NBK Wealth Thought Leadership: Outcome-based investment solutions

KUWAIT: In the ever-changing landscape of investing, outcome-based investment solutions focus on achieving specific, measurable results rather than seeking to outperform a benchmark. It involves aligning investment decisions with desired outcomes, such as capital appreciation (growth), cash flow generation (income), wealth preservation, their individual financial goals, risk tolerance, and time horizons leading to a personalized investment strategy.

This approach requires a shift in mindset, moving away from the traditional emphasis on short-term financial gains and towards long-term sustainable outcomes. Furthermore, it is crucial to consider various constraints that may impact the design and implementation of the investment strategies, due to High Net-Worth (HNW) investors’ distinct characteristics, preferences, and complexities that need to be taken into consideration.

When designing an outcome-based solution, factors such as wealth preservation, income and growth, asset and liability structures, social responsibility, family governance and succession planning are all equally relevant. Advisors can develop tailored investment strategies that lay the foundation for achieving sustainable outcomes. These strategies reflect the complexities and long-term aspirations of their clients, while also assessing their financial situation, goals, risk tolerance, time horizon, tax implications, and estate planning.

The two moderate-risk portfolios below embody the principles of an outcome based approach and are customized based on the client’s desired outcome, risk tolerance, and investment horizon through sound levels of diversification. Advisors can develop tailored investment strategies that lay the foundation for achieving sustainable outcomes.

Alternative investments (usually privately held, illiquid, unlisted assets like commodities, real estate, private equity, private credit, as well as hedge funds) can potentially offer increased diversification and higher returns through an illiquidity premium. By incorporating alternative investments into a portfolio, investors can enhance the risk-reward trade off, as Alternatives have the potential to provide returns that are distinct or have lower correlations to stocks and bonds, regardless of market cycles or varying macroeconomic conditions. The impact of allocating different proportions to alternative investments can significantly influence a portfolio’s risk and return, as illustrated in the following charts, demonstrating the importance of considering alternative investments when constructing a well diversified portfolio.

A 60/40 stocks/bonds portfolio yielded an annualized return of 8.5 percent with a volatility of 9.6 percent. On the other hand, a 40/30/30 portfolio, with 30 percent allocated to alternatives, showed an improved annualized return of 9.0 percent and lower volatility of 7.9 percent. In summary, there is historical evidence and a strong incentive to explore diversification beyond a 60/40 portfolio by incorporating exposure to alternative asset classes.

Key takeaway

By starting from the evaluation of what they identify as the desired outcomes from their investments through a balanced and diversified investment strategy, and guided by their advisor’s expertise, HNW investors can achieve their financial goals while minimizing risk as compared to narrowing the investment choices to only one or two asset classes or products. This approach prioritizes personal objectives and leverages investment principles to offer a clear path towards predictable and consistent investment results.

By aligning investment strategies with specific outcomes, this approach empowers clients to navigate uncertainties, mitigate risks, and achieve their desired financial goals, based on their desire to achieve clear outcomes through a comprehensive holistic approach, away from the single-product bias. Overall, as the investment landscape continues to evolve, adopting this approach will be key to success.