Investment Strategy
Investment Strategy
Thank you for entrusting us to help you protect and grow your wealth.
Our over-arching philosophy can be defined as long-term oriented value investing. This means that we only purchase investments at fractions of what we believe them to be worth and we wait for as long as it takes for others to see the same value we see. More simply put, we aim to buy $1 for 50c.
Protecting the capital that your hard work built is important to us but the concept isn't just about being conservative. By striving to eliminate the chance of losing your capital permanently, we also believe we are dramatically increasing our chance of making money for you over the long-term.
In the short-term, asset prices are driven by the collective emotions of investors, hence the large day-to-day fluctuations. Long-term however it is the fundamental value of an investment that ultimately determines the price. We have no confidence predicting the short-term fluctuations and so expect to hold our investments for a long period of time (+5 years) before we derive our expected return.
Short Term
"Voting Machine"
Emotions, Rumours, Hype, News
Long Term
"Weighing Machine"
Fundamentals → Market Value
There are three main ways that we limit the risk of losing your capital permanently.
Ensuring there is a large gap between the price we pay and intrinsic value of the underlying investment. There are no certainties in life and so the margin of safety provides a buffer to protect us should an investment not progress to plan.
Where the margin of safety might not be so apparent, we prioritise businesses and assets with an enduring advantage over its peers. A company's moat goes a long way to protecting its long-term profitability.
While we are extremely confident in the first two principles, we like to have a healthy spread of investments to ensure that if we do it get it wrong, your overall capital doesn't suffer dramatically.
Over the years we have refined our investment process to provide further checks and balances. We have criteria and checklists that each investment must pass through, and we have an investment committee that holds us to account.
This process is designed to harness our core strengths as a boutique manager - agility, independent thinking, and curiosity - while anchoring our decisions in the institutional rigor and bias-correction necessary for long-term discipline.
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We are naturally curious. We read widely.
Curiosity is balanced by discipline.
Our deep-dive process is quantitative and forensic.
Final approval is never a formality.
Strategy becomes action.
Our job doesn't end at the buy decision.
Long-term investments in the best businesses in the world, bought at a reasonable price.
Low-cost ETFs to capture market returns with modest tactical tilts.
Private and public lending, and real assets like infrastructure and real estate.
Complementary and obscure strategies managed by third parties.
Extremely low risk investments, waiting for a home in high returning assets.
This portfolio is deliberately constructed to participate meaningfully in rising markets while providing meaningful downside protection when markets fall. That is where long-term wealth is truly built.
The mathematics of compounding favour loss avoidance over gain maximisation. A portfolio that falls 30% needs a 43% gain just to recover. One that falls only 15% needs just 18%.
Over a full market cycle, the portfolio that protects capital in drawdowns spends less time recovering and more time compounding from higher base levels. The result is a portfolio clients can stay invested in through turbulent periods, which is itself one of the most powerful drivers of long-term returns.
While talk about target returns of ~8% pa for a balanced portfolio, the market almost never delivers that in a single year.
| Scenario | Expected Return | Context |
|---|---|---|
| Strong year (4/10 years) |
+10% to +20% | Equities rally, privates perform, credit spreads tighten |
| Average (2/10 years) |
+7% to +10% | In line with the strategic model |
| Mixed year (3/10 years) |
-5% to +5% | Income and defensive buckets buffer equity falls (or vice versa) |
| Terrible year (1/10 years) |
-15% to -20% | Equity markets fall -35%, credit spreads widen |
We also enforce a number of risk parameters to ensure cost efficiency, maintain diversification, and uphold disciplined portfolio management.
cap (at cost) on any individual stock or fund manager
cap on any illiquid asset (income or private investments)
annual cash flow for drawings supported by aggregate portfolio
liquidity within 5 days supported by aggregate portfolio
A deep dive into each allocation bucket — from our hand-picked bluechips to the defensive vault.
Warren Buffett and Charlie Munger have said time and again, investing is simple but it isn't easy.
Lugarno Bluechips is a reliable stock portfolio, with a structure that attempts to solve for the more difficult parts of investing.
Lugarno Bluechips has three primary characteristics:
Great businesses generate reliable profits and have quality reinvestment options to grow those profits over time. Businesses who don't have quality reinvestment options can also be great so long as they make the rational decision to return spare capital to shareholders.
Great business led by great leaders are very effective compounding engines to build peoples wealth. Half the difficulty is choosing the right business to purchase, the other half is holding on!
Lugarno Bluechips sits somewhere between an index fund and a managed fund. The strategy enjoys the low costs and simplicity of an ETF but with transparency and tax efficiency. Bluechip investors personally own shares in a collection of companies they understand. This familiarity builds the important confidence required to hold through all cycles.
We try to think like business owners. The portfolio has fewer holdings, it rarely changes, and our time horizon is long-term. As long as we don't pay a silly price, we are confident we will do well overtime.
Lugarno Bluechips is designed to defeat investors worst instincts and biases via its sensibility, its simplicity, its transparency, and our regular communication to our fellow investors.
Our favourite holding period is forever.
— Warren Buffett
The most quantitative aspect of our process. Utilising our database to measure the important return and profitability measures in both an absolute sense and relative to peers.
Relatively low levels of debt against both equity and cash flow.
