HCP Quant 2/2021 +11.02% | Value stocks came back with a bang

The rotation to value stocks continued in February, which was also reflected in the substantial growth of the HCP Quant Fund. HCP Quant returned +11.02% during the month. The benchmark index MSCI ACWI SMID Value Total Return also grew by +6.60% in euros. The United States’ S&P 500 Total Return Index, which measures the development of large-cap equities, returned +3.20%, and the European equivalent S&P Europe 350 +2.73%.

In hindsight, it is easy to pinpoint the catalyst that changed the markets to favor value stocks again. It was the long-awaited news about an effective corona vaccine. Pfizer was the first to announce the news in early November, and since then HCP Quant has returned 34%.

The stock market tends to price in events around six months into the future. Value stocks’ “relief rally” is happening because investors have begun to look at the time after corona vaccination. A return to the norm. Many of the hardest-hit stocks have been the biggest gainers of the new cycle. Even after the recent surge, many of them are still valued very low, and when compared to their average historical valuations, there is still plenty of room to grow. If the rotation is here to stay, it means better times for value investors. And it will also greatly benefit HCP Quant.

There are also a number of factors that could cause an early end for the rotation. At the current pace of vaccinations, in most countries, we are still many months away from returning to normal life and as such, the turn in favor of value stocks may have begun too early. In this case, we might still be facing bumps in the road until the timeline gets clear. On the other hand, the valuations were very low, to begin with.

The other large risk factor to the new rotation is the actions of central banks, as they have the difficult task of balancing sufficient inflation, interest rates, and the revival of the economy. Low interest rates and high levels of quantitative easing favor growth stocks, whereas higher inflation and interest rates favor value stocks. Interest rates turning higher has been supporting value stocks recently. Yesterday the President of the United States Joe Biden signed a record-breaking 1.9 trillion-dollar COVID relief bill. While stimulus funds like this mainly support growth stocks, there is a limit to how much new money can be pushed into the system without causing uncontrollable inflation.

In other words, there are some dark clouds looming over both growth and value stocks. If previously investor’s portfolio has had a focus on growth stocks, now might finally be time to allocate some of it into value stocks. Similarly, those who are “all-in” on value stocks could benefit from also holding a portion of growth stocks, as even if the rotation has begun, we are still in its early phases and a lot can still happen.


The relative earnings of stocks in developed markets, divided by market cap and valuation. 6/2018 – 8/2020.
Source: David Blitz

The past couple of years have been a strange time for investors. There have been many ways to underperform, but there has really only been one way to outperform: mega-cap growth stocks. What makes this so extraordinary, is that typically excess returns are spread among a number of factors, whereas in recent years there has essentially been only one way to do it. By investing in the largest growth stocks.

David Blitz from Robeco Quantitative Investments wrote about the returns of these different factors in his research paper: The Quant Crisis of 2018-2020: Cornered by Big Growth. Blitz covers the traditional academic factors: size (small-minus-big, SMB), value (high-minus-low, HML), investment (conservative-minus-aggressive, CMA), profitability (robust-minus-weak, RMW), and momentum (winners-minus-losers, WML). Without the momentum factor, the rest of the factors combined made a loss during the past decade.

In the end, Blitz concludes:

“We examined the performance of factor strategies during the Quant Crisis of 2018-2020. Our main finding is that there was basically only one way to outperform during this period, namely by investing in the largest and most expensive growth stocks. Mega-caps with the strongest profitability and momentum characteristics also outperformed, but we find that this is due to their sizable implicit exposure to the same large growth stocks. Moreover, profitability was only effective in the mega-cap space conditional on having a strong growth tilt. Smaller stock portfolios underperformed across the board. Thus, there were numerous ways to fail during the 2018-2020 period, but essentially only one way to succeed.

“In fact, Arnott et al. (2020) and Blitz and Hanauer (2021) have observed that the recent underperformance of the value factor is primarily driven by an extreme multiple expansion of growth stocks which appears unsustainable and bound to mean-revert, at some point. In other words, instead of having been arbitraged away, the value factor has experienced an increase in its expected return to a level well above its historical average.

The valuation multiples of growth stocks have been stretched to unsustainable levels, and correspondingly, the expected earnings of value stocks are considerably higher than historical means.

Value investing isn’t dead after all, even though many had already accepted its passing.


As a reminder, HCP’s funds are accepting subscriptions during the month of March. You can make a subscription electronically by pressing the button below.

Best regards,
Pasi Havia
HCP Quant Portfolio Manager

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“The single greatest edge an investor can have is a long term orientation.”
Seth Klarman

Huya – Gaming is the gold rush of the digital age

Gaming is the gold rush of the digital age

The popularity of gaming has grown immensely. It was not long after the creation of the first computer, that the first computer games were also born. Ever since, the advancements in the gaming industry have been astonishing. Games have evolved from moving around a few clumsy pixels to ultrarealistic experiences involving real-time interaction with other players.

Games have evolved, but so has the entire culture surrounding gaming. It wasn’t long ago that society considered playing video games to be a complete waste of time. However, over time it has become more socially acceptable, and nowadays gaming is popular among all ages.

At the same time gaming has also become increasingly professionalized. Nowadays, talented gamers can potentially earn millions of euros over the span of their careers and E-sports have even surpassed many traditional sports in viewership.

