Weekly Market Commentary By H.E.R.O. (4 to 8 Jan 2021)
During the week ended 8 Jan 2021, the the Portfolio of Global Dividend-Yielding Innovators gained around 0.8% nett in SGD, vs MSCI ACWI All World index +3%, S&P 500 +1.8%, Gold -2.6%, Microsoft -1.3%, Apple -0.5%, Facebook -2.1%, Amazon -2.3%, Adobe -3%, Visa -1.5%, Nestle -2.8%.
Since the recent inception on 28 August 2020, the Portfolio of Global Dividend-Yielding Innovators has generated double-digit returns and overall NAV rose above S$40 million (€25 million), outperforming major world indexes in MSCI ACWI All World Index, S&P 500 and NASDAQ in SGD terms, during which MSCI ACWI All World index +12.8% (in USD, or +10.1% in SGD), S&P 500 +9%, Gold (physical spot in USD) -5.9%.
The separate equity portfolios of H.E.R.O. Innovators of our clients generated over +66.1% in average returns in SGD, as at 8 Jan 2021, since the H.E.R.O. research methodology was provided for and implemented in March 2020, vs MSCI ACWI All World index +48.2% and Singapore STI index +18.4% over the same corresponding period.
- Key contributors during the week were led by: (1) Denmark's #1 Cloud Software In Process Automation & Transformation for the Global Public Sector (+6.3%); (2) 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 (+5.3%); (3) One of the Largest Private Italian Wine Groups With a Unique Integrated Low-Capex & Direct Sales Business Model (E-Commerce 30% of Sales) (+9.6%); (4) Australia’s #1 Enterprise Content Management (ECM) Cloud Software Leader for Mission-Critical Operations of Governments and Regulated Industries (+9.2%); (5) TSMC, World’s Largest Pure-Play Foundry (+8.9%).
Markets stormed to a new high in the first week of 2021 - despite the Trump-incited mob assault on the Capitol, a downbeat December jobs report that showed the U.S. economy lost jobs for the first time in eight months in December as a resurgent COVID-19 pandemic shuttered restaurants and other businesses, and the worst start to a year for the S&P since the 2001 dot-com crash - as traders went into a frenzy in rotating into Cyclicals (Financials and Energy) on expectations of massive fiscal stimulus measures after the unexpected Democratic win in the Georgia Senate runoffs that resulted in the majority control of the Senate, reviving the “Blue Wave reflation trade”. Biden said on Friday that Americans need more economic relief from the coronavirus pandemic now and that he will deliver a plan costing “trillions” of dollars next week. Biden also called for raising the minimum wage to $15, a campaign promise, and for sending out $2,000 in direct cash payments. There was some reality check on Friday around additional government spending after “the most conservative” Democratic senator Joe Manchin said he would “absolutely not” support passing a round of $2,000 stimulus cheques as a first priority for the incoming Biden administration, which underscores the fragility of the slim Democratic majority in the Senate. Every Democratic senator is needed to pass anything Republicans reject, which means each of them have a veto—and the centrist senators such as Manchin are sure to block anything they see as going too far, including large parts of the spending in the Green New Deal trumpeted by the left of the party.
As Big Tech corrected on potential increased regulatory risk, with Microsoft -1.3%, Apple -0.5%, Facebook -2.1%, Amazon -2.3%, Netflix -5.6%, Adobe -3%, Elon Musk dethroned Amazon’s Bezos to become the world’s richest man as Tesla’s market cap surged above US$830 billion, while China’s Nongfu Spring bottled water entrepreneur Zhong Shanshan overtook Warren Buffett in wealth with a US$91.7 billion fortune. Long-term bonds and emerging market currencies were hit hard as US 10-year treasury yield spiked up to above 1% for the first time since the market crash in March 2020. Notably, 10Y UST yield has spiked above the liquidation trigger of billions in trend-following CTA strategies, which could result in ugly volatility in the market ahead. Gold fell over 4% on Friday in its biggest one-day loss since early Nov 2020, sending it down 2.6% for the week, as higher bond yields increase the opportunity cost of holding non-interest yielding bullion, and the existential value of gold is increasingly at risk of being disrupted by bitcoin as traders piled into the gold-to-bitcoin switch. Meanwhile, Citi published a note on Thursday that it sees no further upside for U.S. and world stocks in 2021 as lockdowns induced by fresh waves of COVID infections roil global economies. Jason Zweig wrote in the WSJ that “on social media, the first few weeks of the year will be full of bluster and braggadocio, with everyone who owned bitcoin or Tesla Inc. in 2020 boasting about how much money they made” and warned that “It may be tempting to keep riding the wave of hot assets from last year. Do that long enough, and you'll eventually get burned.”
