Key points
- Our goal is to consistently be the highest returning equity fund over 5+ year timeframes
- The Fund’s investment strategy has been optimised for long-term growth
- But that does mean this Fund will likely have higher volatility than other lower-returning funds
- We think this Fund best suits investors who have long-term capital that they are looking to grow over 5+ year timeframes
We Start With A Cautious Investment Universe …
The first step in our investment process is to winnow our investable universe – the set of stocks that we will consider investing in – down to only high-quality large companies that have safer characteristics. For example companies that have strong and stable earnings, clean balance sheets, large market capitalisations, and whose shares have high liquidity.
Within that group of high-quality stocks there will always be some that are performing better than the market overall. We are trying to identify those companies.
And Then We Optimise For The Best Possible Long-Run Return …
Specifically, we are optimising the Fund’s portfolio for a mix of 5-year net returns, 10-year net returns, and total net returns since inception (which was April 2016).
We don’t have a specific percentage target for what those net returns will be. But we expect the Fund should be able deliver long-run net returns that are at least 2% pa above the return from the MSCI All Country World Index. There will be shorter intervals where that index out-performs this Fund, but our objective is that the Fund always out-performs this index over those longer timeframes that we optimise for. To date we’ve comfortably beaten that index, but there’s the usual proviso that past performance is no guarantee of future performance.
That Does Mean We Have To Do Something Different …
It’s impossible to produce better-than-market returns unless you’re prepared to do something different. Doing the same as everyone else in the industry will result in achieving the same level of returns as everyone else. Doing the same as the market index will result in achieving the same returns as the market index.
The first thing we do differently is that this Fund has a concentrated portfolio. The Fund typically holds between 16 and 20 positions. Our experience and our research says that performance falls away as the portfolio goes beyond 20 positions.
The second thing we do differently is that we try to be patient investors. The Fund is not a trader. We believe that long-term gains come from a long-term strategy, and that chasing short-term fluctuations just destroys value. The big gains are not from buying or selling, but from waiting.
As Charlie Munger said “Successful investing is where you find a few great companies and then sit on your ass”.
But There’s No Such Thing As A Free Lunch …
Optimising for the best possible long-run net returns leads to a portfolio structure that will have more volatility than other portfolios that optimise for slow-but-steady net returns.
You want that volatility – strong gains upwards are volatility, they’re just “good” volatility. But having strong upwards volatility also means you will have the occasional falls too – “bad” volatility. For some reason the market sees growth stocks, like those this Fund invests in, as its relief valve and when the mood turns towards fear that fear tends to coalesce around these stocks. Most of our research and development effort is directed to reducing this volatility but it will still exist.
There’s a real-world balance between favouring higher performance with volatility vs lower performance with lesser drawdowns.
If you’re committed to investing for five years or more then sacrificing long-term performance to avoid daily or monthly swings is overly conservative. You’re giving up returns to feel better along the way, during a time when your intention is, supposedly, to let the money ride. If you’re investing to capture a better long-term return, and you’re confident you’re not going to sell any day when the volatility scares you, then we’re not sure a low-volatility investment is worth it. There’s nothing wrong with a smooth ride per se, but we’re cautious about why you would pick an investment strategy with a lower likely return in order to get it.
Our take is that over the full market cycle investing to achieve short-term comfort costs you a fortune.
But A Lot Of Investors Have Long-Term Capital That Needs To Grow
If you’re an investor who’s looking for attractive long-term returns then talk with your financial advisor about whether an investment in the Lighthouse Global Equity Fund might suit your portfolio.