Sur­veys: In­vest­ment per­for­mance ver­sus in­vest­ment out­come

Finweek English Edition - - MOMENTUM -

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.

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