Transparency in asset management: kill the hidden fee bogeyman

Advocating for transparency in asset management

Trending in asset management right now: rising client expectations. What has rocked the trust towards the industry for ages are the to-the-roof rewards of top management with no coherence to fund performance as well as hidden fees. Investments have continued to shift from traditional active asset management towards more low cost options, such as passive index funds. An asset owner wants to know – How much am I paying to invest and what is the net value I gain after all direct and indirect costs? Providing exceptional cost transparency to clients means acting with respect. This should be the norm. Those who stay ahead of this trend, continue to attract clients who trust in active analysis and research. In see-through operations. Service. Products with vision.

 

Fortunately, the industry is on the verge of turning a new page – a see through one. PwC predicts that fee transparency is facing a rapid change on a global scale. Regulations in all levels of investment activities are increasing. The most essential one until now is perhaps MiFID II from last fall, which is an Europe wide directive for investment services that presses towards increasing cost transparency. But what we see having even a stronger effect is the the will to act for the client’s best interests. Trust is core. And it can’t be won over otherwise.

From the beginning of our history we have committed to full transparency in the company’s fee structure.

This means that we disclose exactly how much our clients pay from our services all in all. We are a fee only – no commissions type of company. This policy eliminates hidden costs and incentives. Also, by investing company’s own equity in our funds, we are saying that hey look, our interests are really aligned with yours.

Here’s what we are up to. As far as it’s possible without losing competitive advantage in terms of investment strategies, we disclose all information from our funds. We publish fund performance on our website and send out up to date information about funds to our clients. Key Investor Information Documents (KIID) are required from asset managers by law and we disclose them on our website. We also show the most recent allocation by asset classes for HCP Black and allocation by industries for HCP Focus and Quant. Since 2018, we have published furthermore all the portfolio companies for HCP Focus. As do we communicate our investor returns annually. For a client to have enough information for decision making, all of this is, essential at least.

You can find information about each of our fund’s performance, fee structure and compliance and risk management on our website. Currently, we are working on updating our responsible investing policy. We are also publishing our CSR report of 2019 soon – stay tuned!

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About the Author

Anette Tuomainen works as a Junior Communications Manager at Helsinki Capital Partners as Miika Koskinen, who is responsible for marketing communications and customer experience, is finishing his journalism studies. Anette became excited about HCP for its visionary investing, responsible values and identity attached to cultural actors. From her opinion, these make HCP stand out positively in the investment services industry.

Focus’s portfolio companies announced their results and the stocks hit an all-time high

HCP Focus has a strong earnings season –  read the portfolio manager’s comments by each company

The earnings season that started mid-April ended last week for HCP Focus portfolio companies. All companies have now reported their results. HCP Focus has remained resistant to the corona crisis. Selected megatrends the portfolio focuses on supported the record scores, such as digitalisation. When looking at the short term period, there are no signs of these trends turning around. Rather the opposite. Currently prevailing trends are escalating further.

Many companies have gained benefit from the accelerated digital leap. Working, buying, and services are moving online even more. All in all, eight stocks out of twelve are either in their all times highest value or near it: Intuitive SurgicalFacebookAmazon.comMercadoLibreShopifyEtsyPayPal, and Nvidia.

Some challenges also await, at least in the short-term. Trump has begun to reheat the trade war with China. The latest turnarounds are a way of driving Chinese companies away from the USA stock market and prevent pension funds from investing in them. Because of this, the only Chinese companies in HCP Focus have been facing falls. Alibaba assumes they can reply to the legislative proposal and believes the situation doesn’t affect them. Baidu on the other hand is thinking of pulling their share out of Nasdaq.

16.4. Intuitive Surgical
29.4. Facebook
30.4. Amazon.com
5.5. LendingTree
MercadoLibre
Match Group
6.5. Shopify
Etsy
PayPal
18.5. Baidu
21.5. Nvidia
22.5. Alibaba

How did each portfolio company do?

Intuitive Surgical –  a company known for their Da Vinci surgery robots begun the fiscal period in the portfolio. Due to challenges from corona robotizes surgeries came down 95% in China in mid-February. Steep fall was followed by a strong recovery. Intuitive Surgical had reached 70% of the value before corona by the end of March. If Europe and the US follow the pattern the situation could settle as normal in the third quarter. The company’s growth prospects are looking well. The aging population is an indisputable megatrend. The stock has risen 50% from the pitfall of March and is close to reaching a new top.