A qualitative measure best identified via. letters, interviews, speeches, and actions observed by the company's leadership over long periods.
Strong moats or competitive advantages will always initially show up in a company's returns and profitability, i.e., if a company has established above average returns and margins over long periods one can assume there is something making life hard for peers to compete with them. All of our investments enjoy at least one of these features – some more than one.
Two companies with identical operating results and different approaches to allocating capital will derive two very different long-term outcomes for shareholders. We are attracted to those management teams that deeply understand the fair value of their business and can identify attractive opportunities to re-invest cash flows.
This table represents our optimal blueprint for investing new capital today. Every business listed has met our rigorous "bluechip" criteria. We categorize each holding into one of three "buckets" based on our conviction level and the current share price relative to our internal estimate of fair value.
If you are an existing investor, your personal portfolio will likely look different from this model. This is intentional. A core pillar of the Bluechips strategy is to never interrupt compounding unnecessarily.
We follow the principle of "letting our winners run" rather than "cutting the flowers to water the weeds." Because we prioritize long-term growth over short-term rebalancing, your portfolio reflects the organic growth of your specific entry points.
Sometimes, our highest-quality companies grow much faster than anticipated. When a stock's price outpaces its immediate valuation, its prospective return for new capital becomes less attractive. This creates a dilemma: it is difficult to justify buying more today, yet the company remains a powerhouse.
In these instances, we move the company to "The Bench":
For Existing Investors: We hold the position. We recognize that great companies are often underestimated, and we want our clients to benefit from continued compounding.
For New Investors: We pause active buying. The company remains on the bench, fully researched and ready to be "called up" for new capital should the share price provide a more favourable entry point.
While there are overlapping industries and business models, the portfolio is still quite diversified in how they generate profits.
Vertical Market Software
Insurance / Investing
Asset Management
Logistics
Platform Businesses
Consumer Brands
Cloud / Enterprise Software
Online Advertising
Commodity Royalties
Consumer Payments
Insurance Broking
Equipment Manufacturing
Aerospace & Defence
This bucket of the portfolio is designed to be the structural anchor - giving us market returns, with high liquidity and at low costs.
Instead of buying 500 individual company stocks to track the S&P 500, we can buy one share of an ETF (exchange traded fund) that holds them all for us.
We allocate to a basket of different ETFs to capture factor and tactical tilts, manage currency and ETF provider risks. The smaller holders also give us an easy position to sell (if needed), allowing the main portion to compound without any interruption.
The blended look-through of this index portfolio is that we own 3,695 companies across the world.
Our largest tactical tilt is that we are more exposed to higher growth emerging regions across Asia, and less exposed to the Magnificent 7 and large cap US technology companies.
This bucket of the portfolio is designed to provide dependable, recurring cash flow. It sits between the defensive vault and the growth focused Bluechips/Index allocations.
It generates a steady yield stream that can fund withdrawings, reduce the need to sell stocks at inopportune times, and provide a degree of inflation protection through assets whose incomes tend to rise over time.
The portfolio may hold any of the following in this bucket:
Investment grade or government debt, via low-cost ETFs or a specialist manager
Direct lending, asset-backed lending, and similar strategies where the investor accepts reduced liquidity in exchange for a meaningful yield premium over public markets.
Infrastructure (utilities, toll roads, energy), REITs, and unlisted real estate funds. These provide income that is often contractually linked to inflation (through regulated pricing, CPI-linked leases, or rent escalation clauses), adding a layer of purchasing-power protection.
Allocation
Yield
Liquidity
A concentrated portfolio of warehouse facilities to non-bank lenders. The largest positions are currently to a lender to doctors, and a resi property bridge lender.
Allocation
Yield
Liquidity
Portfolio of 50 asset backed securities (cars, credit card receivables) and private and buyout loans to stable businesses like Arnott's or MYOB.
Allocation
Yield
Liquidity
ETFs that own government and investment grade corporate bonds.
This bucket captures specialist, actively managed strategies where manager skill is the primary return driver and the opportunity set is difficult to access through passive vehicles.
It diversifies the portfolio's return sources - many of these strategies have low correlation to traditional markets - and provides an opportunistic sleeve to capitalise on dislocations and structural inefficiencies as they arise. It gives clients access to parts of the market they couldn't easily reach on their own.
Strategy types include:
Managers who profit from both rising and falling prices, focus on markets that we don't have the skill set to research, and who have excellent track records over long periods of time.
Investing in financially stressed companies or credit market dislocations. Inherently cyclical, with the best opportunities emerging during periods of broader market stress.
Early and growth-stage exposure to private companies and high-growth sectors increasingly absent from public markets. High dispersion of outcomes, sized accordingly.
Monthly Liquidity
A concentrated value fund, that serves as the primary investment entity for the Harradence family's wealth. The holdings are typically contrainian in nature.
Monthly Liquidity
Fred Wollard has one of (if not) the best track records in Australia. They have a flexible mandate that can be summarized as looking for 'heads I win, tails I don't lose' type situations.
Depending on liquidity needs, and fundraising cycles.
The portfolio's defensive anchor. This bucket holds cash and gold - assets that are immediately liquid, uncorrelated to markets, and designed to serve three purposes:
