The Swell Global Portfolio

Our next speaker is the founder and CIO of Swell Asset Management, Mr. Lachlan Hughes.

The Swell Global Portfolio is a carefully selected portfolio of international equity investments listed in developed markets.

The principal objective is capital preservation.

Therefore, there is a greater emphasis on preventing losses than reaching for higher returns.

Lachlan founded Swell Asset Management in 2014.

He is a CIO with responsibility for investment decisions.

Loughlin's career spans over 22 years in legal and analytical roles, with 15 years in investment management.

Previously, he worked in Nova Port Capital, Kenai Wood Mallisons, the Bank of New York, London, and Alco Finance Group.

Loughlin is going to discuss the Swell Global Portfolio.

Welcome Loughlin.

Thank you very much and thanks for joining this presentation.

In the interest of time, I'll let you read the quote and the disclaimer and jump straight to our business roadmap.

So as you can see here, Swell was incepted back in 2015 and we have an eight year track record now, but in many ways, we really feel like we're just getting started.

I actually started my career in law, as you've already heard, and moved into funds management in September of 2008, which was the week after Lehman Brothers collapsed.

And I learned a lot through investing in this period.

But it showed me if I cast my mind back to that time, I would have thought that the GFC was the worst financial event that we would encounter in my lifetime.

And then

roll forward 15 years, and today we see it.

We've seen just in the short time, the eight years that Swell's been around, we've seen a global pandemic.

We've seen war break out in Europe.

We've seen record inflation.

and record amounts of stimulus.

So I think that the key message is the world is always uncertain.

In fact, it was even uncertain in December of 2019 before we entered the pandemic, we just didn't realise it.

So when people expect things to be uncertain, or feel uncertainty today and expect more of the same in the future, it tends to be a good time to invest in the markets because

Generally, when there is uncertainty, prices are lower.

So it's worth keeping that in mind.

Now, the way to overcome this uncertainty is to have a process, a clear process for identifying companies and investing in them.

And that's what we have here as well.

Now these three bullet points deal with the who is swell, but what I would like to do is tell you a little bit about the why is swell.

And to do this, I need to take your mind back to, or take you back to the 1950s and the birthplace of modern portfolio theory.

And basically this is where diversification was born.

And what started with noble intentions brings us to a point today where 90% of fund managers

are underperforming their benchmark after fees.

Now, there's a good reason for this.

And the reason is, as you increase diversification, yes, this is good from a diversification standpoint.

But if you add a stock of lower quality, you're actually lowering the quality of the overall portfolio.

And this is why at Swell, we focus on concentration and quality.

But look, we've borrowed this from the super investors.

If you look at Warren Buffett, Charlie Munger, Seth Klarman, all of these super investors adopt a concentrated approach because it is the only way to beat the market over the long term.

Now at Swell, we help two types of people, really.

The majority of the people we help are busy executives and business owners.

And the common characteristic they share is that they are time poor.

And because of this, the most important thing for them is to get trust in the person who's managing their money.

And the way that we help them with the trust component is to invest alongside our clients.

I have more than 90% of my net wealth invested in this World Global Portfolio.

And this will always be the case.

And the second part is we want to be really transparent

about the way we manage people's money.

And I feel like we do a good job of preparing them for what they can expect, investing with Swell.

Now Swell philosophy is based on four simple principles, quality, value, conviction and horizon.

But quality is the first aspect of this and I'd like to talk to that a little bit.

We wanna find companies that we understand, being able to understand them is very important.

and they need to be earning an attractive return on their invested capital.

But more than that, we need to have companies with a strong moat or competitive advantage.

And it's more important, it's obviously important to know what the moat looks like today, but we really wanna know what this moat's gonna look like in five or 10 years time.

And you can only do that with certain companies.

So whenever we identify a company, we really wanna look into the future and see what does this moat gonna look like in five years or 10 years time.

Once we can make that,

decision, the rest of the process tends to follow.

And obviously the value component, we need to purchase these companies at a discount to their intrinsic value, conservatively stated.

So that's why we say we're a value investor.

And the last two parts, conviction I touched on, but horizon, this is where we adopt a long term view.

Now, how do we differ from our peers?

we seek to own 10 to 20 high quality companies.

And as I said, stock concentration provides the best opportunity to beat the market and the empirical research supports this.

Excuse me for a second.

If we have a look on the chart on the right, this is all funds and producing, these are diversified funds, produces over this, the extent of this study around 10 years

the average return of all funds was 6.3%.

But had we taken their best 10 ideas, excuse me, if we'd taken their best 10 ideas and invested them from their current portfolio into the best 10, they would have lifted their performance by more than 3%.

So what this tells us is traditional funds are not doing a bad job.

It's the system in which they're forced to operate.

having too many companies makes it very hard to beat the benchmark.

Because the more you add, the more you replicate the benchmark.

And if you take out fees, that leads to underperformance.

