SummaryHearts and Minds Investments (HM1) is a LIC with the "highest conviction equities from leading Australian fund managers, with all fees donated to medical research institutes." A third of the portfolio is dedicated to picks from the annual Sohn conference for 12 months.

It's been more than 5 years since listing and HM1 has significantly underperformed its benchmark the MSCI World Index (AUD) by 3% annualised since inception and over 14% annualised in the last 3 years. The 3yr cumulative underperformance is over 48%!

As a result, HM1 trades at 15-20% discounts to Pre-tax NTA and 25%+ discounts to NTA adjusted for franking credits and tax assets (due to losses). Yet, this is a large fund not a minnow. On over $700 million in net assets (inc franking), the discount represents $150 million in value that shareholders can recapture if they vote to simply convert it to an Open End fund trading at NAV.

While shareholders own the fund and decisions should be taken in their interests, currently the Directors, founders and fund managers appear to think they can continue to run the fund for their interests (reputational benefits, status, self-promotion, benefiting their own positions/funds). Given the appalling performance, and a string of failings of managers and directors, they are well aware many investors would exit at NAV as soon as that was possible.

In this post, I will summarise the case for converting HM1 to an Open End fund. If it did, investors happy to continue can do so with no detriment, but those who wish to exit can do so without sacrificing 25% of their assets. Actions for interested shareholders include: sharing this post with other investors, coordinating via this site and Hotcopper to bring on a conversion vote, and voting against the remuneration report (only 25% is needed at two annual meetings and the board will be spilled).

After a litany of failures and excuses it's time for HM1 to give shareholders an exit


I will be updating this post regularly and I encourage HM1 shareholders to share it with other holders and reference it when emailing HM1 to support conversion:

My view is that Open End conversion within the next couple of years is inevitable if HM1 is stuck at persistent discounts over 15%. HM1 Directors should be forced by majority owners (who they are meant to represent) to convert earlier rather than pointlessly delay. Also, they should communicate conversion potential (and then plans/timeframe) proactively such that trapped retail holders benefit rather than mostly vultures funds and wealthy arbitragers.

Action 1: Shareholders with over 30,000 shares can send me the number of shares owned and an email address. At this stage, this is only to collate a list to email in advance of future votes, including each AGM. All HM1 holders can monitor the Hotcopper thread below and post their share count if desired.

Communication/Discussion: I minimise all unnecessary time on the phone, chat and email. I am just one shareholder and only represent my own views on this site. Other shareholders please use the below Hotcopper thread to communicate your own perspective. I can then respond in a time-saving, transparent way to everyone.

> Hotcopper: Why HM1 shareholders should vote to convert it to an Open End fund

Open End Conversion Value (updated 25 Jan 2024):

HM1 Share Price: $2.57. Pre-tax NTA $3.01. Post all tax: $3.01. Franking credits+ $0.24. Total: $3.25

Value uplift: ~26%!! A $100,000 investment would instantly be worth ~$126,000.

Outcomes: Investors could then exit or remain holders.

HM1 Directors can follow the well-worn conversion process (like MHH, MGF, FOR, EAI and dozens of other CEFs), but are resisting acting in the interests of most shareholders.

1. HM1 NTA performance in the last 3 years has been appalling and nothing has changed since the "fixes"

You can see this in their own monthly reports:

HM1 Dec 2023 Monthly Report

The 3yr underperformance has been 14.4% annualised (cumulative underperformance of 48%!). As of Nov 2022, HM1 management claimed to have fixed the issues that led to such massive underperformance, but you can see that in the year from Dec 2022 to Dec 2023, NTA performance was 11% below the MSCI World benchmark. So, despite their claims, the fixes didn't work.

As the MSCI World Index can't be compared directly on Sharesight (or invested in), I use the most relevant ETF tracking it: iShares MSCI World ETF (URTH). Below are the NTA returns since inception on 14 Nov 2018:

Note that over this period VGS delivered 11.94% and VAS 9.35%. A 70/30 mix of them would have delivered 11.2% over this period.

2. HM1 directors claim to have been very focused on resolving the discount for 18 months but have finished with changes and are now just waiting on the performance fairy to turn up!

The 2022-23 Annual Report contained this summary:

Essentially, they have a new CIO, a new fund selection committee, new stock-pick screening, new disclosure of the portfolio in monthly reports, and new half-yearly dividends. Now they're waiting for better performance to magically show up.

