Invested for the long run

What outcome-based investing means for investors


It has been said that outcome-based investing (OBI) is analogous to one-day international (ODI) cricket, with returns and risks comparable to chasing runs and losing wickets. Under the ODI format, teams chasing a lower total of runs can pace themselves and knock the ball for ones, twos and the occasional four. When chasing a big target, however, teams have to take a riskier approach and try to hit the ball for six rather than play it safe. Similarly, while all investments carry some sort of risk, it is the higher investment risks that carry the larger potential returns. Whereas conventional investment strategies tend to focus on returns or on outperforming competitors, outcome-based investing (OBI) maximises clients’ chances of achieving their specific investment goals. Like a cricket team chasing a score, investors following the OBI philosophy know in advance what is required to attain a particular goal in a given timeline – when to pace themselves and when to go all in. Naturally, in OBI as in ODI, skill and experience make all the difference. Blue Chip spoke to Jeanette Marais, CEO of Momentum Investments and deputy CEO of MMI Holdings, to find out more about how Momentum has applied the OBI philosophy for almost a decade and how the lessons learned can help investors stay ahead of the game.

What makes the outcome-based investing philosophy revolutionary in the investment management space?

Momentum Investments pioneered outcome-based investing in South Africa. CIO Sonja Saunderson and her investment team took the well-adopted international best practice in investment management and successfully implemented it in thesouth afri South African market in 2011. This journey took the team away from being a traditional multi-manager or single manager, and we took the best of both worlds into our investing philosophy. Our differentiator is not just how we think about portfolio construction but also how we then implement and execute it. It’s a difficult thing to copy and we now have a compelling track record.

The departure point of the outcome-based investing philosophy is the client. When we understand a client’s needs, it helps to formulate the requirements and goals that the investment solution needs to deliver. It therefore starts with the end in mind and manages towards a predefined outcome, as opposed to short-term noise or short-term, low-conviction opportunities.

How will the funds be managed differently to other funds with similar asset allocations?

There is a defined set of tools and opportunities in the investment industry, so taking a snapshot of a fund or portfolio at a single point in time may make it appear indistinguishable from other funds. The real test and difference comes through over time; in a lower-yield environment, what actions do you take (we have increased our growth-orientated asset classes), and do you increase your exposure to unlisted investments (for example private equity, unlisted credit, property)?

The benefit of managing the funds on a life balance sheet is that it gives clients the opportunity and ability to invest in asset classes that will deliver returns that are different from the usual equities, bonds and cash. Term-premium or illiquidity premiums can be harnessed in a much more effective way than what a traditional investment manager can achieve.

How will the funds deliver more certainty than other funds?

We construct funds with the outcome in mind. This means the starting point is already aligned to deliver on the predefined outcome. Every single investment decision we make along the way is with the outcome in mind. This ensures that we manage the risk relative to the outcome in the most optimal and effective way possible.

The DNA of the investment team and our philosophy has remained largely unchanged for more than a decade.Clients and financial advisers can be confident about what to expect from the investment team. It also tells a good story, and maybe it’s the ultimate form of flattery that so many investment managers are now joining the chorus and becoming outcome-based or goal-based investment managers. The challenge though is that when you change your DNA, only time will tell whether you will be able to deliver consistent returns with a new philosophy and investment process. Our biggest challenge though has been to get an emotional connection with our clients to what they are buying and making sure they fully understand what outcome-based investing actually is. It’s not a 90-second conversation.

What role does the media play in helping investors manage their emotions?

The media has a critical role to play as a trusted source of perceived impartial and objective information. Importantly, while it may be tempting to focus on fads and narrow success stories, it is important to reiterate that investors need to first and foremost think about what they want to achieve, what success looks like for them and how much risk they are willing to take. Successful investors are patient investors who do not chop and change on impulse, but rather consider the consequences of their actions carefully.

The media often thrives on negativity. This adds fuel to the fire in terms of the irrational behavioural biases and actions we so often see in humans. Creating that balance between reality, expectations and the requirement to have a financial adviser and remaining invested in a solution suitable for an investor’s outcome is a crucial strategy the media should use to help manage investor behaviour and emotions.

