Unconstrained Bond Funds
These funds have become extremely popular during their relatively short existence, in large degree due to the number of tools available to their managers, such as the ability to go short. Unconstrained bond funds are not tied to any particular benchmark. These are go-anywhere portfolios that involve closely timed buying and selling strategies, and represent an area where the skill of an active manager can really come into play. They provide opportunity for realizing alpha, but also increase the due diligence requirements. These strategies can be extremely complex and most investors can truly benefit from professional guidance. Most funds have very short track records and investing in them requires significant confidence in the manager. These funds offer the promise of low, fixed income-like volatility while having lower correlations to traditional fixed-income products. The shorter durations when compared to core bond funds can also help reduce interest rate risk, an added benefit in a rising rate environment.
As stated earlier, there is no perfect replacement for fixed income in every portfolio. By tactically diversifying fixed-income positions and including one or more non-traditional strategies, investors can continue to benefit from the core functions of bonds while buffering interest rate risk.
Of course, each client is an individual. Scenario analysis using historical and Monte Carlo simulations can help advisors better define the potential outcome of a given diversification strategy in different environments. As with any portfolio construction, bond diversification strategies should be implemented with caution and proper diligence. This is an area where advisors can truly demonstrate the value of a well-thought-out financial plan and professional advice.
Tim Clift is chief investment strategist at Envestnet | PMC and is responsible for the development of investment strategies for client portfolios as well as the development of manager and fund strategist selection methods.
This material contains the current opinions of the author but not necessarily those of Envestnet | PMC and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. For investment professionals only. It is not intended for private investors.