Gaming isn’t going anywhere. We believe it will continue to grow even further. Younger generations are playing more than the previous ones, and nowadays gaming is considered a normal part of life even as we grow older. Young people today will continue to be gamers even in retirement.

Gaming has staggering growth figures. Due to its growth in popularity, we also see increasingly large sums of money in the industry. From an investor’s perspective, this phenomenon is somewhat reminiscent of the gold rush in the 1800s. As an investment, gaming companies are a bit like gold miners, we can’t know for certain whether their future games will be successful, much like how we can’t know whether the miner heading to Klondike will find gold.

Finding enormous success through a single game is comparable to a miner’s pickaxe hitting a gold vein (Rovio’s “Angry Birds”). The risk is high, but so is the potential reward. We can of course reduce this risk through acquiring a larger game company (Nintendo, Tencent, Activision, Blizzard) or through acquiring a handful of different game companies.

However, gold miners weren’t the biggest winners of the goldrush, although some of them got lucky. The ones who actually gained the most were the hardware merchants who sold pans, pickaxes, hammers, and nails to miners with gold fever.

In the HCP Focus Portfolio Management team, we’ve been watching the industry from this perspective. We haven’t been interested in stand-alone game companies, due to their unpredictable nature. Instead, we’ve been searching for the greatest hardware merchant in all of Klondike. Firms like these can benefit more widely from the impact of the gaming megatrend. We’ve considered the hardware merchants to be firms providing gaming infrastructure, widely used game engines, technology, and so on.

After careful consideration, we have decided to invest in China’s leading live game streaming platform: Huya.

 

Huya Inc

Huya was born in 2014 when YY.com’s video streaming service began operating independently. It was listed on the New York Stock Exchange in 2018. Huya is China’s leading live game streaming platform, that allows streamers and viewers to interact during the broadcast. The content provided on Huya consists of mobile, PC, and console games, as well as a few non-gaming-related categories. In South-East Asia and Latin America, Huya’s platform goes by the name Nimo TV, and it covers roughly 4000 games.

In the West, the equivalent market leader of live streaming is Twitch. It was acquired by Amazon in 2014 for 970 million dollars – at the time it had 55 million monthly active users (MAU). From today’s point of view, the price seems extremely cheap. HCP Focus is invested in Amazon, thus by taking a positing in Huya, our game streaming ownership has grown to cover South-East Asia, China, the Americas, and the rest of the West.

Huya’s primary revenue source is its live stream earnings (Q3/2020 94.4% of revenue), which mainly consists of the money that paying users choose to spend on the platform. Over the past three years, the number of monthly average users and the number of paying users per quarter have both doubled. Based on the latest reported quarter, Huya’s MAU was 172.9 million and its number of paying users was 6 million. The remaining portion of Huya’s revenue comes from advertising.

The company’s revenue has grown almost fivefold in the same time span, to 2.8 billion yuan (414.6 million US dollars) quarterly. Huya’s revenue growth was around one hundred percent mark in 2018 and 2019, but it has slowed down since to 24.3% in the latest quarter.

The slowing growth isn’t a cause for concern, as the starting point was quite low and the gross margin has experienced clear growth, now being at 22%. Huya is successfully utilizing its growing user base for improved results. In comparison, their main competitor in the Chinese market: DouYu, has a considerably lower gross margin of 14.5%. Assuming that China’s competition authority will act favorably towards Huya, the company could soon experience new explosive growth, which could easily lead to improved margins as well.

 

Winner takes all – through a merger or without

Last October Huya announced the plans to merge with its main competitor DouYu. Huya’s largest stakeholder Tencent also owns a part of DouYu. Besides the merger, Tencent would also sell its game streaming service Penguin eSports to DouYu—which is fourth biggest in the Chinese market— for 500 million dollars.

To summarize the Chinese market players: Huya is #1, DouYu #2, and Penguin eSports #4. Huya and DouYu alone have 80% of the market share, so the new Huya would take over the entire Chinese market.

The merger has Tencent’s full support, so internal conflicts are unlikely to come in the way. However, whether the merger will happen, is largely reliant on China’s competition authorities. The deal is expected to be finished during the first half of the year.

It’s clear that there are many synergies that would follow from the merger. Huya’s platform is very scalable, so the addition of new users won’t cause a problem. MAU of the new company would be approximately 400 million, although there are overlaps among the user bases of all three platforms. The larger user base would ease generating more advertising income and allow for improved scalability of servers and bandwidth, as well as better monetization for streamers.

Tencent is the largest video game publisher in the world. China is the largest market for videogames. Gaming is very popular in Asia, far surpassing the West. The merger would allow Tencent great access to streamers and viewers alike, which they would certainly utilize for promoting games and e-sport tournaments.

All of this would improve Huya’s operations and their bottom line. The new company would be an 11 billion dollar giant in the game streaming industry. Currently, Huya’s market cap is around 6.2 billion dollars and DouYu’s around 4.6 billion. The new Huya would be significantly larger, more efficient and it would have almost no competition. Huya’s brand would get even stronger and it would essentially become China’s official video game streaming platform. A natural monopoly with the capabilities to further improve its position in the rest of Asia and Latin America as well.

The merger and its benefits look good, but it is by no means certain. It’s evident that in case the merger fails, Huya’s stock price will fall in the short term, and likewise, if the merger succeeds the stock has a lot of room to grow. We think it is justified for HCP Focus to carry the risk of a potential failed merger, as we consider Huya to be a solid investment in the long term as is. We are not making this investment shortsightedly. Instead, we are following our strategy of looking past cyclical changes and considering the longer-term megatrends at play. Huya is the market leader even without the merger, and it is positioned outstandingly in a high-growth industry.

