Working to ensure value for investors
• This means, understanding the desired outcome and the client’s risk budget, writes Andrew Gillingham
Outcome-based investing is an investment approach that aims to better match current resources and risk budgets with the financial outcome people are aspiring to or set for themselves. A good example of this is saving for retirement.
As such, it is not a one-sizefits-all strategy and there are a number of different elements that are taken into account to produce a strategy that fits the desired outcome.
Sonja Saunderson, chief investment officer at Momentum Investments, says outcome-based investing is an investment philosophy according to which Momentum Investments manages portfolios.
“It is a process and a belief system that has its foundation in the recognition that keeping clients invested is really the way to create the most value over the longer term.
“To do this, you have to properly understand the desired outcome and the client’s risk budget,” Saunderson says.
In other words, not only does the investment manager need to determine the required goal of the client, like the amount of capital that will be needed to sustain the person’s income needs on retirement, but it also requires an understanding and assessment of how much risk the investor is prepared to assume, bearing in mind that the level of risk is related to potential returns.
“If you want to stay invested without intolerable stress, you need to determine the unique risk budget you are comfortable with so you can keep your money invested, while being mindful of the necessary level of investment growth you require over time.
“How much can you take in terms of capital losses or what level of drawdowns can you tolerate? Or perhaps these are not issues for you and volatility/predictability is most important to you.”
Saunderson says the time the investment has to run also feeds into that equation as the more time clients have before retirement, the more time they have to ride out any dips in the market. Many of these elements are not unique and any financial adviser or consultant will seek to achieve the same approach.
But the manner in which Momentum Investments implements outcome-based investing on the investment side for that outcome is different to the typical portfolio or product offering.
“In theory, many investment approaches are supposed to follow a similar pattern. However, our industry is plagued with product pushers, offering an apparently similar toolkit but often not put together in a deliberate and scientific manner to get to a specific outcome in accordance with particular risk budget,” Saunderson says.
She says outcome-based investing is relatively new in SA and it is becoming increasingly popular. However, globally, outcome-based investing has been a theme for about 15 years driven by consumerism, the need for transparency, the advent of social media and changing regulatory environments.
“Consumers have been making it clear they want more clarity about whether they are getting value for their money.
“To get value for their money, they want to make sure it is a solution, product and an experience that is relevant to them as individuals.
“They also want to know the service and the fee they pay are commensurate with the value add that should be there,” Saunderson says.
Having the integrity to ensure investors get real value and incentivising them to have a plan and stick to it while also executing effectively on the plan is the best service an investment manager can give a client. She says the 2008 international financial crisis further emphasised this trend, raising trust issues with regard to the financial services system.
Locally, factors such as pension fund reform and the direction the Retail Distribution Review is taking are two of the factors leading the South African industry and consumers to a point of view that focuses on the fact that solutions should be more about what the investors require as opposed to the providers’ unrelated best view of the manner in which a portfolio should be constructed, as well as themes such as the way local markets will perform or the rand’s likely performance.
“You still need to know these elements but the way you package them in a portfolio is profoundly different in an outcome-based setting.”
She notes that South Africans are often focused on peer-relative returns, namely looking at investment managers’ returns relative to one another and switching investments based on the flavour of the month.
“Our industry loves to play musical chairs with investment managers’ returns changing on a peer-relative-returns basis.
“However, switching to this month’s top-performing portfolio all the time does not necessarily mean investors are in a better position.
“I should not measure my success on the basis of whether I am outperforming the return of someone else in the industry. If they are all down 20% but I am down 18%, I may have outperformed the competition but my investors are not cheering and are not better off.
“As a consequence, an outcome-based approach is less peer-centric and more client-centric and the focus is on the absolute value you are creating for an investor within a well-calibrated experience that works for the client, with a commensurate fee.”
THE MORE TIME CLIENTS HAVE BEFORE RETIREMENT, THE MORE TIME THEY HAVE TO RIDE OUT ANY DIPS IN THE MARKET