Unconstrained Will Get Overdone
David Merkel | Dec 25, 2013 01:43AM ET
Maybe I’ve just had a couple of unusual random draws from the information urn, but it seems to me that unconstrained mandates are getting more favorable investment attention from investment consultants than they used to. The “style box” is breaking down a little, and I think that is a good thing.
My view of the investing world starts with industries, not market cap size, and not even growth/value. Much as I end up on the value side, I am flexible on what constitutes value in different industries. I range from growth at a reasonable price to deep value. It depends on the state of the industry.
All that said, let me talk a little about what it takes to be a good unconstrained manager. Organizationally, you have to understand a lot of things better than the rest of the world. Do you understand the market, factor, and industry cycles, as well as asset level misvaluations? Investors have the choice of the informationless index, which typically does well versus the average active manager.
As consultants analyze unconstrained managers, their models will get stretched. The more degrees of freedom a manager has, the tougher it is to evaluate them. If an unconstrained manager made a brilliant tactical move once, can he do it twice? Three times? More?
Think of the few market players that got short prior to the 1987 crash. Aside from who also does not want to end up in the fourth quartile , where business is lost.
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