Case Closed: Outcomes-Based investing works | Our Performance | Consistency Data
We all know investing is personal. When clients invest money to finance certain life events that are important to them, not achieving their goals can have detrimental consequences for their life.
Amity Investment Solutions is not just another DFM, but a boutique discretionary fund manager that partners with the independent financial advisor to offer them a range of outcomes-based investment solutions. Our philosophy, strategy and process reduce the uncertainty of achieving the investment goals of clients, and reduce investment and behavioural risk.
How it all started
Outcomes-based investing was a very unique philosophy and one we easily subscribed to. The biggest challenge however, was that traditional investments didn’t align with this philosophy. We needed to change this and offer advisors outcomes-based solutions to align with an outcomes-based investment advice process and strategy.
The process started with years of research into the asset class characteristics, and we had to understand how different asset class groupings perform in different market cycles. We tested this for various rolling periods and used 20-years of data.
December 2019 we launched a model portfolio called the Steady Growth portfolio. This was the first strategy we created in our range of outcomes-based investment solutions and as an investment committee we decided that a very strong evidence-based strategy was necessary. For this strategy we identified the rolling investment term as 3-years and after intensive research found the target band to be between CPI and CPI+3%. From our research we saw that a client can easily outperform CPI 90% of the time and we placed this as the lower target band for the solution.
We then decided on the risk budget in order to achieve this target with the highest level of consistency and once the risk budget was established, selected the asset allocation mix, the underlying managers, and constructed the portfolio.
The strategy has done extremely well and continue to deliver on the mandate.
We recently updated all our research and below we can illustrate the recent results. When considering the rand value results, we can see that the strategy managed to deliver R130 432 for every R100 000 invested at least 68% of the time. The period used was 2002 till February 2022 and rolling 3-year return numbers were considered.
It is also evident that we exceeded the 90% probability mark as this strategy delivered on the CPI expectation 94% of the time, and even managed to achieve CPI+3%, 64% of the time.
The ASISA MA Low Equity category also managed to deliver positive return numbers in most instances and achieved CPI, 83% of the time. It is however more difficult for the index to achieve CPI+3% consistently and you will note that the index only did so 48% of the time.
GUARDED GROWTH AND OPTIMAL GROWTH
In March 2020 we launched two additional model portfolios. At that stage we identified the need for a portfolio with a rolling investment period of 5-years and a range of CPI and CPI+4%. The Guarded Growth strategy was our 'middle-ground' strategy and we decided on a 50:50 allocation between risk assets and defensive assets given our research. This strategy can easily be compared to the ASISA MA Medium Equity.
Along with the Guarded Growth strategy there was also a need to launch a strategy with a target band of CPI and CPI+5% and a rolling investment horison of 7-years. This strategy is called the Optimal Growth strategy and has a risk budget of 60% growth assets. Research showed that to achieve this CPI+5% target over a rolling 7-year period was achievable with only a 60% risk budget and that you didn't require such a large allocation to growth assets or offshore growth assets as typically expected.
We also realised from our research and even some past failures (as we previously managed CPI+5% and CPI+6% target return portfolios), that it is not possible to reach CPI+5% consistently over 5-years. In fact, most funds in the ASISA MA High Equity category (your typical balanced funds) still recommend an investment horison of 5-years. We found that to enhance on the probability to reach the desired outcome of CPI + 5%, you need to extend your investment term to at least 7-years.
So how does the Guarded Growth and Optimal Growth portfolios stack up against the ASISA categories?
The results are in- and we are pleased to say that the strategies work!
When considering the distribution of outcomes for the ASISA MA Medium Equity category and comparing this to the Guarded Growth Strategy, we can firstly note that the ASISA MA Medium Equity category only managed to achieve a CPI+4% target 41% of the time compared to the Guarded Growth Strategy doing so 64% of the time. Although the ASISA MA Medium Equity category achieved a slightly better rand value, it only did so 15% of the time. When comparing the end values in the below illustration, you'll note that the Guarded Growth strategy provided better end values for each R100 000 invested in almost all instances. The category did however offer a slightly better return but not frequently and not very consistently. The crux of the results below, is the improved consistency numbers and the enhanced probability for a client to achieve their goal.
The results are very similar for our Optimal Growth strategy when compared to the likes of the ASISA MA High Equity category. Again the biggest improvement is perhaps the probability of achieving CPI+5%. The ASISA MA High Equity category only managed to achieve this target 33% of the time. The Optimal Growth strategy actually managed to double up on this probability number, and managed to consistently achieve CPI+5%, 70% of the time. Even though the ASISA MA High Equity resulted in a slightly better outcome at the top end of the best and worst results, it only managed to do so 2,5% of the time and only did so marginally.
The aim of the Optimal Growth strategy is to deliver on the CPI mandate 80% of the time and it managed to do so for all instances in the time period tested.
It is clear that our evidence-based process adds value. When the narrative moves away from which combination of assets deliver a better return to which combination of assets has the highest consistency of achieving a specified range of outcomes (regardless of market conditions), a client can achieve financial wellbeing.
Using these strategies and knowing the likelihood of achieving certain outcomes, makes it much easier to plan for your clients’ goals. In a world filled with uncertainty, why not make use of investment strategies that create a bit more certainty?