Our philosophy is founded on a long-term, high-conviction approach with a core focus on seeking asymmetric outcomes in investment opportunities.
In a world where investors increasingly seek to compete on how quickly they can react, Lakehouse competes on patience. We believe a long time horizon provides a structural advantage in equity markets as robust empirical research consistently demonstrates that turnover is inversely correlated to performance. By extending our time horizon we shift the drivers of our performance away from short-term fluctuations and towards long-term business fundamentals.
We are strong believers in backing our best ideas with conviction. Numerous studies show that managers’ best ideas on average add value, however, their smaller positions tend to detract value. Likewise, the incremental diversification benefits of additional positions fade quickly. We believe the data validates holding a smaller number of positions that are better understood by our team.
We seek asymmetric opportunities with multiple ways to win and few ways to lose. The Lakehouse Funds are typically searching for companies that display the following attributes:
• Strong positions in growing markets
• Pricing power with customers and suppliers
• Durable competitive advantages grounded in scale, strong brands, network effects, or high customer switching costs
• Aligned and experienced management teams with strong track records of capital allocation
• Conservative balance sheets
• Attractive valuations
1. Identifying Opportunities
We are fascinated by companies and our desire to identify and understand the factors that give them an edge in delivering long term sustainable growth.To screen our investable universe, we focus on and examine the fundamental attributes we believe are more aligned to the long-term growth characteristics we seek. The three fascinations are explained below:
– Intellectual Property (IP)
Think brands, data, patents, or even corporate cultures that are difficult to replicate. Businesses with strong IP have enduring pricing power and, often, an innovative culture and strong distribution network that creates and scales new and valuable IP.
– Network Effects
Think marketplaces, exchanges, payment networks, social networks. What is a network effect? A business exhibits a true network effect when the value of its products and/or services increases as more customers join the network. We’re passionate about businesses with network effects because many of them scale quickly with capital efficiency, creating a significant amount of value in short order.
Think enterprise software, payment processors, subscriptions, or any other form of business with an intense focus on customer loyalty and retention. Importantly, we view loyalty as not simply resistance to high switching costs making it difficult for customers to move on, but also the delivery of value and delight to customers that makes them want to stay for long periods of time.
2. Fundamental Research
All considered companies undergo a detailed proprietary checklist to examine the company’s fundamentals and assess the asymmetric opportunities and risks presented. A decision is then made on whether to build a more detailed investment thesis involving analysing a range of factors such as management, financials, competitive advantages, risks, 360 review (competitors, suppliers, customers & regulators) and valuation. Subject to investment team discussion and review, a decision is then made by the portfolio manager whether or not to initiate a position in the portfolio.
3. Portfolio Construction
Our view is that the benchmark is a measurement tool, not a portfolio construction tool; unlike many traditional managers who reference the benchmark in terms of stock and sector weighting. We are happy to be under-weight sectors where we do not find compelling opportunities, as we believe not all sectors, like all companies, are created equal. Not only are all companies not created equally but sectors too. This results in a highly active portfolio which may vary significantly to benchmark and peers. Typically, the portfolio will hold 20 to 40 companies with a maximum of 10% on cost in any one position and cash allocations ranging between 5-15%. Given our long-term approach, turnover is low with most activity driven by managing exposures across market cycles and volatility.
We share details about our investment process and the portfolios in our monthly investor letters and Insight pieces. You can receive our regular communications by subscribing here.