Unconstrained Bond Investing: Too Good to Be True?
7 Pages Posted: 20 Dec 2015
Date Written: April 1, 2015
Market dislocations and record-low interest rates have spawned interest in unconstrained bond funds amid investors’ ongoing quest to boost income and protect capital. Despite its popularity, this non-traditional approach remains mired in complexity. Ironically, it also carries risks that may offset the very risk-reducing benefits investors seek and dilute the role of fixed income as a portfolio’s primary risk-mitigating component.
Unconstrained Bond Funds May Create New Risks: Complexity makes evaluation difficult; Increased credit risk; May negate the role of fixed income as a portfolio’s primary diversifier Mediocre returns, often with high fees; More traditional mandates may offer a better option to unconstrained strategies.
In this article, we explore the factors driving demand for unconstrained approaches and investigate their associated risks, featuring insights from Tim Doyle, CFA, Brandes Fixed Income Portfolio Manager, and Eric Jacobson, Morningstar Senior Analyst/Co-Head of Fixed Income for North America.
Keywords: unconstrained bond, non-tranditional bond, fixed income, portfolio management
JEL Classification: G10, G11, G14, G15, G20, G22, G23, G30
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