Facebook – A positive stunner. Social media usage has increased when people are spending time on quarantine. Definitely one of the winners of the current moment – which is not a surprise. This can also be seen in the stock price which is higher than ever before.

Amazon.com – The company is doing well. Especially consumers in e-commerce order items home instead of visiting physical shops. AWS cloud service business grew 33%. Amazon is the most long-term investment in the portfolio and will remain as a pillar to lean on. The stock price reached its new top last week.

LendingTree – One of the portfolio disappointments this year. Since the world economy is plummeting consumer trust is facing a crack. Consumers are worried about their own jobs and lack the courage to spend money as before, especially in terms of more expensive purchases that would acquire taking a loan. The outcome was good but the corona creates a shadow of uncertainty for the upcoming year. The stock has plummeted 17% from the beginning of this year.

MercadoLibre – The Amazon in Latin America is one of the corona winners, similarly as other e-commerce platforms. Local small business owners have moved their sales efforts to MercadoLibre’s platform and consumers are buying more and more online. The stock price has reached its historical high.

Match Group – Tinder is perhaps the most well-known out of the many dating services owned by Match Group.  The company performed well in stock but it is overshadowed by corona. People are indeed using more dating apps while saying at home but are not ready to pay for them. In the end of March users of Tinder conducted 3 billion swipes in one day, which is a new record. In countries where restrictions are slackened it can be seen that the amount of paying customers has started rising. The stock is 8% below its last peak of January.

Shopify – Stock rocket of the year. The company has doubled its value from the beginning of the year and enjoys the largest weight in the portfolio. Shopify is expected to grow at least 30% during this year. They are managed to deliver an excellent response to the corona situation by improving their products. Last week Shopify announced a collaboration with another HCP Focus portfolio company – Facebook – about Facebook Shops. Merchants can create branded stores to Facebook and Instagram with it. The collaboration benefits both. Win-win!

Etsy – The second largest weight in the portfolio. E-commerce of handcraft and vintage products is blooming. The gross sales of Etsy-sellers doubled in April. Customers searched especially corona-related accessories, such as masks and protective glasses, which indicates that this high peak in sales can be only momentary. The growing trend of shopping online however favours the company. The stock price has increased by 75% from the beginning of the year.

PayPal – Increasing e-commerce requires a trustworthy payment service. Commerce resettling to online has helped PayPal. Other investors have sensed this accordingly and the stock is higher than ever.

Baidu – Heartache of the portfolio. The stock price at the same level as eight and a half years ago. This year it has dropped by 18%. China is ahead in recovering from the corona crisis and the situation is looking promising. The daily amount of users in the Baidu App grew 28% in March towards 222 million and search requests grew by 45%. Baidu might get effected from Trump’s actions and it’s withdrawal from Nasdaq makes me wonder. Baidu is the most likely candidate to give room for new portfolio investment.

Nvidia – Prominent growth in data center business. Amazon, Google, and Microsoft are Nvidia’s largest customers in artificial intelligence. Growth applies also to games. There seem to be no limits for Nvidia’s growth and it’s a forerunner in utilising the digital leap. It’s hard to say anything bad about the company. This can also be seen in the stock price which is in its highest value. One of the diamonds in the portfolio.

Alibaba – Like the other Chinese stocks in the portfolio Alibaba has also faced pressure. Expectations were however crushed and the post-corona world looks more promising to Alibaba than many other Chinese companies. Alibaba benefitted from Covid-19 in terms of increasing grocery shopping, cloud service, and remote work service usage. Retail sales in the food and supermarket business grew by 88%. In April and May the number of transactions has returned to the level before the crisis. The company expects their revenue to grow 27,5% in this fiscal year.

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Digital companies are flying high, which makes many wonder. Can the skyrocketing continue or are we going towards the next faceplant? Central banks have made it clear that they will give their all to prevent a market crash. They say you can’t fight a central bank. I agree. If I’m wrong there are much bigger troubles in the society than the stock market.

Best regards,
Pasi Havia

HCP Focus portfolio manager

HCP Quant 4/2020 +11.43% | Small companies turn around faster than whales

In April, markets surprised with their strong upswings and downswings. Stocks rallied all over the globe. The HCP Quant fund rose 11.43% in April and its benchmark index MSCI ACWI SMID Value Total Return gained 12.42% in euros. The US S&P 500 Total Return index in turn rose 13.17% in euros, whereas Europe’s S&P Europe 350 Total Return index returned a more modest +6.09%. Since the beginning of the year, HCP Quant is clearly ahead of its benchmark index, outperforming it by approximately 8 percentage points.

Quick rallies are a part of bear markets, after which the downswing continues. April’s recoil could be a so-called sucker rally, but we cannot know this for sure. Central banks’ stimulus efforts are stronger than in the financial crisis, which supports equities. Here too the United States seems to act more decisively and better than Europe.

Russell 2000 Value Total Return (EUR) index (white, RUJTR) vs. S&P 500 Growth Total Return (EUR) index (green, SPTRGSX) year to date. Source: Bloomberg

The United States has this year too kept outpacing other countries. The story is the same old one I have told on many occasions. Big growth companies keep roaring ahead while smaller companies and value companies are having a more difficult time. The graph above shows the S&P 500 Growth Total Return index in euros year to date versus the small companies’ Russell 2000 Value Total Return index. These indices both represent American equity markets.

Where growth companies have returned +0.47%, small companies have lost 25.79% of their value. Quite a difference! We are still speaking of a market which considering the coronavirus situation is very strong. Considering this, HCP Quant has performed quite well this year. Especially considering that the fund does not have a single investment in the United States, but in markets where the trend has been more challenging.

The earnings yield spread of small value companies vs large growth companies. SCV = Small-Cap Value, LCG = Large-Cap Growth. Source: OSAM

The earnings yield spread (cheapest decile measured by the P/E ratio vs. the most expensive decile) is near an all-time high. The spread is already over 21%. Before in history, this has been followed by a 16.8% annualized outperformance period relative to growth companies over ten years. Typically the earnings yield spread is 6-9%. A good question for investors to ponder is how long this spread can keep widening.

Small and large companies’ returns following 26 worst months and quarters. Source: OSAM

In bear markets, small companies’ shares often drop in price faster than large companies’. Correspondingly after hitting the trough, they have rallied more quickly. The US Russell 2000 index lost 21.90% in March and lost 30.89% for the first quarter. One can get a perspective for this crash by looking at how such companies have performed over the next 1-10 years. Small companies’ 25 worst months’ drop has been on average 22.7% (21.90% in March 2020) and for the quarter -34.6% (2020 Q1 -30.9%). This year’s numbers are thus quite close to historical means.

With the market cycle turning from bear to bull, small companies have been one of the best-performing asset classes. After big drops, small companies have outperformed large companies over one, three, five, and ten years.

One of the most used pieces of investment advice is to buy low and sell high. Following this when you are shopping for milk is easy, but when it comes to investing it seems difficult. Investing in something that has had poor returns recently feels difficult. Still, markets have rewarded just such choices made by investors historically.

Are we experiencing a reversal or are we in the middle of a sucker’s rally?

Thoughtful regards,
Pasi Havia
HCP Quant portfolio manager

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“Feel the fear and do it anyway.”
Susan Jeffers

(This text is a translation of the Finnish-language HCP Quant investor letter.)

Corona accelerates digitalisation and takes the Focus fund to a record result in April

The HCP Focus fund was up 23.25 percent in April, making the month the most profitable one in the fund’s history.

Corona pandemic accelerates many of the existing trends in society. These include, for example, online shopping, working from home, digital services, robotics, and other needs of increasing knowledge work.

The fund’s strongest performers over the past month were Etsy, an online store for handicrafts and vintage goods; Shopify, a company providing payment system and trading platform services; and the peer-to-peer loan platform LendingTree. Etsy rose in dollars about 69%, Shopify 52%, and LendingTree 36% over the past month.

“Corona has acted as a catalyst for digitalization, both in people’s daily lives and at work. The current shift in the use of digital services is one that would normally take several years,” says portfolio manager, Pasi Havia.

The rise in the stock market has made the contrast visible between the securities market and the real economy. Stock valuations are not a measure of the current state of the economy, but they reflect the companies’ expected future returns. If investors believe in the future of a company, its stock price will rise.

“If users who have newly discovered digital services continue to use them as the corona pandemic eases and society returns to business as usual, the growth of these companies can be sustainable,” Havia argues.

According to Havia, the rise in equities now seen in April is also due to the exceptionally strong measures taken by central banks.

“Central Banks have poured money into national economies and the cash needs to flow somewhere. These measures boosted US stock exchanges.”

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Whatever you are, act well your part

I joined HCP a little over a year ago because it is a B Corp. I had moved from the UK to Finland for personal reasons and was wondering what opportunities might be out there.

One thing was clear in my mind – I wanted to work for a company with a clearly stated aim to positively contribute to society. Realistically speaking, no company is perfect and everyone has a scope for improvement. But stating to the world outside that the intention to be better takes a little more than a gesture.

The criteria I used was the B Corp certification. I knew the concept, having interviewed one of its founding fathers several years ago. When I checked the list of B Corps in Finland – it was HCP that came up, and no other.

Looking back, it is both a surprise and delight that I ended up with HCP. The company is small in size and growing, which is not necessarily unique among B Corps. But it caught my attention that HCP is an asset manager.

How can an asset manager contribute to society?

This is, in fact, a quest that the company has pursued and continues to do today. In contrast with major institutional investors or the largest asset managers, our abilities in influencing investees is extremely limited. We are not a specialist in ESG start-ups. So what can we do?

The bottom line to me is that anyone – everyone – in society has a role to play, however local, however small. It is a matter of actually doing what we can, and be ready to listen to others what else and how we can do better. And this involves a conversation.

HCP’s Sustainability Report did exactly that in my case. After the first meeting with the HCP team, which was followed by a number of discussions, Tommi the CEO handed me over HCP Sustainability Report 2017. Leafing through the booklet with a pink cover illustration by painter Sini Kunnas (#HCPSPIRIT resident artist) I was both amused and intrigued.

Alongside building a transparent relationship with institutional and retail investors, HCP has been collaborating with artists, musicians, and athletes. They all have their specific needs that go beyond investment. We meet them, discuss their projects, and share our knowledge and experience. We join forces to help them make their ideas come true. (Read more about #HCPSPIRIT projects here.)

What else can we do? We have been collaborating with universities and business schools to help them gain from diverse viewpoints. We work on original topics, and one of which is the Nordic KPI project – a study on the tax and other payments through which companies contribute to the wellbeing of society.

All these are little steps to make society a better place than today. And when every one of us lives with the idea that we all have a role to play, the world indeed will be a better place. We are all work in progress: our B Corp certification in 2017 was 98.3 out of 200 (don’t worry, the pass mark was 80). We know there is a lot more we can do, and that’s why it is so important that we continue our dialogue.

HCP is organising an afternoon event to introduce the SDG Action Manager that B Corp developed in association with Global Compact. The event on 7 May is open to all, B Corp or else. If you are interested, please let us know for participation details or see the event page.

Just like John Allan, a 19th-century architect, famously said: “what e’er thou art, act well thy part”.

Stormy Markets and New Winds in HCP Focus Fund Management

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.

Regards,
Pasi Havia
HCP Focus portfolio manager


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It is a long and never-ending race

The race

Finance is my passion and I am fortunate to have it as my profession. Even after some 25 years in the industry, investing money still is the most exciting thing I can think of doing as a profession.

In order to succeed in investing, one needs to have an edge. Whatever your edge is, it is always under threat and it only lasts for a moment in time.

This is because any advantage acquired by an edge will attract competition fast. After your edge becomes common knowledge there is no profit to be made anymore and actually neither is there an edge.

The race in the late 1990s

During my career, I have seen my first special skill as a sales trader become worthless as computers and algorithms replaced humans in this function.

I will illustrate the skill I had in this example:

Buy these 32 different stocks in these European markets “over the day, max 1/3 of volume, with  volume-weighted average price target (VWAP), happy to own -6% from yesterday’s close“

Today you can automate this trade command on a computer before the market opens and it will perform the whole procedure.

