud Software Leader in Groupware for Mail Sharing & Expense Management (+11.9%); (8) Lonza, “The TSMC in Biotech” & Swiss Global #1 CDMO (Contract Development & Manufacturing Organization) Leader (+11.2%); (9) Canada’s Dominant #1 Overnight Domestic Freight Cargo Network with a Near-Monopoly Share of 95% (+10.8%); (10) Japan & Global #1 Online Medical Platform (“Facebook & LinkedIn for Doctors”) (+10.8%)
- The K-shaped recovery divergence, coupled with the worsening U.S.-China relationship, points towards the new world order in the post-pandemic future that marks the ascent of the quiet Nordic powerhouse region – comprising of Sweden, Denmark, Norway, Finland and Iceland with a combined GDP of over US$1.6 trillion, combined population of around 27.3 million people, and the highest regional GDP per capita in the world at over US$62,000 – where they are a Winter War kind of country: innovation happens when things are tough, not when they’re easy and comfortable.
"This is the time to heal in America", Joe Biden addressed the nation over the weekends as the President-elect won more votes than any other candidate in U.S. history. The best election week since Roosevelt beat Hoover in 1932, led by Big Tech stocks who posted the best three-day rally in five years, highlights the difficulties of trying to do market timing, as many anxious investors had adopted a wait-and-see approach and were largely sitting on the sidelines waiting for further clarity on the election result, even as Trump contested the results. So far, none of Trump’s lawsuits have gained traction or demonstrated that the results of the election can be overturned.
Facing a likely Republican majority in the Senate, Biden would have to draw on longstanding relationships with top Republicans in Congress in order to have any shot of passing major legislation or getting his preferred cabinet confirmed. While Senate control will not be known until after 5 January 2021 as Georgia holds runoff elections for two Senate seats, it's worth noting that the odds of Democrats winning both races are very slim, with Republican David Perdue well ahead of his Democrat challenger Jon Ossoff in the first race, while the second one will see two GOP candidates, Kelly Loeffler and Doug Collins combine to take on Democrats Raphael Wornock and Deborah Jackson, with the republicans comfortably leading their democratic challengers.
As Bloomberg commented in an article during the week, the rally has burned the tech haters, and schooled them on the risk of using conventional valuation metrics and macroeconomic data as a primary market timing tool despite large swath of the listed companies population languishing as economically-sensitive cheap-gets-cheaper value traps, as these market timers pulled back and even shorted the tech stocks. As the “Blue Wave” odds of both the White House and Congress coming under Democratic control collapsed, prospects for a massive fiscal-aid package vaporized, sending the dark crawling Cyclical creatures feeding off the unrealistic hopes of a V-shaped recovery to retreat back to their holes. The certainty of a gridlocked, divided government, and the grim reality of surging global virus cases leading to Lockdown 2.0 to hurt economic recovery and dampen stimulus efforts, have sent investors back into the arms of the market’s most reliable earners in the structural growth innovators.
Noteworthy is another Bloomberg article pointing out that the post-election surge actually saw more S&P 500 members fall than rise: on Wednesday when the Nasdaq 100 surged more than 4%, an equal-weight version of the S&P 500 barely budged and some 270 of the S&P 500 constituents were nursing losses and some lost a lot. Hence, this market rally saw most stocks not bouncing up. Wednesday’s rally was the first time in at least six decades that the S&P 500 jumped more than 2% as more volume flowed into declining securities than advancing ones on the New York Stock Exchange. Another note is that since 28 August 2020, Microsoft’s share price is still down -2.3%, Apple -4.9%, and Amazon -2.7%. So beating the indexes since 28 August 2020 is far tougher than one thinks.
