Sonja Saunderson, chief investment officer at Momentum Investments
Investment professionals can be a strange lot. They often speak in a language full of jargon and which seems to be inaccessible to most people.
‘Investment strategy’ is two words that get bandied around often. However, it’s a concept that can be misunderstood if not clearly defined. So let me try to explain this concept and how it should be interpreted when you hear it being used.
At its essence, an investment strategy is a decision-making framework. You get an investment idea or opportunity and consider whether to make the investment or not based on your strategy. An investment strategy could be something like “I invest in high-dividend shares”. Then when you have an opportunity to make an investment you ask: is this a high-dividend yield stock and is it reasonable to expect it to continue to be one?
Other strategies that are widely used in financial planning includes passive investing where a buy and hold strategy of companies give a lower cost experience and can give competitive returns. Income strategies are very popular for generating income, as opposed to focusing on capital appreciation and play a pivotal role in matching income and cashflow requirements. Value investing is arguably the most popular long-term value creation strategy where the intrinsic value of a company is unlocked over time. This strategy can generate high returns but with cyclicality in how well it gets rewarded at different points in time of a typical business cycle. Dividend growth strategies look to invest in companies where dividends are paid consistently and with a predictable frequency and typically suit investors who like the stability in compounding returns over time. Trending strategies are for investors that like to ride the wave and that understand that sentiment determines the value of a stock. They typically believe that winners keep winning and losers keep losing, but this often makes for lumpy performance with volatility.
All of these strategies is from the perspective of a single investment, which could clearly be a risky proposition. Therefore, to fully build up the strategy you need to start complementing this with a variety of other factors, including the asset classes you invest in, how much risk you are willing to take and how you define this risk, your investment duration, benchmarks, and liquidity requirements. These factors can be limited in some way that forms your risk management approach and complements and enriches your investment strategy.
Our outcome-based investing (OBI) philosophy informs our strategy. This investing approach defines the way we manage and grow our clients’ investments. Investing is personal and our philosophy places the client’s goals at the centre of the investment process. We define pre-determined risk targets, implied return targets and realistic timeframes of a client reaching their goals. Each investment decision is then evaluated against this framework.
Why is it important to truly understand the investment strategy? At its simplest it is about alignment – when you have specific liabilities or goals, you want to set them out clearly and see how they frame and map to the investment strategy. If there is a good match there is a good chance that the client’s needs are met. One of the most important reasons for a client to remain invested is that the investment meets their expectations.
Our outcome-based investing philosophy is about maximising the probability of a client achieving their unique goals. It ensures portfolios remain flexible, adaptable and diversified for an attractive risk-adjusted return that provides a more consistent investment experience over time, and limits the risk and temptation of market timing.
Ultimately, meeting expectations means that clients remain invested, which is by far the biggest driver of investment success for anyone.
Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider (FSP 6406)