Unconstrained strategies carry expense ratios averaging between 1% and 2%, according to Morningstar. That acts as a sandbag against potential returns since investors must clear the hurdle presented by their fees before they make money for their investors.
“We’re in and remain in a period where bond returns are going to be relatively muted,” says Rosenbluth. “The greater the potential returns, the greater the risk. The higher fee that is being charged to investors in these funds has and will continue to eat into their returns. If you’re charging 100 basis points or more over traditional core bond strategies, the bar is set very high for you to overcome and outperform a conventional strategy.”
However, with indexes like the Agg increasing in duration while still producing low yields, active strategies may be more desirable to investors, says Brown. “Active management in fixed income is a prudent way to invest,” he argues. “A fund like ours has had positive performance this year. With active management we think you can navigate this environment.”
Unconstrained funds could thus find a place in more portfolios as rising interest rates and equity market volatility force advisors to think creatively.