“These factors vary widely from one investor to the next and are best addressed by having both a trusted financial adviser and a portfolio solutions architect as part of your team,” says Niel Hougaard, Portfolio Manager at Sanlam Multi-Managers.
Sanlam Multi-Managers believes that the journey to sustainable investment outcomes begins with the quality of the advice relationship between the client and financial adviser. In addition, the adviser’s ability to recommend financial solutions that are aligned to the client’s risk and return profile, appropriate for different life stages, is equally critical. One of the most important components of this adviser-client relationship is an accurate assessment of the client’s current financial situation, risk appetite, and investment time horizon. Mistakes in this area can result in the client being placed in a risk-inappropriate investment, and contribute to significant future stresses on both adviser and client, especially during periods of market turmoil.
Individual investors, guided by their advisers, must choose from the available investment solutions based on how far along they are on their respective savings journeys. “Someone in the earlier part of their accumulation phase, being a number of years pre-retirement, will have a far higher appetite for risk or volatility than someone in the decumulation phase, post-retirement,” says Hougaard, who notes that client-centricity is non-negotiable. A fund manager cannot build a client-centric solution without a deep understanding of the client’s specific investment objectives. Success hinges on being deliberate and building an outcomes-based solution that is as close a fit for the client as possible.
“We refer to ourselves as solutions architects because our aim is to assemble optimal client-focused portfolios from the many asset classes and funds available to us,” explains Hougaard. These solutions are grounded on a three-part portfolio construction methodology that covers both manager skillset and market research. As such, Sanlam Multi-Managers approaches the inherent uncertainty of short-term capital market returns in three ways: first, by the selection of skilled fund managers; second, by ensuring that the selected fund managers’ investment styles are suitably diversified; and third, by focusing on tactical asset allocation and risk management when constructing portfolios.
The multi-manager also uses different risk and return optimisation techniques during portfolio construction to ensure that its solutions ‘match’ investors’ needs specific to how far from retirement they are. A technique called mean variance optimisation (MVO) is preferred during the accumulation stage, and conditional value at risk (CVaR) during decumulation. MVO is all about volatility management. “We focus on either maximising the return for a given level of risk, or on achieving a given level of return without exceeding a certain level of risk across the portfolio,” explains Hougaard. “As the client moves into the decumulation phase, we use CVaR optimisation to attempt to limit the downside risk in the portfolio.” The idea with CVaR optimisation is to explicitly isolate the left tail of an investment distribution, attempt to mitigate potential negative outcomes and skew the portfolio towards more positive stable outcomes over time. Through explicit focus on downside protection, these portfolios aim to outperform over time and deliver a smoother return profile for capital withdrawals.
Investors in their accumulation stage can focus on the multi-manager’s Building Block or Multi-Asset Model Portfolios, in addition to the Offshore range of portfolios. Those in a decumulation (post-retirement) stage are better served in the manager’s absolute return or real income portfolios. “The latter portfolios are based around an asymmetric approach that seeks to smooth portfolio returns, reduce sequence risk and prolong the purchasing power of investors’ capital,” says Hougaard. Unfortunately, many South African investors reach their decumulation phase with insufficient retirement savings, making this de-risked or asymmetrical approach an appealing option: they cannot afford to assume the volatility to position for high return, and have no choice but to eke out their capital for as long as possible.
According to Hougaard, the multi-manager’s ability to identify style biases across fund managers is a key driver of understanding risk in their portfolios. And so far, the theory has stood up to the vagaries of the market. The ultimate test for any multi-manager is whether or not its various portfolios deliver on the promised risk- and return-related outcomes through market cycles. “Our experience is that our absolute return and multi-asset portfolios are performing well against their respective benchmarks, and even our living annuity income solutions, though fairly new, are performing admirably,” concludes Hougaard.
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