In this period of low volatility, investors are finding unconstrained bond funds an increasingly attractive option.
Institutional Investor
September 17, 2013
By Robert Stowe England
Over the past year or so, bond investors have had to field a whole lot of mixed signals. The consensus view in late 2013 was that U.S. interest rates had nowhere to go but up. But now, it’s mid-September, the annual Jackson Hole confab has come and gone, and the fed funds rate is scraping zero. At its monthly meeting today, the Federal Market Open Committee announced that there is "considerable time" before interest rates can begin to normalize. Regardless of policy, the 30-year bull run on the bond market is winding down. And in the golden years of this generation of fixed-income investing, unconstrained bond funds have found their heyday.
What’s driving the interest in flexible-strategy fixed income? Since the 1980s, fixed-income markets have been under the sway of steadily falling interest rates and steadily rising leverage, says Rick Rieder, chief investment officer of fundamental fixed income and co-head of Americas fixed income at BlackRock in New York. The change in market fundamentals — particularly persistent low yields — is prompting investors to rethink the role of bonds in the performance of their overall portfolio. “It’s an interesting evolution,” he explains. “Last year you sort of saw some significant inflows into our fund and other unconstrained funds. These were largely from retail investors looking to own something that didn’t have as much interest rate risk as their other fixed-income [holdings] would.” This year, he adds, the increase in net inflows into unconstrained bond funds is coming from “a tremendous number of institutional investors — and retail as well.”
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