How should investors behave to gain more certainty?

Avoid impulsiveness and buyers’ remorse, and don’t chase after the latest fad or success story. Once you commit to an investment, understand what you have invested in and allow enough time for your investment to deliver.

How can you ensure that a financial adviser’s advice process is aligned with the outcome-based solutions you offer?

This is a question with levels of grey. At best, we can influence advice by making sure financial advisers know what our products and funds entail, and we can empower them with tools. The greatest control we will have is with financial advisers who are most closely aligned with our business. Ultimately, the advice process happens in a closed room between the financial adviser and client. As a client, you need to listen carefully and apply a rationality test; does this make sense, is it realistic or just too good to be true (the ultimate walk-away question)?

Our outcome-based solutions do, however, give the financial adviser the ability to choose funds that are more closely aligned to an investor’s needs. This in itself should ensure a closer alignment to the advice process.

The importance of staying invested for the long run

You mentioned the high probability of beating inflation over long periods.
What can be done to direct clients’ attention to long-term rather than short-term returns?

Repeat the message, gain a client’s trust and be proactive and honest with good and bad news, opportunities and risks. Markets go up and down, and if there is too much focus on the short term, it becomes an emotional experience for clients, who will be overwhelmed by the noise. So, keep reinforcing the long term, and the successes attained.

Stay invested, even if the market doesn’t seem to be offering the opportunities to deliver high inflation-outperforming returns.

What are the main reasons that clients stop being invested?

Apart from the practicalities of needing their money, it is often about losing trust and faith in the investment because their expectations are misaligned and the disappointment that naturally follows. In other words, irrational behavioural biases.

How can technology be used to prevent clients from switching funds during a market correction?

Sometimes just creating a pause for thought, allowing time for reflection and highlighting the consequence of your decision, can sway an investor.

We can also use technology as a pre-warning for irrational behaviour. We should communicate to clients during times when markets are tough.

What responsibility do fund managers have to help clients behave better?

They should be honest and create a clear context and expectation. To communicate on an ongoing basis what the client can expect, what has happened – good and bad – and what we are doing. Keep clients up to date with what is happening, and why.

How can clients know how much volatility they are able to handle?

We actually need to start by asking ourselves whether we are speaking a language clients understand. Volatility is a concept clients may battle to truly understand. We need to use a different language around risk and opportunity and how long clients can remain invested.

Instead of talking about the investment horizon and what happens if there is a loss of capital, ask how much can a client bear to lose compared to the return he or she wants or needs. Everyone understands this and this will better align clients’ expectations, experience and portfolio returns.

How important is financial literacy and investor education in managing client behaviour?

It is crucial. If we cannot speak a common language, we cannot align our expectations. If we don’t understand each other, we'll end up disappointing each other.

The role of a financial adviser in ensuring that clients achieve their goals

How equipped is the average financial adviser to deliver a goal-based service to their clients?

There are great financial advisers and some not so good ones, just like in any other field. We believe good financial advisers would already be focusing more on the needs and goals of their clients as part of providing a professional service and running a great practice. As such, we believe our solutions are well aligned to best practice in the financial adviser space.

What are the skills that a financial adviser needs to put together a financial plan based on desired outcomes?

The most important requirement is to effectively communicate what our solutions entail and what a client can expect. We truly believe the greatest value financial advisers can add is the time spent in front of their clients, understanding their needs and coaching them on the journey to success. We need to help financial advisers who support us to understand that. By using and understanding our solutions, we help them to free up their admin time to create the ability to deepen and enrich their client contact time.

What skills do financial advisers need to be able to help clients stay the course to achieve their outcomes?

Great financial advisers need to be truly driven by a passion to help their clients, a willingness to engage and be available. This needs to complement the real technical and product skills to create a holistic experience for clients.

The statistics of financial advisers who are able to help clients remain invested are worryingly low. What can Momentum do to support financial advisers with this challenge?

