Surveys: Investment performance versus investment outcome
The investment industry prides itself on being an industry driven solely by a client’s needs. The client experience, until recently, stands in stark contrast and some might say t hat t he client has been subjected to a one-size-fit-all, productdriven - rather than tailored - solution. Current trends suggest that more attention is being given to building bespoke solutions, such as defining long-term consumption objectives (standard of living in retirement years) within the context of short-term dollar and risk constraints. This approach has client-centric investing at its core. Surveys focus primarily on performance and rank solutions based on historic achievements over limited timeframes (and further note that past performance is not indicative of f uture returns). Where does this then leave retail and institutional investors who are trying to choose between the plethora of available solutions? Confused or overwhelmed, at best. To further complicate the life of the investor, let us examine the South African equity category (see figure below).
Research has i l lustrated that a top-
HEAD OF INVESTMENT PERFORMANCE AND RISK INSIGHT AT MOMENTUM INVESTMENTS ranked 11Q1 fund had a 31.6% chance of achieving the same ranking in 12Q1 (and a top-ranking 12Q1 fund 47.6% and a 13Q1 fund 45.8%), highlighting the temporary nature of survey-related performance information and its nonsuitability to a longer-term, sustainable investment plan. Information is also largely one-dimensional in that, although the inclusion of risk-adjusted performance is gaining momentum, evaluation of an investment should include additional downside measures (e . g. l a r gest drawdown). Clients are not concerned about the terminal value of their asset base. Rather, their focus is the terminal ratio of their assets to liabilities as this will determine the standard of living they can afford on retirement. They are concerned about how to improve their investment solutions, which should offer a high probability of achieving both their essential and aspirational goals. A top survey ranking is not necessarily indicative of positive return potential (the fund could simply be the best performer among a lowperforming group). Consideration should rather be given to how an investment will contribute towards the savings objective as this will have far more relevance to an investor and deliver a more predictable outcome. The term structure of risk reduces for risky assets over the longer term, making them a viable option when saving for essential goals (versus investing in less risky assets, such as cash, as an investor would not be able to achieve the desired outcome from this asset class). Investment performance is therefore better gauged against an investment goal than against fund peers or benchmarks and should define the goal, as well as the preferred path to achieving that goal, as clearly as possible. There is a level of risk appetite and term implied in any good investment strategy, which creates both outcome certainty and a comfortable experience for the investor as he/she works towards achieving their savings objectives (success is driven more meaningfully for investors if these requirements are met).
Retirement reform proposals, which are due to be tabled, are aimed at ensuring that South Africans are better protected and able to enjoy a comfortable standard of living in their post-formal-work years. Taking a longer-term view on an asset increases the likelihood of achieving a desired investment outcome within a responsible management framework which protects savings.