Unconstrained investing – The freedom to perform
Thomas Moore of Aberdeen Standard Investments tells us why volatility in the UK equity markets has created numerous investment opportunities and why his investment approach is ideally suited to capture these opportunities.
The unconstrained approach naturally leads to a portfolio that’s different from the index and different from our peer group. We don’t need the index as a comfort blanket. We get our comfort from the strength of our research resource driving the strong ideas that power the returns of the portfolios.
UK equity markets have been volatile since the turn of 2018, with sentiment buffeted by various economic, political (notably around Brexit) and monetary policy developments. However, such volatile conditions have created numerous investment opportunities – opportunities that we believe our bottom-up unconstrained investment approach is ideally suited to capture.
Casting a wide net
Through two of our Standard Life Investments funds – UK Equity Unconstrained and UK Equity Income Unconstrained – we are able to search the entire UK equity market for the best opportunities, irrespective of sector, style characteristics or market capitalisation. This freedom allows us to express deep, stock-level insights to the fullest possible extent without having to consider potentially inhibiting benchmark constraints.
Indeed, many fund managers reference a benchmark when constructing a portfolio. They can therefore be heavily influenced if that benchmark is concentrated in a small number of companies or sectors. For example, over 30% of the FTSE 100 Index is made up of oil & gas and mining firms.
By contrast, our unconstrained strategies are able to invest across the full breadth of the UK equity market, including the dynamic and diverse opportunities found within small- and mid-cap stocks. Such flexibility means we can access a greater number of companies that can potentially outperform at different stages of the economic and investment cycle.
Due consideration of risk
Despite these benefits, some investors are initially concerned that an unconstrained approach is too risky. They fear it is simply a cover for managers to do as they please, holding whatever stocks they feel like with little accountability. There is also a sense that such activity could result in unbalanced portfolios without sufficient risk control.
This is misleading. Rather than viewing them as risky, our unconstrained investment strategies represent the purest expression of our approach to active management – disciplined, highly active and highly risk aware. Our goal is to maximise exposure to stock-specific risk, the risk attributes particular to one company. This is where bottom-up equity investment managers can expect to have an information advantage and non-consensus insight. Focusing on the ‘right’ stock-specific risks ensures that investors are exposed to only our best investment ideas inside a carefully constructed and appropriately diversified portfolio.
It is also worth noting that investing relative to benchmark weightings is not ‘risk free’. Indeed, this kind of strategy can often end up doing little more than mimicking the index, giving the fund higher exposure to uncontrollable market risk rather than to the underlying stock-specific risks many investors expect. It also forces managers to tie-up investors’ capital in companies simply because they are on a benchmark, without any consideration for their underlying fundamentals.
UK equity markets have been turbulent and are likely to remain so as various domestic and international factors unfold. However, by applying an unconstrained approach we are able to capture, what we believe are, the best opportunities from across the investment spectrum, while avoiding companies with, in our view, a more troubled future. In combination, this allows us to build high-conviction, risk-aware portfolios that we believe have the opportunity to outperform as we move through 2018 and beyond.
Issued by Aberdeen Standard Investments
Aberdeen Standard Investments is a brand of the investment businesses of Aberdeen Asset Management and Standard Life Investments.
All information, opinions and estimates in this document are those of Aberdeen Standard Investments, and constitute our best judgement as of the date indicated and may be superseded by subsequent market events or other reasons.
This material serves to provide general information and is not meant to be legal or tax advice for any particular investor, which can only be provided by qualified tax and legal counsel. The value of an investment is not guaranteed and can go down as well as up. An investor may get back less than they invested.
Past performance is not a guide to the future. Please refer to the Key Investor Information Document or the Prospectus for more details of the risks applicable to each fund.
The value of an investment is not guaranteed and can go down as well as up. An investor may get back less than they invested. Past performance is not a guide to the future. Please refer to the Key Investor Information Document or the Prospectus for more details of the risks applicable to each fund.