By: Momentum Investments
Outcome-based investing is a game changer for local investors, according to Momentum Investments chief investment officer, Sonja Saunderson.
MMI Holdings has fully committed its policyholder assets to outcome-based investing as its underlying investment philosophy and the framework for managing clients’ assets and their investor journey through Momentum Investments.
“The true essence of outcome-based investing means a complete overhaul of the way we understand investor needs, make investment decisions, dialogue with investor and do business. It makes the investor’s goal the only benchmark that matters”, says Saunderson.
She believes that investor behaviour is proven to be driven by behavioral biases such as greed and fear with a focus often placed on short-term and peer investment returns, as opposed to long-term drivers creating successful outcomes for investors. The industry in turn is product-driven as opposed to solution-driven and it often leads to a vicious cycle of sub-optimal outcomes for investors.
Momentum Investments follows outcome-based investing as its philosophy given its role within MMI Holdings, which has a dedicated vision to be being client-centric and delivering financial wellness. Saunderson says: “We have re-organised our investment capabilities to align to the optimal way of constructing investment portfolios. This includes having passive and smart beta, fixed interest and liability-driven investments as well as alternative asset classes like private equity, property, commodities, hedge funds and others. We need these diversified capabilities to focus on the investment outcome and risk budget sought by the investor, and then delivering on that in a seamless and re-assuring way in an optimal portfolio.”
There are broadly five key steps to an outcome-based investment programme:
- Understanding the client need or liability and setting the desired outcome clearly – for example, how much money the investor needs for retirement.
- Formulating an appropriate matching investment strategy through our outcome-based construction approach that will robustly deliver on the objectives.
- Regularly assessing progress and whether the plan is still appropriate to get to the outcome
- Managing risks continually and appropriately
- Framing all communications to the investor and assessing ongoing success in terms of the desired outcome.
Outcome-based investing means an emphasis on growth with control, something Saunderson says can be achieved through crafted solutions, which are diversified across multiple asset classes, investment strategies and mandates that match the specific objectives that have been set.
“We uniquely offer an ability to use multiple sets of skills spanning different types of traditional forms of investment management depending on what will lead to the best client outcome. Our process tailors a solution using three different tiers, namely asset allocation, investment strategies and mandate selection, and we can blend strategies to eliminate downside experiences relevant to the investor. We blend in-house capabilities, which are especially designed to deliver on key components of our construction process like our cost-effective passive and smart beta capabilities; and complement these with other investment opportunities through smaller and more agile investment companies like ALUWANI and RMI Investment Managers for high returns and robust delivery. We also outsource to other best-of-class providers in the market as required for robust portfolio delivery.”
She says a key part of outcome-based investing is placing a priority on selecting the right investment opportunity first and foremost. Diversification is key to outcome-based delivery and we therefore focus most of our energy on getting the right allocation of opportunities together. When we need to select a best-of-class provider for an investment opportunity, the investment philosophy and portfolio construction approach of the provider is important to us. “That matters far more in the long run, in terms of properly matching the required strategy of the portfolio they will be used in, than the portfolio’s past returns or a brand name. Having a consistent philosophy and process is a better predictor of returns than the rear view mirror of yesterday’s results.”
Saunderson emphasises that outcome-based investing is not a cover for poor investment returns: “The key for us is framing the adequacy of returns solely in the context of the liability or required outcome set at the beginning and not being distracted along the journey. We can deliver choice and appropriate solutions in a very cost efficient manner because of our model of using the best of in-house and external capabilities and evaluating investment opportunities and its merits on the basis of after-cost value add to clients.”