Our investment approach is designed to deliver the explicit target outcomes of goal-specific plans. We refer to this general approach as ‘outcomes-driven investing’. Its equivalent in institutional investment is Liability-Driven Investing. We call our fully-customised portfolio solution a ‘Defined Outcome Portfolio’.
There have been for some time technical solutions that make the challenge of delivering specific, quantified outcomes at defined times, subject to individual constraints, relatively simple for genuine experts. These solutions have already made dramatic inroads in institutional investment, because clients such as pension funds and college endowments realised they had unique goals but saw their portfolios were standardised and knew that could not be right.
Standardised portfolios, whether for individuals or institutions, have no choice but to rely on diversification across a number of different asset classes or strategies to manage risk. Because they are standardised, they focus on single, short-period volatility (how bumpy the ride) rather than the more important uncertainty about real outcomes (what will my money buy when I need it), which is the risk that outcomes-driven investing focuses on.
This risk can be managed without relying on diversification alone, by combining risky ‘real’ assets like equities with risk-free ‘hedges’ that provide certain (or near-certain) outcomes when you need the money. Where money is needed at different times, such as to fund retirement spending, the assets are matched to all these different time horizons. This way, a portfolio can be dynamically managed to remain consistent with an agreed range of tolerable outcomes for each horizon, even as market conditions change and the horizon gets nearer.
As you might imagine, in these sophisticated solutions the underlying data and techniques are highly complex and it is usually only by adopting systematic or computer-based processes that firms are able to manage fully-customised (or even unique) outcomes-driven portfolios so cost-effectively. This is the highly-specialised industry context from which Fowler Drew came.