Practical analysis for investment professionals
26 February 2015

Poll: Which Statement Best Reflects Your Opinion on Unconstrained Bond Funds?

Posted In: Fixed Income

As interest rates continue their descent and hover near record lows, fixed-income investors are understandably nervous. Not surprisingly, they have been receptive to an alternative to traditional bond funds, which are typically vulnerable to rising interest rates.

Unconstrained, or nontraditional, bond funds have surged in popularity recently because their flexible mandates allow them to invest in a broad range of assets, including sovereign debt, bank loans, real estate, currencies, derivatives, and even stocks. Advocates are drawn to the prospect of skillful managers being able to navigate diverse markets and deliver better returns.

Critics argue that these funds are merely replacing interest rate risk with risks related to credit quality, currency fluctuations, and liquidity. Furthermore, the increased correlation to equities means these funds aren’t providing investors the counterbalance they expect from their fixed-income portfolios.

We asked CFA Institute Financial NewsBrief readers for their opinions on unconstrained bond funds. Of 679 respondents, 47% think they are poorly understood, with their risks underestimated by most investors. About 17% consider them a marketing creation that should be looked at with skepticism. The prospect of stronger returns because of the funds’ “go anywhere” mandate appeals to 15% of respondents, whereas 12% regard them as a welcome innovation for investors.

Which statement best reflects your opinion on unconstrained bond funds?

Poll: Which statement best reflects your opinion on unconstrained bond funds?

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

About the Author(s)
David Larrabee, CFA

David Larrabee, CFA, was director of member and corporate products at CFA Institute and served as the subject matter expert in portfolio management and equity investments. Previously, he spent two decades in the asset management industry as a portfolio manager and analyst. He holds a BA in economics from Colgate University and an MBA in finance from Fordham University. Topical Expertise: Equity Investments · Portfolio Management

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