2020 H1 Investor Letter - Guardian Fund
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2020 H1 Investor Letter
INVESTMENT PHILOSOPHY
We grow our capital through long-term ownership in great businesses that thrive. Investments are selected based
on seven main criteria: Does the company have superior technology at its core? Is it data-driven? Is the company
growing its competitive advantage? Is it self-financing? Do we admire management? Is the capital allocation
intelligent? Is the price we pay to become co-owners fair?
PERFORMANCE (NET OF FEES AND EXPENSES)
% in EUR Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2010 5,1 0,2 1,3 1,7 1,8
2011 0,8 -0,4 0,0 -1,6 1,0 1,3 -1,8 -0,4 -3,4 -1,6 4,2 0,1 3,7
2012 7,0 0,6 1,0 2,5 -1,2 -0,2 2,2 2,5 -0,2 0,4 -0,9 -0,9 1,0
2013 15,2 1,3 2,6 4,4 0,1 2,7 -1,3 1,6 -0,9 0,2 1,7 1,5 0,4
2014 15,5 -1,8 1,8 1,3 0,4 2,0 1,6 0,0 3,9 1,5 0,7 2,3 0,9
2015 9,0 -0,7 6,8 1,4 -2,0 3,3 -3,1 3,5 -5,8 -3,2 8,9 4,2 -3,5
2016 12,0 -6,4 -0,2 0,9 1,6 5,2 -3,4 4,3 1,2 1,0 0,5 6,1 1,5
2017 15,6 1,7 2,4 -0,7 1,5 0,5 -0,1 1,6 1,1 1,9 4,1 -0,9 1,6
2018 -10,1 4,5 -2,1 -5,7 1,9 7,8 2,6 0,4 2,1 -0,9 -8,1 0,3 -11,9
2019 29,5 7,8 3,1 3,4 5,2 -7,6 4,9 2,3 -3,5 0,1 1,3 7,6 2,7
2020 19,3 3,0 -5,2 -18,4 20,0 13,3 10,1
TOP INVESTMENTS COUNTRY ALLOCATION
Alphabet, Inc. US & Canada
Crowdstrike Holdings, Inc Germany
Elastic N.V.
Roku Inc. Brazil
Sea Limited New Zealand
Shopify, Inc.
Israel
Spotify Technology S.A.
StoneCo Ltd. Singapore
Tencent Holdings Ltd.
China
Wix.com Ltd.
Cash
OPERATIONS INVESTMENT TERMS
Administrator: Kaya Fund Services Inception Date: 01.08.2010
Banks & Broker: Rabobank, Binck Bank NAV: EUR 295.49
Depositary: Stichting Juridisch Eigendom Guardian Fund Min. Investment: EUR 100,000
Legal Structure: Fonds voor Gemene Rekening (FGR) Redemptions: Quarterly, 20 days written notice
Legal Counsel: Neleos Legal Services Mgmt./Perf. Fee: 1.00%/25% p.a.; 6% hurdle rate
Fund Manager: Kaya Capital Funds B.V. High Water Mark: Yes
Fund Advisor: Fratres B.V. Leverage: Maximum of 20% of assets
ADVISORY BOARD TEAM
Jacques Kemp Georg Krijgh: BSc University College of Utrecht, University of
Dirk Lindenbergh California, Berkeley, MSc (economics) Erasmus University
Peter Jan Rubingh Rotterdam, Equity Analyst at Rabobank
Martin Krijgh: University of Amsterdam (law), Georgetown
University Washington, lawyer at De Brauw Blackstone
Westbroek, M&A at ABN Amro
Felicia Groenewoud: VU University Amsterdam (finance), analyst
at Kempen and ABN Amro
Seth Lowry: Equity analyst at Merrill Lynch and Citibank
1July 9, 2020
Dear Partner,
Over the first six months of 2020, the return of our partnership was +19.33%, net of fees and expenses.
This compares to -3.08% for the S&P 500 Index, measured in U.S. dollars, and including dividends.
Our wealth has increased because we co-own businesses that thrive.
Participate in the Winners
Over the past four months, we have experienced a lifetime worth of narratives. From an investing
perspective, 2020 has been the most interesting period of my life so far. The massive global scramble to
digitalize both private and professional matters is creating big winners and losers.
The changing world is a challenge for most businesses. In the first half of 2020, nearly 73% of the S&P 500
companies’ stocks declined and 35% of the total was down 20% or more. About 67% of all U.S.-
headquartered firms with over USD 50 million in market value were down and 44% down by 20% or more.
The Guardian Fund’s mission is to let you participate in winning companies that take significant share in
the fields of e-commerce, cloud computing, gaming & e-sports, digital payments and advertising, content
streaming and discovery, cybersecurity, as well as digital health. The truffle hunt for the best teams is
exciting.
Since many years, technology-driven businesses have become our main focus because I felt that they
offered the best risk-adjusted returns. The pandemic has accelerated existing trends and has forced
organizations to implement their three-year roadmap within three weeks. The global shift to online
lifestyles is irreversible.
