Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
NZ global equities house flashes retail light
After five years operating as a wholesale and institutional manager, the Wellington-based Lighthouse Investment Funds has signalled the broader market with a new retail international shares offering launched this month.
Flying under the colours of fund-hosting business Implemented Investment Solutions (IIS), the Lighthouse Global Equity Fund mirrors the firm’s long-running offshore shares strategy first established in wholesale form in 2016.
However, the genesis of the Lighthouse fund dates back two years further when co-founders, Mark Donnell and Andrew Ormsby, began running a global shares portfolio for a small group of friends and family.
“We morphed into a wholesale fund in 2016 and now a retail fund,” Donnell said.
Over the eight-year period, the Lighthouse strategy has shifted from the smaller cap end of the market to its current focus on large, highly liquid US-listed companies.
“Now the smallest company in our portfolio would have a market cap of at least US$20 billion,” he said. “We really value liquidity.”
Despite settling in the larger end of the market, Donnell said that core Lighthouse approach of investing in companies it expects to grow faster than GDP over the long term has not changed since inception.
“We very much have a patient long-term growth focus but we concentrate on profitability and capital structure too,” he said. “The companies in our portfolio need to have robust profit margins and tend to have conservative books with many of them actually holding cash not debt.”
Under the manager’s profitability targets, Lighthouse passed over current growth favourites such as Tesla, Donnell said.
In practice, the rarely traded Lighthouse portfolio consists of about 20 stocks that fall out of an investment process beginning with quantitative screens.
“Like most managers we use a quantitative screening approach looking for patterns and trends – we have our own recipe,” he said. “But then we look for whether there is a truly sensible basis for any growth that shows up in the numbers.
“Is there a long-term narrative we can understand or is it just a one-off thing?”
For example, Donnell said airlines sometimes pop out of the quant process but don’t meet the Lighthouse long-term targets.
“Airlines tend to have one really great year and then terrible ones,” he said.
Silicon chip-maker, AMD, however, entered the Lighthouse portfolio more than two years ago, just as the company was on the cusp of a secular upswing.
Donnell said as one of only two specialist ‘x86’ chip-manufacturers (along with Intel), AMD already had a “high moat” while the company subsequently won two key gaming contracts – for Playstation 5 and the new Xbox – as well as branching out into new markets.
“AMD signed the Playstation and Xbox deals 18 months ago but the impact on its financial results is only starting to flow through now,” he said.
Aside from the general stock-selection criteria, Lighthouse also has an environmental, social and governance (ESG) overlay.
“We only want to invest in companies that we would feel comfortable describing to our families,” Donnell said.
The manager is also in the throes of signing the UN Principles for Responsible Investment.
With the five-year anniversary of its wholesale fund looming at the end of March, Donnell said the portfolio is on track to record an annualised net return of 20 per cent since inception.
Last year, Lighthouse also joined the Melville Jessup Weaver (MJW) quarterly investment survey for the first time, in anticipation of the new fund launch.
According to the MJW survey, Lighthouse notched up gross one- and three-year returns of about 63 per cent and 38 per cent, respectively.
While – or perhaps because – co-founder Ormsby has a background in foreign exchange, Donnell said the fund is unhedged.
“We like the fact that the Kiwi dollar tends to act as a natural hedge to US markets,” he said. “Right now our US dollar returns are much stronger than the NZ dollar returns but we’re confident that will revert to the mean over time – we see it as ‘stored alpha’.”
Following a soft launch in March with existing investors in the approximately $8 million wholesale fund due to switch to the retail vehicle along with new clients, Lighthouse would engage directly with the wider market, Donnell said.
The new fund has an annual management fee of 1.05 per cent with a high water-marked performance fee structure.
IIS provides the legal ‘wrapper’ for the new Lighthouse portfolio investment entity (PIE) with Public Trust as supervisor and Adminis supplying administration and custody.
Anthony Edmonds, IIS managing director, said Lighthouse had joined the growing stable of credible investment firms managing global shares from a NZ base.
“Milford, Fisher, Mint, Kiwi Invest, Te Ahumairangi, Elevation, Kernel, and Lighthouse are all proving they can manage global shares from NZ,” Edmonds said. “If you are a smart portfolio manager, why would you live in London or New York when you can readily and easily manage international equities from God’s own?”