The new market narrative and embedded expectation is that Mitch McConnell’s Republicans in the Senate will act as a check on fiscal profligacy, the risk of higher taxes and more onerous regulations under a Biden administration has been averted, and that the Fed will be pushed to go bigger. Senate Majority leader McConnell had already hinted on Friday that the next stimulus will be much smaller, pointing out that the better-than-expected October employment data released on Friday “clearly ought to affect the size of any additional stimulus package we do". The Fed will have no choice but to keep propping up the bond market, and possibly even resort to yield curve control; while 10Y UST yields dropped sharply and the curve flattened, they remain elevated – but unlikely to result in market panic as the rate of change is stunted.
Another shock delivered during the week was Beijing’s chaotic crushing of Alibaba’s Ant IPO just days before its dual-listing debut on the HK and Shanghai markets, on material regulatory risks from a clampdown on Ant’s micro-lending business – and what it could mean for China stocks. The IPO suspension would be for at least another six months and on a sharply reduced valuation by potentially worth far less than half of what it is now, given new minimum capital requirements and other restrictions on online lending that were imposed to guard against "systemic risk", and Ant’s micro-lending business contributed close to 40% of the group’s revenue in the first half of the year. The new regulatory requirement requires micro-lenders to fund at least 30% of any loan they fund jointly with banks; only 2% of the loans Ant had facilitated as of end-June were on its balance sheet, which means that nearly the entire revenue in Ant’s micro-lending business would be adversely impacted. Alibaba also reported that its revenue grew at its slowest pace on record for a September quarter, underscoring how the ecommerce giant’s post-pandemic rebound is starting to plateau.
Yet, the unquestioning consensus crowd maintains the bullish view on Alibaba even as the management, auditors and investment community did not comment on the potential impairment writedown in billions of value of the fintech investee businesses and associates in Alibaba’s balance sheet. The Ant shock showed that the China tech titans are not untouchable and is also likely to bring greater regulatory scrutiny into the fintech businesses – and their downgraded valuations and impairment writedowns - inside other Chinese companies that include Tencent and JD.com, and could also point towards the start of a China techlash.
Our portfolio companies have shown resilience and scalability during this tumultuous environment and the management continue to make key strategy decision to expand their market leadership in their respective fields. The quiet HE.R.O. innovators have invested wisely in innovations that sharpen their exponential competitive edge for long-term value creation, strengthened their market position in the value chain that supercharged their cashflow dynamics, developed new channels, new markets and new customer base for revenue growth while improving their profitability at a time when most businesses are struggling, and nurtured their human capital and corporate culture to foster innovation and ESG sustainability.
We highlight 4 Nordic examples of winners in a volatile and uncertain market that will remind investors that quality fundamentals prevail:
- Nordic Global #1 Leader in Sauna & Spa Tech, which is up +22.3% during the week. On 5 Nov 2020, the company announced 3Q2020 sales rose 63.8% yoy, operating profit jumped 106.9% yoy with operating profit margin improving from 16.9% to 21.4%, and operating cashflow increased 88.1% yoy. CEO Mr. P commented: "Revenue growth was good in all product groups in the third quarter. It was particularly strong in the control units (+98.2%) and sauna heater (+61.4%) product groups. Nearly 75% of our revenue already comes from international markets despite the strong growth of the Finnish market (+22.5% in the third quarter). We will keep our eyes determinedly on the cornerstones of our strategy and will implement the strategy with a focus on increasing the value of the average purchase, geographical expansion, and continuous improvement of productivity. In addition to organic growth, we continue to actively explore opportunities to grow in the sauna and spa market through acquisitions, in line with our strategy."
