More opportunities for unconstrained managers

International equity fund managers who are constrained by their benchmark have underperformed less constrained managers, who have been more able to take advantage of opportunities and retract positions with exposure to the after-effects of the global financial crisis.

The was a key finding from Standard & Poor’s Fund Services’ (S&P’s) latest International Equities Sector Report, which found a trend among international managers to broaden their investment mandate constraints to better align those constraints to risk targets and manager skill.

“The structure of international equity markets is also changing, with emerging markets becoming an ever-increasing portion of global growth and demand, leading to improved transparency and liquidity in these markets,” said S&P Fund Services analyst Justine Gorman.

The report rated 345 international equities funds by 38 managers, with 11 strategies upgraded and 11 downgraded.

It found the greatest level of alpha was identified by managers who applied the following investment disciplines: growth/‘growth at a reasonable price’, thematic, concentrated, and unconstrained equity.

Some managers are reconsidering their risk-management approach from a benchmark-relative view to viewing risk from an absolute view, which gives greater insight into a firm’s future success or failure, the report stated.

The report also found that around a third of funds didn’t have stock limit constraints, and half were not constrained at a sector level; many managers increased the limit of cash held; there was a high volatility in currency markets; and international small-cap stocks widely outperformed large-cap stocks over the year.