The lawsuit ratchets up vitriol between Gross, 71, who now runs the Janus
Global Unconstrained Bond Fund for Janus Capital Group Inc, and Pimco, which he co-founded and built over four decades into the largest U.S. bond fund complex.
That said, several of the new registrations will end up being solid and useful offerings: T. Rowe Price is launching a global high income bond fund and a global
unconstrained bond fund while Vanguard will offer an ultra-short bond fund for the ultra-nervous.
These include currency - hedged ETFs, triple - levered ETFs based on commodities,
unconstrained bond funds with short positions betting against U.S. Treasurys, private equity funds, emerging market debt instruments, historically less - liquid bank loan funds, and all manner of actively managed strategies packaged in supposedly easy to buy and sell wrappers.
The Risks of Go - Anywhere Bond Funds
Most unconstrained bond funds replace interest - rate risk with corporate credit risk, which can make their portfolios behave more like stocks.
We examined each of these claims for the average performance of
unconstrained bond funds since 2011 and noted that fund performance varied among them.
With
unconstrained bond funds free to take an unusually wide range of risks, investors should make sure they aren't taking on too much risk themselves in buying such funds.
It is very hard to evaluate one
unconstrained bond fund against another because you can't even look at the portfolio on a static basis and judge it on its investment merits.
Despite its flat - line performance since 2009, cash is often mentioned as a viable alternative (eg,
Scout Unconstrained Bond Fund SUBFX and Crescent Fund FPACX are now cash heavy).
Of the 10 alternative bond funds, only four of them — Iron Strategic Income Fund (IFUNX), Deutsche Unconstrained Income Fund (KSTAX),
MainStay Unconstrained Bond Fund (MASAX) and Dreyfus Opportunistic Fixed Income Fund (DSTAX)-- led to a higher seven - year annualized return when used in a 60/40 portfolio.
Though unconstrained bond funds do show periods of low, or at times negative, correlation to the U.S. Aggregate Bond Index, they also tend to demonstrate persistently high correlation of above 0.50 to the Global Aggregate Bond Index, though only until 2014.
On average,
unconstrained bond funds delivered lower return and lower return per unit of volatility than the U.S. Aggregate Bond Index and higher return than the Global Aggregate Bond Index.
Most
unconstrained bond funds claim to offer the following potential benefits: Low correlation to core fixed income; Attractive risk - adjusted returns; and Actively managed downside risk mitigation.
Even though the first fund started in 1969, it wasn't until after the global financial crisis of 2007 - 2008 that
unconstrained bond funds started gaining traction among investors.
It so happened that Bill Gross, the portfolio manager of the Janus
Global Unconstrained Bond Fund, made that 2.6 % call in a Bloomberg interview on Friday and then in his monthly investment letter on Tuesday.
In this case, that promise is the rise of
the unconstrained bond fund.
A few years back, people started investing in what were known as «
unconstrained bond funds.»
As the name implies,
an unconstrained bond fund isn't restricted to a sector or strategy or even a country.
In general,
the unconstrained bond funds haven't been doing all that great.
Unconstrained bond funds have been known to move very quickly in and out of certain credits, even holding over 50 % cash at times.
There probably aren't any systemic consequences to the proliferation of
unconstrained bond funds, except a continuation of the credit bubble and maybe a lot of unhappy investors.
Unconstrained bond funds can invest in corporate credit, sovereign credit, currencies, high yield, emerging markets, any and all derivatives, and of course, Treasuries.
In
an unconstrained bond fund, the manager can hedge interest rate risk with futures, options, or swaps, or even short Treasury bonds or notes, and make up the loss in yield by overweighting credit.
Bill Gross, who used to run the PIMCO Total Return Fund but is now managing the Janus
Unconstrained Bond Fund, is encountering headwinds with his new product.
I was on SiriusXM radio for an interview with Jeremy Schwartz of WisdomTree last week and the other guest on the show was
an unconstrained bond fund manager from Western Asset Management.
This is because, as I write in my new Market Perspectives piece, «Removing the Constraints: Understanding the Risks and Opportunities of
Unconstrained Bond Funds,» unconstrained funds offer the potential to mitigate some of the challenges enumerated above.
To be sure,
unconstrained bond funds are no panacea.
Still, in an environment characterized by low nominal yields, often negative real yields and elongated duration,
unconstrained bond funds are an alternative solution worth considering.
A portfolio containing
an unconstrained bond fund will likely have modestly higher risk.
At Janus, Gross will manage the recently launched Global
Unconstrained Bond fund and related strategies.
This is because, as I write in my new Market Perspectives piece, «Removing the Constraints: Understanding the Risks and Opportunities of
Unconstrained Bond Funds,» unconstrained funds offer the potential to mitigate some of the challenges enumerated above.
Still, in an environment characterized by low nominal yields, often negative real yields and elongated duration,
unconstrained bond funds are an alternative solution worth considering.
A portfolio containing
an unconstrained bond fund will likely have modestly higher risk.
Two of the funds that were launched in May were
unconstrained bond funds, one of the more popular categories for asset inflows in 2014.
To be sure,
unconstrained bond funds are no panacea.