Blue Chip Issue 81

COLUMN
How do we build
your portfolios?
By Florbela Yates, Head of Momentum Investment Consulting
As a discretionary fund manager
(DFM), our clients look to us to
construct robust and diversified
portfolios that will perform
through the cycle regardless of which
asset class or investment style is in favour.
We are also expected to reduce volatility
wherever possible. In delivering on our
promise to clients – building portfolios to
achieve their unique investment goals over
a pre-determined time frame – we follow a
disciplined and proven investment process.
Florbela Yates
We call this process outcome-based investing
and follow three main steps.
The most important step is determining which asset classes we
need exposure to in order to maximise the probability of getting
to our investment objective (or performance outcome) over the
relevant investment horizon. Research done by our investment
teams in both South Africa and the UK shows that most investors
can’t stomach big bouts of volatility and disinvest when portfolios
are perceived to be too volatile. We therefore make sure that
we do not put too much of the client’s capital at risk over any
one-year period. Our modelling focuses on achieving the ideal
balance between capital protection and getting to the outcome,
to make it palatable for clients to remain invested.
The next step is to identify which styles will further increase
the probability of achieving the investment outcome. The
first choice in this step is whether to invest actively or
passively, and the two are not mutually exclusive. For some
asset classes it makes sense to invest via active strategies
while others may be better suited to a passive strategy.
Unless we are satisfied that active funds will consistently
outperform their benchmark after fees, we would prefer to
access that style using a passive or smart-beta strategy. But
the decision to do so is an active one.
We then determine the appropriate allocation to different styles
(such as value, quality or momentum within equities) to ensure
that the overall blend outperforms through the cycle, regardless
of which style is in favour.
Where we do use a passive strategy, the three main
considerations for going passive include:
• Costs: Even though passive fees are generally lower than
active funds, the rule remains that we look for consistent
outperformance after all investment fees. That means, after the
passive index fees as well as the DFM or multi-manager fees.
• Predictability or consistency: Does the passive fund increase
the predictability of that strategy within a portfolio? Consistency
is important. We do not chase an outcome at all costs, but rather
try to ensure that we consistently outperform over the relevant
investment horizon.
• Diversification: Nobody can predict which asset class, investment
style or sector is going to be the best performer over the period.
We focus on building diversified and robust portfolios designed to
perform through the cycle.
The third step involves identifying managers that are experts in a
particular strategy. We believe in using specialists and when we
select the funds to execute on a particular strategy, we make sure
that they are, in fact, able to do so. We also ensure that there isn’t
too much overlap between the underlying strategies, sectors or
stocks they are invested in. So, when we look through the portfolio,
we can better determine both the level of diversification as well as
the expected performance during various market scenarios.
Another factor that has gained importance is environmental,
social and governance (ESG) issues and their impact on
investment portfolios. Our manager research process includes
an ESG filter, and we determine the integration of their ESG
policy in their investment process. We take our corporate
activism seriously and believe that ESG is an integral part of
any investment decision.
There are many moving parts in any investment decision. And
they are often integrated. Understanding the interaction between
funds and the impact on the investment journey is a complex task
and requires skillful resources.
Understanding investment markets can be complex. But so
are human beings. Our clients are unique – they have varying
investment outcomes, different investment horizons and
liquidity requirements.
We understand this and we build solutions that cater for their
different needs. Because with us, investing is personal.
For more information, please contact your financial advisor or
Momentum Investment Consulting at mic@momentum.co.za
Momentum Investment Consulting (Pty) Ltd is an authorised financial services
provider (FSP32726) and part of Momentum Metropolitan Holdings Limited and
rated B-BBEE level 1.
16 www.bluechipdigital.co.za