Given Equilibrium’s focus on outcome-based investing, what specific tools or metrics do you provide to financial advisers?
We have developed our product range based on feedback from advisers. Each portfolio is designed to achieve a particular outcome over a reasonable investment period, while focusing on downside risk or drawdowns.
By not focusing on achieving the outcome at all costs, but also modelling for particular drawdown maximums over any rolling 12-month periods, we make it easier for advisers to ensure that clients go into portfolios aligned to their risk tolerance over the shorter term. This has resulted in clients staying invested for longer periods and not trying to time the market.
We show advisers the modelling and the impact that different outcome targets, investment periods or drawdown amounts can have on portfolios when they first join us. By ensuring alignment between these targets to the advice outcome, we make it easier for advisers.
We have also tested the models using data from the Momentum Wealth platform to assess the impact on clients who use our models. What we found is that clients in the models tend to stay invested for longer, switch out less often and therefore have a higher probability of success.
As an investment group, Momentum has conducted extensive work in behavioural finance. We have developed tools to understand the costs of switching out of portfolios at the wrong time, and can determine the impact of switching on clients’ portfolios. We are also able to compare the impact between portfolios.
While we believe that this work adds exceptional value to advisers, I think it’s fair to say that this is still a fairly new discipline and not all advisers sign up. But those that do have used the behavioural personalities and client behavioural insights to create better outcomes.
Equilibrium is an “advice-led business”. How do you bridge the gap between investments and the adviser’s advice processes?
Our models were put together in consultation with financial advisers, so they have been constructed specifically to address advisers’ financial outcomes for their clients. We have a range of models that cater for different needs, ranging from income drawdowns, capital protection requirements and real returns.
We can also cater for advisers whose clients might have more bespoke needs. Here, we build customised solutions that take into account different outcomes, different time horizons or even different targets. In addition, we can customise for varying asset allocation requirements.
Since our skill set covers not only local but offshore investments as well as alternative asset classes, we have a range of offshore and hedge fund solutions for clients.
How does Equilibrium choose fund managers for its investment portfolios?
As a global business, we have teams based in South Africa and the United Kingdom. Both teams follow the same outcome-based investing philosophy and look for similar things when selecting asset managers.
The changes to Regulation 28 allowed us to invest up to 45% of our local portfolios overseas and this forced us to re-evaluate how we construct portfolios. This was the trigger for the two teams to start operating more cohesively. Although the primary responsibility for portfolios lies with the team in the jurisdiction in which the portfolios are domiciled, we now have joint manager research, asset allocation and portfolio construction meetings.
As an outcome-based investment manager, our process starts with strategic asset allocation. Since this is the most important driver of returns, we have regular combined asset allocation meetings comprising members of both the local and offshore investment teams, our economists, strategist and global CIO.
We also now include members of the offshore investment team on our local manager meetings and vice versa. As subscribers to the United Nations Principles of Responsible Investing, we follow an integrated approach to responsible investing with extensive collaboration between the teams.
The quantitative modelling of funds is also conducted across both domiciles, ensuring consistency.
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