 

Game streaming is a part of the platform economy

Most of HCP Focus Fund’s holdings are platform companies. For example, our previous investment Fiverr, Shopify, Etsy, Match Group, Amazon, MercadoLibre and so on. Now Huya joins the list as the latest addition.

We like platform companies. Their businesses scale very well. Arimatti Alhanko discusses the advantages of platform companies compared to more traditional business models in Finnish article Platforms Rule. Platform companies connect the business to the users, which enables the direct exchange of values between them. For a traditional linear business, getting one new customer creates only one new connection, whereas, for a platform company a new customer also creates a new connection with all existing customers. This nature of the business model is highly beneficial for both the company and the end-user.

On Huya’s platform, the connection is created between the streamer and the viewers. A streamer could be an individual or even a e-sports tournament with commentators, like in traditional sports. Streamers get a share of the revenue from paying viewers and advertising. Nowadays, popular streamers are considered celebrities, and their income can be in the millions. This creates a mutually beneficial arrangement, where viewers can consume high-quality content, and Huya gets compensated for enabling everything as a platform.

According to the book Modern Monopolies – How Online Platforms Rule the World by Controlling the Means of Connection by Alex Moazed and Nicholas L. Johnson, in a few decades half of the S&P 500 companies’ output will come from the platform economy. We are seeing that the world is moving in this direction. The world’s largest provider of accommodation (AirBnB) doesn’t own a single hotel room, the largest ride-hailing companies (Uber, Lyft, Bolt) don’t own any taxis and the largest food services (DoorDash, Uber Eats, Grubhub) don’t own any restaurants.

 

Summa summarum

Huya checks all boxes of the HCP Focus investment process. The underlying driving force is the growth of gaming and the subsequent development of the e-sports and game streaming megatrend, which we believe will continue to increase in popularity for a long time.

Huya is a platform company and the clear leader of its own market in China. According to the “winner-takes-it-all” philosophy, the winner will get a disproportionally large share of the market. Huya already has a majority share of the market, and if the merger is successful, it will take over the rest as well. As a platform company, Huya has a significant network effects.

The stock is reasonably priced, although as it is a Chinese company, more conservative valuation multiples are justified. However, considering Huya’s growth metrics, with its forward P/E ratio being around 30, its valuation is very favorable compared to many other holdings in the HCP Focus portfolio.

The primary valuation tool we use for HCP Focus investments is the EVA-method. Using EVA, Huya’s quality and valuation are both very attractive.

Best regards,
Pasi Havia
HCP Focus Portfolio Manager

 

HCP’s funds are now open for subscriptions until 31.03.2021. Schedule an appointment for a virtual meeting or make a subscription into our funds by clicking the button below.

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HCP Quant 1/2021 +3.59% | The Rise and Fall of WSB?

January was favorable for HCP Quant, and the cycle supporting value stocks continued. The first few months of the year tend to also favor smaller companies, this phenomenon is known as the January Effect. Be it the January Effect, the emergence of the new cycle supporting value stocks, or a combination of both, it has delivered a long-awaited gust of wind to the sails of HCP Quant. While writing this, February has also had a strong start, with the fund nearing +20% returns for the start of the year.

But let’s return to January for a bit. HCP Quant returned +3.59% during the month. The MSCI ACWI SMID Value Total Return benchmark index, measuring the global development of small and mid-cap companies including gross dividends, returned +1.33%. Whereas the U.S. S&P 500 Total Return index fell -0.25% in euros, and the European S&P 350 Europe Total Return index fell by -0.77%.


The Reddit group Wall Street Bets (WSB) and its recent endeavors have gained a great deal of attention. Countless media outlets have already covered the topic, so I won’t initialize the matter thoroughly.

There have been a great variety of factors including conflicting interests, goals, ideologies, feelings, memes, humor, timing, and even cult mentality, which all contributed to the conditions that led to the events of the past weeks. WSB is by no means just a homogeneous group. I will simplify matters to present one aspect of the situation with Wall Street, the “nemesis” of WSB.

As we continue to live in the midst of a pandemic, normal life is limited and people are holed up in their homes. These circumstances create the perfect environment for an online community like WSB to thrive. When we combine the financial troubles caused by the pandemic, with young age, frustration with the current financial system (which is evident from the popularity of Bitcoin among young people, the widespread distrust of fiat currencies, and the attitude that Wall Street works against the common person), the stimulus checks in the USA, record cheap leverage, increased free-time, the relatively new convenience of buying shares (Robinhood application), inexperienced investors, and sprinkle on top some underground meme humor, the soup is ready to be served.

A company selling video games primarily in shopping centers, GameStop (GME) became one of the many targets of the WSB community. The original investment thesis was actually sound, but later the whole initiative took an unforeseen turn. GameStop has been struggling for some time now due to video game sales largely moving to online platforms, and more recently due to the pandemic closing shopping centers, causing GameStop to lose their customers. Many Wall Street hedge funds started smelling blood in the water and began short selling the stock aggressively, expecting GameStop’s problems to continue and the stock to keep falling.