This is the problem with the conceit of active management: if you simply believe your fund is going to be able to outperform, well there's no end to the things you can actively fiddle with while telling shareholders to sit tight.

Meanwhile, the facts keep slapping them in the face. For example, after all their fixes to the Conference Portfolio the results were still appalling:

Instead of honestly engaging with the reality of the active management experiment they've set up (especially the Conference Portfolio), HM1 directors and management are determined to press on! After all, they have super, strong beliefs - isn't that what matters?!

3. So does HM1 Management actually know what the real issue is?

- They replaced the CIO Rory Lucas with Charlie Lanchester. No-one will miss Rory's CIO Insights (plus golf commentary) as he blithely presided over a truly enormous drawdown. But Charlie hasn't turned the underperformance around, he's continued it. Changing a few things doesn't mean HM1 can suddenly outperform. Long-term outperformance after all costs is rare. From the way HM1 management discusses how it tries to achieve outperformance, it's obvious they just have blind faith in active management. They constantly confuse alpha with beta. I debunk this faith here: About page (see: Q: Where is the evidence that active management underperforms after all expenses?)

4. The new Fund Management Selection Committee

- This new committee was supposed to provide greater diversification (not tech dominated) and replace poor managers with the best available. There were two additions to the Core Portfolio (Tribeca and Munro). Their representatives also picked two stocks for the 2022/23 Conference Portfolio which are easy to track from 30 Nov 2022 to 30 Nov 2023:

Jun Bei Lu (Tribeca) picked: China Tourism Group Duty Free

Nick Griffin (Munro) picked: ASML Holding NV

ASML outperformed by 3%; China Tourism Group Duty Free underperformed by 72%! This was the worst performance out of all Conference stock pickers. But Tribeca are still Core and Conference Managers and Jun Bei Lu is still the stock picker.

Clearly, simply swapping out a fund manager every few years is just another subjective and pointless dial HM1 turns now and then. Just like the existing Investment Committee, the new Fund Management Selection Committee is asleep at the switch while overhyped stock pickers swing for the fences. Perhaps management's thinking is if they create enough committees, investors will think they're doing their best? This is absurd.

5. HM1 Directors arrogantly dismissed my AGM question about a conversion to an Open End fund that trades at NAV. But the arguments remains uncontested!

HM1's 2023 AGM was held in Sydney and online on 30 Nov 2023. Interestingly, the link to the AGM recording was never published, let alone promoted. I requested it and was emailed it: > Vimeo: HM1 AGM 2023

Notably, you won't find the 2023 AGM on the HM1 website or even by browsing HM1's main Vimeo page. Shareholders might like to guess why it has been hidden?

Amusingly, at the 29min mark Chris Cuffe couldn't think of a single good reason why HM1 investors might vote to oppose the re-election of himself or any other Director (10% of votes were opposed). Here's one: abject negligence over the last 3 years as HM1 spiralled into massive underperformance.

My Question (30min mark): Given HM1's persistent 15-20% discount, why shouldn't shareholders get to vote on converting it to an active ETF that trades at net asset value? The LIC structure is tax inefficient, and its captive capital nature explains the low accountability decisions on high risk investments or adding unlisted investments. An open ended structure will force greater consultation with us owners, or we can exit at NAV if we don't agree with the direction being taken.

Chris Cuffe's Answer (edited only for clarity): "The board's acutely focused on the discount, but it's not an HM1-specific thing; there's been a persistent discount across the LIC sector, especially international LICs. Our structure is fairly new, we've only just reached 5 years. People bought into a LIC which is quite different to an actively managed ETF. So it would be too early, we think as a board, to consider changing the structure. They are fundamentally different and there are different tax consequences as well. We do understand the issue and ourselves have asked if it's too early to start looking at different things. We've had experts come and talk to us, but we're unanimous that it is too early. And we're very optimistic on the changes we've implemented in the last 18 months. We're pretty confident they will lead to better results. Discounts often persist when markets are down in general, but in the case of HM1 its investment performance has not been where we'd like to see it, and we're confident that once it improves you should see the discount lowering."

