What is flexible management?

Flexible management is a solution whereby the allocation between asset classes varies over time to adapt to market configurations.  The end-goal of flexible funds is to allow investors to benefit from the growth potential of markets over the long term, while controlling the risks inherent in these markets over the short term. 

The objective of flexible management is to seek out an asymmetrical return profile 

Generally speaking, flexible management employs different means to accomplish this objective:

  • The fund manager is free to increase or decrease exposure of his/her risky asset classes to adapt to market configurations.
  • Priority is given to allocating assets in the management process.

This type of management first appeared in 2002-2003 during the previous sharp drop in the equity markets. And it has developed greatly since the 2008 economic crisis for primarily the following three reasons:

  • Flexible management was management companies' reaction to criticism that they did not anticipate or react aggressively enough to sharp market downturns

  • The client-base’s refusal (private individuals and institutional investors) to significantly invest in equity markets.

  • Traditional bond markets became less attractive and yields flattened over the years.

 

Flexible management as a reaction to the financial crisis

Flexible fund launches have proliferated as a reaction to the financial crisis starting in late 2007. This financial crisis has shown that investors are more compelled to seek portfolio management to deal with the battered financial markets.

Flexible management is no job for beginners. The difficulty specific to this type of management is market timing, as the choice of entry and exit points for investments are at the discretion of the managers and their teams. They can change their asset allocation by constantly tracking and adapting to market fluctuations, unlike so-called "long only" management.

For example, based on his/her opinion and analysis, the manager may decide to invest from 0 to 100% in equities. As flexibility can vary from one fund to another, one must read attentively the information contained in the prospectus of each fund, as well as the monthly management reports available on asset management company websites, to fully understand the management team’s strategy. 

Flexible management requires methodology and technique that combines expertise and experience. Like in other types of asset management, future results are inextricably linked to the fund manager’s accuracy of analysis.

 

Asymmetrical behaviour: be a part of the upturn and avoid most of the downturn.

As part of his/her job, every manager is keenly aware of asymmetrical behaviour, as is the long-term investor who wishes to delegate all or part of his/her tactical or strategic allocation to confidently navigate stock market cycles.

A flexible fund’s return profile can be characterised by the following:

  • Smaller scope of fluctuation than those of the indexes
  • Lower downside risk than that of the indexes.

  • Lower earning potential than the indexes (by definition, as the fund is flexible it cannot be 100% invested all the time). So when the equity markets rise, one must accept that the gain is going to be more modest than with an equity fund. However, the downside is that during a stock market crash, the flexible fund can be invested much less or not at all in the equity markets, for example.

Over the past few years, this management approach has achieved considerable respectability, to the point where it is now considered an asset class unto itself.

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