One member of the WSB community, Keith Gill, bought call options for GameStop in 2019. Famous investor Michael Burry (“Big Short”, Scion Capital) bought GameStop shares the same year. Both of them thought that the stock was clearly undervalued. At this point, the investment was well justified, and Keith Gill continued to actively share his views and bank statements on the developments of the investment to the WSB community.

Earlier this year on the 22nd of January, the shorted shares of GameStop had grown to 140%. It was at this point that the WSB community saw an opportunity. The stock was undervalued, and the aggressive shorting by hedge funds could create an opportunity for a short squeeze with a great pay-off. For this to be possible, a large enough group of WSB users would have to work together, and so they did. The group now had over a million members, it was certainly large enough.

While initially, the basis for the investment was good, but as the stock rose wildly in a matter of days, it quickly became an absurd game of hot potato where people were just trying to pass the stock onto the next “player” (Greater Fool theory). The company’s share price became very disconnected from reality and fundamentals. In just a few days, the GameStop stock rose from 20 dollars to an unbelievable high-point of 480 dollars.

The large influence of WSB gained wider recognition as the media began reporting the story, which then inspired even more people to join the group, causing it to multiply manyfold in a short period of time. This rise in members was also necessary for maintaining the share price and making it rise even higher. At the same time, a common enemy had been established, making the act of dumping money into a wildly overpriced stock seemed ideologically justified to many (This is for you, Dad).

The common enemy in question was the hedge funds that had been short selling the stock. Many WSB users were prepared to buy GME stock and hold on to it (“HODL”, “Hold the line”, etc.) regardless of potential losses. For them, it was more important to see the hedge funds lose and hopefully even drive them to bankruptcy. The WSB community had power, and they were drunk of the realization that they could actually affect markets. The sentiment among the members seemed to be along the lines of “Let the Wall Street bankers cry, we have the power now! We will revenge the injustice!”.

They wanted to send Wall Street a message. It was no longer about GameStop being undervalued. GameStop had become a pawn in the game WSB was using to get back at Wall Street. The power of a large group is captivating. The feeling of being part of something greater is empowering, and if on the side it can also makes you some money, even better!

Ultimately, WSB wasn’t able to see it through quite this far. Did Wall Street really receive the message that WSB wanted them to get? I don’t think so. In the end, it was just a case of failed risk management. Risk management has failed investors countless times throughout history. When the risk management of LTCM’s PhDs failed in 1998, they needed 14 banks to save the day. During the financial crisis, banks were falling like dominoes as the subprime risks were realized. This time it’s a few hedge funds. But what did they and Wall Street learn from this? They learned that their models didn’t include sufficient risk of a short squeeze. The fact that the squeeze was orchestrated by a group of angry young people doesn’t change anything. Certainly, many hedge funds will have learned from this, and they will update their risk assessments to better consider these kinds of factors in the future.

While WSB was able to hurt a few hedge funds through the fall of their risk management, they also hurt themselves in the process. The Robinhood application is a very popular platform for making investments among WSB users. During the most hectic trading hours, even Robinhood’s own risk management gave in. WSB investors were lining up to invest borrowed money into highly risky derivatives through Robinhood. This led to Robinhood’s collateral requirements skyrocketing, and them having to rely on outside capital and restricting trading to avoid going bankrupt. In their attempt to hurt Wall Street, the WSB users nearly caused their own favored platform to fall as well.

Similar increases in collateral requirements also occurred on other brokerages that had significant trading activity for the select stocks that WSB was targeting. The restrictions to trading created many conspiracy theories about Wall Street working together to strike back at WSB. Naturally, this further drove the comradery within the group.

 

GameStop share price and trading volume. Source: Wikipedia

All good things must come to an end. WSB saw an opportunity for a short squeeze and grabbed it, the stock grew manyfold and the “Dethrone Wall Street” mentality had many people join just to hurt hedge funds. Everything seemed to be going well. Hedge funds had to realize some losses and many WSB investors made massive gains. It’s likely due to the inexperience that most didn’t consider who would be bearing the cost of all this. As the ones paying the price are in fact many of the WSB users involved. Not the hedge funds.

Short squeezes always follow the same pattern. The explosive growth is followed by the fall. When a company’s valuation gets too far from the value of the underlying business, it eventually goes back to a more justified level. GameStop has now fallen around -90% from the top. WSB investor’s risk management also failed. As a method for humor, many have changed their gloating to showcasing “loss porn”. In the end, the message they wanted to send turned out to be very costly. A boomer doesn’t pay for the kind of valuation multiples on GameStop that would make the share price hundreds of dollars.

WSB seems to be a victim of its own success. In a short time, the group was able to gain millions of users. They were able to manipulate the share prices of multiple companies (AMC Entertainment, Nokia etc.). The curiosity towards WSB grew into a phenomenon. The administrators of the group received offers to make a movie out of the events that had occurred, which caused internal conflicts. The GameStop saga ended with a large group of bitter investors condemning the market and Wall Street. When the funds have been burned, will there be enough left to move the next stock? There has to be a continuous influx of new investors to replace the fallen ones in order for something like this to continue.

In the end, I don’t think Wall Street will learn much from this. Besides adapting through adjustments to their risk models and creating systems to predict movements in the market based on the online communications of groups like WSB. However, I do hope that many individual investors learned from this saga.

Best Regards,
Pasi Havia
HCP Quant Portfolio Manager

“Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble… to give way to hope, fear and greed.”
Benjamin Graham

HCP Focus Featured in BarclayHedge 2020 Performance Rankings

Helsinki Capital Partners’ HCP Focus fund has been featured in BarclayHedge’s performance rankings for the year 2020, reaching number 6 globally in the equity long-only category for the year (BarclayHedge Hedge Fund Yearly Rankings).