Someone unidentified piped up to comment that to convert to Open End would disenfranchise investors wanting to hold long term. This is nonsense, as no-one would be forcing them to sell. They also commented that investors knew what they were buying into at IPO. This is an illogical argument too. HM1 belongs to the current owners of the shares not the original owners at IPO. For example, I currently own 120,000 shares and it's entirely irrelevant what the prior owners of those shares think. Nor does it matter whether I bought them yesterday or at IPO. Chris Cuffe didn't correct either of these baseless assertions which shows how his interests are clearly separate and different from current shareholders.

In answering a shareholder query on whether a buyback might be used to address the discount, Chris Cuffe revealed that directors don't wish to shrink the size of the LIC as its genesis was also about contributing to medical research. Less shares means smaller donations. Thus directors don't see a buyback as desirable for that reason. Inadvertently, the directors revealed that they subordinate shareholder's interests to their own, different priorities.

Regarding Chris Cuffe's answer to my query. Yes, Closed End and Open End structures are fundamentally different - that's the whole point! Closed End structures are inferior for all of the reasons I've listed on this site. Yes, they have different tax consequences - that's another reason to convert. LICs are always more tax inefficient than Open End trusts as I've summarised here (see Reason 16).

As for the experts the HM1 board had come in to discuss options, who exactly are these experts? I suspect Chris Cuffe just made this up and cannot name a single "expert" who considers the Closed End structure to better serve HM1 investors (I'm willing to correct this if advised who these "CEF experts" are. I enjoy adding scalps to my list and exposing their fictions). I'm the number one, independent expert on ASX Closed End Funds and have published over 20 cogent reasons why CEFs (especially equity CEFs) should be eliminated. No-one, let alone any HM1 director, manager or "expert", has published a rebuttal of even a single one of those 20 arguments.

Regarding the "it's too early to consider changing structures" excuse: CEFs have been around for many decades and, since July 2020 when CEF selling commissions were finally banned, it's been a one-way train: 34 Closed End LICs and LITs have been delisted, 4 more will join them soon, and only 5 have launched with only 1 (WAR) raising any significant capital. WAR trades at a 10-15% discount and the others are similar (HCF) or much worse at 20-50% discounts (CDO, SB2, TVL). Chris, if Closed End structures for equity CEFs like HM1 are desired by investors, why has the demand evaporated?

The real issue is there will never again be demand for equity LICs like HM1 at NTA. Sustained active management outperformance after all costs is incredibly rare and HM1 has no chance of getting there. I suspect HM1 directors and management think that the discount pressure will ease as HM1 delivers any positive performance (markets usually go up) and that continued long-term underperformance of alternatives (URTH, VDHG, VGS/VAS mix) will then matter less. However, honest reporting of underperformance over multiple years will keep the discount elevated as investors become resigned to the performance gap to passive ETFs (VGS, VAS, URTH, VDHG).

Finally, the defensiveness of the HM1 directors, founders and management about converting to an Open End fund is not due to disadvantages of the structure. Indeed, if HM1 insiders truly believed in the value of the HM1 concept they would welcome the Open End ability to grow the fund much larger: more investors would benefit and more money could be raised for medical research. HM1 wouldn't even need to outperform, many investors would be happy with performance close to the benchmark given where the fees go. Their defensiveness is explained because even they realise HM1 will persistently underperform, and most investors will have a limit to how much money they will sacrifice to back philanthropy this way.

6. Unless their is an exceptional reason for ongoing demand, all ASX Closed End equity LICs and LITs are being forced to convert to Open End or being merged. HM1 won't be an exception!

In his response above, Chris Cuffe claims HM1 just needs more time to make a success of the Closed End structure. According to him it could even trade at a premium again! This just shows how out of touch Chris Cuffe and the other Directors are with what's happened to Closed End funds since July 2020. They simply don't accept the actual reason for their boom (selling commissions) and the new reality since these ended: each one needs to attract ongoing demand at NTA in Closed End form or abandon the CEF structure.

Across this site, I establish with facts why almost all ASX equity CEFs should be eliminated and cover the track record which proves I'm correct and demonstrates the inevitability. See: > Tracking the elimination of ASX Closed End Funds

So to the HM1 Directors (Chris Cuffe, Geoff Wilson, Lorraine Berends, Matthew Grounds, Gary Weiss, Michael Traill, Guy Fowler, David Wright) who claim it's too early to concede HM1's Closed End structure should be changed:

- Out of 123, why have 35 Closed End funds delisted since July 2020 and only 5 launched (all of which are at big discounts)? The track record since July 2020 is thus 40 out of 40 CEFs demonstrating the failings of the CEF structure.