During the month of March, Twitter was an important source of information. While the stock market was
tanking, tweets from business insiders provided valuable insights as to how the pandemic was impacting
their companies. For instance, during the lockdown Jean-Michel Lemieux (the Chief Technology Officer of
Shopify) wrote: ‘as we help thousands of businesses to move online, our platform is now handling Black
Friday level traffic every day!’.
Such green flags gave us additional confidence to increase our investment in businesses such as Shopify,
the leading cloud-based multi-channel commerce platform that provides merchants with a powerful back-
office and a real-time view of their business.
Recent changes in behavior worldwide require even more focus on the winners of this era. Like always one
needs to own the right businesses. We spend no time thinking about cheap legacy firms in hopes that their
share price will rebound. Dietrich Bonhoeffer said ‘if you board the wrong train it is no use running along
the corridor in the opposite direction.’
2Early Stage
Today, we are at a shockingly early point in the digital transformation.
The economy of the internet is still only a single percentage of global GDP. We are gradually heading to a
place where the GDP of the internet will provide the majority of economic activity. This big social change is
like a huge tailwind driving the most successful businesses in the next decade.
E-commerce penetration in the U.S. grew from 5.6% in 2009 to 16.0% in 2019. Then it grew about 30% in
April. There are 5.7 billion adults on the earth of which about 4 billion have a smartphone. The penetration
of e-commerce is still low in most countries because people lack good internet and digital tools. If one
would like to buy a handmade fabric from a person in Senegal online, then there are quite a few
complications with regard to the exchange of goods and money. However, the teams at companies such as
Starlink, Stone, Stripe, Shopee, Square, and Shopify, are determined to provide the most efficient platforms
that allow and urge everyone to participate.
As digital commerce is growing more businesses are building a direct relationship with the consumer. For
instance, L’Oréal’s chief digital officer said “We are setting ourselves up for a world where half of the
business is e-commerce and 80% of customer interactions will happen online.” L’Oréal quickly shifted its
advertising and marketing spending online, which led to an increase from 50% to 70% of its total since the
start of the pandemic. As a result, digital advertising on platforms such as Instagram, Amazon, Cardlytics,
Spotify, and Roku, is set on a trajectory this year to overtake spending on traditional media.
Changes are clear beyond commerce; the pandemic has caused a massive acceleration of remote education
and telehealth which grew from an 11% penetration in 2019 to about 46% currently. The pandemic has
increased the need for technology that enables on-demand virtual urgent care, virtual visits, remote
personalized monitoring, and collection of data to improve care driven by machine learning. We own shares
in Livongo, a firm that is using software to empower patients who suffer from chronic conditions to live
better lives.
Agility
We concentrate on businesses that are agile.
Our main focus is on firms that develop a single scalable cloud-based software platform to which the client
subscribes. Then we study those that are self-financing (meaning there is no need for outside capital to
finance growth), that have a leadership of owners, that own the client relationship, and that generate data
to leverage deep learning in order to constantly improve the product. Current examples are Spotify, Adyen,
Shopify, Stripe, and Stone.
The winning companies are those that can continue to stay well ahead of everyone else. This requires a
focus on the core competency that makes the business essential to clients; the secret sauce.
To maintain an competitive edge, the engineering focus has to be on the core technology which acts as the
muscle behind the user experience. In today’s world, small teams can leverage the public cloud and API’s
3in order to obtain flexible infrastructure and enterprise-level software. Since there is no need to buy, install,
maintain, and debug servers, this reduces overhead, latency, as well as increases security. The most agile
businesses integrate essential non-core competencies by paying for software subscriptions to another
firm’s key product.
Cloud-native software firms can be highly scalable. The economics of these ‘software-as-a-service’
businesses are incredibly attractive. The lifetime value of a client is often a multiple of the cost to acquire
them. Some businesses do not need to do marketing at all; the cost of adding clients is zero and often
revenue growth is driven by the client’s success.
Some software businesses can easily increase the share of wallet by adding users, volume, and new
products. For example, Crowdstrike, the cloud-based cyber security firm, has a 124% net retention rate
which means it can afford to add zero new clients and grow 24% annually from existing users.
The combination of a recurring predictable revenue streams, attractive economics, and long runways of
possibility ahead makes some of these valuations look attractive. The valuation of a great software business
trading at 30 times revenue can be more attractive than most businesses trading at 15 times earnings.
In the freemium model the product is basically free and the company can upsell value-added services to
existing clients; Spotify’s ad-supported users can listen to music without an subscription, Zoom offers a free
basic plan, Wix offers tools for a free website and then sells online entrepreneurs premium tools, and
Garena is selling virtual features to players of the game Free Fire.
While cash flows always play an essential role, today’s investor has to steer away from an accounting
mindset. The most important drivers of value are embedded in the intangible factors; culture, software,
focus, incentives, and untapped earnings power. Often, the map is not the territory. Look at how Spotify
keeps growing it’s addressable market or how Amazon became a force in cloud computing and gaming.
