The seismic economic and political shifts we’ve seen recently have turned the markets into an uncomfortable ride for the many investors looking for stable, stress-free returns.
While this turbulence has justifiably caused nervousness, arguably the biggest issue facing those investing for their pension, or future in general, is a lack of understanding when it comes to how much money they will need and how they’re going to amass it.
The age of final salary pensions is over and the majority of people will need sound financial plans to achieve the quality of life they’re hoping for in their later years.
Central to this should be the provision of outcomes-based investment options; funds with jargon-free, clearly defined returns that all clients can comprehend, using them to plan for and meet future goals.
The whole point of outcomes-based investing is that it brings the investment process into alignment with the needs and desires of the customer, in a framework they can understand. To achieve this, we must move away from ‘accidental returns’.
This describes a situation where results are not aligned with investors’ actual goals and short term targets take priority over long-term goals, often exposing clients to higher volatility.
There are lots of funds today that either target a risk level, or a tracking error level, or a certain level of outperformance versus a particular index.
All of these approaches run the risk of accidental returns because they fail to reference the customer’s individual targets. This benchmarking approach is also bewildering for most people and is not useful in helping them to plan for future savings targets, whether this is in retirement or earlier.
To give you some context, no one gazes into the eyes of their new-born child and thinks: ‘I’ll do what I can to save fifty pounds a month until they turn 18, and as long as I keep my realised volume below 5 per cent annualised or if I generate a Sharpe ratio of 0.8, I’ll be able to send them to university or buy them their first car’.
Most investors, or customers, take a more pragmatic and simplistic view and think in terms of risk, return and time (and the monetary value associated with these returns). This is what should be guiding their decision-making process when they invest.
They know, for example, that if the value of their investment grows by 5 per cent above inflation over a set period, then their investment will be 5 per cent more valuable - and they will be that much closer to affording those university fees or that first car.
This is the premise of Momentum’s Factor Series – our Factor 5 Fund for example aims to deliver 5 per cent returns, above fees and inflation, over a rolling six-year period.