- Many of these (e.g. MHH, PAF, EGI, CVF, AYZ, WLS, EAI, 8EC, AEG, HML, MA1, APL, URB, EGD, EAF, EFF, AGM) did so after 6 years or less.

- Why did MHH convert from Closed End to Open End in 2021 given it only listed in Oct 2019?

- Why did PGG convert from Closed End to Open End given it only listed in Sept 2019?

- Why is NBI converting from Closed End to Open End given it only listed in Sept 2018?

- Why is MGF converting from Closed End to Open End given it only started in 2017?

- Why is FOR converting from Closed End to Open End given it only listed in Dec 2016?

- Why is SEC (listed 5 Dec 2017) converting from Closed End to Open End if the discount isn't below 5% by Dec 2024?

- There are thousands of Australian Open End funds. Is there a single one converting to Closed End now?

HM1 Directors won't answer these questions. Why not?

The forced abandonment of the CEF structure continues for precisely the reasons I cover on this site.

HM1 Directors, founders and management claim (contrary to all evidence) the Closed End structure has advantages for investors but can't demonstrate what they are, or explain why every single CEF fund example since July 2020 (over 44) indicates the opposite.

But everyone now knows the truth: the CEF disadvantages (for investors not insiders) are overwhelming and the insiders just want to hang on to the captive capital for as long as possible. Once HM1 inevitably converts to Open End many investors will flee.

7. If it isn't acceptable for any equity Closed End fund to remain at large discounts indefinitely, then why haven't Directors set a deadline for conversion?

HM1 started trading at over 15% discounts in April 2022 and has persistently traded at 15-25% discounts since.

No HM1 Director has the brass to assert it can trade at over 15% discounts for decades and not be converted to an Open End fund where shareholders can finally exit at NAV.

So, logically, there has to be a finite timeframe for how long shareholders can be expected to give Directors and management to rectify the discount.

If HM1 Directors were serious about the 15-25% discount being unacceptable then they would candidly state what they think that finite timeframe should be? 2 years? 3 years? 5 years?! 10 years?!!

The fact that they haven't stated what timeframe they are giving themselves demonstrates they aren't serious and have no efficacious strategy. They have no solution for outperformance. They are just hoping the rising tide of an upbeat market lifts all boats, regardless of underperformance.

Amusingly, current HM1 Directors seem to think they will get away with this. But it will be 2 years of continuous 15-25% discounts in April 2024. And I am going to keep asking this question at every opportunity till they answer it. When they finally do, and say something ridiculous like 5 years, it will be blindingly obvious to all shareholders that they should just force the conversion as soon as feasible, as the current Directors can't be trusted.

However, given this is all so predictable as to how it will play out, shareholders should just look ahead and take action now.

8. Are HM1 Directors breaching any of their duties?

If anyone listens to the relevant parts of the 2022-23 AGM I discuss in Reason #5 above they would realise that Chris Cuffe explicitly states that he and the other directors have personal priorities different from most shareholders (e.g. to maximise donations by not letting captive shareholders escape and reduce the size of the fund). And, of course, all of the directors benefit greatly - in terms of reputation, status, careers and their legacy - through being in charge of a $600m fund that donates millions to health charities each year.

This is at odds with the majority of shareholders who bought shares as investments. As such, I am investigating director duties under Australian law and what shareholders can do in such circumstances. More information and updates will follow.

> Stonegate Legal: Breach of Directors Duties in Australia

> Norton Rose Fulbright: Shareholder primacy already requires directors to actively consider non-shareholder interests

9. How did HM1 raise $500 million in the first place if there are now so many more sellers than buyers that there is a persistent ~20% discount?

The same reason as all other captive capital Closed End funds that raised huge amounts at IPO: selling commissions! Here's the proof from the HM1 Prospectus:

Basically, all arrangers/brokers (Commonwealth Bank, NAB, Crestone, Bell Potter, Evans Dixon, JBWere, On-Market Bookbuilds, Ord Minnett, Patersons, Shaw and Partners, Taylor Collison, Wilson) got paid 1.5% of all funds they raised from retail investors.

This turned out to be around $7 million in loot for simply pumping this out to their client base as the next hot fund to get into at IPO (before the risk of having to pay a premium after IPO!)

