H&G High Conviction Fund - May 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 May 2022 (after all fees)

1 Month

Financial YTD

Last 12 months

7 years

Since inception (1 Nov 2007)

H&G High Conviction Fund

-0.2%

10.0%

7.9%

9.1% p.a.

8.4% p.a.

ASX Small Ordinaries Accumulation Index

-7.0%

-5.9%

-3.0%

7.8% p.a.

1.7% p.a.

Key Contributors to performance during May 2022


Dear Unit Holder,


H&G High Conviction Fund weathered another stormy month, returning -0.2% net of fees in May compared to the ASX Small Ordinaries Accumulation's -7.0%. Stocks continued to fall in the context of mounting concerns about inflation, interest rates and economic growth. The worst affected shares have been those trading on high valuation multiples. The Fund managed a steady return due to a large concentration of debt-free and asset-rich "value" stocks that are less correlated to the wider market, as well as a considerable cash weighting. This has been and continues to be our strategy while stock multiples across the board remain historically high.


TOP FOUR HOLDINGS


Kiland shares increased by 5% in May despite no material news being announced by the company. During the month, it was encouraging to see the managing director, James Davies, purchase a further $330k worth of stock around current prices. Interest in Kiland shares have benefitted from an increased focus on agricultural companies, which are deemed a good hedge against inflation. Additionally, the disruption to supply chains has emphasised the need to secure onshore food supplies.


Po Valley Energy shares rose by 3% in May. Early in the month, the company announced the retirement of founder and chairman, Michael Masterman. We have maintained our position on the board and are confident the new chairman, Kevin Bailey AM, a longstanding shareholder, is well-suited to steer Po Valley as the company progresses towards first gas at its onshore field, Selva. Shortly after month-end, Po Valley announced the local region (Emilia-Romagna) had given approval for production at Selva after an intensive consultation period. Italian natural gas prices remain over 5x higher than July 2020 and we believe Po Valley's assets can help address the country's significant energy crisis.


Bisalloy Steel Group shares increased by 11% in May on no news.


Hillgrove Resources fell by 7% during the month despite some positive drilling results and an updated mineral resource estimate demonstrating an increase in copper. The company continues to progress plans to recommence mining in the final quarter of this year.


MARKETS


We remain cautious about the short-medium term outlook for the stock market. To that end, we retain an historically high level of cash (26% of the Fund as at the time of writing), as well as a small allocation towards gold and put options on the S&P 500. Over the last month we have met with numerous management teams and are building up a "wishlist" of companies we would like to own shares in as valuations become more attractive. We intend to deploy our cash as such opportunities arise.


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.