- Pioneering Inventor & Nordic Global Leader Specializing in Helmet-Based Rotational Motion Safety and Brain Protection, which is up +20.3% during the week. On 6 Nov 2020, the company announced that 3Q2020 sales jumped +94% yoy and operating profit rose +175% yoy with operating margin improving from 39.5% to 53.6%. CEO Mr. S commented: "The third quarter was the strongest so far in the history of MIPS, normally the third quarter is a seasonally soft quarter. After the exceptional situation with shutdowns during the spring, we saw increased demand during the summer months. We began to see a positive recovery in demand for most helmet types, for which we sell solutions, already in June. The positive development continued with bicycle helmets as the biggest contributing factor. We continue to grow with existing customers expanding their range of helmets with our solutions. During the third quarter the positive market situation, in the bicycle industry, contributed to the growth. We have seen a very good development from helmet brands in both the US and Europe. Demand from the US has primarily been driven by sales of bicycle helmets specifically for recreational use. The market situation in Europe has been favorable mainly from strong demand for bicycle helmets used for commuting. Cycling for both commuting and recreation has increased around the world in the wake of the COVID-19 pandemic. This had a positive impact during the beginning of the second half of the year on our sales. Demand has been higher than what the helmet manufacturers have been able to meet, which has led to low inventory levels. We expect a strong demand in the coming quarters. With continued positive developments in bicycle helmets, progress in motorcycle and promising discussions in the safety category, I optimistically look at the rest of the year and continued progress next year. Therefore, I continue to look forward to the journey towards achieving our unchanged long-term goals."
- Sweden’s Twilio” & Emerging Global Cloud Software Leader in Communication Platform as a Service (CPaaS), which is up +15.4% during the week. On 3 Nov 2020, the company announced that it had launched a new generation of messaging platform services that comes with more and better features such as multiple receipts and encryption. The service is traditionally aimed at businesses with a need for critical communication, such as care, rescue and on-call operations, but can now address additional target groups such as single-worker activities where better products are currently needed. The service integrates with the company's APIs and web tools, giving control over sent messages, delivery status, and responses. Thanks to low frequency (approximately 170 MHz), the technology has excellent penetrability in e.g. large houses, underground and industrial environment. The company's customers require a reliable network in the event of emergencies and other overloads, something that cannot be offered by regular telecommunication operators. The company serves over 5,000 customers in social-critical functions and commands a special position in rescue services, police, defense and emergency and alarm operations, healthcare and e-health, as well as e-commerce and logistics. With its own and independent network, the system meets the requirement for those who need independent alarm channels. Because it is based on broadcast technology, it is possible to reach many recipients with the same message very efficiently. Messages reach the recipient within 15 seconds without getting caught in the network. CEO Mr. J commented: "This is the single largest investment made in modern times. The development has been made in close dialogue with our customers and we are proud to be able to deliver a really competent solution with the best possible availability".
- Nordic Global Leader in Pet Health & Nutrition, which is up +26.5% during the week. On 6 Nov 2020, the company announced that it had secured exclusive rights for the purchase of raw material for its main dental products for the North American market, which the company has used to develop the unique quality of efficacy of the product that is an important part and the foundation for its success story. The company's unique premium natural product is seen as a market leader in effectivity for dental care with plaque reduction of 35% and is the only powder approved by the Veterinary Oral Health Council. CEO Mr. L commented: "With this agreement, we have now ensured an exclusive and long term collaboration for pet dentalcare products in North America.“ Earlier on 22 Oct 2020, the company reported record 3Q2020 results in which 3Q sales jumped 119% yoy and EBIT rising 70% yoy on margin of 26.8%. CEO Mr. L commented: “When it comes to addressable markets the number of pets has increased in almost all markets and as pet parents now value and spend even more time with their four-legged friends even stronger bonds are made, a factor that is positive for us as a distributor of premium products.”
While the short-term day-to-day price movement can be volatile, what continues to be crystal clear is that the quiet structural growth H.E.R.O. innovators remain the most visible and vibrant pathway in a foggy, volatile, whipsawing, uncertain market to deliver sustained outperformance with their healthy fundamentals results.
