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SSGA enters the ‘unconstrained’ debate

UK – So-called unconstrained mandates may improve returns, but how will those picking managers identify the best, asks State Street Global Advisors’ UK chief investment officer Rick Lacaille.

The idea behind unconstrained benchmarks, floated recently by consultant Hewitt Bacon & Woodrow, is that performance should improve if managers are given a larger investment universe from which to pick. Lacaille agrees that for highly-skilled managers this would be the case.

“The beauty of an unconstrained portfolio is that, if the manager has a high skill level, there will be a much greater transfer of this skill into the portfolio results than under normal circumstances,” says Lacaille.

He added: “The ultimate unconstrained portfolio would be a long/short equity portfolio in which the manager would not be ‘constrained’ to be exposed to overall equity market developments. There would be more or less pure transmission of alpha.”

The key question regarding unconstrained benchmarks, however, says Lacaille, is ‘what analytical skills manager pickers can bring to the table to find the best unconstrained managers?’

“It is absolutely correct to challenge the home bias implicit in many investment mandates, although the benefits of a broadening of benchmark would extend equally to indexed mandates.

“However, there could be some unexpected outcomes for clients if managers attempt to take substantially more risk against a global benchmark. One should not be surprised that investment professionals say they want more freedom in order to deliver more return.”

As David Boal, managing director at Bank of Ireland Asset Management UK, says: “In the end, success as an active manager comes down to skill and conviction. If you develop a core investment skill and stick to it, then time will tell if it adds value for your clients.”

The comments follow a survey conducted by Hewitt which found that most UK fund managers believe that benchmarking against an index prevents them from backing their best ideas and that so-called unconstrained mandates would lead to improved portfolio performance.

The consultancy firm polled 40 fund managers and found that 70% believe that index benchmarking prevents fund managers from “backing their best stock ideas”. And it found that 82% believe that an ‘unconstrained’ mandate would lead to improved portfolio performance.

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