And Chris Cuffe and his fellow directors made it easy to pump up by including just two tasty performance morsels in the prospectus:

It's misleading to include these two years of 10 month returns from the Sohn Conference because they happened to be very positive. I'm sure if the returns were from recent Sohn Conferences (mostly negative) they wouldn't have been included in a Prospectus. So this is selection bias. Notably, HM1 has never sought to provide like-for-like returns for all Sohn Conferences since.

Regarding active management outperformance after all costs, the long-term exposes all fantasies. It's very revealing that HM1 reviewed the long-term performance of the Core Fund Managers (who are picked for the long-term unlike the Conference Managers) but chose not to publish any results. Perhaps because the results were consistent with what I assert on this site: that active management outperformance after all costs is very rare in the long run.

10. Simple quantification of Conference Portfolio returns could be provided each year but never is

Each year, HM1 boasts about the star stock pickers its obtained for the Sohn Hearts and Minds Conference. The stocks are intended to be held for ~12 months from around the end of November. For comparison purposes, it is very simple to show the 12 month total return of the Conference Portfolio versus the benchmark (regardless of when exactly HM1 holdings were bought or sold down). But HM1 management consistently refuses to do so.

So now I'll be doing so on this blog.

HM1 Conference Portfolio 30 Nov 2022 to 30 Nov 2023:

As you can see, 7 of the 12 stocks had negative returns in a period in which the benchmark ETF (URTH) delivered a return of 16.6%. AMP, Darling, Keyword Studios and China Tourism delivered returns of -27% to - 55%! Only 4 of 12 outperformed the benchmark.

The arithmetic average return of the 2022-23 Conference Portfolio was: -3.86% underperforming URTH by over 20%!

And in case you were wondering if HM1 just got unlucky with the losers in this 12 month period, relax it doesn't look likely:

HM1 2022-23 Conference Portfolio 30 Nov 2022 to 15 Jan 2024:

The duds were still duds. Meanwhile the benchmark ETF URTH had increased to a return of 18.26%.

Of course, at the time of the Sohn conference, HM1's media partners were telling investors its 2022-23 picks were playing it safe in profitable companies! See: > AFR: Why Sohn’s top stock pickers want investors to play it safe

Let's add a little accountability given HM1 management never does.

2022-23 Conference Portfolio Stock, Returns, Fund Manager, Stock Picker:

New Relic: 67.6%, Eminence Capital, Ricky Sandler

Car Group: 25.2%, Auscap, Tim Carleton

Champion Iron: 23%, Regal Partners, Tim Elliott

ASML: 20.5%, Munro, Nick Griffin

Nike: 6.1%, Claremont Global, Bob Desmond

FDJ: -2.8%, Perpetual, Anthony Aboud

Transurban: -5.2%, Wavestone, Catherine Allfrey

Eurofin: -12%, Cooper , David Cooper

AMP: -27.2%, Samuel Terry, Fred Woollard

Darling Ingredients: -36.6%, Firetrail, James Miller

Keyword Studios: -50%, FACT Capital, Joyce Meng

China Tourism: -55%, Tribeca, Jun Bei Lu

See: > Sohn Hearts and Minds: Key Takeaways from Sohn Hearts & Minds 2022

11. Conference Portfolio stocks do NOT have a max holding period of 12 months

The maximum holding period for Conference stock picks is supposed to be 12 months and HM1 has never advised of any change or exceptions.

For 2022/23, the worsr pick of all was by Jun Bei Lu (Tribeca): China Tourism Group Duty Free

Lo and behold, at 31 Dec 2023, HM1 is still holding China Tourism Group Duty Free after advising the Conference Portfolio has been changed over! No doubt, HM1 will justify this by claiming this stock is now suddenly a Core Portfolio pick.

This begs the question as to what other changes HM1 has made without consulting us owners. And what it will do in future? Alarmingly, this is a pattern of behaviour. The biggest change was the decision to invest in unlisted companies without getting approval from shareholders (I'll discuss this further).

12. Rockstar fund managers with "high conviction" picks but no conviction in HM1

The whole thesis for HM1 is that investors are getting a concentrated portfolio of the highest conviction ideas from seven of the best fund managers in Australia plus a yearly Conference portfolio from star fundies across the globe.