So the way to beat the market over the long term is to take a concentrated approach.

Now, while concentration makes a lot of sense if you're getting your calls right, it makes absolutely no sense if you're getting your calls wrong.

So what this chart on the left shows is,

the chart on the left shows is that Swell's concentration is around 10 to 20 companies, but we actually get 66% of our stock calls right.

And that compares to 50% for our peers.

So that's our hit rate.

It means in every 10 companies that we look at and invest in, 6.6 will be right.

And that's the first piece of the puzzle.

The second piece of the puzzle is ensuring that those stocks you're investing in

producing a payoff that's attractive.

And when we calculate our payoff versus our peers, it's almost 2x our peers, 197% payoff.

So Swell's getting the stock calls right at a higher rate than peers, but also investing in the right types of companies.

Now I mentioned before about playing the long game, and this is incredibly important for us here as well.

So we focus on the long term, but we remain true label on that point.

And this is borne out in our average holding period, which is 2.86 years versus our peers at 1.37 years.

So more than 2x our peers.

And the real challenge investing in the long term is holding the companies that have performed well.

But a good example of a stock that we've owned since our inception in 2015 is the company Microsoft.

Now, Microsoft's up nearly 7x since we purchased it in 2015.

So it's appreciated a lot.

And there's been many, many times throughout this period where we've been encouraged to sell the position where people were fearful about the future

But we've managed to hold the company the whole way through.

And you can see when you buy the right companies like Microsoft, even with the pandemic, even with the war in the Ukraine, the good companies continue to go up.

And I think a forgotten element of investing in a concentrated way is it's important to focus on your defenses.

So we focus all of our attention or 80% of our attention on the companies we own today.

We want to know them better than anyone in the market and to understand the risks you need to focus on them.

And this has been a very good thing for us.

If we take a company like Meta, Meta was a really poor performer in 2022.

But because we knew the company exceptionally well.

we felt comfortable in lifting the position of the meta within the portfolio during a time when the market was very negative.

And this has produced like a fantastic return for us in 2023.

But it does go to show that when you're investing in a concentrated way, you must focus on your defence, you must focus your time on the things you own, because that is where the biggest risks will be in the portfolio.

And finally, I just wanted to show you this World Global Portfolio logos.

They're all very well known companies and they span a wide selection of industries, whether that's agriculture with John Deere, whether it's healthcare in a company like GE Healthcare, which makes MRI machines or

companies like Google, Microsoft or Amazon and the big investments they have in the cloud today.

So you can still get diversification with a small group of companies, but the key is focus on the companies and you look very well over the long term.

Thanks Lachlan.

Now I have a couple of questions for you.

So first one is, can you describe the process you follow to select the top performing companies for your portfolio?

Absolutely.

So we follow a very traditional process here as well.

So we start with a stock screen, which identifies about 5,000 companies

Then we do a little bit more work on those stock screen and we bring it down to a group of 500 companies.

But the real work starts once we've identified a stock from within that group of say 100 companies.

We put it through a preliminary checklist which goes through a number of factors that we think are very important to how this business is going to perform over the long term.

But the real point of difference from our peers is we will spend upwards of sometimes 300 or 400 hours

identifying and working on a company before we acquire it.

And that's really our point of difference.

We've got to know the company very well to understand what the moat is going to look like in three, five and 10 years time.

You have to do the hard work at the start.

So what we spent hundreds of hours looking at these companies.

And then once we've progressed through, we'll build things like we do a detailed financial model, which includes balance sheet, income statement, cash flow statement,

but also a very detailed qualitative compendia document, which goes through all the key points that we think we need to understand prior to investing.

And very few, I think the point we make is that very few companies make it through the process.

It's only the small select group that can meet all of the tests we have in place for our companies.

So look, I say it's traditional in the respect that we are researching in the same way as other funds, but we're doing this at a much, much deeper level.

Well, one more question for you.

Last year, I hope you don't mind asking you this, your performance was under pressure.

So how did you respond to that?

Yeah, last year was a really tough year for technology investors.

And the way we responded is to follow the process.

We doubled down on the process.

We did exactly what we've done previously.

We made sure that in companies that have fallen,

We redid the work.

We had a look at them.

And where they were attractive, we increased the position weights.

And we did that with lots of these companies.

So what we found is as we moved into 2023 and people became more optimistic about these companies, they've rallied back.

So, you know, an interesting point would be a stock like Meta, which fell from $300 to $100.

Well, it's back to $300 today.

Now, all the things which had that stock falling last year, it really was

the stock was very hard done by last year, and it got into this spiral of negative news.

But if you understand the stock, you're not as fearful, and we really take advantage of those things.

So in tough periods like last year, we followed the process, and I really think we've kind of indicated that approach in 2023, as we've had very strong performance this year.

Thank you, Lachlan.

Good to see you.

Take care.

Thank you.