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Saturday, October 4, 2014

About Using an Unconstrained Bond Fund

In my last post I wrote that:

 I do certainly hold to the view that "go anywhere" bond funds are not a good idea for investors...certainly not as a significant part of their bond allocation.

A bond allocation should be the anchor of relative stability for a portfolio and should be transparent. 

Investment-research firm Lipper estimates that 71% of the more than $70 billion in new money that has poured into taxable bond funds over the past 12 months has gone into alternative or nontraditional strategies.
That number will surely rise now that Mr. Gross is joining the Janus unconstrained fund. But a fund can pursue higher returns only by taking on greater risk....
Furthermore, such strategies tend to outperform safer bonds in a bull market—but can suddenly suffer when bonds (or stocks) collapse. Their returns are less bond-like and more like those of the stock market, so these funds are less likely to provide the diversification of conventional bond funds in the next stock-market decline, Ms. Bush says.
The ability to go anywhere, says Mr. Siegel of the CFA Institute Research Foundation, gives unconstrained managers an incentive to take unrestrained risks. “To let bond managers buy whatever they want and not be accountable is kind of crazy,” he says. “A lot of them will just take as much risk as possible.”

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