The current seven core fund managers are below with the key HM1 stock pickers noted:

Munro Partners: Nick Griffin, Kieran Moore

Tribeca Investment Partners: Jun Bei Lu

Cooper Investors: Peter Cooper

Regal Partners: Phil King

Magellan Asset Management: Elisa Di Marco

TDM Growth Partners: Tom Cowan, Ed Cowan, Fraser Christie

Caledonia: Michael Messara

However, I doubt any of these brilliant minds have a holding in HM1 at all, or at least one significant enough to reveal. No fundie stock picker has ever mentioned investing in HM1 personally due to believing in the high conviction thesis and its chance of outperforming. When invested, I typically have 8-12% of my net worth in HM1. I doubt any of these fundies have even 1% of their net worth in HM1. Indeed, most wouldn't own a single share!

The fund managers real interests in HM1 are not backing their investment acumen. Their ulterior motives are: reputational benefits, status, self-promotion, and benefiting their own funds and fund positions in these stocks.

HM1 loyalists who worry that converting to Open End will reduce the fund size should just ask the above names to put their money where their mouth is, and also recommend HM1 to family and friends. I can guarantee you this will never happen.

13. The U.S. activist fund Saba Capital now has a substantial stake. What are its intentions and can Australians join forces?

On 10 Jan 2024, Saba Capital filed its latest Change in substantial holding notice. It now owns 21.4 million shares which is 9.35% of HM1:

In only the last few years has Boaz Weinstein's Saba Capital started aggressively targeting Closed End funds. And only in the last year has he started building stakes in Australian CEFs.

Notably, Saba Capital hasn't stopped just above the 5% threshold required to call a meeting to put forward a resolution to wind-up or convert to Open End. It has over $4 billion to put to work, so may be building a larger stake to benefit from a conversion at NAV down the track (and ~20% discount elimination) and ensure a vote suceeds.

Saba Capital has been ramping up its CEF activity on the ASX and LSX, and resolution of permanent discounts according to Boaz Weinstein is for funds to simply "push the button" to Open End the fund.

Saba’s Boaz Weinstein Sees Value in Closed-End Fund Arbitrage

As noted in the Actions at the start of this post, Australian shareholders can post their share count on the Hotcopper thread (and monitor), or if at least 30,000 send to me directly. Future coordination for Australian shareholders may include CEF activists like Saba Capital.

14. HM1 directors/management deliberately doesn't want the majority of shareholders engaged in voting or potential major decisions (Open End conversion)

Anyone can check the Annual Report or and see HM1 has 228 million shares on issue. Yet, at its 2023 AGM the total vote levels were less than 25 million:

This means less than 11% of shareholder votes were cast in total. Less than 16.2 million votes were actively cast For any of the resolutions: this is just 7% of shareholder votes! This is indicative of the support for HM1 directors and management, and also the level of HM1 director's interest in shareholder engagement.

Yet, HM1 directors feel they can simply refuse to address the reasoned arguments for and against the Closed End fund structure, which is costing owners $150 million in exit value via the discount?!

This conceit will not end well for HM1 directors. If still a holder, I aim to activate shareholders well in advance of the next AGM, and expect the vote outcomes will be very different. Current HM1 directors may be in for a surprise.

15. HM1 directors/management decided to start investing in unlisted assets without shareholder approval despite the prospectus stating it didn't intend to invest in unlisted assets

In Dec 2022. HM1 directors and management decided, without approval from shareholders, to commence investing in unlisted investments (they simply updated the mandate themselves!). 

Yet, the prospectus for the fund clearly stated: "The Company does not intend to invest in unlisted securities."

Since Jan 2023, HM1 investors are now invested in Rokt and Guzman y Gomez (TDM pushed for this change as it has major stakes in both). TDM could simply have had it reiterated that they need to stick to listed companies only, but apparently management and directors didn't think it was necessary to represent shareholder's interests or seek their approval.

In every CEF market (UK, U.S. Australia, Canada), all other things being equal, the greater the proportion of unlisted assets, the higher the discount of the CEF (See Reason #13 here). Apart from the uncertainty regarding valuations and concerns about liquidity, investors have learned the hard way not to trust most fund manager's timeliness and accuracy in marking their unlisted asset valuations. Many large investors also have their own self-driven process as to if, when and how to invest in unlisted assets, they aren't seeking a fund targeted at listed equity exposure to start making unlisted investments!

