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Unconstrained Bond Funds

Last week, WallStreetRanter posted some data and incited a pretty good thread. One of his concerns re. unconstrained bond funds and the risks they were taking on. Here is a longish article (news, not white paper) from last month, that gets into general characteristics of some of these funds, and what one can expect when they state an orientation of "absolute return" (which some of them do, and some don't.... but probably do, or will do).

http://www.institutionalinvestor.com/Article/3335100/Asset-Management-Fixed-Income/A-Brave-New-World-for-Bond-Investors.html?ArticleId=3335100&p=1

[I hope this isn't something posted last month here; using the search engine for key words, and the link itself, I came up with nothing..... so I tried.... Ted]

Comments

  • Doesn't the word 'unconstrained' demonstrate that we're not speaking about a class at all since classes are necessarily defined by some kinds of constraints? But if we're to take it that they're just funds with wide latitudes, then the distinction between Unconstrained Bond Funds and Strategic Bond Funds and World Bond Funds becomes a rather fine one for my poor understanding. Perhaps it would all come down to the degree of hedging allowed?
  • We are big users of 'unconstrained' or 'flexible-mandate' or 'strategic' bond funds. Investors do trade one kind of risk for another when they move from 'core' bond funds to one of these 'go-anywhere' funds, the key is to know the manager or team really well. Their expertise and the tactics they use, and their ability to execute them in a timely manner, are critical. And understand that the name of the fund may not be indicative of how it operates. There are a few standouts in this area, including Osterweis, Goldman Sachs, Thornburg, Loomis, but they are not the only ones. I would pass on any funds where management does not have a lot of experience.
  • edited May 2014
    @ BobC Ditto; and I'm using the same criteria as you are to make selections of The Unconstrained, and doing so cautiously, really scrutinizing everything with more rigor than I usually do.
    Regarding "measurement," may I ask:
    (1) where are you putting your selections on the risk/reward spectrum? Are you placing them one notch below your more aggressive bond/multi-sector/income funds, or do you put them into this pool as well (and does this depend to some degree on whether they plan to use an absolute return or total return strategy)?
    (2) so far, all of these funds either state that their investing decisions will not be tied/tethered to any benchmark or they pick some bench like BofA Merrill Lynch 3-mo LIBOR Index for measuring performance over time (wow, really setting a high bar for yourself there). Where has your thinking taken you on this issue (and does it depend on AR or TR as their strategic choice)? To leave this unresolved, in my mind, seems like sloppy thinking, yet.... I dunno.
  • Bob- would appreciate a few fund names if you can do that, hopefully available through Schwab.

    Thanks- OJ
  • You got it, OJ. Osterweis Strategic Income OSTIX, Goldman Sachs Strategic Income GSZIX or GSZAX, Loomis Sayles Bond LSBDX or LSBRX, Thornburg Strategic Income THIIX or THIFX. Another one is Loomis Strategic Alpha LASYX (uses long-short bond strategy).
  • Hi heezsafe. Your thoughts are right on. Benchmarking them can be really difficult, but we ask the managers what THEY use, which might be different from what the fund's literature says, and certain to be different than what M* uses. Their benchmark is almost always wrong for these kind of funds. Heck, they moved OSTIX to their high yield category not too long ago, so that shows how little they actually talk to the managers of the funds. Anyway, since we use these funds as core holds for most clients, we spend most of our time checking to confirm they use different strategies, techniques, holdings. After all, why use three or four unconstrained bond funds when they operate in much the same way? The ones we use range from ultra-conservative to fairly aggressive and have yields that reflect their risk profiles. Truth is there are lot of really good funds in this class, but we cannot use them all. We are impressed with Mainstay's fund MSDIX or MASIX, and BlackRock has a decent option in BSIIX, just to mention a couple.

    In the end, our decision has been to hire great managers who invest differently and who are not forced to operate in a restrictive box. Understand that for our truly short-term bond allocations, we do use more traditional funds like Lord Abbett LLDYX or U.S. Global Near-Term Tax-Free NEARX. But these are more cash-substitute options, not strategic allocations like the unconstrained group. And we have a lot of dollars with Templeton's Hasenstab, who is one of the best currency evaluators anywhere. And something like Forward's KIFYX and Oppenheimer's Steel Path MLPDX are other ways to add to current income-producing investments, but they are clearly on a higher risk/reward plateau.
  • Bob- Thanks much for the suggestions. Hope all is well at your end.

    Regards- OJ
  • MWCRX seems to be a winner from a good shop.
  • @BobC, MASIX - Merk Asian Currency fund, I assume, is is a mistyping in your recommendations.
  • I just thought Unconstrained Bond Fund is counterpart to Allcap Equity fund. One shouldn't benchmark and focus on absolute returns.
  • FSICX and PONDX?
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