Publications
Partners
The MMI experience of putting focus on institutional investor needs highlights the growing shift in the industry away from big picture returns.
Well, this discussion is sponsored by Absa, a member of Barclays. David Williams is at the Absa Investment Conference and talking to Sonja Saunders. Sonja, the theme is ‘Improving Investor Outcomes’ of this conference, what has been your contribution here?
Yes, so we have been doing outcome based investing for about 20 years, so we’ve got a lot of history and experience on how to do the investment part but it really is only successful if you’ve managed to change the conversation with the client. You almost need the full value chain to align with what you’re doing from an outcome based investing perspective, so it’s a change in outcome.
You must invest in accordance with that outcome and for us, from an investment perspective it basically means that you need to tease out of a client exactly what he’s after because most clients don’t really know what they’re after. They’re just looking for maximising return or looking better than a peer group and there are all sorts of behavioural aspects that play in the investor’s mind over time, as well.
Now from our own research and also mining a lot of the Life Company Member Data and Information. We’ve got first-hand knowledge of how destructive that behaviour can be. Right, so it’s seems intuitive and when there’s a big market crash, to protect your assets and move it to a cash portfolio, but that’s usually exactly the wrong time at which clients are doing it, investors are doing it.
Read also: Roland Rousseau: Is Alpha dead? Shifting incentives beyond benchmarks
Outcome-based investing is all about the dialogue, the handholding exercise, and expectation management of a client. It means sitting with them, understanding exactly ‘are you saving for retirement’. Are you saving for going on a holiday? Are you saving to leave a legacy for your children one day? Whatever it may be, and then with the input of the investor translate that into something that will make him comfortable, understand what the outcome entails, and what to expect as he gets to that outcome.
If you invest it for the next 20 years, this is what you likely should be expecting from an investment outcome. If markets fall, if something happens in China, if there’s a Fed rate hike – this is what’s likely to happen with your portfolio, so that the investor is comfortable and understands why he will still get to the outcome that he’s saving for.
It’s got profound implications for, not just how you do investment management because we think about risk and return differently. It’s not about peer chasing returns. It’s not about anything that doesn’t talk to the outcome and the experience that our investor is looking for.
It also has significant implications for how we talk to each other in the industry right, so how you represent yourself, typical fund fact sheets, report backs, marketing material needs to be very different because it’s not about selling performance. It’s about selling a journey that will get you to a destination that leads to an outcome that will give ultimate success.
To a particular customer.
A 100%.
Read also: Vivienne Ming: Where does Artificial Intelligence leave humans in IM?
Now you say you’ve been doing this at MMI for 20 years. It sounds like, given that this is the theme of the conference, you’ve been ahead of the game.
I’d like to believe we have been ahead of the game but I also know that we have a big industry challenge. In that, we are very fragmented in terms of how we deal with clients. If you think about an investor coming into a Pension Fund, you’re a member in the Pension Fund. Typically, there’s a board of trustees.
The board of trustees will appoint an advisor. The advisor will go, and they want to be independent, so they want to select someone that they don’t have close ties with. They’ll look at either solutions, aggregate, [inaudible 0:03:34.1] platform, or whatever the case may be that looks at a fund manager, that looks at a stockbroker.
You know, there’s a whole chain of people that works together to lead to an outcome that the member in the Pension Fund is experiencing.
If those people don’t all do something in that in unison will lead to this outcome and the experience that’s promised then it doesn’t matter if one component is doing it. You actually need the full value chain to work together and I think that’s the magic that we’re working on with MMI and I certainly also, from an investment management perspective, what this conference was about is how do we link those things together to get to successful outcomes.
Read also: Nico Marais: Uncertainty is investors biggest risk. How do you manage that?
In an earlier conversation the issue of awards, it’s an industry where there are lots of awards and you have big ceremonies and so and so is the winner for the year. That award system rewards certain kinds of behaviour and performance. That clearly needs to be looked at again because it’s rewarding the inappropriate behaviour.
I agree 100 percent, so if you’re just rewarding on performance, or even risk adjusted performance, the risk that it’s measured against is often a typical standard deviation or volatility. Something that means a lot to practitioners but the client doesn’t care. He cares about capital being protected or drawdowns being minimised, or certainty in the outcome, so I agree 100%.
It’s got profound implications for surveys, for report backs, for award ceremonies and the way that we measure success of how we do investment management.
That’s part of the challenge for us. Having done it for 20 years you can only do it if you’ve got enough of a direct dialogue with a client, so that they understand what successful measurement is.
If you’re managing for a different success level but there’s an advisor in between that actually gives the intrinsic performance number, and he doesn’t contextualise the experience in the right way, then you can’t expect the full value chain to be aligned to get to the right outcome. I think that’s our biggest challenge.
* For more in-depth business news, visit biznews.com or simply sign up for the daily newsletter.