In the case of HM1 it's even worse as TDM will naturally be placing its financial interests ahead of HM1 shareholders in recommending when HM1 enters and exits, and at what valuation.

David Wright co-founded Zenith Investment Partners and sits on the HM1 Investment Committee. In discussing rating funds David emphasizes the importance of them staying "true to label" and producing "no nasty surprises." I hardly think I'm alone in considering this unapproved decision to start unlisted investments is not true to label and was a nasty surprise!

After re-reading the investment guidelines, HM1 investors may wonder what other decisions will be taken without shareholder approval: gross exposure increases, short selling, derivatives, leverage, other asset classes?

Most alarmingly, the way this significant decision was made suggests HM1 is thoroughly captured by at least some of the Core fund managers like TDM. In my view, TDM is using our captive capital to serve its interests rather than providing pro bono services for investors.

Finally, the real cynic in me thinks its quite possible that HM1 directors and management shifted into unlisted assets in part due to foreseeable pressure to address the persistent discount. An equity fund comprised of liquid, listed stocks is dead easy to convert to Open End, merge or wind-up. But every shift away from this to unlisted or illiquid investments makes the process more complex, and makes delaying easier to defend.

16. HM1 is supposed to be a fee-free LIC but fees embedded within investments are now a risk

Instead of charging an investment management fee, HM1 donates an amount equal to 1.5% of the fund's NTA per annum... To help maximise our impact, our fund managers and key service providers have committed to waiving their usual fees.

> Hearts and Minds Investments: Our Impact

That tradeoff was all well and good when HM1 was invested only in listed securities, which was the original IPO mandate, and the case from inception to Dec 2022. But then the Directors and management decided, without approval from shareholders, to commence investing in unlisted investments and managed funds (they simply updated the mandate themselves!). 

In Jan 2023, this resulted in investments in Rokt and Guzman y Gomez (where TDM has key stakes) and a Regal Partners unlisted fund. Who knows what else will follow?

Supposedly, HM1 investors still aren't paying any fees despite this change, but there's no safeguard or transparency once HM1 isn't directly invested in listed securities. There are other investors in the Regal unlisted fund, did they approve HM1 getting a free ride? Maybe the ride isn't free after all. Presumably, this arrangement suits Regal nicely, but is it really in HM1 shareholder's interests? Maybe more of the Core fund managers will go down this route too?

And there are many ways for TDM to take advantage of having HM1 investors buy into its private investments with TDM recommending the valuations, timing and structure. It's quite possible the structure of HM1's investment is indirect (e.g. a TDM-managed vehicle) that has costs and fees attached.

17. HM1 has a significant amount of franking credits trapped earning nothing. They would be released in a conversion

Each month HM1's Monthly reports publish a summary that includes the "Available Franking Credits":

It claims to have 56 cents per share in franking credits which is misleading. I tried to push them to publish the accurate amount per share. They declined to do so but now include a note which states this: "Represents the level of future dividends (expressed as cents per share) that can be fully franked"

So "56cps" actually equates to 24c in franking per share (56/.7 = 80. 80 - 56 = 24c)

While Chris Cuffe asserts one of the reasons it's not a no-brainer to convert HM1 to Open End are the fundamentally different tax consequences, this just shows the sophistry of fund insiders with different motivations to investors. The tax consequences of Open End funds are far superior to the Closed End LIC structure.

Not only does HM1 sell the entire Conference portfolio every 12 months, but it also runs a high beta portfolio with lots of fence-swinging picks and that means returns can swing wildly from one year to the next as markets boom and bust. If an Open End Active ETF (i.e. not liable for tax itself but pass-through), in the boom years it would retain all gains to distribute or reinvest. But as a Closed End LIC it has lost 30% to tax leakage which is only returned over time via franking dividends. In the interim years, it is dead capital earning nothing, not even the risk-free 5.1% from UBank.

I've written a whole post explaining this major downside of Closed End LICs using HM1 as an example: > HM1 - Hearts and Minds Investments - Cheat Sheet

Opaque quirks, complexities and inefficiencies are the primary reason I selectively trade ASX CEFs. HM1's franking credits aren't ever represented in its NTA, but are real assets that will be distributed at some point. A conversion to Open End would force full distribution.


Hearts and Minds Investments Fund (HM1) Insights: About page

> Betashares: Are active funds really a better bet in the current market environment?

> Hearts and Minds Investments: CIO Insights: Let's Recap

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