COVER PROFILE Invested for the long run What outcome-based investing means for investors 12 www.bluechipjournal.co.za
COVER PROFILE 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, outcomebased 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. <strong>Blue</strong> <strong>Chip</strong> 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 the 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 outcomebased 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, lowconviction 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. www.bluechipjournal.co.za 13
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