How do you define outcome-oriented investing?
Piré: Outcome-oriented investing is the proposition that investors think of their investments with an eye towards the ultimate outcome rather than the approach. This is not a new phenomenon; in fact, apart from purely speculative investing, many investors approach investing that way and some financial professionals have become masters at translating an investor’s desired outcome into actionable portfolios.
For example, investors rarely come to their financial professionals and say they are seeking uncorrelated sources of return to maintain the real value of their portfolios. Instead, they may express concern about rising inflation and the effect on their savings. Similarly, investors are unlikely to tell their advisor that they are seeking growth with a measure of downside protection, often opting instead to express that they need to grow a nest egg but can’t afford to lose much of their hard-earned savings.
What are some of the challenges associated with outcome-oriented investing?
Piré: Outcome-oriented investing can be a challenge in part because investment products have historically focused on what they are – rather than what they can do for clients. For generations, many financial professionals have worked to help investors build investment portfolios that can help them to progress toward their financial goals and make sense of many of the investment products available on the marketplace.
However, few asset management firms that develop investment strategies have looked to develop products with the express intent of delivering outcome-oriented solutions. Aside from target-date funds, the vast majority of investment products – such as mutual funds and ETFs – can be thought of as “tools” or building blocks that provide exposure to certain market segments. This extensive variety of “tools” can feel overwhelming and leave investors puzzled about their purpose and role in a portfolio and, more importantly, how to use them to help accomplish their financial goals.
Is innovation helping to quell some of these challenges?
Piré: Yes. Over the past few years, many asset managers have moved swiftly to help investors make sense of it all by delivering products tailored to achieving certain outcomes. Smart beta,2 for example, has been one of the trends that provided some fuel to outcome-oriented investing by working to harness the power of certain factors to help deliver results. For example, many minimum volatility funds are specifically tailored to deliver growth in certain market segments while providing a measure of downside protection. With these particular products, the intended outcome is to provide the investor with a smoother ride by reducing the magnitude of shifts from up market to down market, therefore reducing volatility. Said another way, these funds are typically designed to help investors grow their nest egg while working to limit the potential loss of their savings.
So do you make a distinction between outcome-oriented investing and outcome-based investment products?
Piré: There is a difference. At a high level, outcome-oriented investing is more of the macro issue that underlies an investor’s motivation. For example, an investor may seek to maintain the real value of their portfolio or want to strictly limit potential losses. From a more micro perspective, it’s important to understand the outcome of certain investment products to see how they can fit.
That’s interesting. So rather than lead with the approach and process, the focus is on the outcome?
Piré: That’s right. I believe that we have turned the corner on the smart-beta or factor investing movement and many investors have gotten smarter about these products. They don’t want managers talking to them about their version of smart beta anymore; they want to know what this product can potentially do for them and how it fits into their overall investment strategy. We rarely see investors who expressly set aside room for factors in their portfolio. The fact is that investors tend to build portfolios based on geography and/or sectors. An outcome-oriented approach to factor investing can help rationalize how these strategies may fit within the allocation – either as a core holding or as a core-satellite from a portfolio completion angle.
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2 The term smart beta refers to investment strategies that attempt to deliver a better risk and return trade-off than conventional market cap weighted indices by using alternative weighting schemes based on measures such as volatility or dividends.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.
Investing involves risk, including the risk of loss. ETFs trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than the ETF's net asset value. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
The term factor based investing, refers to an investment strategy in which securities are chosen based on attributes that may be attributed to potential return increases. These factors can include style, size, and risk.
Volatility management techniques may result in periods of loss and underperformance, may limit the ability to participate in rising markets and may increase transaction costs.
Diversification does not guarantee a profit or protect against a loss.