By Florbela Yates, head of Equilibrium
As a discretionary fund manager (DFM), we try to narrow the gap between investment management and advice, which can be quite a complicated process. A DFM needs to have a very good understanding of the way financial advisers give advice, how they segment their clients and what they’re trying to solve for.
As a DFM, we then build solutions that cater to their clients’ specific needs. For example, if an adviser is looking for a solution for their retired clients, we would jointly agree on the outcome (or the benchmark) that makes the most sense for clients who are drawing an income, and then build a portfolio that aims to achieve that over a period that is aligned to the adviser’s advice process. In this example, our primary focus is on capital growth so that income lasts for as long as possible, but we also make sure there’s limited volatility in the portfolio so that it doesn’t affect the income drawdowns.
Using behavioural finance
We have been using technology to provide a better form of analysis for advisers and their clients. In the past, investment managers and financial advisers may have not spoken as much but now we spend a lot of time trying to understand each other’s worlds and analysing the impact of different investment decisions on the client’s investment journey.
Paul Nixon, our head of behavioural finance, uses client data to analyse the experience that different markets have on how a client behaves – do they stay invested or disinvest? The learnings from this have helped us to show financial advisers the impact different markets have on different types of clients and how to keep clients invested.
Most clients don’t achieve their investment outcomes because of their switching behaviour, which we call ‘behavioural tax’. For example, this can happen to a conservative investor invested in a portfolio with a level of risk that they are not comfortable with. So, when markets are volatile, they become anxious and disinvest. By trying to time the market, and disinvesting when markets are down, investors lock in a loss. And because they are nervous investors they probably don’t get back into the market until there’s good evidence that the market has risen. They therefore lose out on a portion of the upside as well. Some of the tools that we have at our disposal make it easier to understand the individual investor and their behaviour.
Using technology in portfolios
We also use technology to analyse the holdings in the portfolio and how the manager gets to those holdings. The different strategies of these different asset managers impact how the returns in each of the funds are felt by the investor. Therefore, when we build a portfolio there are two things we try to do. Firstly, we make sure that we get true diversification in the portfolio. We use tools to look back through different market cycles to see how it panned out for that fund and the impact it would have had on both returns as well as any portfolio draw-downs.
We also look for diversified sources of alpha (outperformance of the benchmark). Technology allows us to do that much more easily. In the past, when you were building a portfolio, you would look at cash, some fixed income, equities, and listed property. Today, we have so many alternative sources of alpha we can include in our portfolios. For example, in our international portfolios, we have an offshore manager that invests in music royalties, which gives you a very good stream of income for income investors.
When constructing a portfolio, you either need a very big team to analyse the data or you need technology, but I’d argue that you probably need a combination of both.
At Equilibrium, our solutions can help your clients achieve their defined investment goals through personalised portfolios. We become the adviser’s investment management team, and therefore, an extension of your practice. Our unique advice-led model portfolios are designed to be efficient and optimised through market cycles, so your clients stay invested and achieve their investment goals. Because partnering with you to enable your advice outcomes, is our business.
Equilibrium Investment Management (Pty) Ltd (Equilibrium) is an authorised financial services provider (FSP32726) and part of Momentum Metropolitan Holdings Limited and rated B-BBEE level 1.