Investments in 'unconstrained' funds - those that pay no regard whatsoever to a benchmark when it comes to stock selection - can be particularly beneficial in times of uncertainty and volatility.
High-conviction funds such as these should fare well in 2017, as we move from loose monetary policy - where a rising tide lifts all boats - to one focusing on growth and reflation, leading to a greater dispersion of returns.
Of course, not all unconstrained managers will outperform, and not all managers with the flexibility to take large weightings that differ radically from index weightings actually use that flexibility.
Paul Craig, multi-asset portfolio manager at Old Mutual Global Investors, says: 'How many "unconstrained" managers will embrace this opportunity?
'[Some will] simply stick with the safety of the crowd while promoting the benefits of focused investing to justify the higher fees of active management. It may be a Ferrari, but if it's driven at 30mph, you are no better off than you are in a Ford.'
Sometimes it pays to be an index hugger. For example, following the UK's referendum on EU membership last year, it was very difficult to beat the FTSE 100 index.
During 2016 as a whole, the FTSE 100 ranked 22nd and the FTSE All-Share 53rd out of 280 when analysed as part of the Investment Association's UK All Companies sector. Many active fund managers underperformed.
However, Ben Yearsley, investment director at Wealth Club, says: 'These periods are often fairly short. Over the longer term - 10 years or more - I'd expect good active managers to outperform the main indices.'
Since the turn of the millennium, 80 out of the 109 surviving UK all companies investment funds have beaten the FTSE 100. The top performer, Fidelity Special Situations, delivered a return of 493 per cent, compared with the index's 86 per cent.
When Gavin Haynes, managing director at Whitechurch Securities, invests in active funds, he looks for managers who are not constrained in the way they run their portfolios.
He says: 'I don't want to pay management fees for closet trackers; I want managers who have strong convictions. To paraphrase the legendary investor Sir John Templeton, it is impossible to produce superior performance unless you do something different from the majority.'
Unconstrained funds are typically high-conviction, concentrated funds, so one way to spot them is to look for funds with a high 'active share', which is a measure of the percentage of stocks in the fund that differ from the benchmark index holdings.
For example, a UK equities manager that does not hold HSBC has an active share of roughly 5.2 per cent, as that is the weight of this stock in the FTSE All-Share index.
If another stock accounts for 4 per cent of a fund, but only 1 per cent of the index, this translates into an active share of 3 per cent.
The further away the combined calculated active share of a fund is from the benchmark, the more actively it is being managed. A fund with an active share of 100 per cent is completely different from the benchmark.
Fidelity Special Situations has an active share of more than 90 per cent, for example, while Scottish Mortgage, a global growth investment trust run by Baillie Gifford's James Anderson and Tom Slater, has an active share of 95 per cent.
Fund management groups are not yet obliged to publish active share figures, but a growing number are providing them on their fund factsheets.
Investment flexibility works particularly well in efficient markets such as the US equity market, where it is hard to add value.
Jeff Morris, head of US equities and manager of the Standard Life Investments American Equity Unconstrained fund, says: 'A robust research effort by a well-resourced team can reasonably find 50 to 80 good [US equity] opportunities in most market conditions, but not, say, 250.
'The unconstrained approach allows us to build a concentrated portfolio, allocating the fund's assets to compelling stock ideas without diluting returns with holdings in large, efficiently priced companies that form the ballast of the benchmark.'
Flexibility really comes into its own in tough market conditions. Iain Stealey, co-manager of JPM Global Bond Opportunities, foresees a 'challenging environment' for traditional fixed-income investing as major central banks start to unwind from a near-decade of ultra-low interest rates and monetary easing.
In such an environment, he says, a 'more unconstrained, opportunistic approach should prove beneficial'.
Some unconstrained managers have great freedom to invest within an asset class, but others can invest across asset classes. Among these is John Stopford, head of multi-asset income and manager of Investec Diversified Income.
He says: 'Recently, the shifting outlook for global interest rates has encouraged us to raise our financial equity exposure.
'The fund has doubled its position from 10 to more than 20 per cent equity positions in a matter of months, through names such as Danske Bank and Wells Fargo that offer good relative value, sustainable, well-capitalised business models, growth drivers, and transparent and sustainable dividend policies.'
Funds with such freedom can pose portfolio construction problems, however. Nick Peters, multi-asset portfolio manager at Fidelity, says: 'Blending an unconstrained fund into a style-neutral portfolio can be challenging when we are managing the portfolio to a benchmark.
'Also some unconstrained managers may hold a lot of cash, which is frustrating in a bull market when they've been selected to provide equity exposure.'
For these reasons it often makes sense to select an unconstrained fund in line with your investment objectives - to secure income, for example - or to invest using a particular style bias such as value or quality.
When an investor gives a manager much greater flexibility than is needed for close adherence to a benchmark, they place more faith in that manager's ability to select opportunities.
Nevertheless, there is no guarantee that any active manager will make the right investment decisions. In 2016 the top UK growth fund returned more than 50 per cent, compared with a 16 per cent rise in the All-Share index, while the worst lost 6 per cent.
Unconstrained managers can make bigger calls in terms of asset allocation and stock selection. For this reason, their funds are likely to perform very differently from the wider benchmark, and returns can be volatile, especially over the short term.
Nathan Sweeney, a senior investment manager at multi-manager Architas, says: 'When unconstrained managers get the calls right, they can offer real outperformance. An example of this would be when managers piled into Facebook, Amazon, Netflix and Google stocks that soared in value in 2015.'
However, he adds: 'The obvious drawback is that with an often very concentrated portfolio there is a bigger focus on stock-specific risk, because a couple of single stockpicking mistakes can have a dramatic impact on performance.'
A sensible way to mitigate this risk is to back an experienced manager with a track record of coming up with unique stock ideas that have added real value.
FIVE FLEXIBLE FUNDS
JOHCM UK Dynamic
While 2016 proved a difficult year for active managers, Alex Saviddes, manager of the JOHCM UK Dynamic fund, comfortably outperformed.
Gavin Haynes at Whitechurch Securities says: 'Saviddes adopts a value and contrarian stance. Although the active share, at 65-70 per cent, is not particularly aggressive, he will go 75 per cent overweight/underweight in each sector.
Sanlam FOUR Stable Global Equity
On the global stage, Darius McDermott, managing director at fund research website FundCalibre, likes Sanlam FOUR Stable Global Equity. He says it is a 'strong example' of a high-conviction, concentrated fund.
He adds: 'It avoids certain cyclical sectors entirely, such as banks, energy and mining, and it currently has just 25 holdings from a global universe of thousands.'
Lindsell Train Global Equity
Although Lindsell Train is better known for its UK equity fund, its global proposition is a favourite of Nick Peters at Fidelity.
He says: 'Run by Michael Lindsell for the past six years, this is a classic example of long-term, fundamental investing - what might be called the Warren Buffett approach. I also like its high exposure to Japan - one of my favoured equity regions - at the moment.'
Mitn US Special Opportunities
Nick Ford, manager of Miton US Special Opportunities, is no slave to any index: he switches between large and small cap in response to valuations and expectations.
Paul Craig at Old Mutual Global Investors says: 'He also buys stocks that he considers have strong earnings potential, while offering a margin of safety, and when they hit price targets he sells and looks elsewhere.'
RWC Global Emerging Markets
RWC Global Emerging Markets, run by John Malloy, provides 'good potential upside participation', due to its unconstrained approach, says Nathan Sweeney at Architas.
An example of Malloy's willingness to make big calls on individual countries is his significant overweight to Russia, India and Argentina in 2016. The fund had a recent sector bias to consumer stocks and commodities.
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