#129 Compound Kings: Lessons Learned as an Investor and Emerging Manager | Robert Cantwell, Portfolio Manager

About Compound Kings

‍“The investment management business actually looks a lot more like every other business, where there's products, there's marketing, and there's distribution, and you have to be outstanding at all three of those things in order to succeed in this business.” – Robert Cantwell

Robert Cantwell is the Founder of Upholdings and Portfolio Manager of Compound Kings, which is an exchange-traded fund focused on investing in companies often called compounders. Compounders are typically profitable, growing, and generate very high returns on invest capital (ROIC).

This is an incredible interview with a true pioneer in the actively managed ETF space. In it, we look back at the top three positions in Compound Kings when Robert and I sat down in early 2021, which feels like a world away, to review the performance of Alibaba, Meta, then Facebook and Berkshire Hathaway.

Robert shares his perspective on how the actively managed ETF market is shaping up and he talks about how his views on concentrations have changed over the last year and a half.

We also talk about the rise of thematic funds and where they can go wrong.

Robert shares the three biggest learnings from the last 18 months including: why you always have to be learning new industries; why you should add a quant to your investment team; and why knowing the people running public companies matters a lot.

Robert also walks through his team's thesis on the three largest positions in the fund today, which include Meta, ServiceNow and Adyen. This section of the interview is fantastic so skip ahead and don't miss it if you're short on time.

And finally, Robert shares what it's like to build an ETF business scale assets under management and why running an investment business is very similar to an enterprise software business.

For more, explore the transcript of this episode.

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Chapters

This episode is our definitive guide to building an ETF business. In it we cover:

(00:02:23) – Introduction
(00:04:53) – Defining a compounder (growth, profitability, high ROIC)
(00:06:22) – Investing in challenging markets
(00:14:26) – Robert’s thoughts on the rise of active management
(00:17:28) – Why so much money is still in mutual funds
(00:19:33) – Thematic ETFs and where they can go wrong
(00:39:05) – Why investing in public markets is so challenging
(00:46:09) – Top three positions in Compound Kings today: Meta, ServiceNow, and Adyen
(01:05:35) – What it’s like to build an ETF business

Listen to the episode on Apple Podcasts, Spotify, Overcast, Google Podcasts, Amazon Music, Castbox, Pocket Casts, Player FM, Podcast Addict, iHeartRadio, or on your favorite podcast platform. You can watch the interview on YouTube here.

Big Takeaways

Since inception, Compound Kings (KNGS) has outperformed the S&P 500. But they’ve also learned a lot of lessons, including:

Why you have to always be learning new industries. Unless you invest only within a specific industry, it’s important to always be expanding your knowledge of new industries and the companies within them. As a rule of thumb, everything is interconnected. Studying new industries and companies will not help you understand more businesses and business models, it will help you connect the dots between industries and companies.
Why you should add a quant to your investment team. Most investors lean more qualitative than quantitative. Meaning that they focus on understanding the company, its products, its team, and developing a point of view on its future, rather than looking purely at the quantitative aspects of the business or industry. If your investment team consists only of qualitative investors, it’s important to realize that you’re all approaching the problem from the same general angle. By adding a quant, short for quantitative investor, to your team you’ll have more diversity of thought and be able to see the world (and your investments) more clearly.‍
Why knowing the people running public companies matters. At the end of the day, all businesses are run and led by people. While financial metrics feel more objective and are often easier to analyze, deeply understanding the people that run the companies you invest in is incredibly important. To do that, you can listen to their commentary on investor calls, watch or read their interviews, study their annual or shareholder letters, or best of all try to spend some time with them in person. Only by doing that will you understand the people — as well as their perspectives, philosophy, and worldviews — that will drive the company forward.

Our Favorite Quotes

Here are a few ideas we'll be thinking about weeks and months from now:

“I believe that a lot of investment managers that are pursuing the pure independent thought path might actually find that their learnings around individual securities or management in general can in fact be accelerated if they were willing to just open the window just a tad. They don't have to blow the whole doors open and share the whole thing or sharing of their secret sauce. But I do believe that even by testing a few of your own personal conclusions for things like that, it forces a faster learning cycle than if you didn't.”
“If you want to grow a retail investment management company, you have to figure out how to make your fund useful to financial advisors.”
“Our US boards, they're so political. They focus around the head of the compensation committee, who has to sit on seven other compensation committees of other boards. And how much independent thought are you really getting when you're just having this person that is just averaging together what they're seeing across all these compensation committees? They're not doing something that is uniquely beneficial for that particular company.”
“One of the challenges as a public investor is that you are an extremely minority investor in the companies that you're participating in. As Joe likes to say, that means you are getting the company as it is. And if you think that you need to sit around for a new CEO or for a change in board, buckle up, I hope you've got a lot of patience because that investment is likely to underperform your benchmark or underperform other securities that you're looking at.”
“There's just always some amount of Berkshire that you have to have in your portfolio. Every investment decision I've ever made at any point in my life, I always benchmarked against what if I had just bought Berkshire Hathaway instead on that date?”
“Honestly, the survivability of mutual funds is a huge reason why we got into this business in the first place, which is one of the secrets of the retail investment management industry is that the majority of money that is invested and grown doesn't actually get spent. Most of it ultimately gets handed down or transferred at some point. And so what that means is that money that has been allocated to mutual funds, mutual funds have a hundred year head start here and actively manage ETFs.”
“The simplest way of describing the types of companies that we seek is pursuing the longest duration businesses possible. So what is it about the characteristics of the business that are going to allow it to survive market cycles even if it has somewhat volatile cash flow characteristics throughout those periods?"

Selected Links

We covered a lot of ground in this interview. Here are links to the stories, articles, and ideas discussed:

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