What is Unconstrained Investing?
Unconstrained investing is an investment approach that liberates fund managers from the shackles of specific performance benchmarks. This strategy grants managers the flexibility to explore various asset classes and sectors in the quest for returns.
Key Takeaways
- Unconstrained investing allows fund managers to implement ideas without being tied to benchmarks like the S&P 500 Index.
- This strategy provides the agility to swiftly respond to market changes.
- However, it also heightens the risk of investment management, as independent decisions can potentially impact the portfolio negatively.
Understanding Unconstrained Investing
The rise of unconstrained investing is notably tied to the reactions from the financial community following the 2007-2008 Financial Crisis. Disillusioned by traditional benchmarks such as the S&P 500 Index or Russell 2000, investors sought alternative methods. Professionals commonly use benchmarks to assess whether portfolio performance aligns with expectations. However, strict adherence to benchmarks often left fund managers unable to capitalize on market shifts promptly.
During the pre-crisis period, many portfolio managers had rigid guidelines that concentrated heavily on the U.S. market, which was on the verge of being severely affected by the subprime mortgage debacle. This rigidity prevented timely adjustment of portfolios, leading to exacerbated market turmoil.
Unconstrained Investing as an Alternative Style
Unconstrained investing is about optimizing long-term performance rather than chasing short-term gains. It removes limitations tied to traditional benchmark tracking, offering broader investment horizons.
Fixed-Income Investing Example
In the realm of fixed-income investing, managers are freed from adhering to specific bond ratings, currencies, or sectors. Instead, they can leverage a portion of the portfolio to use derivatives to hedge against price and rate risks and make calculated market bets.
While this approach increases investment manager risk—managers devoid of specific guidelines or those operating independently may make harmful decisions—it’s imperative for managers to have a deep understanding of different asset classes, sectors, and their interrelationships across geographies and governmental influences.
Internal performance metrics and risk controls still exist within unconstrained investing. The key distinction is the absence of mainstream market benchmarks as the focal point for these metrics.
Access to Unconstrained Investing Styles
Many investment teams craft their unique unconstrained investing styles. Established firms, such as J.P. Morgan, offer accredited investors and high-net-worth individuals access to these strategies. These managers harness unconstrained approaches to scrutinize and implement top-notch ideas across diverse asset classes, security types, and sectors—a multi-sector, multi-asset, global investing strategy.
Related Terms: Investment Style, Portfolio Manager, Sectors, Fixed-Income Investing, Derivatives, Hedge.
References
- J.P. Morgan Asset Management. “JPM Global Unconstrained Equity Fund”.
