Lakehouse Capital, an investment management firm, published its “Global Growth Fund” second quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly return of 33.2% net of fees and expenses, was recorded by the fund for the second quarter of 2021, compared to 27.7% for its benchmark. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Lakehouse Capital, the fund mentioned The Charles Schwab Corporation (NYSE: SCHW), and discussed its stance on the firm. The Charles Schwab Corporation is a Westlake, Texas-based financial services company, that currently has an $128.1 billion market capitalization. SCHW delivered a 28.11% return since the beginning of the year, extending its 12-month returns to 104.98%. The stock closed at $67.95 per share on July 30, 2021.
Here is what Lakehouse Capital has to say about The Charles Schwab Corporation in its Q2 2021 investor letter:
“Charles Schwab is not a household name in Australia but it is in the US where it is the largest discount broker with more than 32 million brokerage accounts, 2 million corporate retirement plans, and total client assets of US$7.4 trillion. Schwab’s shares performed extremely well during the year thanks to a confluence of factors including a strong stock market with the S&P 500 up 39% year-on-year, the company’s recent merger with industry heavyweight TD Ameritrade, and expectations that interest rate income would grow as the US economy gained steam.
Two other important contributors to Schwab’s year, which were a mix of cyclical and structural, were an increase in net new accounts and increased trading activity. We view these as cyclical in the sense that markets are performing very well and that retail investors have been bored and emboldened during the American lockdowns, however, also structural because Schwab’s shift to $0 commissions on equity trades has permanently reduced a barrier to trading for investors with smaller accounts. We also note that, while brokerage activity is cyclical, the average brokerage account itself is very sticky — we estimate normalised annual retention rates for accounts of better than 93% — and that the average client assets per account grow over time thanks to asset growth and clients collectively being net savers.
Schwab makes for an excellent natural hedge for the Fund as Schwab tends to perform well when interest rates increase, which is generally negative for the rest of the portfolio. And the position did its job for us by increasing during a rising interest rate environment, enabling us to harvest much of our gains from Schwab and redeploy them to shares of other growth companies that had gotten cheaper in response to higher rates. We’re mindful of the run in the shares and the cyclical nature of the business but comfortable keeping a small position for now given Schwab’s natural hedging dynamics, extremely loyal customers, and an industry-leading position in a growing market.”
Based on our calculations, The Charles Schwab Corporation (NYSE: SCHW) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. SCHW was in 76 hedge fund portfolios at the end of the first quarter of 2021, compared to 61 funds in the fourth quarter of 2020. The Charles Schwab Corporation (NYSE: SCHW) delivered a -3.48% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.