What's In An Unconstrained Name?

This morning I stumbled across the Monarch Volume Factor Global Unconstrained ETF (MVFG). The fact sheet wasn't crystal clear but Copilot says the fund allocates based on fund flows, will typically be an equity proxy but has a process for flipping to treasuries. 

We've looked at the Artisan Unconstrained Fund (APHPX) a few times and that is essentially a hedge fund. It's not an equity proxy, it intends to be more of a macro hedge fund strategy.

A third one that we've never looked at is the Manning & Napier Unconstrained Bond Fund (MNCPX). It is a fixed income strategy. It's a three star fund so pretty ordinary and while it resembles AGG (correlation is 0.72), there is differentiation, in 2022 it was about 650 basis points better than AGG. MNCPX is a bond fund that hopefully adds value for its holders.

So that's three different funds, all "unconstrained" but all doing very different things. The first point today is the importance of sifting through how a fund is named to make sure you understand what it does. It's not obvious to me how the word unconstrained fits with MVFG, which is fine, from Monarch's viewpoint I am just some rando on the internet, the fund will either do well or not but on first glance there doesn't appear to be anything obviously wrong with it. 

I like the word unconstrained. In the investing context, it means looking different somehow and to me it implies being innovative in an attempt to problem solve. If the default portfolio is 60% SPY/40% AGG or IUSB, that is a problem that needs solving for reasons we've talked about in hundreds of posts. 

Something related, a paper from Alliance Bernstein titled The 100 Year Portfolio: A State Of Mind Rather Than An Allocation, along with a TLDR from Idea Farm. Maybe 100 years isn't something we need to think about but there were a couple of interesting ideas all the same. 

Across the past century, a 60/40 portfolio’s chance of beating inflation approaches a coin flip, despite unusually strong post-1980 performance.

This hits a point we make very frequently here. There was a 40 year run that concluded in late 2021 of fantastic bond returns that cannot be repeated. Carving out that 40 year period, 60/40 isn't so hot according to the paper. If 60/40 with the 40 in AGG or IUSB is the default and the great bond bull market is over, then we're back to coin flip territory. Again, that is a problem to solve. 

Alliance Bernstein estimates a real return of 4.5% (CPI plus 4.5) for equities going forward versus the historical 6.7%. We've talked about a common return target of CPI plus 5 using a diversified portfolio for endowments and foundations. So 4.5% may not seem so bad but I take from the paper they mean 100% equities to get CPI plus 4.5 not an endowment style allocation which typically is not 100% equities. 

Broken record, this is a problem to solve in an unconstrained manner with differentiation and innovation. We express that here and in client portfolios with trying to make portfolios a little more yieldy (cat bonds do this), have a slice of negative convexity, managed futures, alts that aren't typically sensitive to cycles and a couple of other ideas. 

There is no way to know whether 4.5% will turn out to be correct, it doesn't make sense to me to try to predict when or if bad things will happen, it is far more robust to simply be ready if it ever happens.