Additionally, Investment Research Finland (Suomen Sijoitustutkimus Oy) has ranked HCP Focus as the second best global equity fund in Finland by 5-, 3-, and 1-year returns (Mutual Fund Report December 2020).

The long-only equity fund, co-managed by Pasi Havia, Elias Koski, and Anthony Simola reached its best annual performance in 2020, a +58.30% return after fees, significantly outperforming the benchmark index MSCI ACWI IMI Total Return (EUR), which returned +7.22% in 2020.

The fund is open for subscriptions until March 31st, 2021.

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Greetings from HCP Group Chairman and Vice-Chairman

HCP Group’s annual general meeting elected a new board of directors for the company on September 28th, 2020. The new chairman of the board is HCP’s partner and board member Timo Vertala, and the new vice-chairman is HCP’s newest partner, Cobbleyard Real Estate CEO Christoffer Sundberg.

HCP Group chairman of the board Timo Vertala (left) and vice-chairman of the board Christoffer Sundberg (right).

HCP Group chairman of the board Timo Vertala (left) and vice-chairman of the board Christoffer Sundberg (right).

Timo Vertala, you were elected as HCP Group’s new chairman of the board at the board’s inaugural meeting 29.9.2020. Congratulations! Tell us about yourself and how you are doing.

Thank you. Firstly I would like to thank my predecessor Elias Koski and I would like to wish him continued success in his role as chairman of the board of Helsinki Capital Partners fund management company.

I have worked in various executive positions and been a partner at HCP since 2010 and a board member since 2011. Chairmanship of the HCP Group board was the next natural step for me, and I am grateful for the trust shown by the other partners towards me and the rest of the new board.

Could you tell us more about the new board?

Work within a board of directors is teamwork, and I am convinced that we will achieve results with the board of directors we have elected. Other elected board directors in addition to myself were HCP’s founding partner and CEO Tommi Kemppainen, compliance officer and partner Juhani Halminen as well as our strategic investor, Cobbleyard Real Estate CEO Christoffer Sundberg.

The board members complement and support each other with their backgrounds, experience, and professional expertise.

The year 2020 has unarguably been a year of change in the world and in financial services. What particularly will you stress in the work of the board?

The world is changing radically and quickly. As a smaller company, HCP has the resources and expertise to react to things much more quickly than bigger asset managers. When the environment changes, you have to change – and this is why companies need to actively renew in order to survive and to thrive.

I will in particular focus on transparency in decision-making and ensure that HCP’s strategy is implemented appropriately and with measurable results by operating personnel.

You mentioned the importance of active renewal. Can you explain in more detail what this means for HCP’s strategic development in the current market?

Our funds are managed by our four-person investment team, so areas of responsibility are clearly defined and the group works constructively together. As to the firm’s development, we as a company have 13 years of growth experience, and we will continue actively furthering our sales and marketing by using this experience.

In addition to this, we are open to other market opportunities. HCP has historically very strongly focused on publically listed securities and alternative investments. Interest rates are historically low and inflation predictions are unclear, so Finnish institutional investor rightfully seek out also other opportunities in alternative investments.

Christoffer Sundberg, you became an HCP partner in summer 2020 and were now elected as a board member and vice-chairman. Could you tell us about yourself and about how you ended up investing in HCP?

I am a professional investor and have been an investor in HCP’s funds for several years now. First, HCP’s story of how to manage external assets and invest responsibly awoke my interest. I got to follow the company quite closely for a few years and my interest only grew. When an opportunity opened up to further intensify our cooperation, I immediately took it.

You have a long career in real-estate investing and in managing real-estate funds. How would you describe the current market situation in Finland and the Nordics for real estate?

In Finland, real-estate investing is only approximately 15 years old, when the first institutions-facing investment funds were launched and asset purchases began to be financed through debt in addition to equity. Then or a little bit before, international property investors arrived in the Nordics and in Finland. At the time of writing this, the supply of real-estate funds in Finland or generally opportunities to invest in real estate indirectly has grown quickly. This means that demand has raised property prices to record levels, and often these are justified by an upside in rents (cash-flow). This driver can be questioned, and for example in Stockholm we are seeing a market correction. The same market correction is now arriving in Finland and will be probably be seen in valuations towards the end of the year. It’s hard to predict how big this correction is especially if and when the number of transactions decreases and market-based appraisals do not have the market data they need. Different sectors of real estate (office, commercial, residential, care homes, logistics, hotels, etc.) suffer in their own ways, as the global pandemic has restricted mobility. Big trends in the use of spaces seem to be strengthening.

How can Nordic asset managers best compete with international companies? Where do you see the most interesting opportunities for growth?

Generally real-estate investing is the “odd bird” of asset classes. Returns are relatively low and many investors sell so-called active asset management, which means that value is created locally at the level of the object. This requires local expertise and a local team. These are important elements in implementing active strategies. The downside is that this can give rise to an expensive fee structure, which taxes the immediate return promised to investors. This can create a mismatch that forces the portfolio manager to raise the properties’ risk profile. There is much talk about liquidity risk, which is one of the easiest ways to improve properties’ net returns. Location risk is one of the biggest factors in liquidity risk. How properties are utilized in the future will change in the post-corona world. This creates opportunities for local active asset management. In the short term, listed securities of real-estate companies seem attractive and in the medium term, Nordic direct properties. We still see value in the office and logistics sectors, especially for those implementing active asset management.