We invest in software businesses because this is the value investing of the third decade of the 21th century.
Overall Mindset
The frontier of technology keeps moving forward. When my grandfather was young, the T-Ford was the
frontier and during my dad’s student years it was the desktop. Great businesses often trade for an earnings
multiple that seems high. For example, Walmart went public on October 1, 1970, for USD 16.5 per share
meaning 55 times its 1971 earnings. Sales in 1971 grew 77%. It was the technology business of the time;
data-driven and scalable. Investing in 100 shares (USD 1,650) would be worth USD 4.3 million today.
Tesla is worth more than any other car manufacturer because due to its superior technology, it is agile. The
legacy manufacturers only seem to trade at a low earnings multiple; in reality most of these business are
being disrupted and the perceived earnings power and margin of safety are a mirage. The trillion-dollar
prize here is owning the data and self-learning software to power everything that drives.
The valuable intangible factors make investing interesting. One needs to have a personal conviction about
the future of a business. It is seldom easy to own a winning company for a long time. Just like Tesla,
4Amazon.com was seen as ‘uninvestable’ by the professional investor community for most of its history
because of an absence of an immediate accounting profit. Likewise, Spotify was just seen as a low-margin
music streaming distributor.
At any time in history there is a group of losers and winners. Change will forever destroy businesses that
may have been successful yesterday. There will always be a shift in wealth because one cannot have endless
compounded growth on a finite planet.
The investor does not need to have an opinion on the economy. It does not matter what the general
economy or the stock market will do. What matters to the investor is whether one belongs to the group to
whom wealth is shifting.
It seems that business economics has long been uncoupled from the way in which the economy was
measured in the 1970s. The big tech businesses are today’s ultimate winners of the rapidly growing internet
economy. In 2019, Apple’s App Store ecosystem supported USD 519 billion in commerce (the GDP of the
Netherlands in 2019 was EUR 812 billion). The winners keep growing because the digital economy is such
a small part of total activity; Amazon’s revenue continues to grow above 20% per year.
The stock market is just a small part of global business and is not representative of the general economy.
Over the past few years, the U.S. stock market has been driven by the tech companies that have a large
weighting in the index. Smaller private businesses that are struggling are not included in the stock market.
That is the reason why a stock index can be doing well in the midst of a recession.
GDP represents what happened during the past year, while market capitalization is the value of all there is
now plus what will be done in the future. The trillion-dollar plus market values of the largest tech businesses
reflect the huge tailwinds and long runways of opportunity ahead.
In overview, the market panic of March 2020 again showed the clear advantage of being an equity investor
during these times. We were able to buy shares of great businesses at lower prices. Our aim is to analyze
any business through the lens of a private investor.
Often we meet startup founders who pitch us their ideas and who beam with happiness because the
business is projected to grow 40%. However, our preference often continues to be to buy stock of a listed
more mature company that is growing at twice the rate; the risk-adjusted return is far more attractive. The
equity investor with a focus on great businesses has got an advantage over most private and venture capital
investors.
Despite varying opinions of American politics today, we are long American intellectual capital and the
venture capital ecosystem to fund it. The big tech companies of today are the biggest winners of this system
and more great business will emerge.
The hardest challenge is to not sell a great business. Especially when the stock doubles and then doubles
again. Let the winners run as long as they are far ahead of competition.
5Miscellaneous
During the crisis in March, our partners added capital to the fund. This shows the reliable intent of our
partnership. It is certain that over the next decade we will see plenty of wild swings in prices driven by
changing sentiment. I have been investing through the 2008/09 credit crisis, the European sovereign debt
crisis, as well as the pandemic, amongst others, and volatility has always provided us with opportunity. I
am grateful for the temperament that nature has given me; I seem to get calmer when the crowd panics.
Our goal is to continue to grow our wealth by owning a portfolio of businesses that thrive. Today, various
companies are emerging that will become USD 100+ billion market values before 2030. We aim to remain
or become shareholders in several of those.
Our Tech Fund, the concentrated portfolio of five technology companies that are also part of the Guardian
Fund, returned +65.33% net of fees. The Tech Fund is unique in its concentration and ability to also
occasionally purchase shares in businesses that still have to start trading on the stock exchange. Recently,
we acquired private market shares in Palantir, a machine learning engineering firm.
Thank you for your referrals; we see the EUR 100 million assets under management milestone coming
closer and we are happy to welcome your children and friends as partners. Please feel free to forward this
letter to them.
I would like to thank Martin, Felicia, and Seth for their contributions to the investing work. An impression
of our team’s work can be seen here https://www.youtube.com/watch?v=7VO0NVPAISU
In closing this letter, I wish you a wonderful summer and a healthy second half of the year. As always, feel
free to contact me with any questions.
Sincere regards,
Georg
E georg@fratres.com | Trade Register number 34393154 | IBAN: NL38RABO0124437664 | BIC: RABONL2U
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