Company converts performance-driven hedge fund into ETF

Yahoo Finance’s Alexis Christoforous and Robert Cantwell, Founder & CIO of Upholdings, discuss the company’s investment strategy and new ETF.

Video Transcript

ALEXIS CHRISTOFOROUS: A small $3 million hedge fund made history this year by becoming the first to convert into an exchange traded fund. The actively managed Upholdings Compound Kings ETF is up 15% since launching late last year. That compares to the S&P 500's gain of about 4%. Joining me now is Robert Cantwell. He is the founder and CIO of Upholdings Group. Robert, good to have you here. I think you're on to something. Why did you decide to convert your hedge fund to an ETF?

ROBERT CANTWELL: Thanks, Alexis. You've covered it pretty well in the past, the pace of assets moving into the ETF vehicle. We see over the next decade at least $5 trillion moving into ETFs. But today, really all that's available are passively managed vehicles. And the SEC in the past year or two has updated a lot of their legislation to really open the door for active managers.

So we were able to bring our track record. We're able to bring all of our assets, all of our investors. And ultimately, this was a fund-- this was the type of fund that I was looking to invest into, but didn't exist yet. So we built it.

ALEXIS CHRISTOFOROUS: So when I was looking at your portfolio, tech heavy. FAANG names are there. Internet stocks comprising 44% of assets. And your top holdings include Alibaba and Facebook. I'm wondering if you could share with us your investing philosophy. A lot of the stocks that are in the portfolio have some questionably high valuations right now.

ROBERT CANTWELL: Sure. So there's a couple of pieces there. First is, what is the investment strategy? Second, what do we do about some of the high prices that we're seeing in the market? So for us, first, what we like to call a compound king is a company that's in an attractive market with a great business model, a strong management team. And it's still trading at a price that's interesting.

So, using Alibaba as an example, the Chinese e-commerce market is 50% bigger than the US's. Alibaba commands 2/3 of everything that's moved online. They have a very profitable business model underneath that. And they're trading for about 30 times free cash flow. All things considered, that is a very reasonable valuation for an opportunity like that. And by the way, that's a company that's not in the S&P 500. So we're able to attach ourselves to growth that isn't normally available inside of common products here.

The second piece that you mentioned about prices being high, we absolutely are seeing prices high in a few areas. I'll share a story. My analyst and I, yesterday we both reread Marc Andreessen's August 2011 op-ed that software is eating the world. And without question, it has been a timeless piece where he was absolutely right, and he nailed a lot of important technology trends. But what was also great is that he talked about what was in his portfolio at the time that he authored it.

And if you look back, it was Groupon and Zynga and Twitter and Facebook. And in the months that followed that op-ed, many of those companies would go public. And in the 18 to 24 months that followed, basically, that portfolio of securities was down 50%. So we look at that and we actually think that says a lot about the market that we're in today, where there's a lot of innovation that's happening and a lot of innovation that's being talked up.

But that doesn't necessarily mean that there are a ton of attractive, new, investable opportunities in new innovation. And right now, we're seeing much better opportunities in these large, high market share, big cash flow compounder players.

ALEXIS CHRISTOFOROUS: Yeah, that op-ed is definitely a good read from a few years ago. I would push people to take a look at it if they have a moment. But I want to ask you about Berkshire Hathaway, which is also, I think, your third largest holding in the portfolio. Did you see that Warren Buffett made changes to Berkshire's holdings, letting go of a little Apple, getting into Chevron, Verizon, which is the parent company of Yahoo Finance, and Marsh & McLennan, I think it was EW Scripps. What do you make of those moves on the part of Berkshire?

ROBERT CANTWELL: We do pay very close attention. I've been a very proud Berkshire shareholder for more than 15 years now. And their stock in the current market for the cash flow that they generate and some of the new businesses that they're acquiring are still very, very interesting to own. Specifically, as it pertains to the moves that they make, to be honest, we're always focused on what are they still owning.

So, sure, they trimmed Apple. Apple went from 46% to 43% of their entire portfolio. It's still three times larger than their next largest position. And honestly, Berkshire Hathaway is, funnily enough, one of the best ways to own Apple. Because Apple itself is trading at a huge premium, but given the discount to all of its parts, Berkshire really offers a way to own a company like Apple at a discount.

ALEXIS CHRISTOFOROUS: Yeah, they still do own quite a lot of it, even though they let a little bit of it go to buy up some of these other stocks. I want to get back to the reason why you did this conversion from hedge fund to ETF. Was it to open up the playing field or to try to level the playing field, I guess, if you would-- if you will-- and bring in more of the retail investor? Because we've seen, I think especially last month, just the power of the retail investor when we saw the whole GameStop Reddit situation go down. So was that behind part of the incentive here for you?

ROBERT CANTWELL: I mean, that's a big part of it. I think there's plenty of great investment opportunities for people that already have a lot of money. So we talked about this problem a lot at Everlane, which was if you had a ton of money, there's tons of expensive fashion for you to go and buy. But if you didn't, how could you buy a high quality product at a fair price and get it in a reasonable amount of time?

And really, it's that same mindset that we're bringing to Upholdings in the Compound Kings Fund that we run. We can pursue the same research as the best firms that are out there. We can run a concentrated portfolio off of that. And as a portfolio manager, I can be held accountable for those decisions. And strangely enough, that is a product that isn't available in a lot of ETFs yet. But we do think there's going to be a lot of competition and a lot of people coming at it in a similar way.

ALEXIS CHRISTOFOROUS: Yeah, I think you're right. I think we're going to see a lot of conversions from mutual funds to ETFs as well. Robert Cantwell, founder and CIO of Upholdings, thanks for being with us.