With the world changing at such a rapid pace, maintaining a sense of security can be a challenge, and predicting the future seems near impossible. Given the way digital technology has shaped the way we view the world today, one thing that is fairly certain, however, is that it does not benefit the investor to act emotionally.
This is according to Jeanette Marais, who was speaking to a packed room of financial advisers about the investment philosophy of the future at a recent sold-out industry event, The Investment Forum. “Outcome-based investing is an investment approach for tomorrow’s advisory practice and the philosophy itself is revolutionary in the investment management space. The objective of an outcome-based solution is simple: to keep clients invested. We also aim to give clients a stronger sense of certainty that they will achieve their investment objectives.”
This objective, Marais says, is based on the rationale that sometimes the best thing to do is nothing at all. “We know this to be true for local investors in times of financial market uncertainty and high volatility, when looking at the history of the JSE. In fact, historical data shows that clients who have stayed invested for at least four years, have managed to achieve not only positive, but also inflation-outperforming returns since 2003.
“And yet, our information shows us that only 35% of advisers on the Momentum platform have managed to get at least inflation for more than half of their clients. In fact, 71% of clients on the platform failed to outperform inflation during the period they’ve been invested on the platform, which includes 9% of clients, who experienced negative returns. This proves that fund picking is not a strategy, which is easily rewarded.”
Marais mentioned that Momentun’s research clearly indicated that switching between funds results is a disappointing outcome, as opposed to sticking to a consistent investing strategy. This also highlights the importance of staying invested in the long term.
How should financial advisers go about keeping their clients invested? Marais suggests shifting the focus away from trying to outperform a market benchmark and highlighting, instead, the reasons for investing in the first place. This means understanding each client’s unique long-term investment goal. Clients connect to their goals, as these are tangible and real. An emotional connection also helps the client to focus on their end goal, instead of being disheartened by short-term underperformance that triggers switching. And switching is the destroyer of capital.
“Focusing on a real-life goal acknowledges that people invest to meet day-to-day and long-term needs and aspirations – not to simply outperform an arbitrary market benchmark. This makes a financial adviser’s proposition that much stronger,” she explains.
This is quite a different approach to what the majority of competitor fund providers are doing, Marais notes. “The majority of funds in the South African market is either chasing a market benchmark or a peer benchmark, and it’s often difficult to bring these benchmarks into client conversations in terms that they can relate to, especially considering the unpredictable nature of markets in the short term.
“To overcome this challenge, outcome-based investing is about building predictability into returns. We are, therefore, not trying to outperform the market over the short term, because our focus remains steadfast on the end goal of our clients, whatever they may be,” she says.
Marais goes on to unpack what the outcome-based investing philosophy is and how it helps in achieving the overarching objective of keeping clients invested. “In its simplest form, outcome-based investing is about constructing a unique investment portfolio that maximises the probability that clients are going to achieve their predefined investment goals.
“So, in other words, outcome-based investing offers investors a range of funds. Clients – with the help of their financial advisers – are then able to choose the specific investment outcome they want based on how much time the client has to achieve the goal. As investment managers, we will then do everything in our power to ensure the chosen outcome is achieved.”
This, Marais continues, allows a financial adviser to offer a goal-orientated solution that is suitable to each individual client. “All clients want solutions tailored to their individual needs, so outcome-based investing allows advisers to construct portfolios, which are uniquely designed to achieving their goal, while also being aligned to what they can handle in terms of volatility.
“Our job is therefore to ensure the comprehensive range of outcome-based solutions we offer cater for a wide range of goals and maximise the probability of achieving these goals. While the job of a financial adviser is to understand their clients’ goals, they have to select the appropriate solution that will maximise the probability of achieving these goals. Advisers also have to guide their clients through the process to ensure they remain invested to do this,” Marais concludes.
Jeanette Marais, CEO of Momentum Investments and deputy CEO of MMI Holdings