Outcomes-based philosophy puts the investor first

Sonja Saunderson, Momentum’s head of portfolio solutions.

• “Outcomes-based investing is changing the investment game.” • “Outcomes-based investing defines risk as the probability of not reaching the investor’s desired outcomes.” • “Outcomes-based investing meets the requirements of recent and upcoming regulations.” • “Outcomes-based investing is more predictable and credible.”

At the Momentum Investment Summit in Cape Town on 12 November, Momentum’s head of portfolio solutions, Sonja Saunderson, outlined Momentum’s outcomes-based investment philosophy and its advantages for investors as well as financial advisers.

Saunderson explains: “Outcomes-based investment is more than an investment philosophy; it’s a belief system that defines the way Momentum invests. Our outcomes-based investment philosophy puts investors first and helps them achieve their long-term personal and lifestyle goals.”

Saunderson loosely segments investor’s needs into three categories:

1. Essential needs: Where the investor seeks a predictable income with real growth to survive.
2. Lifestyle wants: Investors aim to maximise their existing living standards through steady wealth accumulation.
3. Legacy aspirations: This refers to investors who want to make a difference in their own descendants’ or other people’s lives and require a high-growth strategy.

“The outcomes-based investment journey is unique to each investor. We draw up a plan to achieve the investor’s ultimate goal including the time it will take to achieve and the investment milestones along the way. We use a liability-driven investment style, which suits investments where the goal is clearly defined or can be predicted fairly accurately”, says Saunderson.

Saunderson believes outcomes-based investment is changing the investment game: “Outcomes-based investment redefines investment principles and performance assessment from the perspective of the investor’s individual long-term goals, not investment managers’ ongoing peer-based performance reviews”.

“Whereas conventional investment strategies simply offer the highest return for a specified risk parameter, outcomes-based portfolios target specific investment goals over a set timeframe. Likewise, conventional investing defines risk as the volatility of returns, while outcomes-based investment defines risk as the probability of not reaching the investor’s desired outcomes”, adds Saunderson.

Outcomes-based investment offers diverse opportunities to achieve the required investment outcome via portfolio construction. While investment opportunities on the JSE are limited, Saunderson points to the growing list of investable collective investments schemes.

To achieve the investor’s desired outcome, Momentum uses a multi-asset class, multi-strategy, multi-mandate approach. It partners with smaller investment boutiques, as they are nimble and client centric, but will use bigger investment managers where appropriate to create alpha, or even some passive investments and hedge funds. The mix is entirely dependent on the outcome.

“Outcomes-based investment meets the requirements of recent and upcoming regulations like treating clients fairly and the retail distribution review”, continues Saunderson. “We start our process by putting the investors’ investment goals first along with their risk appetite. We map the probability of delivering on the investment objective and then agree on a reasonable timeframe to achieve it. From the start, outcomes-based investment is more predictable and credible than other investment opportunities.”

Saunderson points out that the burden of choice falls on the financial adviser together with the investor. For the adviser, outcomes-based solutions allow them to seamlessly connect their advisory process to an investment manager’s solution set and underlying service delivery.

“Outcomes-based investing is different, as it is not measured against investment peers where there are always winners and losers, tempting investors to constantly switch to the top performer. Advisers need to prepare investors for the ups and downs of the market. As investors tend to under- or overreact to market fluctuations, advisers must ensure their clients remain invested and do not try to consistently time the market”, says Saunderson.

Saunderson believes outcomes-based investing is a useful tool for financial advisers to deliver on client needs in terms of annualised returns. Solutions providers must simplify the investment philosophy and process, so it is easy for advisers to explain outcomes-based investing to their investors.

“Using outcomes-based solutions makes it easy to connect the adviser and investor’s investment plan with a strategy that delivers goal-orientated results”, concludes Saunderson.