Interesting Readings to be a Better Investor & Person
From Productivity to Psychedelics: Tim Ferriss Has Changed His Mind About Success
+ Tim Ferriss’s Recent Change of Heart Shows How Self-Improvement Can Fail You
“Not everything that is meaningful can be measured easily.” -Tim Ferriss
The “noise” of self-improvement are the aspects that are a distraction from what truly matters. And, for Ferriss, that has meant a shift from searching for “answers to questions about how to do more (and do it more efficiently)” to focusing on what’s happening “inside and helping you get comfortable being with yourself.”
For many of us, discovering what matters most happens as we go through difficult times and realize what’s working for us and what’s not. For example, while having successfully “improved himself” to the nth degree, and having experienced incredible success, Ferriss found that he still struggled with his mental health: “Certainly I found myself, after checking a lot of those boxes, still suffering.”
Whatever self-improvement methodologies Tim was using had ultimately been a distraction — noise — from what would aid him in his mental health struggle.
It doesn’t matter how much money you have or how much you’ve accomplished if you’re still just as miserable and ashamed of who you are — distracting yourself from yourself. In this case, the money and accomplishments only prolong the suffering.
Much of what we call self-improvement is really just a band-aid for deeply rooted pain. And this pain is a seemingly universal experience of feeling unworthy.
Tara Brach — the noted psychotherapist and meditation teacher — describes this unworthiness in her book Radical Acceptance: “As a friend of mine put it, ‘Feeling that something is wrong with me is the invisible and toxic gas I am always breathing.’ When we experience our lives through this lens of personal insufficiency, we are imprisoned in what I call the trance of unworthiness. Trapped in this trance, we are unable to perceive the truth of who we really are.”
Our root problem — as Tara Brach describes — is ‘unworthiness’. We feel that we are just not enough — that we are uniquely flawed. And this is why self-improvement can so easily become a problem.
If I am uniquely flawed and I’m ashamed of those flaws, then it is only normal that I will be attracted to anything that promises to help me “improve” and to be “better”. But the vast majority of self-improvement does not address the roots of my feelings of unworthiness but rather distracts me from them.
And the thing is, this sort of self-improvement “works”. You can experience short-term feelings of success and experience dopamine-fuelled highs that make you think everything’s great. But, in time, your feelings of unworthiness will return — leaving you looking for another hit of “self-improvement”.
Any improvement that doesn’t address your underlying sense of unworthiness is just noise. To live fully alive, you have to grapple with the genuine stuff of life — your own unique experience of unworthiness, shame, and discomfort at being alone with yourself.
And the way to “improve” this sense of unworthiness is to accept it — to stop hiding it, fighting it, and compensating for it. Accepting ourselves as we are is a journey deeper than any productivity hack or supplement stack. It’s difficult, scary, and — as Tara Brach writes — radical:
“Clearly recognizing what is happening inside us, and regarding what we see with an open, kind and loving heart, is what I call Radical Acceptance. If we are holding back from any part of our experience, if our heart shuts out any part of who we are and what we feel, we are fueling the fears and feelings of separation that sustain the trance of unworthiness. Radical Acceptance directly dismantles the very foundations of this trance.”
|The H.E.R.O. Investment Framework
The H.E.R.O. framework, methodology and strategy are powering equity portfolio asset for our clients. The Portfolio of Dividend-Yielding Global H.E.R.O. Innovators is the only equities strategy in the market that focuses on both dividend yield and innovation-driven capital gains to enhance total shareholders’ returns. It is also the only dividend-yielding equities strategy in the market that is entirely not dependent on and with zero exposure to: (1) cyclicals (concentrated in economically-sensitive and rate-sensitive sectors such as financials, property & construction, energy & materials) that may not be resilient in economic downturns, and (2) cheap-gets-cheaper yield- and value traps. It also applies the proprietary forward-looking fact-based accounting fraud detection system that was pioneered and taught at the Singapore Management University, ranked top five in the world accounting rankings, and presented to the top management team of Singapore’s top financial regulator Monetary Authority of Singapore (MAS), to mitigate downside risks which escape detection by typical western-based forensic tools.
