Lakehouse Capital went ecstatic after Charles Schwab’s + 100.9% return
Lakehouse Capital, an investment management firm, has released its second quarter 2021 Global Growth Fund letter to investors – 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 check out the top 5 holdings of the fund to get an idea of their top bets for 2021.
In Lakehouse Capital’s Q2 2021 letter to investors, the fund mentioned The Charles Schwab Corporation (NYSE: SCHW) and discussed its position on the company. Charles Schwab Corporation is a Westlake, Texas-based financial services company that currently has a market capitalization of $ 128.1 billion. SCHW has returned 28.11% year-to-date, extending its 12-month returns to 104.98%. The stock closed at $ 67.95 per share on July 30, 2021.
Here’s what Lakehouse Capital has to say about The Charles Schwab Corporation in its Q2 2021 letter to investors:
“Charles Schwab is not a household name in Australia, but it is in the United States where it is the largest discount brokerage with over 32 million brokerage accounts, 2 million company pension plans and total assets of $ 7.4 trillion. Schwab shares performed extremely well over the year thanks to a confluence of factors including a strong stock market with the S&P 500 rising 39% year-on-year, the company’s recent merger with the heavyweight the TD Ameritrade industry and expectations that interest rate income would rise. as the US economy grew.
Two other major contributors to Schwab’s year, which were both cyclical and structural, were an increase in new net accounts and an increase in trading activity. We see them as cyclical in the sense that the markets are performing very well and retail investors got bored and emboldened during the US lockdowns, but also structural as Schwab’s move to $ 0 in stock trading commissions definitely has reduces a barrier to trading for investors. with smaller accounts. We also note that while the brokerage activity is cyclical, the average brokerage account itself is very sticky – we estimate standardized annual retention rates for accounts above 93% – and that the average client assets per account increase over time as assets grow and customers collectively are net savers.
Schwab is an excellent natural hedge for the Fund as Schwab tends to perform well when interest rates rise which is generally negative for the rest of the portfolio. And the position did its job for us by rising in an environment of rising interest rates, allowing us to reap a large chunk of our Schwab gains and redeploy them into shares of other growth companies that had become cheaper in response to higher rates. We are aware of the fluctuation in stocks and the cyclical nature of the business, but we are comfortable keeping a small position for now given Schwab’s natural hedging dynamics, extremely loyal clients and position. leader in a growing market. “
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Based on our calculations, The Charles Schwab Corporation (NYSE: SCHW) was not able to land a spot on 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 fund in Q4 2020. Charles Schwab Corporation (NYSE: SCHW) has returned -3.48% in the past 3 months.
The reputation of hedge funds as savvy investors has been tarnished over the past decade, as their hedged returns could not keep up with the unhedged returns of stock indices. Our research has shown that small cap hedge fund stock selection managed to beat the market by double digits every year between 1999 and 2016, but the margin for outperformance has shrunk in recent years. Nonetheless, we were still able to identify in advance a select group of hedge funds that have outperformed S&P 500 ETFs by 115 percentage points since March 2017 (see details here). We were also able to identify in advance a select group of hedge funds that underperformed the market by 10 percentage points per year between 2006 and 2017. Interestingly, the margin of underperformance of these stocks has increased in recent years. Investors who are long in the market and short on these stocks would have reported more than 27% per year 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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