HCP Group owns the Helsinki Capital Partners fund management company, whose funds are open to subscriptions until 31st of December 2020. Book a virtual meeting or make a subscription by clicking one of the buttons below.

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Diversifying into Alternative Investments Is Worth It

In February and March this year, we saw a sneak peek of what it looks like when equity markets’ valuations begin to revert to their historical mean. Very quickly, a third of the market’s value disappeared. The graph below shows the S&P 500 index and HCP’s multistrategy fund HCP Black, which makes wide use of alternative investment targets.

In terms of valuation, the equity market did not even reach its historical mean in March. The graph below shows the total market capitalization of American companies (Wilshire Total Market) against US GDP. The y-axis is marked in trillions of dollars (T).

Source: https://www.gurufocus.com/stock-market-valuations.php

Valuations would reach their recession-era historical mean if markets collapsed to a third of their current level.

Source: https://www.gurufocus.com/stock-market-valuations.php

From this we come back to our first graph and the reason why diversifying into alternative investments, such as the HCP Black fund can significantly improve the benefit of diversification and thus decrease an investment portfolio’s risk during economic shocks. If you carry a significant amount of risk in your own business, or maybe you are a startup investor or just a stock investor who felt uncomfortable during the crash in March, this is an opportune time to familiarize yourself with alternative investing. Even a small allocation from the entire portfolio into alternatives can increase the entire portfolio’s resilience through the cycle. Such is the difference between alternative and traditional investments that it can be clearly seen in February’s and March’s returns. More information about our solution for risk management can be found here.

An athlete should definitely make use of tax benefits by funding

To be honest, it is unwise not to utilise the professional athlete fund’s tax benefits.

COVID-19 has shown us how an unexpected outer crisis can suddenly stop whole industries. Practically the whole event planning industry with its subcontractors has been unemployed. Travelling will never be the same. Sports? Cancelled, at least that is how it felt during late spring. In Europe, sports leagues were postponed and cancelled, and in America, huge amounts of cash was used to continue games in sports bubbles. There is no professional athlete in the world who was not or will not be affected by the pandemic during the next few years. What should we think about all this? At least it is obvious that we are all in charge of ourselves and that taking care of one’s personal economy is the best way to tackle the crisis.

Panu Satama

An athlete’s career is significantly shorter than an average working career. A professional athletic career might last for 8-12 years, so the picture can be drawn how much one needs to earn in order to create a foundation for an economically safe post-athletic life. Working in the financial sector, I obviously encourage people to invest their money wisely. However, for athletes it is even more important to learn the importance of personal finances already at a young age, as especially the pros with more valuable contracts have a real possibility to secure their future financially even in a substantially short period of time.

Luckily, the special nature of professional sports does not go unnoticed in Finland, as our system allows athletes to fund a part of their income. Every athlete who earns more than €9,600 p.a. in Finland may fund tax-free up to 50% or €100,000 of their annual income from sports. This way, the taxable income decreases, reducing the athlete’s tax percentage – in some cases even significantly. To add, after retiring from professional sports, the athlete has an opportunity to collect one’s investments in the Athlete Fund within 210 years and pay taxes according to the post-career tax percentage.

We wish to be the athlete’s trusted financial partner and provide help in professional athlete’s investment decisions, real estate-related matters or with banking connections.

We wish to be the athlete’s trusted financial partner and provide help in professional athlete’s investment decisions, real estate-related matters or with banking connections. At HCP, we create a tailor-made investment plan for the athlete, including consultation with taxation and daily finances if necessary.

Timo Vertala and Panu Satama from HCP Sports encourage athletes to get acquainted with sensible spending and investing since the beginning of one’s career.

After retiring from hockey, I started studying economics. My studies in finance have led me from working at a major bank into asset management and now back to my biggest ambition, sports. Being a new shareholder and working with athletes’ asset management, it is easy to say that I have found my place inside the industry. In my opinion, openness and responsibility are key factors in financial services. When it comes to client relations, I want to focus on clear and transparent communication.

Timo Vertala

Vertala joined HCP in 2010 after quitting his career as a professional hockey player. In addition to Finland, Vertala played in Sweden and North America. He got acquainted with athletes’ financial needs already during his own career, and due to his extensive experience at HCP Sports, he is now a respected expert on professional athletes’ asset management.

HCP Sports aims to grow its business by concentrating on personalizing and expanding its services and by building a stronger brand image also internationally. One of our major goals is to be able to provide our fund investment services even for those clients who are residing in North America. In Finland, we believe that there still is a significant marketplace for us to take over. Working with player associations and sports agencies more regularly is one of our objectsand hopefully that way we can build on those relationships even stronger in the future. I believe that a more versatile set of representatives from asset management within player associations would encourage athletes to analyze and compare different investment possibilities more comprehensively and thus make them more interested in their personal finances. In the long run this would be a massive step not only for athletes but also for the player associations.

Let’s hope that the current situation does not completely stop professional sports. We hope to see you around!

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HCP honored with B Corp Certification for the second time

The non-profit organization B Lab granted B Corp Certification to Helsinki Capital Partners for the second time. Certified B Corporations are businesses that meet the highest standards of verified social and environmental performance. In order to be recognized as a B Corp, a company must pass the B Impact Assessment (BIA), which measures the impact a company has on its employers, customers, community and environment.

