Taking a patient approach: Q&A with Lakehouse Capital distribution head Stuart James March 2020

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Sydney-based boutique fund manager Lakehouse Capital recently brought Stuart James aboard to help ramp up the public interest for their two unlisted managed funds, the Lakehouse Small Companies Fund and the Lakehouse Global Growth Fund. James shares his insights into working with a boutique fund manager in the age of coronavirus and the differences between working in a large, well-established global house with a new, smaller local business.

Lakehouse has been operating for several years but is now increasing their distribution effort. How have things been going?

Lakehouse Capital was established back in 2016, and rightly the core focus to date has been on investment and ensuring we have a well-resourced investment team and disciplined process. The Lakehouse Small Companies Fund and The Lakehouse Global Growth Funds now have impressive 3 year and 2 year track records respectively.

While I would contend that Lakehouse is one of the best-kept secrets in the market, the Funds have actually generated significant flows from direct investors and early adopter advisers over that period. As at the end of February 2020 the Small Companies Fund had $240.0m in FUM and the Global Growth Fund $153.5m. Lakehouse is already profitable, has a strong balance sheet and a diverse client base, while backed by a global parent in the form of The Motley Fool.

These are very strong foundations and I’m excited to now have an opportunity to help with the next stage of this growth journey and see Lakehouse become a leading provider of investment solutions to Australian investors.

The Motley Fool is renowned for offering general investing advice. How does your relationship with your parent organisation work?

Both companies share a passion for educating and assisting investors with their investment needs, so we have much in common, although we operate independently. We focus purely on asset management, while The Motley Fool indeed has a wide range of services to assist, educate and guide their direct clients across a spectrum of investment and financial needs.

From a practical perspective, the relationship gives us access to some common centralised resources and economies of scale. For example, we share some IT platforms, software and HR resources. Day to day we run autonomously -- different teams, offices, etc. -- but the flow of knowledge and experience right across the organisation is impressive and ensures there is a great deal of deeper resource and support behind the scenes. I am glad to be both a Laker and a Fool.

How has coronavirus affected your push to increase distribution to wholesale and institutional investors?

We recognise that the current environment is unnerving for many investors and that the workload on advisers will have increased significantly in recent weeks. Not only is there the direct impact of markets on investors but also the broader social impacts on people’s ability to undertake normal activities including the conduct of business and meetings.

Our first priority at the moment is not only to maintain our investment discipline but to ensure we communicate openly with investors and advisers and make available as much support as they need.

At the same time the new Distribution team is also seeking to enhance our investor, adviser and educational materials and begin the process of seeking more research ratings, platform and approved product list inclusions. We know that this process is lengthy at any time, and we are patient in our approach as we seek to build and grow a sustainable investment proposition that we believe will be attractive to local investors.

The businesses you back are generally established with long-term prospects. How do you define that in such difficult times?

One of the main things that attracted me to Lakehouse was their investment philosophy, summarised as long term, high conviction, and asymmetric. They take a very different approach to many traditional managers, starting with how they identify opportunities. This leads to concentrated portfolios, with high active share and a long-term approach reflected in relatively low turnover. This process naturally leads to portfolios which typically have little or no exposure to more cyclical and capital intensive sectors and industries such as materials, energy, banks and airlines.

Conversely, given our growth orientation, we have larger exposures to software, ecommerce, payment systems and loyal consumer brands. When coupled with our typical cash exposure of 5-15% there is some inbuilt robustness given recent volatility although not immunity.

The biggest factor right now though has to be our long-term approach, while we cannot control volatility in the share market, we can control our response. As such we have been patient while seeking to selectively take advantage of recent movements to trim and build positions across the portfolios.

I think when Australian investors have the opportunity to learn more about this approach, they will find it both refreshing and intuitive.

You have two solid offerings now. Is there a push to expand the products that Lakehouse Capital offers?

Our initial focus will be on the two strong offerings we currently manage. As we introduce Lakehouse to a broader audience it is important that we have a clear and focused value proposition. On that basis we wish to remain focused ourselves in terms of resource and our ability to service and grow our existing investor base.

There is no desire to mass manufacture product for the sake of it, and the team has already demonstrated their desire to be patient by building a strong track record in our existing funds before taking them to the broader market. That being said, I very much doubt these will be the last Lakehouse offerings you see.

You come from Aberdeen Standard Investments, a well-established company. What’s the difference in working with a younger organisation?

My tenure at Aberdeen was both long and enjoyable. When the opportunity to join Lakehouse came up the contrast between working for a large, well established global house versus a new smaller local business was front of mind. However, having met with Joe Magyer and the team, and developed an understanding of their approach to investing I knew it was the right opportunity and challenge for me. In terms of youth or age, I’m not sure that has been the biggest difference.

While Lakehouse is relatively young as an organisation there is plenty of experience and wise heads across the investment and operations teams. One of my least favourite phrases in business is “But that’s the way we’ve always done it”.

So, one of the big advantages of joining a newer business is the absence of historical baggage and out-dated legacy systems and processes. The benefit of a smaller and nimble management team and their ability to make timely, collaborative decisions and react quickly to client needs has probably stood out to me the most. On a personal level, the broad use of modern technology and software has been an eye-opener.

While it has been a steep learning curve for this IT dinosaur the benefits are significant when it comes to flexible working and the sharing of information.

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