Capital Markets are Information Markets 

New ways to source or construct information create alpha.

The information landscape is shifting rapidly, but few funds build their own software tools. In fact, the median number of software engineers at a fundamental micro fund is 0. Most fund managers rely on the same third-party products (especially if we exclude earnings-release traders). Yet if you speak with any fundamental investor, you’ll find that every one of them suffers from filter failure – i.e. they could benefit from better ways to filter information and generate ideas. A window has opened for fundamental investors who can thrive in this new environment.

Lembas Capital was founded upon the recognition of this opportunity.

Cash Flow / Capital Flow and Macro / Micro

The best investors integrate multiple perspectives to source opportunities across market cycles. We split our filters into a cash flow / capital flow and macro / micro framework. 

Contrary to popular opinion, “purely fundamental” DCF-focused strategies rely on capital flows too. Look at some winning playbooks from the past few decades. Risk arbs sourced mispriced stock from retail traders who immediately took gains after M&A announcements. Emerging market specialists invested in private shares ahead of new global depository receipts and the mutual fund flows that would follow. Special sits investors bought downgraded debt and spinoff equities from rules-driven sellers and then sold the same securities back to the same investors after the upgrade or return of liquidity. To ignore the capital flow side is to miss what took those approaches from good to world-class.

Likewise, great fundamental micro investors position well within the macro context. In particular, they avoid investments that will get run over by shifts in the consumer credit cycle or in the liquidity environment. The top performing investment at a given time is, by definition, the one that is most overfitted to the current environment. Also by definition, that same investment is the one that is the most fragile to any changes in the environment. When the landscape shifts, that investment can face a significant drawdown – even if its long-term prospects are strong. A little macro awareness here could save a lot of micro pain. 

We’re fundamental investors at heart. Diligencing cash flows and capital flows + focusing on micro while staying macro aware + a lot of software augmentation is, as we see it, a winning formula.

What We Want for Our Clients and for Lembas

For our clients, we want to earn excellent returns on a rolling 3-5 year basis and to be good partners. We want to support our investors’ goals, be they funding pioneering research, doing charitable service, or safeguarding the family for the next generation.

For ourselves, we want to build an exceptional team with complementary skillsets. We’re passionate about the game, we’re in it for the long term, and we intend to constantly evolve our playbooks and improve our approach. We also aspire to be the most fun and interesting place any of us has ever worked. Our aim is to advance our field, to contribute where we can, and to improve societal allocation of scarce resources. 

We seek pure alpha, the intellectual capital derived from exploring hidden processes, building strong filters, and executing on the opportunities we uncover. Our rigorous approach to product analysis and capital flow analysis is what makes us unique. Some investors are insightful fundamental analysts or talented capital flow traders, astute at macro calls or skilled at micro diligence. But the people who integrate these skillsets well in the modern markets are few and far between.

As you can probably tell, we love investing, and we strive to be great investors over the long run.

Luke Constable Signature

Luke Constable