It was clear already in the mid-’90s that automation will replace humans in many functions. However, there were many years to earn profits with this edge, before new competition crowded this specific race. Now sales traders have lost their jobs to algorithms.

The race in the new millennium 2000s

The next track where there was room to make profits was securities analysis. Instead of just looking at stocks and bonds, I looked into all investable objects in parallel and compared their risk and return characteristics.

Together with my first HCP crewmate and co-founder  Jarno Lämsä we built two programs named Sijoitusmoottori (Finnish for investment engine) in 2009. We were partly financed by “TEKES” funding from the Ministry of Economic Affairs.

The idea we developed is still at the very core of my investment strategy in the HCP Black fund. For the first eight years, HCP got its bread and butter from this specific style of investing before expanding to parallel races within the field of investing.

The race in the 2010s

There is no slowing down on research and development when one aims to hold an edge.

Our team did some burdensome manual analysis of corporations in the early 2010s that was almost undoable as it was so human resource-intensive. Today the same study can be done by a computer and database. As in the late ’90s sales traders lost their edge to algorithms, now computers and databases have replaced humans in this calculus.

In our HCP Focus fund, we started using one specific database to replace manual analysis in 2015. Using this tool instead of manual analysis is the most important source of Focus fund’s alpha ever since. For the last five years, we have gotten our bread, butter and even some cheese from this specific investment analysis.

So what competitive sport is this really?

Finance as a sport might sound unfair as any practitioner can expect their skillsets to be cannibalized sooner or later. But the never-ending race goes on and professionals will continue to look for new tracks to make profits in.

The understanding and knowledge acquired by holding a certain edge in the past are not for nothing though. Only due to my work on artificial intelligence (AI) in the mid 90’s I have developed a mature understanding of what computers can do in finance. This expertise allows me to currently have 26 % of assets invested in trend-following strategies in the HCP Black fund, which is partially based on machine learning.

Also, the expertise that our team acquired by doing a burdensome analysis of corporations manually, made it possible for us to evaluate different databases on their accuracy. We had high-quality benchmarks of the calculus done by ourselves to compare the computer calculus with. This allowed us to make a well-informed decision when choosing the database used in the Focus fund.

We live with the well-known market wisdom “Enjoy as long as it lasts – it never does” and work on research and development constantly. That is the way to constantly have the edge as a team. What all we are working on right now, I will tell you later, and it is that way for a reason.

Just yesterday we published our research on “risk parity” which type of investments we are not currently involved with for a reason.

Security from the “Stay-at-home” Economy during the Corona Panic

Stock markets have met a shock. This time the hit came from outside of the economic realm in the shape of the coronavirus. The world economy has suddenly stopped with countries closing their borders and people quarantining in their homes. The beginning of the year’s returns have melted off in markets at a pace not seen since the financial crisis.

The sudden braking in markets has to be understood, as the world economy has been on artificial life support through various massive stimulus measures. When the world economy suddenly stops, all ingredients for a deep dive are there. Several countries’ economies will fall into a recession, and the probability of a depression is high. The longer the situation lasts, the more lasting will be the damage done to the economy.

Central banks across the world have been supporting slowing world economies with ever increasing stimulus. In the United States, the Federal Reserve reduced rates to zero and presented a 700-billion dollar stimulus package. The European Central Bank in turn will begin emergency funding to the tune of 750 billion euros. At the same time, Lagarde moved the Eurozone from “whatever it takes” rhetoric to “there are no limits.” Too bad that none of these measures will cure the coronavirus pandemic but only moderate its side effects in the economy.

In a severe bear market, all stocks are sold off. Only a little bit later, when there has been time to analyze the situation better, is the wheat separated from the chaff. The coronavirus affects companies in different ways. Airline companies and other companies related to tourism and transportation have naturally been the objects of panic selling.

The corona epidemic does not seem to be a short-term problem, but according to the latest information the situation will last for months. In the worst scenario, if the virus mutates, it will keep spreading across the globe for years. With people’s mobility being restricted and with them spending time at home in increasing amounts, the types of services people use will change.