The minimum amount of BIA-points for a certified company is 80. When HCP was certified for the first time in 2017, we were awarded with 97.8 points. In the most recent assessment, our score was 99.9, so we are definitely on track.

B Corp Certification is a sign of success, but there is always room for improvement

Our mission is to be Asset management to be proud of.™ Therefore, the B Impact Assessment is a great way to evaluate if we are working according to our values.

Responsibility governs all our actions, whether it be externally towards our stakeholder groups or internally towards our employees. Responsibility towards our clients manifests in, for instance, full cost transparency. Our funds aim to increase our customers’ wealth by being genuinely active. What additionally serves our customers’ interest is that we care about our employees and give them responsibilities as well as power and freedom. Nowadays all of our permanent employees are HCP shareholders.

Renewing our B Corp Certification shows that we have truly lived up to our mission. However, if we wish to remain worthy of a certificate, we need to constantly evaluate our performance.

“B Corp Impact Assessment shows how we have performed in certain categories. However, there will always be a certain dispersion between our strengths and weaknesses, regardless of the total amount of points that we gain in the evaluation,” says Tommi Kemppainen, CEO of HCP.

“For instance, we had a great success in the impact area of Workers, the total amount of points being 26,5. We excelled in the categories of Health, Wellness & Safety, Career Development as well as Engagement & Satisfaction. On the other hand, the least amount of points was given on Financial Security. It is only justifiable to be brought into daylight that our salaries are 30 percent below industry average.”

“For instance, we had a great success in the impact area of Workers”

Tommi Kemppainen, CEO of HCP

With its own example HCP wishes to encourage the financial sector to conduct business in a responsible way. We have also proved that responsibility and successful asset management can go hand in hand. We share openly each of our fund’s performance, fee structure and compliance and risk management on our website. Being committed to responsibility, this is self-evident for us.

The B Corp movement and stakeholder capitalism – The purpose of business is not limited to maximizing profits

The B Corp movement has its roots in stakeholder capitalism, which strongly questions the ideology behind the traditional shareholder capitalism. Stakeholder capitalism aims to provide a new – and sustainable – model of business, which is not limited to maximizing profits.

The stakeholders in stakeholder capitalism are defined as any group or individual who can affect or is affected by the achievement of an organization’s purpose. Such stakeholders are, for instance, employees, customers, communities and the environment. The B Impact Assessment evaluates how a company impacts these groups.

During the last couple of years, stakeholder capitalism has become more mainstream for many reasons. The number one reason is global warming, which cannot be tackled by merely focusing on maximizing profits. A more recent concern is COVID-19, which has caused global unemployment. The financial crisis of 2007–2008, on the other hand, showed us what pure focus on profits at the cost of stakeholders can cause at its worst. In 2019, the flaws of the capitalist economy were brought into daylight, when Financial Times published its new agenda Capitalism: time for a reset.

HCP has discussed corporate social responsibility from the point of view of The Nordic KPI. We present this theme in more detail in our sustainability report.

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About the author

Ville Punsar is taking care of HCP’s communications in autumn 2020. Ville, who follows the world of investing particularly from the point of view of communications, got excited about HCP due to its unique identity. In his opinion, HCP’s tailor-made investment services for professional athletes provide great additional value.

HCP Quant 8/2020 +0.34% | How would a coronavirus vaccine affect investors?

HCP Quant increased +0.34% in August. Benchmark index MSCI ACWI SMID Value Total Return performed better and increased +3.88% in euros. US S&P 500 Total Return increased +5.82% in euros and Europe’s S&P Europe 350 Total Return +2.99%.

Since the beginning of 2020, HCP Quant has still outperformed its benchmark index by more than ten percentage points, as the fund yielded -9.19% and the benchmark index -19.42%. HCP Quant has also outperformed S&P Europe 350 Total Return. Meanwhile, the US S&P Total Return has increased approximately three percentage in euros. The strong performance of S&P 500 is mostly explained by a handful of companies. Year to date return of S&P 495 is negative as well.

The difference in ten year annualized returns between value stocks and growth stocks. Source: Bank of America

Value stocks have had incredibly hard times. According to Bank of America‘s recent report, value stocks experienced their worst decade ever of performance relative to growth stocks.

A combination of low interest rates, little to no inflation, and a global economic slump account for 79% of the return difference between growth and value stocks. Hence, BofA suggests four changes for value investors to improve their returns. BofA’s tips are listed below with my own comments on how they reflect in HCP Quant’s strategy.

  1. Go small
    Value premium of small-cap value companies is bigger than large-cap companies. Small-cap value companies have yielded 5.5% p.a. better than growth companies since 1926. Hence, BofA believes they will continue to be the better alternative in the future.

    Comments: HCP Quant invests in small- and mid-cap value companies, so this is part of the fund’s strategy.

  2. Go for quality
    In order to avoid value traps and dead industries, BofA urges value investors to focus on the quality of the companies. Historically, adding high quality has meant an additional percentage point better annual returns.

    Comments: HCP Quant measures the quality of companies with Piotroski F-Score and Beneish M-Score. A company has to reach a certain level of quality in order to fulfil the fund’s investment criteria.

