(Bloomberg News) Pimco Unconstrained Bond Fund and other "go-anywhere" bond funds created during the 2008 credit crisis went mostly to the wrong places in 2011 after missing a rally in Treasuries and buying riskier assets that lost ground.
Funds that Morningstar Inc. calls "non-traditional" declined an average of 1.8 percent this year through Dec. 5 while the Barclays Capital U.S. Aggregate Bond Index gained 7 percent, the Chicago-based research firm said. The $15.5 billion Pimco Unconstrained Bond Fund, the biggest such fund, has lost 0.1 percent this year and the $13.5 billion JP Morgan Strategic Income Opportunities Fund, the second-biggest, fell 0.5 percent.
Pacific Investment Management Co., JPMorgan Chase & Co. and rival firms have collectively amassed more than $50 billion since 2009 in such funds, attracting investors with the promise of bond selection unconstrained by maturities, credit quality or region, and the ability to protect against rising interest rates. This year, Europe's debt crisis drove investors worldwide to the safety of U.S. Treasuries, pushing down interest rates and hurting managers who expected rates to climb.
"Sometimes the future takes a turn that is surprising to even the smartest among us," Jeff Tjornehoj, an analyst with Denver-based Lipper, said in a telephone interview. "Investing in Treasuries wasn't how these guys expected to make a living."
William Eigen, who runs the JP Morgan fund, said that while he is disappointed with his "flat" performance this year, he isn't unhappy with the choices he made.
"I don't regret not owning Treasuries because they were dangerous," Eigen, who has managed the JP Morgan Strategic Income Opportunities Fund since its inception in 2008, said in a telephone interview from Boston. "In fixed income you need to be looking at alternatives."
So-called "go-anywhere" bond funds were created during the 2007-2008 financial crisis, spurred by the decline in interest rates to near zero and a widespread belief that an inevitable increase in rates would hurt traditional funds, said Eric Jacobson, Morningstar's director of fixed-income research. Bond prices fall as interest rates climb.
"There was a fear that even good funds would get whacked at some point," Jacobson said in a telephone interview.
The premise helped the non-traditional funds attract $9.2 billion in 2009, $27.6 billion in 2010 and $13.7 billion in the first seven months of this year, according to Morningstar. In 2010, Eigen's fund, Pimco Unconstrained and the $6.5 billion Eaton Vance Global Macro Absolute Return Fund were among the 10- best selling bond funds in the U.S., Morningstar data show.
By the end of October, the non-traditional funds had $55 billion in assets, up from $2.8 billion at the end of 2008. Investors pulled almost $4 billion from non-traditional bond funds in the three months ended Oct. 31, after performance this year trailed the bond market.