11.4.2020 Pasi Havia

Stormy Markets and New Winds in HCP Focus Fund Management

Security from the "Stay-at-home" Economy during the Corona Panic
Corona accelerates digitalisation and takes the Focus fund to a record result in April

Welcome to read the HCP Focus fund’s investor letter for Q1 2020!

In the coronavirus, the world has faced a crisis with enormous economic consequences. As irony of fate would have it, this conincided with a change in the HCP Focus fund’s management. The previous portfolio manager Ernst Grönblom’s employment ended in March, and the fund is now team-managed. The team includes Pasi Havia as the portfolio manager, Anthony Simola as an analyst, and Elias Koski as the junior portfolio manager who has been involved with the fund since inception. The portfolio manager’s deputy is HCP’s CEO and the HCP Black fund’s portfolio manager Tommi Kemppainen.

The turmoil in markets and the simultaneous change in the portfolio management team can cause concern for investors. We are responding to our HCP Focus investors’ need for information with more frequent communications. This is why we have initiated quarterly investor letters, the first of which you are reading now. You can subscribe to the letter at this link.

HCP Focus portfolio management team

Every investor has certainly heard about the coronavirus to the point of being fed up. The topic cannot be however ignored, because it dominates the market unequivocally.

Above HCP Focus fund performance in Q1/2020 and below HCP Focus fund performance since inception. Highlight with the cursor the period you would like to enlarge.

The year 2020 started off excellently. The HCP Focus fund peaked on February 19th, when the beginning-of-the-year return was +18.18%. This was followed by a sharp decrease as coronavirus worries spread from China to the rest of the world. The darker the news got and the more clear it became that this was not a quickly passing problem, the stronger became the wave of selling that extended to all stocks. The markets came down faster than even during the financial crisis.

The fund reached bottom on March 16th, when the maximum drawdown was 31.71%, and the beginning-of-the-year’s return was -19.29%. Despite its concentration, HCP Focus clearly outperformed its benchmark index. The MSCI ACWI IMI Gross Total Return was also at its highest on February 19th, when its beginning-of-the-year’s return was +6.32%. HCP Focus having bottomed out on March 16th, the benchmark’s maximum drawdown was 32.22%, reaching bottom on March 23rd, when the beginning-of-the-year’s return was -29.71%, and calculated from the peak, -33.89%. The quarter’s returns were -9.93% for the HCP Focus fund and -21.04% for the benchmark index.

All in all, HCP Focus sailed through markets battered by the coronavirus with relatively little damage. The reason for this is ordinary. With people locking themselves inside, digital services – which constitute the majority of the fund’s investments – do not suffer as badly as traditional industries. Actually, the opposite holds true. Many companies’ demand grows when people spend more time at home. Such a new “stay-at-home” economy can even benefit these companies. Many services’ new users will continue using them once the coronavirus blows over and with society returning to its normal rhythm. You can read more about this topic in my blog post published on March 20th.

The fund’s three best-performing stocks this quarter are all such that they benefit from the “stay-at-home” phenomenon. This year, the best performer has been NVIDIA, which rose +14.66% in euros. The second one was Amazon.com with a +7.99% gain, followed by Shopify with a +7.33% return in euros.

NVIDIA’s growth factors

NVIDIA’s core business

More than half of NVIDIA’s revenue comes from the gaming industry. With people spending more time indoors, people play more games. AI, augmented reality, and virtual reality are quite immune to coronavirus effects in this situation. The decrease in face-to-face communication feeds this industry further. New car sales have hit a wall, but investments in the future – like in self-driving cars, which NVIDIA plays a role in – are not necessarily under threat. These will probably have demand in the future as well. Deep learning and artificial intelligence’s share of NVIDIA’s business has grown strongly in recent years.

LendingTree: Top Tier Partners Across the Spectrum

The worst-performing investment in HCP Focus was LendingTree, which fell 38.14% in euros over the quarter. LendingTree is the largest online lending marketplace in the US. Through it, you can apply for a mortgage, a student loan, a car loan, etc. through its partners. The more there are loan applications, the better it is for LendingTree. In the corona crisis, people’s economic uncertainty grows, and consumers postpone large purchases like cars and apartments. Therefore it is not surprising that specifically LendingTree did the worst this quarter. The trend of sourcing loans is probably in the long term not going anywhere. In the case of LendingTree, it is critical how long or lengthy the coronavirus-induced economic shock will in the end be.

In the first quarter, the HCP Focus changed one position. The food delivery service Grubhub was sold off on January 13th and replaced by Intuitive Surgical.

The Da Vinci Vinci surgical robot | Picture: Intuitive Surgical

Da Vinci’s completed procedures and instrument-specific revenues. Source: Intuitive Surgical CEO Gary Guthart,  J.P. Morgan Healthcare Conference 2020

Intuitive Surgical’s main product is the da Vinci surgical robot. At the end of 2019, there were 5582 robots installed worldwide, of which 3531 in the US, 977 in Europe, 780 in Asia, and 294 in the rest of the world. The price of a single robot is approximately 1.5 million dollars, so these are by no means cheap machine. In a Da Vinci surgery, the surgeon guides the robot from a console that is at a separate location from the patient.

Intuitive Surgical’s products in development. Source: Intuitive Surgical Annual Report 2019

As the market leader and pioneer, Intuitive Surgical is developing several interesting innovations in addition to da Vinci. As the population grows, efficient surgiccal methods enjoy growing demand. Intuitive Surgical can here be in a key role in providing growing demand with more effective and efficient healthcare.

We are likely living through the biggest defining period of my generation. The society that comes out of the coronavirus will not be the same as the one before the coronavirus. Crises change societies but they also provide new opportunities. Coronavirus will likely accelerate certain pre-existing trends. These can for example be remote working, various digital services, robotics, and other technologies and services demanded by growing knowledge work.

The HCP Focus portfolio management team is looking for a new investee company with this angle in mind. We are doing fundamental work without hurrying. The HCP Focus fund’s main idea is to invest in the long-term in select megatrends. The fund can remain invested in a particular company for as long as 10 or 15 years. This particular time is favorable for recogniing the next megatrends and the companies that benefit from it. The work has been started and the sleeves have been rolled up. We expect to get to the point of choosing the next portfolio company earliest this fall.

Pasi Havia
HCP Focus portfolio manager

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Security from the "Stay-at-home" Economy during the Corona Panic
Corona accelerates digitalisation and takes the Focus fund to a record result in April

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