Blue Chip Issue 81

COLUMN How do we build

COLUMN How do we build your portfolios? By Florbela Yates, Head of Momentum Investment Consulting As a discretionary fund manager (DFM), our clients look to us to construct robust and diversified portfolios that will perform through the cycle regardless of which asset class or investment style is in favour. We are also expected to reduce volatility wherever possible. In delivering on our promise to clients – building portfolios to achieve their unique investment goals over a pre-determined time frame – we follow a disciplined and proven investment process. Florbela Yates We call this process outcome-based investing and follow three main steps. The most important step is determining which asset classes we need exposure to in order to maximise the probability of getting to our investment objective (or performance outcome) over the relevant investment horizon. Research done by our investment teams in both South Africa and the UK shows that most investors can’t stomach big bouts of volatility and disinvest when portfolios are perceived to be too volatile. We therefore make sure that we do not put too much of the client’s capital at risk over any one-year period. Our modelling focuses on achieving the ideal balance between capital protection and getting to the outcome, to make it palatable for clients to remain invested. The next step is to identify which styles will further increase the probability of achieving the investment outcome. The first choice in this step is whether to invest actively or passively, and the two are not mutually exclusive. For some asset classes it makes sense to invest via active strategies while others may be better suited to a passive strategy. Unless we are satisfied that active funds will consistently outperform their benchmark after fees, we would prefer to access that style using a passive or smart-beta strategy. But the decision to do so is an active one. We then determine the appropriate allocation to different styles (such as value, quality or momentum within equities) to ensure that the overall blend outperforms through the cycle, regardless of which style is in favour. Where we do use a passive strategy, the three main considerations for going passive include: • Costs: Even though passive fees are generally lower than active funds, the rule remains that we look for consistent outperformance after all investment fees. That means, after the passive index fees as well as the DFM or multi-manager fees. • Predictability or consistency: Does the passive fund increase the predictability of that strategy within a portfolio? Consistency is important. We do not chase an outcome at all costs, but rather try to ensure that we consistently outperform over the relevant investment horizon. • Diversification: Nobody can predict which asset class, investment style or sector is going to be the best performer over the period. We focus on building diversified and robust portfolios designed to perform through the cycle. The third step involves identifying managers that are experts in a particular strategy. We believe in using specialists and when we select the funds to execute on a particular strategy, we make sure that they are, in fact, able to do so. We also ensure that there isn’t too much overlap between the underlying strategies, sectors or stocks they are invested in. So, when we look through the portfolio, we can better determine both the level of diversification as well as the expected performance during various market scenarios. Another factor that has gained importance is environmental, social and governance (ESG) issues and their impact on investment portfolios. Our manager research process includes an ESG filter, and we determine the integration of their ESG policy in their investment process. We take our corporate activism seriously and believe that ESG is an integral part of any investment decision. There are many moving parts in any investment decision. And they are often integrated. Understanding the interaction between funds and the impact on the investment journey is a complex task and requires skillful resources. Understanding investment markets can be complex. But so are human beings. Our clients are unique – they have varying investment outcomes, different investment horizons and liquidity requirements. We understand this and we build solutions that cater for their different needs. Because with us, investing is personal. For more information, please contact your financial advisor or Momentum Investment Consulting at mic@momentum.co.za Momentum Investment Consulting (Pty) Ltd is an authorised financial services provider (FSP32726) and part of Momentum Metropolitan Holdings Limited and rated B-BBEE level 1. 16 www.bluechipdigital.co.za

COLUMN Professional financial planning for all An opportunity to re-imagine our profession Rob Macdonald, Head of Strategic Advisory Services, Fundhouse Rob Macdonald has held several senior positions in the investment industry. At Fundhouse, he acts as a consultant and coach to financial advisors and develops and facilitates training programmes in behavioural coaching and practice management. Before joining the financial services industry, Macdonald was MBA director at the UCT Graduate School of Business. He is co-author of the book Rethinking Leadership and has consulted, written and spoken widely on a range of topics. Macdonald has a Master’s degree in Management Studies from Oxford University and is a CFP® Professional. The FPI’s vision of Professional Financial Planning for All is noble. But I believe if we are to achieve this vision, financial planners need to re-imagine how they see themselves and the profession. I was recently reminded of this challenge in conversation with two financial planners. One planner shared how he had spent over 60 hours doing work for a potential client. The client complimented him on the quality of his work and his advice but decided to implement the recommendations himself. The planner had not agreed a fee upfront for the work. The second financial planner shared her frustrations about a proposal for a R30-million client. The planner was frustrated she had not followed her normal advice process. The client had insisted on getting an investment proposal with recommendations upfront. The planner usually only talks about investments towards the end of her process. Even if the client agrees with the recommendations, they may not use the services of the planner to implement them and definitely won’t pay for the proposal. Some might argue that these were two difficult clients. Or were they just smart? Getting professional expertise and advice for free. Contrast the experience of the two planners with that of the cardiologist I recently consulted due to an irregular stress ECG. After a physical examination, the cardiologist sent me for a CT scan. Days after the cardiologist’s bill had been settled, I got the news that I was fine. Payment was not dependent on the outcome of the cardiologist’s report. Imagine if we only paid medical bills if we liked the results we got. And yet many professional financial planners operate like this. They do an analysis and present a report or proposal in the hope that the client likes what they see. If professional financial planners working with wealthier clients don’t get paid for all the work they do, what hope is there for the poorer sectors of our society to get professional financial planning? A few years ago, independent financial planner Gregg Sneddon and I approached the then FSB with a proposal to realise the FPI vision of Professional Financial Planning for All. We envisioned a replication of the medical model which gets health services to the poor, through government-backed public hospitals and clinics. Last year, I saw first-hand the power of the medical model when my neighbour’s housekeeper had a heart attack while jogging. Treated in a public hospital she made a full recovery. As a “poorer” member of society, she didn’t have to pay for the world-class treatment she received, but those treating her got paid for their work. The public health system has doctors who range in ability from worldrenowned specialists to new graduates doing community service. Applying the medical model to financial planning, newly qualified financial planners could do their “community service” within public financial planning clinics. Like doctors, they could choose to go into public service or private practice. More experienced financial planners could work in the public or private sectors, or straddle both. And they would be remunerated in both sectors, probably at different rates. Financial planning for poorer sectors of society is often nothing more than selling a funeral policy. The broader financial health of the individual is not considered. Through a private-sector lens, it’s not economically viable to do more than this. To achieve the FPI’s vision of Professional Financial Planning for All, we need a public financial planning service. It will also ensure financial planning rightfully becomes a respected profession, where the value lies in the financial planner’s expertise and advice, not in the product. www.bluechipdigital.co.za 17