  3. Watch macro conditions
    Investors need to follow macro economic conditions to avoid false starts and get confirmation of a change in trend. For example, a coronavirus vaccine would likely boost unloved financials and hurt growthy, overbought lockdown portfolios. According to BofA, this trend was evident during last week’s market sell-off, as the Russell 1000 Value index outperformed its growth counterpart by the most since 2008 (see the picture below).

    Comments: Personally, I think investors should avoid market timing. According to several academic studies, investors who do not time the market have better profits. For these reasons, HCP Quant does not try to time the market in any way. An investor who wishes to time the market can, instead, buy or sell shares in the fund according to their view of the macro economic conditions.

  4. Intangible assets
    Investors should abandon the traditional P/B-ratio. Nowadays, intangible assets, such as intellectual property, intellectual property rights and brand value, play a big part, and P/B-ratio does not take them into account. In 2018, a total of 84% of S&P 500 member companies assets were intangible. Hence, BofA urges to prefer adjusted book value over the traditional one.

    Comments: P/B-ratio is not used in HCP Quant’s investment strategy when defining a company’s valuation.

Russell 1000 value and growth index performance for the last ten years.

Since day one, HCP Quant has implemented most of BofA’s views on how to improve profits in value investing. Trying to time the market according to macro economic conditions is up to the investor. However, it is quite obvious that during the last ten years, the market cycle has been favourable to growth stock investors.

According to BofA, a potential trigger for a turn in macro economic conditions could be a successful coronavirus vaccine. The first vaccine can potentially be available as soon as late autumn, and many investors are trying to figure out how it will affect the markets. After interviewing several strategists and portfolio managers about the subject, Bloomberg Businessweek presented three possible scenarios.

If successful, a corona virus vaccine could lead us back to “normal life”, meaning a shift in policymakers’ attitudes toward the extraordinary economic stimulus they’ve poured on. A turnaround in the current politics might end the market celebration of succesful corona vaccine quickly. New central bank money has flooded the markets which has kept stocks flying high. If they change their attitude we might even see a replay of 2013, when investors took fright as the central bank signaled it would wind down the quantitative easing program it began after the financial crisis. Back then, both stocks and bonds fell.

The second scenario would mean a significant boost for stock prices. “If there is anything that would cause a major rally, that (corona vaccine) would have to be it,” says Randy Frederick, vice president of trading and derivatives for Schwab Center for Financial Research. Anyway, it would take a lot of time for the unemployment rate to get back to normal after a vaccine. Central banks would keep the rates low and credit conditions easy in order to revive the economy, whereby the already expensive stocks would continue climbing.

The last scenario would the best one for HCP Quant’s investors: the comeback of value stocks. The current bull market is strange in that most of the gains have been concentrated in a handful of (tech) stocks that investors see as particularly well-suited for the stay-at-home economy. Most of the other stocks have missed out the rally. The vaccine could benefit the markets laggards, for example, airlines and consumer companies selling nonessential items.

A big question for the investors is whether a successful vaccine is already baked in the stock prices. In addition, what will happen if we see a major set-back in the process of producing a vaccine?


September’s subscription date is approaching. You can make a subscription online by clicking the button below. Please remember that the money has to be in the subscription account by September 30th at 4 pm at the latest.

Your value investing optimist,
Pasi Havia
HCP Quant portfolio manager

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“Let’s be careful out there.”
Phil Esterhaus, Hill Street Blues

Ecommerce to thrive even after corona

HCP Focus fund has made particularly high return during last quarter when ecommerce, remote work and other digitalisation trends of society have received an enormous external push during covid-19-lockdown.

The profit for the quarter is +47.9%, thus reversing the loss for the first quarter of the year, while the benchmark index MSCI ACWI IMI Total Return returned +17.8%. The year-to-date profit as of 30 June 2020 is +33.2%, having exceeded the benchmark index’s return of –7.0%.

Clearly, the societal migration to online retail is not only an acute but structural change in consumption, and we expect our holdings to benefit from ecommerce growth directly through our holdings in Amazon, Alibaba, Shopify, Etsy, Facebook (through Facebook Marketplace), MercadoLibre, and Shopify, and indirectely by merchant fees and payment processing through our position in PayPal. You can read the entire analysis from HCP Focus Investor Letter Q2/2020, and below is a short grasp of it.

Intuitive Surgical

Intuitive Surgical’s flag ship product da Vinci Surgical Systems enjoys trust amongst surgeons and the company is looking to alter the next version even more towards to customer feedback. Plans for international expansion are facing challenges due to the high price of the system.

Match Group

We elected to accept shares in the transaction to separate Match Group from its parent InterActiveCorp (IAC). This will provide benefits for shareholders such as the potential elimination of a trading discount and the possibility of new Match being included in major stock indices. The shift to paid subscriptions in software and content as well as normalisation of online dating are favourable for Tinder, and advertising in the app is expected to bring revenue growth in following years.

Amazon, Alibaba and Shopify

The shift to remote work will  benefit Amazon’s and Alibaba’s cloud computing business, Amazon Web Services and Aliyun. Shopify has launched its consumer-facing shopping app Shop putting in into more direct competition with Amazon, while making its revenue more directly exposed to fluctuations in consumer spending.


In HCP Focus Investor Letters we give updates on the fund’s performance, disclose details about specific investment decisions, and highlight noteworthy changes in the fund’s portfolio companies.

HCP Focus Investor Letter Q2/2020

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If you wish to invest in HCP Focus, the next subscription deadline is 30th of September 2020.

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