Wealthy investors are turning to unconstrained strategies to take advantage of their stability in returns to try and boost portfolio returns, according to wealth advisers.
“Private bank clients are looking for the best actual returns they can get and benchmark relative solutions are not appealing anymore,“ Joyce Ngan, head of fund solutions for Asia Pacific at Deutsche Wealth Management, told AsianInvestor. “That's why we have seen strong growth in interest in unconstrained strategies," she said, declining to offer specifics on portfolio changes among her clients.
Unconstrained strategies allow fund managers to pursue returns across different asset classes and sectors without adhering to any specific benchmarks.
Rainer Michael Preiss, Singapore-based executive director at multi family office Taurus Wealth Advisors, agreed that investors were raising their focus upon end gains.
"Increasingly, investment returns are less driven by index gains and becoming more stock/sector specific," he told AsianInvestor.
This can mean investing into many different types of assets, with an eye on the absolute return available. But while unconstrained funds can cover all asset types, the US and global unconstrained bond funds tend to offer the most trackable data.
According to fund research provider Morningstar Direct, unconstrained US bond funds enjoyed fresh investor inflows of $7.4 billion until the end of july this year. That is a trend reversal from 2016, when the sector saw outflows of over $20 billion.
Six of the top 10 US unconstrained bond funds by assets under management enjoyed inflows over the 12 months to July 31, according to Morningstar Direct. Some of the biggest gainers were the BlackRock Strategic Income Opportunities Portfolio fund and Eaton Vance Global Macro Absolute Return Fund.
The funds within the top 10 also delivered a broad range of returns in the 12 months to August 31, from 2.5% to 9.1%. However even the lowest of these was far superior to the Bloomberg Barclays Global Aggregate Total Return Index, which covers a broad universe of bonds. It has returned 0.78% over the same period.
Ngan said that unconstrained funds have, with a few exceptions, maintained track records of positive returns in recent years. She declined to specify exactly how many unconstrained strategies Deutsche offers, but said it had in recent years increased the number in the 350 to 400 mutual funds it offers on its product platform.
“If you look at across different asset class segments such as US equities, European equities, fixed income or credit, there will be at least one unconstrained manager in each of these categories on our platform,” she said.
Preiss noted that using unconstrained investing could sometimes offer better investing gains over benchmarks. Using Asia as an example, he noted that if an investor followed traditional market capitalisation/index weighted investing, those investments might be skewed towards Korea, Japan and Taiwan, which have higher shares in benchmark indices.
In the MSCI Asia Index, for instance, those three countries account for nearly 61% of the index weights.
“But there may be better opportunities in smaller markets and those can be played better via free style or unconstrained strategies, where the manager is free to make cyclical and contrarian calls irrespective of the index ratings,” he said.
He cites the Philippines equity market as an example of a small market offering good investing opportunities.
“The Manila market is still overlooked and under-researched and therein lies the opportunity,” he said.
“Companies expect earnings to grow by as much as 30% in the fourth quarter of this year amid an accommodative stance by the central bank,” Priess said.
The World Bank also projects continued robust growth for the Philippines and expects the country’s economy to expand at 6.8 percent in 2017.
The Philippines, however, is a very tiny component in the MSCI Asia index: it is clubbed with eight other countries to make up the “other countries” category that accounts for 13% of the index.