The Product Disclosure Statement (PDS) for every managed fund will show a “Minimum suggested investment timeframe” – it’s a statutory requirement for every PDS. In the PDS for the Lighthouse Global Equity Fund we recommend investors have an investment timeframe of five years. Firstly, because that’s the investment horizon we try to target with the Fund’s investments and, secondly, because we believe that over that length of time you’ll receive the “true” return for the Fund’s strategy and style.
While that is our recommendation we appreciate many investors will want to work to shorter investment periods than five years. So how should those investors think about their hold period? We think there are two pragmatic questions that help inform investors’ thinking.
Firstly, How Long Do You Need To Invest For To Avoid The Risk Of Losses?
There’s a chart in our earlier piece on “Focusing on what really matters” that highlights an important concept:
If you look just at the dashed red line, for the “worst ever period”, you can see the Fund’s worst ever 1 year period was a 6% loss, but its worst ever 2 year period was still an 11% pa return.
We think investment risk is all about managing, and ideally eliminating, the probability of permanent loss (we’ll write more on this shortly). So this chart says that if your investment horizon in this Fund is only 1 year then there's a possibility you'll incur a loss (to be more precise we calculate the possibility of any rolling 1 year period having a negative return at about 6%), but if your investment horizon is at least 2 years then, at least historically, there’s been no risk of permanent loss.
If we zoom in to get more detail on those “less than 2 year” hold periods we see the Fund’s worst ever returns across different hold periods have been:
The solid line shows the actual historical experience, which is a bit lumpy, so the dashed line is a smoothed trendline to help interpret the data. What this analysis shows is that, historically, if you invested in this Fund for at least 17 months then you would have always had a positive return – that even the worst ever 17 month period gave a positive return and avoided permanent loss.
So based on this information we’d recommend that 17 months should be the shortest period an investor should consider for an investment in the Lighthouse Global Equity Fund, in order to reasonably expect you shouldn’t lose money on the investment.
Secondly, How Long Do You Need To Invest For To Ensure You Beat The Benchmark Return?
The Lighthouse Global Equity Fund’s benchmark index is the MSCI All Country World Index (ACWI), net in New Zealand dollars. Our objective is not only to beat that benchmark, but to beat it by at least 2% pa.
So if we compare the Fund’s returns with those of the ACWI then we see the Fund’s probability of beating the ACWI is:
What this analysis shows is that, historically, as long as your investment timeframe was at least 22 months long then you would have always received an investment return that was better than the ACWI benchmark’s return. Expressed another way, in every rolling 22 month (or longer) period the Fund beat the benchmark return.
And by the time you get to 24 month hold periods then the Fund is beating our “ACWI + 2% pa” goal 98% of the time (eg in 98% of the rolling 24 month periods).
But if, for example, your investment timeframe is as short as 9 months then the Fund beats the ACWI in only 74% of those rolling 9 month periods – which means you have about a one-in-four probability of underperforming that ACWI benchmark.
So based on this information we’d recommend that investors should consider an investment timeframe of at least 22 months for an investment in the Lighthouse Global Equity Fund, in order to reasonably expect they will receive a return that beats our benchmark index.
Summing It Up
We recommend that when investors are considering investment timeframes – for any investment – they consider the risk of permanent loss and the risk of underperformance. Those two factors are useful guides to how long a commitment you should make in order to ensure short-term volatility doesn’t harm your returns.
For the Lighthouse Global Equity Fund we interpret those two factors as pointing investors towards an investment horizon of at least 22 months. We acknowledge there’ll be investors who have good reason to invest for shorter periods, but we need to point out that the investment risks are higher with those shorter timeframes.
Note that you can do this same analysis for any fund where you can get a long return history (for example, monthly returns for at least five years). Note too that these numbers are as at the end of August 2021 and they may move around a little over time as the Fund and the market go through different periods. But we believe the principles set out here are pragmatic guides to your investment choices.