Robert Cantwell is the founder of Upholdings, one of the first hedge funds to have converted into an actively managed ETF with the launch of the Compound Kings ETF [KNGS]. The focus of the fund is to invest in compounders, which it describes as “companies with the potential to reinvest their own cashflow at above average rates of return”.
Cantwell spent seven years as an analyst before taking on the role of chief financial officer at Everlane. He tells Opto Sessions about how a friend broke away to create a startup, which seemed like the ideal way to grow for Cantwell too, who later followed suit to set up Upholdings in 2019.
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The fund’s investing strategy is to keep a narrow focus on its identified areas – it has just five positions that make up more than 50% of its holdings. “I’ve been a portfolio manager for almost three years. The more that I have been restricted in my ability to trade, the better the fund has performed,” Cantwell says. “Infinite flexibility is costly. Just because you can make changes quickly doesn't mean that you should.”
Could that limit fund participation? Cantwell says that a hedge fund has no rules around marketing except that it must be sold to accredited investors. To achieve success in managing a publicly-traded fund lies partly in being visible and heard. “You have to be sharing and explaining and having what you're doing tested by the market at large.”
“Infinite flexibility is costly. Just because you can make changes quickly doesn't mean that you should”
The fund’s investment philosophy, Cantwell says, is that stocks are first weighed by their long-term potential rather than immediate action. For example, Netflix [NFLX] has seen a weak year because subscriptions fell. “We tend to look at a business like Netflix not over a one or two year period, but over a 10-year period looking backwards and over a 10-year period looking forwards.” Cantwell sees an opportunity in subscription-led content services as a category.
The second investment criteria include valuation and competition. The expected return on investment is double-digit, so “we’ve got to be really careful about the multiples if we’re willing to enter these opportunities.”
Cantwell also says this is “a tricky time to invest in innovation”. “The challenge here is buying expensive, non-cash flow generating small-cap securities is not the only way to participate,” he says.
To hear more about Cantwell’s investment strategies, listen to the full episode on Opto Sessions.