Weekly Market Commentary By H.E.R.O. (7 to 11 Dec 2020)
During the week ended 11 December 2020, the the Portfolio of Global Dividend-Yielding Innovators gained +0.3%, vs MSCI ACWI All World index -0.6%, S&P 500 -1%, Nasdaq -0.7%, Nasdaq 100 -1.2%, Euro Stoxx -1.5%, German DAX -1.4%, China CSI 300 index -3.5%, Hang Seng -1.2%, Microsoft -0.5%, Amazon -1.5%, Facebook -2.2%, Google -2.5%, Visa -3%, Mastercard -4.9%, P&G -0.7%, Mondelez -2.8%, Singapore's local supermarket hero Sheng Siong -0.6%, China's best-run supermarket operator Yonghui Superstores -9.4%.
Since the recent inception on 28 August 2020, the Portfolio of Global Dividend-Yielding Innovators has maintained positive absolute returns above its 3% hurdle rate on high watermark, outpacing the S&P 500 and NASDAQ 100, during which MSCI ACWI All World index +7.6%, S&P 500 +4.4%, NASDAQ 100 +3.2%, Euro Stoxx Tech index -3.6%, Shanghai Composite index -1.7%, Gold (physical spot in USD) -6.4%, while popular big cap tech and innovation-themed companies declined, including Consumer Staples with Nestle -7.6%, Unilever -0.9%, P&G -1.6%, Kraft Heinz -2.3%, General Mills -6.4%, Conagra -7.4%, McCormick -8.7%, Church & Dwight (Condom) -9.5%, Campbell Soup -9.5%, Reckitt Benckiser (Lysol, Dettol, Durex) -11.7%, Kellogg -12%, Kimberley Clark -13.1%; Local Defensive steady supermarket hero Sheng Siong -9.9% and China’s best-run supermarket operator Yonghui Superstores -21.4%; REITS with Keppel DC REIT -5.2%, NetLink Trust -1%; China Mobile -20.6%, Alibaba -8.5%, Netease (China's internet gaming giant whose revenue is around half of Tencent's gaming business) -12.5%; Healthcare giants J&J -0.4%, AstraZeneca -2.2%, Merck -3.1%, Gilead -6.9%; Apple -1.9%, Netflix -3.9%, Visa -4.4%, Facebook -6.8%, Microsoft -6.8%, Adobe -7.8%, Amazon -8.4%, eBay -9.5%, Mastercard -10.6%, S&P Global -11.5%, Salesforce.com -18%; Exchange operators LSE -3.1%, Nasdaq Inc -4.7%, Deutsche Boerse -13.6%, Euronext -14.3%, ASX -15.8%; Glove companies Top Glove -21.2% and Riverstone -42.4%, and medical apparel maker Medtecs -35.5%.
The separate equity portfolios of H.E.R.O. Innovators of our clients generated over +53.3% in average returns, as at 11 Dec 2020, since the H.E.R.O. research methodology was provided for and implemented in March 2020, vs MSCI ACWI All World index +41.4% and Singapore STI index +11.6% over the same corresponding period.
- Key contributors during the week were led by: (1) Nordic #1 CRM SaaS Leader for SMEs (+8.3%); (2) Finland's Most Popular Webstore (+8.2%); (3) Global Leader Specializing in Helmet-Based Rotational Motion Safety and Brain Protection (+7.8%); (4) The only company in the world that builds the testing machines required to verify chip designs for the extreme ultraviolet lithography (EUV) method of chipmaking of advanced chips (+6.5%); (5) Denmark's #1 Cloud Software In Process Automation & Transformation for the Global Public Sector (+5.9%).
“Numb” and “Heartbroken,” the U.S. suffers record virus deaths this week and its worst week in cases and hospitalizations since the start of the pandemic. With cases still rising, experts warned that “the worst is yet to come.” Germany is heading for a national lockdown to combat the spread of the virus and avoid overwhelming hospital, according to Guardian news. Together with fiscal stimulus deadlock on additional COVID relief, vaccine setbacks, “no deal” on Brexit, and antitrust lawsuits formally lashed on Big Tech, global markets slumped and 10Y UST yields retreated significantly to below 90 bps. In addition to Wednesday’s suits against Facebook by 48 attorneys general and the Federal Trade Commission, federal and state antitrust authorities are readying more possible actions against Facebook and Google by the end of January. Charges were also laid by the European Union against Amazon.com, and a Justice Department lawsuit vs. Google.
