Lakehouse Capital on MarketAxess (MKTX): “We Think it Makes Sense for Long-Term Holders to Stay Patient”

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 MarketAxess Holdings Inc. (NASDAQ: MKTX), and discussed its stance on the firm. MarketAxess Holdings Inc. is a United States-based financial services company, that currently has an $18.05 billion market capitalization. MKTX delivered a -16.72% return since the beginning of the year, while its 12-month returns are down by -8.04%. The stock closed at $475.17 per share on July 30, 2021.

Here is what Lakehouse Capital has to say about MarketAxess Holdings Inc. in its Q2 2021 investor letter:

MarketAxess is the leading US electronic trading platform for institutional fixed income investors and broker-dealers. The company’s shares went backwards during the year as the business rolled over some very difficult comparisons from the prior year and a much smaller rival, TradeWeb, made some headway into the company’s original stomping ground of US high-grade credit. We are watching the competitive environment closely but have increased the Fund’s position recently in light of strong overall results and market share gains across most categories.

Just to take a step back, the Fund first invested in MarketAxess back in May 2018. The thesis then looked pretty much how it does now: a founder-led, highly profitable challenger that is methodically gaining market share by offering superior liquidity and price discovery to an opaque market long dominated by trading with brokers over phone or email. The business has done well since with the company’s threemonth rolling market share of high-grade US credit increasing from 17.3% to 21.2% and the shares returning 124.7% in Australian dollar terms since the date of the Fund’s initial investment.

We’re watching the US high-grade credit market closely but one of the most attractive aspects of the MarketAxess thesis is the way that it has leveraged its strong presence in US high-grade credit into adjacent markets. For example, since the Fund first invested, the company’s three-month rolling market share of the US high-yield credit market has nearly doubled from 7.7% to 14.3%, Eurobond traded value has more than doubled, and the company’s total value traded in US high-yield, Eurobonds, and emerging markets climbed 94% to reach 51% of the company’s total value traded. We’re pleased and impressed that the company is gaining market share so quickly in these categories and note that, in a network-driven model such as this one, success breeds success and creates additional optionality.

MarketAxess is also still making inroads with its all-to-all trading platforms that allows investors and brokerdealers to all trade with one another rather than investors only being able to trade through direct brokerdealer relationships. The net effect dramatically boosts liquidity and price discovery, which not only reinforces the value MarketAxess brings but also diminishes the competitive position of the traditional fixed income brokers in the marketplace. This all-to-all trading, or Open Trading, as it is called on MarketAxess, now makes up 33% of the company’s total credit volume, up from around 21% when we first invested.

Again, we are watching the competitive environment closely, but given the firm’s steady leadership, clear and steady share gains across most of its markets, and with a share price that is about 23% below its highs, we think it makes sense for long-term holders to stay patient.”


Based on our calculations, MarketAxess Holdings Inc. (NASDAQ: MKTX) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. MKTX was in 34 hedge fund portfolios at the end of the first quarter of 2021. MarketAxess Holdings Inc. (NASDAQ: MKTX) delivered a  -2.72% 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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