Unconstrained Bond Fund Investments are Back in Mainstream
Fixed income managers increasingly are selecting unconstrained bond funds as a way to provide retirees attractive returns from conservatively positioned portfolios.
From September 1, 2013, through February 28, 2014, $20.3 billion net has flowed into mutual funds within the unconstrained bond fund classification, compared to $12.4 billion of net outflows from mutual funds within the traditional bond classification.
The difference between traditional and unconstrained bond funds is that traditional bond mutual funds usually are “constrained” to a bond index such as the Barclays U.S. Aggregate, and unconstrained bond funds have no such constraints.
According to a correlation analysis, asset classes such as U.S. high-yield corporates, represented by the BofA Merrill Lynch US High Yield Constrained Index, had a correlation of only 0.26 to the broadly diversified Barclays U.S. Aggregate Bond Index fixed income benchmark during the 10-year period ended February 28, 2014.
Given the low correlation, during various periods the unconstrained approach might have offered fixed income investors more attractive total return opportunities, albeit with higher credit risk, than an approach that only considered the passively allocated mix of the Barclays U.S. Aggregate Bond Index.
So the dreary total return of fixed income period could provide an opportunity for unconstrained approach investors.
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