Changes

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Key points

  • From January 2023 the Lighthouse Global Equity Fund will replace its current options holdings with a broader mix of large market-capitalisation stocks.
  • Some investors feel nervous with options, and we want to remove any impediment to them investing in the Fund.
  • The Fund will also modestly increase its overall leverage limit from 20% to 30% of Net Asset Value. 
  • We expect these changes will reduce the Fund’s monthly volatility but not reduce the Fund’s long-term returns.

From January 2023 we’ll be making some small changes to the Lighthouse Global Equity Fund’s portfolio structure.  

The Fund’s portfolio structure and investment activities are very prescriptive and strictly follow a set of disciplined processes.  We’re changing one of those processes.  This is the first change to these processes in 7 years.

What Is Not Changing

We’re not changing the Fund’s investment philosophy.  The Fund will still invest in global equities, with a strong growth focus.

We’re not changing the Fund’s benchmark index.

We still expect to achieve the same long-run performance.

What Is Changing

The Fund will no longer invest in options.  Historically the Fund has invested about 6-8% of its Net Asset Value (NAV) into long-dated call options.  We’re removing the options strategy.

The place of the options in the Fund’s portfolio will be replaced with more large market-cap growth equities.  So, the Fund’s portfolio will be wholly large market-capitalisation growth stocks.

With this change we will slightly raise the overall leverage limit the Fund can operate to.  The options strategy held significant cash holdings that we will now deploy rather than continue to hold as cash.  Because of that we will raise the Fund’s overall leverage limit from 20% of NAV to 30% of NAV.  But note that this is a limit and not a level we expect the Fund to operate at.  We expect the Fund’s actual leverage to average 10-15% of NAV over time.  In practice, the Fund’s effective leverage is reducing, as the options have characteristics of leveraged equities.

Why Make This Change?

Some investors are uncomfortable with options, and we want to remove any impediment to them considering an investment in the Fund.

The Fund’s options strategy has returned on average over 40% pa for the 7 years we’ve been using it, even with about half of its portfolio allocation held as cash.  So we’re not removing it for performance reasons.

What Effect Are These Changes Expected To Have?

We expect the Fund’s monthly volatility will reduce.  That feeds into the calculation of the Fund’s “risk indicator”, which is required by the Financial Markets Conduct Regulations 2014, but we expect the Fund to continue to rate as a “6” on that risk indicator.

The Fund’s ultimate capacity will rise materially.  Every investment strategy has a capacity limit beyond which performance will erode.  The options portfolio was the limiting factor on the Fund’s capacity limit.  With these portfolio changes the Fund’s capacity limit is now high enough that we are unlikely to reach it.

Importantly, we don’t expect these changes to reduce the Fund’s long-term returns. The research and testing we’ve done in connection with these changes suggests the Fund’s 5-year returns with the new portfolio structure should be at least as strong as could be achieved under the current portfolio structure including the options.

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