I. Strategic Focus on Quiet Innovators & The H.E.R.O. Investment Framework
H.E.R.O. is operationalized into a systematic 4-step investment process and investment framework powered by sustainability & ESG principles to identify the winners, to distinguish between the true innovators and the swarming imitators, between the devoted missionaries forging a greater Purpose and the mercenaries.
We use the framework and positive criteria of the United Nations Sustainable Development Goals (SDGs) to integrate environmental, social, and governance (ESG) considerations into the research and investment process in selecting companies that generate sales in products and services that contribute to the achievement of the UN SDGs. The central focus of our impact investing is on innovators who contribute to the UN SDG Goal 9: Industry, Innovation, and Infrastructure — “Build resilient infrastructure, promote inclusive and sustainable industrialization, and foster innovation”.
H.E.R.O. is unique in eliminating the downside risks from accounting tunneling fraud and misgovernance through unusual related-party transactions, consolidation accounting craftiness (opportunistic shifting of expenses and debt into unconsolidated entities), and hidden balance sheet liabilities at the wider pyramidal business group level etc., which escape detection by western-based forensic tools through a proprietary forward-looking fact-based accounting fraud detection system developed by KB, and taught at the Singapore Management University, ranked top five in the world accounting rankings, and presented to the top management team of Singapore’s top financial regulator Monetary Authority of Singapore (MAS). For instance, prevalent across Asian companies, previously Big-4 audited “cash” in the balance sheet are often misclassified “cash equivalents” disguised from improper short-term related party loans employed by the insiders to expropriate or tunnel out cash from the company after initially propping up financial numbers artificially to create false positive signals to lure in funds.
|II. Be Stronger, Wiser & Kinder By Participating in the Quiet Innovators' Quest to Purpose
“Innovators” are companies that generate sales in technologically enabled new products and services that potentially transforms the way the world works. We seek to identify companies capitalizing on innovation in offering faster, cheaper, more productive, more cost effective, more compelling products and services, or that are enabling the further development of an innovation theme in the markets in which they operate.
Not only do the H.E.R.O. innovators generate high profitability at the inflection point of their exponential growth trajectory, more importantly, they are governed by a greater purpose in their pursuit to contribute to the welfare of people and guided by an inner compass in choosing and focusing on what they are willing to struggle for and what pains they are willing to endure, in continuing to do their quiet inner innovation work, persevering day in and day out.
|II. Quiet Innovators Thrive in Stormy Times
Prepare and position a winning portfolio for a post-pandemic world with innovators who thrive in stormy times and transform crises and trauma into opportunities for the future. The coronavirus crisis has helped accelerate innovation and enhanced the leadership of innovators. Market positions are not redistributed during sunny and calm times, but during times of crisis. The pandemic crisis has changed the behavior of both consumers and businesses. Companies offering faster, cheaper, more productive, more cost effective, more compelling and innovative products and services are gaining significant share.
Market leadership and resilient winners in stormy market environment and in the post-pandemic future will be much less about the overcrowded popular trades in mega-cap tech and loss-making tech/biotech, as defined by FAANGT-STAMP (U.S.: Facebook, Apple, Amazon, Netflix, Google, Tesla; Asia/China: SEA, Tencent, Alibaba, Meituan-Dianping, Pinduoduo), who also do not pay any dividends (with the exception of Apple and Tencent), and will be led more by highly-profitable quiet innovators, including dividend-yielding cloud Software-as-a-Service (SaaS) companies.
Notably, of the 90+ cloud software companies listed in the U.S., nearly all (>95%) do not pay any dividends, with many still looped in a negative free cashflow position, while the 20 global SaaS portfolio companies in the Portfolio of Dividend-Yielding Global H.E.R.O. Innovators are unique in being exceptional market leaders in their respective field with ample internal cashflow generative capacity to reinvest for higher-margin growth and still consistently produce rising dividend yield to reward shareholders.