As euphoric traders piled into the trendy Cyclicals and Value Traps, we believe that there is a high probability of downside risk in chasing and catching them at exactly the wrong time after their sharp run-up from being blinded by the fiscal stimulus great expectations and vaccine euphoria — the light at the end of the tunnel — and things can turn very nasty suddenly, as markets tend to underestimate how long that tunnel is, and how dangerous that tunnel is. This situation is very vulnerable for cyclicals to degenerate or revert back into its true ugly colors as cheap-gets-cheaper Value Traps once the vaccine euphoria fades or something negative happen on the mass vaccination roll-out or the vaccine does not prevent people from carrying and spreading the virus to others or new mutated virus strains erupt to render the vaccines ineffective.
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 (companies who cannot cover their interest expense with cash from operations) and Vampires (junk-rated corporations with negative EBITDA) 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.
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.
We will continue to avoid the overcrowded and popular frenzy-gripped frothy emerging markets, such as China, Korea and India, that are driven and dominated by retail traders, as they are far more vulnerable to destabilizing selloffs, systematic corporate misgovernance and accounting fraud blow-ups and black swan risks. The Nordics has the lowest macroeconomic and corporate governance risk as a region and also the strongest in terms of resiliency in coping with the vaccine rollout transition and rebounding well in a PTSD Growth Crisis situation, far ahead of any country/region. Most importantly, the Nordic is less vulnerable to destabilizing fund flow sell-off, and market microstructure wise, the investor shareholding base in the Nordic companies is largely longer-term institutional investors and pension funds, unlike the volatile short-term speculative retail-driven trader flow in many other countries, including the U.S. where the longer-term forex risk has increased. Also, the Nordic is quite distinct from the Eurozone (EU) where fiscal and monetary coordination/disunity are always a problem, so it's regarded as an oasis on its own even though it is technically in Europe but is not part of the EU's problems.
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] How I Built This With Guy Raz - ActOne Group: Janice Bryant Howroyd
In the late 1970s Janice Bryant Howroyd moved to Los Angeles and began temping as a secretary. She soon realized there were many other young people in situations similar to hers. So with $1,500 in her pocket, Janice rented an office in Beverly Hills and created the staffing company ACT-1. Today, ActOne Group is an international workforce management company, making Janice Bryant Howroyd the first African-American woman to own a billion-dollar business.
AOM Podcast #672: How to Do the Impossible This Year
There are goals in life that seem very attainable. And then there are those which seem practically impossible — rising out of poverty and/or a traumatic childhood, becoming a bestselling writer, deadlifting 500 pounds. With impossible goals the odds seem long, and it isn’t clear how to get from point A to point B.
My guest today has spent decades figuring out the roadmap for making that journey. His name is Steven Kotler, he’s a peak performance expert, the Executive Director of the Flow Research Collective, and the author of numerous books, including his latest: The Art of Impossible: A Peak Performance Primer. Today on the show, Steven talks about how he defines an impossible goal and then unpacks the formula for making the impossible, possible. That formula begins with harnessing the five big intrinsic motivators that will give you focus for free and which you need to activate in a certain sequence, and then moves through the six levels of grit which should be trained in a particular order as well. We discuss the importance of creativity and continual learning, and how to assess the ROI of your reading. Steven also explains how flow amplifies the process of achieving peak performance, and why you need to rediscover the primary flow activity from your childhood. At the end of our conversation, Steven shares some things you can begin doing today to start tackling your impossible goals.
- How this book is a continuation of Steven’s work in The Rise of Superman
- What is the “impossible” anyway?
- Why flow is necessary but not sufficient for peak performance
- Why do so many people fail to live up to their potential?
- How biology scales, but personality doesn’t
- What is motivation and why does it matter?
- The five stages of motivation
- Why curiosity is so important to your success
- Why mastery is so effective
- The case for reading books
- What people can do right now to achieve the impossible in 2021
KEE Koon Boon ("KB") | Email: firstname.lastname@example.org | WhatsApp: +65 9695 1860
|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.