In my opinion Jim Cramer came up with a good term for this kind of economy by calling it the “stay-at-home” economy. Cramer brought up 20 companies in Mad Money, which are good picks in such a situation. In a “stay-at-home” economy people avoid contact with other people and use products that can be accessed directly from home. In a “stay-at-home” economy, people use more time on social media than usually, using different entertainment services, and favor ordering products online rather than visiting brick-and-mortar stores.

Out of Cramer’s picks, five companies can be found in the HCP Focus fund’s portfolio: Facebook, Amazon, Shopify, Nvidia, and Etsy. They constitute almost half of the entire fund. In addition to these, Focus has other companies whose services the “stay-at-home” economy could generate demand for. Grubhub delivers restaurants food directly to the consumer’s door, and Baidu will serve as China’s search engine as previously. Therefore a major share of HCP Focus’s investments can be considered “stay-at-home” companies. Despite share prices falling majorly, HCP Focus has not come down as much as the benchmark index or the market globally, even though the fund is extremely concentrated. Companies benefiting from the “stay-at-home” economy have given the fund security during the worst corona panic.

The coronavirus will pass with time, and humanity will survive this as well. Consumers who have been happy with at-home services will likely continue using them. As a result of these, HCP Focus too could emerge stronger than before from the coronavirus pit.

Let’s wash our hands and take care of each other!

Pasi Havia
HCP Focus portfolio manager

You can subscribe to HCP’s newsletter here. If you want to read only the HCP Focus fund’s updates, you can subscribe here.

(This text is a translation of an original Finnish-language text by Pasi Havia.)

HCP Quant 2/2020 -7.39% | From the coronavirus into a recession? | Premier Oil Update

As I am writing this, the world looks to have suddenly sunken into uncertainty as deep as was experienced in the financial crisis. In Italy, the market declined over 11% in a day, in Australia over 7%, in Japan over 5%, in France over 8%, and Europe’s Euro STOXX 50 declined by 8.45%. In the United States, the S&P 500 index dropped 7.60%. Quite some declines!

At the time of the previous investor letter, the coronavirus worries primarily concerned Asia. Now the problems have spread to other continents as well. The highly priced US S&P 500 Total Return index lost 7.54% in euros in February. From these valuation levels, there is still a long way down. The S&P Europe 350 Total Return index fell by 8.57% over the month. HCP Quant’s benchmark index MSCI ACWI SMID Value Total Return lost a total of 9.39%. HCP Quant declined by “only” 7.39%, which is hardly comforting, even though it is clearly less than the benchmark index. That’s how rough February was, and March does not look any easier.


As I see it, the coronavirus has the potential to push the world economy into a new recession, even a depression. Actually at least a short-term recession looks at this moment almost inevitable. In the modern world, supply chains are noticeably longer and more complicated than even a decade ago. Sturdy measures against the coronavirus disrupt these supply chains. Even though companies’ order books look full, the situation can be such that ordered products could not be produced or delivered. The most immediate effects have been seen in industries with direct connections to people’s mobility, such as airlines and tourism in its various forms.

The longer the situation lasts, the more difficult it is in an economic sense to clear the crisis. The virus quite justifiably scares people. With the uncertainty being high, people delay large purchases, such as buying cars or apartments. When consumers’ trust decreases, the economic machine slows down as well.

Part of companies have enough inventory, on the basis of which to keep production up, but with the situation going on problems will spread to these companies as well. Before long, problems will rise in the real world as well. A café owner in Milan can hardly keep the café running for months without customers or a technology company produce smartphones, if it does not get all the necessary components. Central banks’ tools will not make the coronavirus go away, which makes the situation troublesome for the real economy. According to the EU Chamber of Commerce’s report over 90% of European companies operating in China have announced that their business will suffer already significantly.

Despite worrying news, an investor should not despair. One should remember that where there are trouble, there are opportunities. A software company telecommuting solutions probably makes good profits, hand-disinfictentant manufacturers are working long, and facial masks are bought up regardless of price.

What about Quant? Because HCP Quant is invested in stocks, it will go down with the rest of the market. The companies in the portfolio are now clearly more cheaply priced than on average, so it is well possible, that the fund weathers the storm with slightly smaller damages. One could assume that a cheaply priced company has less downside than a highly priced “future promise.” Now the turbulence at hand can be a market-changing force, which would make value investing work again. But before that one needs to have the patience to ride the elevator all the way to the ground floor. This luckily happens much faster than climbing the market stairs up.


