Weekly Market Commentary By H.E.R.O. (23 to 27 Nov 2020)
During the week ended 27 November 2020, the the Portfolio of Global Dividend-Yielding Innovators gained +3.9%, vs MSCI ACWI All World index +2.4%, S&P 500 +2.3%, Apple -0.6%, Nestle -1.3%, Gold (physical spot in USD) -4.5% as the VIX crashes below 20 to February lows during the week. Notably, Gold is heading for its 3rd straight weekly decline, its 4th straight monthly drop and worst month since Nov 2016, and is down -9% since 28 Aug 2020.
Since the recent inception on 28 August 2020, the Portfolio of Global Dividend-Yielding Innovators has maintained positive absolute returns above its hurdle rate, during which MSCI ACWI All World index +6.7%, S&P 500 +3.7%, NASDAQ 100 +2.2%, Euro Stoxx Tech index -2.7%, Shanghai Composite index +0.1%, Gold (physical spot in USD) -9%, while many popular big cap tech and innovation-themed companies declined, following the most extreme rotation ever recorded in history against tech into Cyclicals, including consumer staples Nestle -6%, General Mills -5.1%, Kraft Heinz -5.8%, Conagra -5.8%, Campbell Soup -6.1%, McCormick -8.9%, Church & Dwight (Condom) -9.7%, Kimberley Clark -9.7%, Kellogg -10%, Reckitt Benckiser (Lysol, Dettol, Durex) -13.2%; local defensive steady supermarket hero Sheng Siong -8.1% and China’s best-run supermarket operator Yonghui Superstores -14.8%; China Mobile -14.8%, Alibaba -4.3%, Netease (China's internet gaming giant whose revenue is around half of Tencent's gaming business) -7.4%; healthcare giants J&J -6.3%, Merck -6.8%, AstraZeneca -6.8%, Gilead -8%; Visa -2.2%, eBay -5.4%, Facebook -5.4%, Intel -5.9%, Microsoft -6%, Amazon -6.1%, Netflix -6.2%, Apple -6.6%, Mastercard -7.4%, Adobe -7.6%, Salesforce.com -8.7%; exchange operators Nasdaq Inc -3.6%, LSE -10%, Euronext -12.6%, Deutsche Boerse -13.1%; glove companies Top Glove -20.2% and Riverstone -34.2%, and medical apparel maker Medtecs -36.2%.
The separate equity portfolios of H.E.R.O. Innovators of our clients generated around +49.3% in average returns, as at 27 Nov 2020, since the H.E.R.O. research methodology was provided for and implemented in March 2020, vs MSCI ACWI All World index +40.2% and Singapore STI index +12.9% over the same corresponding period.
- Key contributors during the week were led by: (1) Japan's #1 Technical E-Manual Database SaaS Innovator +26.2%; (2) Sweden's Dominant #1 Cloud Accounting & Financial SaaS Leader (+20.2%); (3) Japan’s #1 Medical Care Big Database Leader (+15%); (4) Nordic Global Leader in Medical Imaging Software Systems (PACS) & Europe’s Public Defense Cybersecurity Leader in Society’s Most Critical Communications (+11.8%;) (5) Japan & Global #1 Online Medical Platform (“Facebook & LinkedIn for Doctors”) (+11.1%).
While the AstraZeneca-Oxford vaccine news on Monday has extended the rally of the Cyclicals and the declines in Big Tech, defensive stocks and havens during the week, in which Apple -0.6%, Nestle -1.3%, Gold (physical spot in USD) -4.5% as the VIX crashes below 20 to February lows, the overall market rally led by Cyclicals faltered with increasing doubts about the robustness of the vaccine results that could lead to delays in regulatory approval. While the success rate was 90% in the sub-group of volunteers, the efficacy was 62% if the full dose was given twice, as it was for most participants.
The perverse market situation of flipping between greed in the vaccine optimism pounded by three consecutive Mondays from Pfizer-BioNTech, Moderna to AstraZeneca-Oxford for a sharp V-shaped economic recovery, and fear over the health & economic impact the ongoing worsening COVID crisis, has: (1) resulted in the extended downside risks of havens in gold and defensives/ consumer staples like Nestle to become the new risky pariahs and the Big Tech to be shunned lepers (Gold is down -9%, Microsoft -6%, Apple -6.6%, Nestle -6%, Singapore’s defensive steady supermarket hero Sheng Siong -8.1% and China’s best-run supermarket operator Yonghui Superstores -14.8% since 28 Aug 2020), possibly over an extended period in months until the first half of 2021, whilst (2) created opportunities in the inexorable rise of a selected group of fundamentals-based structural growth innovators who have remained resiliently positive throughout the most extreme ever recorded chaotic market rotational change over the past three consecutive weeks, setting the roadmap going into the next year and beyond in a post-pandemic future, almost as a tabula rasa. These winners solve high-value real-world problems to generate visible and vigorous quality earnings growth (1) before and (2) during the pandemic, as well as are poised to enjoy continued healthy demand and staying power in a (3) 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
In Asia, Beijing tightens the regulatory screws on the loss-making electric car industry, telling provincial-level government officials to investigate construction and production details of NEV (new energy vehicle) projects approved by state planners since 2015. China's eagerness to develop the segment has led to many chaotic practices. Nearly all are loss-making companies who stay afloat solely on government subsidies or are accused of acquiring land at low prices or raising funds at grossly inflated valuations from unsuspecting investors in the name of developing EV projects. Meanwhile, AAA-rated China bonds are tumbling as default fears spread across the world’s second-largest credit market. HK-listed Genscript Biotech (1548:HK) plunges after chairman of Chinese gene and cell therapy firm is arrested on suspected smuggling offence related to management of human genetic sources such as organs, tissues and cells.
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
Podcast #660: How Ancient Greek Tragedies Can Heal the Soul
When you think about ancient Greek tragedies, you probably think about people in togas spouting stilted, archaic language — stories written by stuffy playwrights to be watched by snooty audiences.
My guest today argues that this common conception of Greek tragedies misses the power of plays that were in fact created by warriors for warriors, and which represent a technology of healing that’s just as relevant today as it was two millennia ago. His name is Bryan Doerries and he’s the author of the book The Theater of War, as well as the artistic director of an organization of the same name that performs dramatic readings of ancient tragedies for the military and other communities. Bryan and I begin our conversation with what tragedies are, what this civic, religious, and artistic form of storytelling was supposed to do, how it was created by war veterans for war veterans, and how a civilian classicist ended up putting on these plays for current and former members of our modern military. We discuss how the ancient Greek tragedies depicted the depth and spectrum of human suffering, the intersection of fate and personal responsibility, characters who belatedly discover their mistakes, and the fleeting chance of changing behavior in the light of such realizations. Bryan also explains how the tragedies may have been a form of training for young people on how to grapple with the moral ambiguities that mark adulthood. And throughout the show, we dig into how tragedies, by showing people they’re not alone, getting them to confront uncomfortable realities together, and bridging divides, can serve as a transformative technology for collective healing, not only for military veterans, but anyone who’s dealt with trauma, loss, and the general confusions and hardships of the human experience.
- Athens’ 3 great writers of tragedy
- The difference between what’s happening on stage and what’s going on in the audience
- How tragedy helps us process grief and shared trauma
- The intersection of fate and responsibility
- Childhood, the sins of the father, and the shaping of our lives
- The healing power of tragedies
- Do these plays offer more than just catharsis?
- How these tragedies can help us navigate discomfort
- The powerful tale of Ajax
- The way that tragedies can touch people from every walk of life
- Where do we find the answers to the questions these plays ask?
|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.