UK - Six pension funds have each invested 10% of their assets in unconstrained equity mandates and others are set to follow, Hewitt Bacon & Woodrow predicts.
The consultant devised unconstrained mandates last year to generate higher, more consistent returns for schemes. It believes that as virtually all institutional equity mandates are measured against an index, this forces fund managers to consider risk purely in terms of deviation from the index.
As a result, fund managers are unable to back their own judgement and this increases the concentration of risk in a handful of companies.
Hewitt says this increases the likelihood of pension funds being swept up – and down – in market bubbles.
Hewitt investment consultant Kerrin Rosenberg (pictured) said unconstrained mandates had consistently outperformed traditional mandates.Hewitt says its research shows unconstrained mandates have outperformed traditionally managed funds by 10% per annum over the past three years.
Rosenberg claimed unconstrained funds had the same volatility as passive funds despite higher tracking errors.
He said: “After talking to pension funds, what we have seen is a pleasing acknowledgement that the investment process is fundamentally flawed and that the terms of reference given to fund managers need to change.
“Our clients want their managers to have the ability to back their investment judgement.
”Unconstrained mandates have done well when markets have been up and down, as well as relative to the traditionally managed equity funds.
Even the worst performing unconstrained briefs have done better than traditionally managed briefs.”
The consultant said that while it had identified capable institutional managers, such as Investec, to run unconstrained mandates, it was also using managers in the retail sector and in other geographical markets.
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