The HCP Quant fund has on Friday sold off, as mentioned in the previous investor letter, its investment in Premier Oil. Russia on Friday decided to break with OPEC, and that decision was followed by Saudi Arabia’s decision to cut the price of crude oil. The price cut is the biggest in 20 years. As a consequence of this, the price of crude oil fell about 30%. Premier Oil fell on Monday by over 57%. Friday’s sale was based on the stop-loss and one could say, that this time the sale was timed successfully before a historically large drop in the price of oil.


Finally a reminder of the approaching subscription day. We are open to new investment all of March. In the currently unstable situation I would like to encourage you to familiarize yourself with the HCP Black fund. If you feel that stocks are too risky right now, and fixed-income has no returns to expect, then perhaps an investment strategy like that of HCP Black could offer some safety. The fund is invested very defensively. A subscription can be done the familiar way by clicking the button below. Please remember that the subscription sum must be seen in the bank account on Tuesday March 31st by 4 p.m. at the latest.

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Regards,
Pasi Havia
HCP Quant portfolio manager

“This too shall pass.”
– Persian saying

(This is a translation of the Finnish-language HCP Quant investor letter.)

By recruiting stars your team can be the whole universe

Say hello to HCP’s Analyst/Institutional Sales Anthony Simola

Quite exactly a year ago, I met Anthony Simola, who was looking for his first job in finance. He had seen me speak at Sijoitus Summit in 2016 and some three years later he announced that he wishes to work with us in analyzing stocks. He had been investing money for some years and his strategy was well-documented since day one. What was there not to like.

I soon learned that this confident young man is not lacking in identity nor maturity. He also had the most critical characteristic that we treasure. That being integrity. My own findings got backed up by a letter of recommendation from Columbia University.

As with any profession, the practitioner becomes very fast in evaluating a talent. I had a feeling that with Anthony there was plenty. He has gone through education with the best possible track record: IB high school in Finland, then Vanderbilt and Columbia University in New York right after.

There was more, however. Soon I learned that he had written and published a book in 2015 at the age of 22.

Anthony had first studied in depth what thinking actually is and what one can do to enhance it before even considering a specific topic in which to apply it. I had to like his approach!

So, now I knew that I was dealing with a real talent. Anthony demonstrated an understanding of topics and constructs that – even if not being rocket science– was something that could not be explained only by his academic studies.

I asked him to name the very core literature that he builds his understanding on. He replied with a list of 50+ names of authors that he has read in the last few years – all of them classics in mostly Western philosophy, psychology, history, economics, politics, and fiction.

Now my formal reasoning could easily catch up with what my gut feeling had told me. Anthony is remarkably knowledgeable and also dead set on acquiring exceptional skills in investing money. Hiring him was not only an easy decision – it was a no-brainer.

The dream team

“At HCP we get joy from the wide diversity of our team. As the dream team in Star Wars, it is totally impossible to get us marching synchronic, but when the golden robot, young man, and a computer on wheels meet at the same point looking at the same challenge with the same powerful mission to solve it, things do happen as in a pre-choreographed state of trance.”

This is how I described the dream team in a foreword to dear then HCP crewmate Pekka Puustinen’s book Financial Service Logic: In the Revolution of Exchange in Banking and Insurance (2015).

The idea is to have a maximally diversified team so that each and every one can use their specific skill as a superpower for common good. In this group, the normative definition of normal becomes very lax as the standard deviation in different features in our team is big. No one really is the odd one out.

Why should you be only one star if you can be the whole universe

We live by this phrase that a famous conductor once told me. What he meant is that even if you have a special talent you still don’t want to be defined only by this single feature. We want to have a rich life and be so much more!

I’ve had Anthony Simola in our team now for a year. He has worked for institutional sales while further developing his skills in stock analysis. I will make sure Anthony has the best possible mother’s milk to further grow in this business and I look forward to him taking more responsibility at HCP. We will also make sure he will have such a blast working together and alongside with the dream team and the whole #HCPSPIRIT community.

For me, once again as with all of my dear crewmates it is my privilege and pleasure to get to be your jungle guide.