April 22, 2013

What is an unconstrained bond fund and how could it be valuable in this environment?

Bonds no longer seem to be the straightforward asset class they once were. The outlook for government bonds looks limited with low Treasury yields, and the ongoing low interest rate environment is putting pressure on other investment-grade bonds. High yield bonds may be strong performers, but we have some concerns about emerging risks in this currently overvalued asset class.

Enter unconstrained bond funds. They provide an answer to the shifting bond landscape by letting the bond manager shift with it. An unconstrained bond strategy allows the manager to invest in their best ideas across the entire fixed income market, including all bond sectors from U.S. Treasuries to high yield bonds. The manager then has the flexibility to focus on long-term value and total return, using whichever tools best fit the current market opportunities. An unconstrained bond fund may show large fluctuations in allocations; for example, a high yield allocation might range from 5% of the portfolio to 95% of the portfolio at different times.

By making it possible for a bond manager to take advantage of inefficiencies in the bond market wherever they may be, an unconstrained bond strategy allows the fund to maximize return by systematically pursuing relative value opportunities, taking advantage of valuation discrepancies, and managing risk exposures. This flexibility in tactical management may not always work across all asset classes, but in the current bond market, an unconstrained strategy allows the manager a broader platform from which to deliver value.

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