Questions Answered

Big News! The constitution for the planned Lakehouse Global Growth Fund was registered with ASIC late last week, meaning we remain on target to begin accepting funds in early November.

The new fund will have a worldwide, ‘go anywhere’ mandate for listed shares but will focus on mid- and large-cap companies in developed markets outside Australia. Soon, you can expect us to share a product disclosure statement (PDS)1 that will distil down all the key points about the fund.

In the meantime, though, here’s a brief Q&A about the fund and our approach based on the most popular questions we’ve received so far.

Can you provide a brief introduction to Lakehouse Capital?

Lakehouse Capital is a business set up by The Motley Fool Australia aimed at managing funds for investors who wanted a “do it for me” solution from Foolish managers.

Lots of Motley Fool followers told us that they loved our investment guidance but didn’t have the time or interest to put their money to work for themselves — so we established Lakehouse Capital. It’s fair to say we’ve scratched an itch for many busy investors as the Lakehouse Small Companies Fund, which launched less than a year ago, already has more than $100 million in assets.

The Lakehouse Small Companies Fund, which is currently closed to new investors, is focused on shares of smaller growth companies listed in Australia and New Zealand. It’s still very early days, and past performance is not indicative of future returns, but since I know many potential investors will ask anyway I might as well mention our performance thus far.

From inception in mid-November 2016 through to our most recent pricing date of 11 October, the Fund returned 21.94% net of fees and expenses compared to 14.15% for its benchmark, the S&P/ASX Small Ords Accumulation Index. It’s very early days, but it’s a pleasing start.

The new fund that we plan to launch soon is the Lakehouse Global Growth Fund, which will have a worldwide, ‘go anywhere’ mandate for listed shares but will focus on mid- and large-cap companies in developed markets outside Australia. We’re very excited to bring some of the world’s great growth companies to the doorstep of Australian investors.

Can you tell readers who are new to Lakehouse Capital about the manager’s style and how it invests?

Our style should look very familiar to Motley Fool followers. We’re business-focused investors who put time on our side by investing for the long term. Our aim is to back talented, aligned leaders of companies with strong competitive advantages and bright futures. We do not try to time the market, hold trading positions, or pay much mind to what other investors think.

We’re also unlike many other fund managers in that we don’t try to be everywhere at once. We’re very comfortable underweighting or outright ignoring certain industries because they’re cyclical (energy), slow-growing (utilities), prone to fads (retail), or where capital goes to die (mining).

Instead, we prefer to focus most of our effort, and our investors hard-earned cash, on industries that are known for extremely loyal customers, historically high and stable returns on capital and have bright long-term prospects. For example, we have an affinity for enterprise software companies. Odds are you wouldn’t have heard of many of them because these companies develop and market software to other organisations, not consumers, but we’re fond of them because they tend to have ultra-loyal customers, pricing power, and attractive returns on investment. Again, all rather Foolish.

What has you excited about going global?

The biggest reason we’re excited is the simple fact that 98% of the world’s sharemarket value is based outside of Australia, including the world’s leading growth companies such as Apple, Visa, Facebook, and others.

Australia punches above its weight but our top-heavy local market is dominated by cyclical and slow-growing companies. Making matters worse is that the enterprising individual investors who do want to push ahead and invest directly overseas quickly find themselves awash in complexity and paperwork.

We wanted to solve for both these problems by introducing the Lakehouse Global Growth Fund. Our team is excited to help investors back some of the world’s best growth companies, diversify into new markets, and do it with our signature high-conviction, low-turnover style. And, of course, shoot for our ultimate objective of long-term outperformance.

Lastly, we’re mindful that the Australian economy is struggling and that investors may want to consider more global options. I’m bullish on Australia’s future but we’d have to be asleep at the wheel not to notice the medium-term headwinds of stagnating wage growth, high property prices, and high levels of household debt. We can’t speak to what’s right for individuals but are still pleased to put our offering out there in the near future for investors and their advisors to consider.

A second fund is a big leap. How are you thinking about managing your time as the Portfolio Manager across both strategies?

I’m more than comfortable for many reasons. For starters, we’ve grown the team with the addition of another analyst with global experience, Pooja Shirangi. Pooja brings highly complementary experience, particularly around consumer product companies, having lived and worked in both Mumbai and London. She’s a great fit and we’re thrilled to have her with us.

Our team also already spends a lot of time studying global markets because most of the companies we back at the Lakehouse Small Companies Fund have operations outside Australia. Even if you did want to stick your head in the sand and only fish in the local pond, we think it’s essential to understand the strategies, strengths, and weaknesses of global leaders who can throw their weight around Australia. For example, it’s hard to have an informed view on Australian retail without having a deep understanding of Amazon.

I’m also looking forward to making the best use of my own background and experience. I’ve been invested in the US for almost my entire adult life, but haven’t been able to make full use of my US investing knowledge since I began serving Australian investors. Being able to directly tap into that experience feels like a bit of a homecoming but without my having to leave the sunny confines of Sydney.

Lastly, our long-term, high-conviction approach lends itself to a more strategic approach to portfolio management and allocation of my time. Sure, we turn over a lot of rocks, and we buy or sell when we need to, but our focus on backing companies with long reinvestment runways means that we’re not incessantly recycling capital into new positions as do traders or deep value investors.

The FANG stocks (Facebook, Amazon, Netflix, Google) are very hot right now. How are you feeling about global valuations today?