Further data published on Tuesday by AstraZeneca-Oxford showed that no patients over 55 were in the group that received the most effective dose combination. Given the fact that only 20% of the patients in the global trials were over the age of 55, questions remain about the vaccine's efficacy among elderly patients. In addition, the vaccine was found to be just 62% effective for all volunteers who received two doses. Two of the biggest vaccine makers in the world – Sanofi and GSK - suffered setbacks as they delayed advanced trials of their experimental Covid-19 shot after it failed to produce a strong enough response in older people, pushing its potential availability to the end of next year. Vaccine trials by CSL and University of Queensland were also unexpectedly canceled and the Australian federal government has terminated its orders for the vaccine. There’s also now increasing doubts that the vaccine production and distribution will go smoothly. Based on outdated figures used by some states in the vaccine estimates, the vaccine will fall far short of protecting high priority groups such as healthcare workers, with the first vaccine shipment expected to cover inoculations of 2.9 to 3.2 million people, nowhere near enough for the 21 million U.S. healthcare workers, weakening overexuberant market sentiments in Cyclicals. Importantly, as COVID appears more and more like an autoimmune diseases, there is an increasing view among experts that possible serious autoimmune side effects that may not appear for months after vaccination, which would render all the positive efficacy results of the Pfizer-BioNTech and Moderna vaccine trials that were assessed for its effectiveness over a short period of time to be irrelevant.
China suffers its worst week in two months with China CSI 300 index -3.5% and the worst performance among global benchmarks, as concern over high valuations, growing wave of defaults in debt-laden companies and local governments, and whether there’s sufficient liquidity in the financial system weighed on the market. A gauge of financial stocks slumped 5.4% this week, the most since mid-July. At least eight companies have this week announced plans from insiders to sell their stakes in the coming months. Noteworthy is that more than US$722 billion worth of Chinese stocks will be unlocked for sale next year, the largest amount since at least 2011, testing a market where valuations are at a five-year high. Beijing is allowing a wave of defaults by state-linked companies in the country’s US$15 trillion credit market. This week, prominent chipmaker Tsinghua Unigroup defaulted on US$450 million of dollar debt triggering cross-defaults on another US$2 billion - equivalent to almost two-thirds of the total defaulted debt in China’s offshore bond market in 2019. Nasdaq said on Friday that it will remove four Chinese companies' shares from its indexes after U.S. order, following FTSE Russell and S&P Dow Jones. It seems likely that the correction in China markets will be persistent and continue in a significant downward trend in the months ahead, with some temporary relief rebound in between, and investors’ complacency will need to unwind as the country’s macroeconomic problems and credit default wave worsen.
This week and Friday is possibly a watershed event in that nearly all major world market indexes are down, China is down sharply, Big Tech are down on antitrust lawsuits and regulatory techlash, “Value” is down (Vanguard Value ETF), “Growth” is down (Vanguard Growth ETF), and the only visible resilient winner are selected smaller- and mid-cap companies, a powerful and persistent trend that looks set to continue in the months and years ahead.
Once the vaccines actually start being administered at scale and the pandemic recedes, a lot of investors are going to wake up to the fact that the global economy is still dogged by a host of thorny problems that both predate and have been exacerbated by the virus. The current unsustainable market euphoria over Cyclicals, Value Traps, Zombies and Vampires has created opportunities for long-term investors in the inexorable rise of a selected group of fundamentals-based structural growth innovators who have remained resiliently positive throughout the most extreme ever market rotational change over the past four to six consecutive weeks, setting the roadmap going into the next year and beyond in a post-pandemic future. These winners solve high-value real-world problems to generate visible and vigorous quality earnings growth before and during the pandemic, as well as are poised to enjoy continued healthy demand and staying power in a post-pandemic future when the world recovers painfully and slowly to transition from the Pandemic Health Crisis to the next crisis – the PTSD Post-Pandemic Growth Crisis.
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.
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
7 Quotes by Albert Einstein That Will Change How You Think
(1) “It is not that I’m so smart. But I stay with the questions much longer.”
(2) “Life is like riding a bicycle. To keep your balance, you must keep moving.”
(3) “You don’t have to know everything. You just have to know where to find it.”
(4) “Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world.”
(5) “A clever person solves a problem. A wise person avoids it.”
(6) “If A is a success in life, then A equals x plus y plus z. Work is x; y is play; and z is keeping your mouth shut.”
(7) “A happy man is too satisfied with the present to dwell too much on the future.”
Stay with the questions longer: Curiosity will take you to much more exciting places than intelligence.
To stay in balance, always keep moving: Quite often, being in motion is more important than anything else. The moment you stand still, you’ll lose opportunities.
Don’t load your brain with unnecessary information: Instead, set up digital information management tools and save your brainpower for important decisions.
Imagination is more important than knowledge: Whatever you do, don’t forget to let your imagination be part of the game.
Learn to avoid problems: Solving problems is nice, but eliminating the root is much more effective.
Working, playing, and keeping your mouth shout will take you to great places: Learn to balance these three and you’ll be ahead of the majority.
Be so present that you forget about the past and the future: Right now is the only time that counts.
|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.