The Power of Portfolio Flexibility
Authors: Jeff Feng, CFA, Head of Emerging Markets Equities, Co-Portfolio Manager; Matt Peden, CFA, Vice President, Co-Portfolio Manager
Many investment managers apply strict portfolio constraints under the guise of risk management best practices. These often include limits in sector over-/under-weightings, geographic concentrations, minimum levels of portfolio holdings and/or market capitalization requirements. The challenge around these types of constraints is that while they are designed to reduce potential return variance, typically in relation to a particular benchmark, they also can limit excess return potential.
Without the burden of excessive constraints, investment ideas could be implemented at earlier stages and at more reasonable valuations. Ultimately, this approach has the potential to lead to the generation of long-term excess returns and growth in capital without reliance on broker research and/or higher valuations that are observed in a passive approach.