What are unconstrained bond funds?
Unconstrained bond funds aim to take advantage of differences in economic conditions across bond markets to provide stable returns to investors. These funds diversify the fixed income portfolio across segments and geographies.
Investor interest in these funds is strong. Unconstrained bond funds offer options for managing fixed income risks, without being shackled by index constraints. According to Morningstar, total net assets under management grew from $51 billion at the end of 2011, to ~$153 billion at the end of September 2014.
Active versus passive fund management
Popular fixed income and stock market ETFs such as the iShares 20+ Year Treasury Bond ETF (TLT), the SPDR MSCI World Quality Mix ETF (QWLD), and the SPDR S&P 500 ETF (SPY) are passively managed. That means they track a particular benchmark index.
For example, TLT tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index. The Index measures the performance of U.S. Treasury securities that have a remaining maturity of at least 20 years. So, TLT is targeted at a particular segment of the bond market—U.S. Treasuries maturing in 20 years or more.
In contrast, unconstrained bond fund are actively managed. They don’t track a benchmark index. Due to this, they aren’t bound by index constraints and can invest in credits outside the index. They may invest in bonds across the credit and maturity spectrum and across geographies. They may simultaneously hold long and short-term debt securities, U.S. Treasuries, as well as debt issued by foreign governments, investment-grade (BND), or high-yield corporate bonds. Some unconstrained funds even have exposure to currencies and equities.
Major funds in the category
These are some of the larger unconstrained bond funds:
- The BlackRock Strategic Income Opportunities Investor A (BASIX)
- Goldman Sachs Strategic Income Fund A (GSZAX)
- JPMorgan Strategic Income Opportunities A (JSOAX)
- PIMCO Unconstrained Bond A (PUBAX)
- Janus Global Unconstrained Bond Fund I (JUCIX)
We’ll be discussing these in greater detail in Parts 6 and 7 of this series. The next few articles will look at the benefits and disadvantages of investing in unconstrained bond funds.