The best we can do is to empower financial advisers with information, support them in understanding our solutions and create opportunities for them to access and speak to us often. We are investing significantly to support financial advisers through boosting the knowledge base of our call centres, having more support staff available, reviewing our IT platforms and apps, and refreshing our fund fact sheets to convey information we believe is meaningful for clients and their financial advisers.

To what extent do financial advisers themselves act emotionally when dealing with clients?

We are all emotional creatures. Being and acting emotionally is natural. We need to guard against emotions that result in actions that can affect us negatively. To really make this change, we need to help foster trust in the system through a common understanding and set expectations that focus on what is realistic in the medium to longer term.

Why outcome-based investing is easier than you think

How should investors process the emotions that they feel during increased market uncertainty?

They need to understand how their investments behave and know what is likely to happen before it happens. Equity markets are volatile and will lose capital from time to time. We have to inform clients that this will happen, making sure they know they can afford to lose capital in the short term, reassuring them they have enough time for markets to recover, and enforcing the message that the points of greatest risk often coincide with the best opportunities. This will give clients the confidence to remain invested even when the unexpected happens.

Try to understand what drives uncertainty in the markets, as it is often a short-term phenomenon. Do some of your own research by understanding that it is better to remain calm and invested during uncertain times, and don’t look at your investment values on a day-to-day basis.

Research showing that investor returns are lower than investment returns has been done frequently. What is likely to trigger an improvement now?

Greater levels of knowledge and professionalism in the financial adviser space, together with better tools should align expectations more realistically. Unfortunately, this is not a silver bullet, and there will be many instances of clients being disappointed. Ultimately, clients need to exercise their choices and should choose their financial advisers carefully.

Switches and cash flows often affect investor returns. Keep switches to a minimum and only switch if absolutely necessary or if the investment strategy changes.

Most people don’t know what they want to do next year. How should they go about understanding their life-long goals?

I think this is as a result of just not spending the time and effort thinking about the future and constructing stories of where and what they want to be. This is an opportunity for financial advisers to start conversations with their clients where they look at their dreams, needs and fears, and then systematically make this practical and achievable.

Often we don’t understand our life-long goals. What we do know is we want to retire comfortably and perhaps have enough money to travel and leave a legacy. This should already be enough to start a conversation and change the mindset of the investor to a longer-term view as opposed to short-term focus on risk.

We manage all funds with the outcome as the focus. It’s not just a single outcome of inflation plus 5%, for example. It’s also about the experience the client has over time. It’s a fantastic story to tell and a great “aha” moment when the client finally gets it and fully understands the "what" and the "how". Once we reach that point, it is difficult to lose clients, and the whole conversation and type of language we use changes when we give feedback. Suddenly, clients understand that we don’t focus on our competitors but on the outcome and the experience. How we perform relative to our competitors is now a consequence, not the focus. We stand for keeping clients invested, using diversification and, in that process, making the journey comfortable.

How does outcome-based investing align with active or passive investment management?

We don’t believe it is an “or” but rather an “and”. Active or passive investing are tools in a toolkit that can address different needs and, in some instances, complement each other. Our funds generally use a blend of these approaches where it makes sense: passive for cost control, risk management and to get direct exposure to market movements, whereas active management opens up alternative sources of return, the potential to add outperformance relative to a market benchmark.

The decision between active or passive investing or a combination is always approached from what the solution is targeting as a whole. Cost control is a driving factor, but so is risk and reward. Active strategies are used only where there is a clear value to be added from an outperformance perspective over time after costs have been deducted. The combination of active, passive and alternative passive strategies, for example smart beta, helps create robust outcomes over time.

How can you be sure that financial advisers not only understand their clients’ goals but also have the expertise to choose the appropriate solution that will maximise the probability of achieving these goals?

We try to help financial advisers through education and tools, support and contact sessions, even by growing our own tied-adviser force. However, this is not a silver bullet and clients need to be selective about which company and financial adviser they choose to partner with.

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