“Too many firms pay lip service to outcomes-based investing – the current volatility will test their commitment”

There has been a noticeable increase, over recent years, of investment management firms professing to target outcomes. This is a welcome development. This is because, at Momentum, we believe that we should never lose sight of the reasons why we invest. At the heart of our Outcome Based Investment (OBI) philosophy and process are three key tenets. It is these tenets that we believe to be the acid test for investing for outcomes and the adoption of this approach should be taken to the very heart of an investment process. The three tenets of OBI for us are targeting the outcome that clients want, making the journey to the outcome as palatable as possible and, finally, keeping clients invested.

The ‘investing for an outcome’ requirement should be a given but beware, even managers that state they do so may only be paying lip service to this approach. In our opinion an OBI approach needs to start at the very beginning - at the strategic asset allocation of the strategy in question.

Inevitably there are several different combinations of assets that give a good chance of beating the target and so we spend a large amount of time deciding between the different iterations. We do that by focusing on making the journey palatable to our investors. Real risk for investors comes in the form of surprises on the journey to the outcome in terms of shortfalls over the entire period and also shorter term drawdowns that can try even the most understanding investor’s resolve. As a result, we run millions of simulations that incorporate real observed returns to find what we believe to be the optimal strategic asset allocation that solves for the outcome and finds the best compromise on the various risk factors identified. All this happens before we’ve spent a single penny.

Once the portfolios are launched we must invest for the here and now and most pertinently the future. So then, when constructing portfolios, the key decision for the investment team is what gives us the highest probability of achieving the targeted return today based on what is presently being offered up by the markets. We choose asset classes that appear cheap according to our valuation models and try to avoid those that look expensive. We believe that risk management should be an integral part of the portfolio management process.

True OBI managers understand that from time to time markets will be difficult and it is times such as these that will really test their mettle. Managers that are using OBI as a flag of convenience rather than as a belief system are being severely tested now. Their natural inclination will be to resort to classical relativistic measures of performance ‘at least we did better than the benchmark’ and so on. We understand that despite our best efforts our strategies are not immune from market weakness and we ensure that our investors are aware of these factors. When the going is tough we take the care to explain what has dragged on performance and why, and we are constantly updating our valuation work to ensure our portfolios provide the best chance of achieving their targeted outcomes on a forward looking basis. That is because one rule of thumb for investors tends to ring true again and again. That is when it feels difficult to make an investment it will often provide a great payoff in the long run.