Research Paper : Are Unconstrained Bond Funds a Substitute for Core Bond?

Proponents of unconstrained bond funds suggest that their flexibility in decision making and broader universe (1) helps insulate investors from growing interest rate risk; (2) allows allocation decisions to be made based on the relative attractiveness of assets rather than benchmark mandates; and (3) creates the potential for additional uncorrelated sources of alpha. In practice, it appears that (1) core bond funds continue to play an important role in portfolios that rising interest rates would not negate, including acting as a diversifier of equity risk, stabilizing a portfolio’s value in falling equity markets; and (2) that while in principle unconstrained bond funds are capable of playing the role that core bonds serve, in practice it appears the universe of managers employing unconstrained strategies have substituted credit risk for interest rate risk.

Read full paper here

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