It’s fair to say that valuations in the US right now aren’t as attractive as they were a few years ago and that rising interest rates introduce uncertainty into the equation. The FANGs are also getting lots of attention, which I don’t mind as a long-time investor in Amazon and Google’s parent, Alphabet, and which probably speaks to my style and approach.

A few important wrinkles are worth keeping in mind, though. For starters, the US economy has continued to expand despite rising rates and the ongoing easing of monetary stimulus, which certainly merits some optimism.

Also, practically speaking, while I’m fond of the US technology sector as a long-term opportunity set, we’re planning a global growth fund, not a FANG fund. The Lakehouse Global Growth Fund will have a lot of latitude to invest across different industries, countries, and continents.

I won’t pretend to know where markets will head over the short-term, but as a long-term investor I’m well aware that pullbacks can and do happen. For example, the S&P/ASX 200 has fallen in 30% of the quarters in the past 15 years, and that’s despite Australia’s not even having a recession during that stretch. And, yet, markets trudge towards record-highs given the fullness of time.

As you’d expect, we have some specific opportunities that we’re excited to get after from the outset, but we also want to be patient with our investors’ capital and let opportunities come to us. We’re running a marathon, not a sprint. That’s why we plan to put the new fund’s initial capital to work over a number of months rather than firing all our bullets on Day One.

While on the subject of macroeconomic risks, though, I do feel obliged to flip this question on its head ask and whether Australian investors are at all worried about stagnant wage growth, high property prices, and record levels of household debt?

I ask because many of the ASX’s largest and most widely held companies are levered to those risks. If that’s a point of concern, now might seem a reasonable time for equity investors to talk to their advisors about whether introducing global companies into the mix makes sense for their personal situations.

You’re known for being a pretty hands on investor who likes to get out and meet with companies face to face. How does that approach play into a global strategy when most of the companies you’ll be studying are based overseas?

It’s true that we spend a lot of time getting to understand the skills, track records, and motivations of the leaders who manage our companies. A lot of that comes from talking shop and, indeed, we’ve spoken to companies almost 200 times over the past year.

The reality, though, is that the importance of directly accessing a company’s management team fades as companies mature, and the mid- and large-cap companies that we’ll focus on with the Lakehouse Global Growth Fund will typically be much larger and more mature than those in the Lakehouse Small Companies Fund.

Larger companies tend to have bigger balance sheets, more diverse operations, and often pay out large portions of their earnings leaving less to reinvest into growing the business. In other words, even though management still matters at larger companies, smaller companies are easier to screw up, and so we have to invest outsized time to understand who is steering the rocket.

Consider Amazon again, which may or may not end up in the new fund but fits the general mould of the kinds of businesses we’re looking to back. The business has massive scale: Amazon does more in revenue in a single day than the largest holding in the Lakehouse Small Companies Fund does in an entire year. That doesn’t mean Amazon is bulletproof, but it is much harder to kill.

Now consider its CEO and founder, Jeff Bezos. It’s never even occurred to me to try and get a meeting with Bezos — he once said that he only spends 6 hours a year meeting with investors — and yet he’s still easy to get a read on from an investing perspective. His annual letters to shareholders are always clear and consistent, he’s proven himself brilliant many times over, and his US$79 billion stake in the company makes for platinum-level economic alignment.

The odds are low that I’ll ever meet Jeff Bezos but he’s given me more than enough information with which to make an informed call about his strategy, skills, character, and alignment. Ideally, we’ll find leaders of other companies who are similarly aligned and transparent. And, when we have to, we’ll dig deeper.

What is the initial minimum investment?

Investing in the fund is a personal decision and the best people to make such a call are you and your financial advisor. That said, we have a very strong preference for investors who embrace our growth-focused philosophy and share our long time horizon. Like us, they measure success over years, not months. They know that trends come and go but that proven, repeatable investment processes win out over time.

Our preferred investor also has a meaningful stake in the fund, not a punt. The Lakehouse Global Growth Fund is a big commitment and exciting opportunity for us and we want to share that same sense of enthusiasm with our foundational investors. That’s why the planned minimum initial investment for the fund will be $100,000.

When will the Lakehouse Global Growth Fund begin accepting applications to invest?

We and the fund’s responsible entity, One Managed Investment Funds Limited, expect to release the product disclosure statement (PDS) for the Lakehouse Global Growth Fund on our websites in early November. Investors should read and consider the PDS before deciding to invest as it’s full of useful information on the fund’s strategy, objectives, risks, fees, and more.

Once the PDS has been issued the Fund can then begin accepting applications. Notably, we plan to wait a couple of weeks thereafter before beginning trading so that investors can get across the PDS, make a decision, and have a chance to be invested at the Day One unit price.

Joe Signature

Joe Magyer, CFA
Chief Investment Officer
Lakehouse Capital

P.S: We plan to accept applications in early November.

Disclosure: Members of Lakehouse team may (and likely do) own shares in some of the companies mentioned in this content.

The PDS will be issued by the Fund’s responsible entity, One Managed Investment Funds Limited.

Lakehouse Global Growth Fund (ARSN 621 899 367) (Fund). The responsible entity for the Fund is One Managed Investment Funds Limited (ACN 117 400 987) (AFSL 297042). The information included in this message has been prepared without taking account of the reader’s objectives, financial situation or needs. All of the commentary, statements of opinion and recommendations contain only general advice. Any person reading this message should, before deciding to invest in or continue to hold the investment in the planned Fund, read the product disclosure statement and seek professional advice.

Lakehouse Small Companies Fund (ARSN 615 265 864) (Fund). The responsible entity for the Fund is One Managed Investment Funds Limited (ACN 117 400 987) (AFSL 297042).