The savers attitude to risk should determine their investment path

Meyer Coetzee, Head of Retail at Prescient Investment Management

Prescient Investment Management’s Meyer Coetzee explains why the investment journey is as important as the destination

For financial advisors, one key aspect of investing a client’s capital is to understand how they view risk. Most investor’s primary objective should be to outperform inflation over the longer term. However, in doing so, some are focused on not underperforming the peer group, while others are more concerned about capital losses over the shorter term. We call this the investment path taken to achieve the investment objectives.

Part of the financial advisor’s responsibility is to assess a client’s risk profile, not only to ensure that the return objectives are set appropriately, but also to ensure that the investment path followed is compatible with the client’s emotional tolerance.

Why is this important? Suppose a financial advisor has two clients, John and Mary.

John is working full time and saving for retirement via his retirement plan. He is a keen reader and follows market surveys diligently. He understands that his investment portfolio needs to generate significant real growth over the longer term and is therefore continuously evaluating the performance of his portfolio against others that are available. He is worried about losing out and each time his portfolio underperforms its peers, he contacts his financial advisor to switch to a better performing fund - even though his advisor has explained to him many times that he should focus on long-term returns.

Mary retired two years ago and is drawing an income from her retirement savings. Although she understands the importance of protecting her income against inflation and the responsibility to manage her drawdown level, she becomes very nervous each time the market dips and her capital value drops. She does not care whether other funds dropped more than hers and regularly contacts her financial advisor to seek reassurance about her chosen portfolio and to propose that she switches to cash.

John and Mary define risk very differently. While John is peer group focused, and Mary is absolute return focused, placing each of them on the appropriate investment path will provide comfort and peace of mind.

To achieve their respective investment outcomes, John and Mary should invest in a diversified portfolio of assets with enough equity exposure to provide inflation protection. There are balanced funds available to meet either need.

The Prescient Balanced Fund is what we refer to as peer risk managed. It is specifically structured to deliver significant inflation-beating returns over the long-term, but to also outperform peers over the shorter term, even though it might experience the same up and downs as others through choppy markets. Since its launch in 2014, the Fund has outperformed more than 90% of all balanced funds, meaning it might well be the ideal solution for John.

The Prescient Absolute Balanced Fund follows an absolute return process. Although this fund is also structured to deliver significant inflation beating returns over the long-term, it is not concerned about the returns of other balanced funds over the shorter term. Instead, it aims to limit shorter term capital losses by spreading its assets across many different asset classes and geographical regions to benefit from the only free lunch in investments – diversification. For someone like Mary who wants to avoid large capital losses over the shorter term, this fund would be a good option.

By ensuring that John and Mary invest in portfolios that follow appropriate investment paths, their financial advisor not only increases the probability of them achieving their investment objectives, he or she also alleviates the emotional stress that can accompany inappropriate paths. Sometimes investors need to be shielded from emotional decisions – and that leads to peace of mind for all involved.