H&G High Conviction Fund - March 2022 Update

OBJECTIVE

We invest in and actively engage with companies that have superior fundamental prospects but are priced at a discount relative to inherent value, usually resulting from non-operating, external events driving a flight of investors. We have significantly outperformed the Australian share market over 14 years.


*Includes the original vehicle, The Supervised Fund, launched in November 2007 by Supervised Investments Australia Limited (SIAL). SIAL was sold in March 2021 to Hancock & Gore Limited, and The Supervised Fund subsequently rebranded as H&G High Conviction Fund.

The strategy of investing in micro capitalisation listed equities has remained consistent.

Performance to 31 March 2022 (after all fees)

1 Month

Last Quarter

Financial YTD

Last 12 months

Since inception (1 Nov 2007)

H&G High Conviction Fund

1.3%

0.6%

9.4%

17.0%

8.4% p.a.

ASX Small Ordinaries Accumulation Index

5.3%

-2.6%

2.8%

11.5%

2.4% p.a.

Key Contributors to performance during March 2022

MONTHLY COMMENTARY


Dear unitholder,


During the March 2022 quarter the H&G High Conviction Fund managed a steady return of 0.6% net of fees during a period of intense market volatility. Global stock markets had their worst quarter since the 2020 pandemic crash, with the MSCI All World Index falling by 5.5%. During these uncertain times we will continue to focus on two key pillars of the Fund's philosophy: capital preservation and investing in companies that are overlooked by most institutional investors.


Bisalloy Steel Group returned 19% during March, which included the company paying its first interim dividend in over fourteen years. No material news was released during the month.


Hillgrove shares increased by 22% in March after the company announced some significant copper intersections from recent drilling and reiterated the intention to commence underground mining this year. Encouragingly, Hillgrove also stated it was finalising debt funding for the project. We believe there is still considerable upside in the share price given the current copper price.


Po Valley Energy shares fell by 16% during March. The Italian government published an updated map of permitted zones for offshore gas production, which now excludes Teodorico. However, there are also new exemptions for producing in excluded zones, which Teodorico appears to meet. The government will assess the situation and provide clarity in due course. Meanwhile, Po Valley continued to progress the final approval process for Selva. The European natural gas price increased by a further 30% during March as the continuation of the war in Ukraine and sanctions on Russia prompted renewed concerns over European energy security. At current prices, Selva alone is worth multiples of Po Valley's market valuation.


Kiland shares fell by 11% during the month as the company announced a discounted rights issue to help fund the development of its 18,000 hectares of land on Kangaroo Island into sheep farms. The majority of the land is encumbered by fire-affected timber plantations and will take several years to rehabilitate. However, given the demand for high rainfall agricultural land in Australia, it is expected there will be significant appetite for Kiland's offering post-development. We believe the project's economics are attractive at the rights issue price of $1.10 per share and accordingly invested 6% of unit holder capital in the deal. This follows our sale of half of the Fund's shareholding in Kiland at $1.34 in December 2021.


MARKETS

Despite the rebound in markets in March, we continue to believe there are reasons to be cautious about the medium term outlook due to persistent rising inflation. Several indicators such as the sell-off in government bonds, inverted yield curve and liquidity issues in commodities trading augur difficult times ahead. We continue to hold a historically high level of cash (26% of the Fund), put options on the S&P 500, and have recently begun an allocation towards physical gold.


As ever, please don’t hesitate to reach out to us with any questions on the Fund.


Sincerely,


The team at H&G Investment Management


PORTFOLIO






FUND INFORMATION

Fund name

H&G High Conviction Fund

Investment Manager

H&G Investment Management Limited

Fund inception

November 2007 (relaunched April 2021)

Fund pricing

Monthly

Fund type

Open-end unit trust

Investor eligibility

Wholesale and sophisticated investors

Trustee

Equity Trustees

Custodian and sub-custodian

Mainstream Fund Services and JP Morgan

Auditor

Ernst & Young

Management fee

1% plus GST p.a. + fund costs capped at 1% plus GST p.a.

Performance fee

20% of benchmark outperformance, with a high watermark

Benchmark

5% p.a.

Buy/sell spread

0.4%



DISCLAIMER

Equity Trustees Limited (“Equity Trustees”) (ABN 46 004 031 298), AFSL 240975, is the Trustee for H&G High Conviction Fund. Equity Trustees is a subsidiary of EQT Holdings Limited (ABN 22 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT).

This monthly performance report has been prepared by H&G Investment Management Ltd (ACN: 125 580 305; AFSL: 317155) to provide you with general information only. In preparing this report, we did not take into account the investment objectives, financial situation or particular needs of any particular person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. Neither H&G Investment Management Ltd, Equity Trustees nor any of its related parties, their employees or directors, provide and warranty of accuracy or reliability in relation to such information or accepts any liability to any person who relies on it. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Information Memorandum before making a decision about whether to invest in this product.