Unconstrained bond is a fixed-income investment strategy that can be used to:
Unconstrained bond investing includes a broad range of non-traditional fixed-income investment strategies. The common feature is that unconstrained bond funds aren’t limited to the securities in any one benchmark or sector. Instead, unconstrained bond managers are free to pursue whatever objective they want — such as total return or high yields — and invest anywhere in the global fixed-income markets. They assess market conditions to invest in any type of fixed-income security, anywhere in the world, with any credit quality and duration. The approach requires pairing top-down analysis of global economic trends, market factors and interest rates with bottom-up analysis of individual securities.
Higher total return: Investing a portion of a fixed-income portfolio in an unconstrained bond strategy can enhance its growth potential. The strategy typically includes investments in higher-yielding assets, which may expose investors to increased credit risk and higher volatility compared to a traditional bond portfolio. However, that volatility tends to be lower than most equity strategies.
Independence from benchmarks: Conventional bond indices are weighted by issuance, meaning the issuers with the largest debts hold the top positions in the benchmarks. As a result, funds that replicate the indices provide outsized exposure to the most indebted institutions. Unconstrained bond managers are free to invest based on the merits of each individual holding, potentially leading to greater risk-adjusted returns. Yet the freedom to invest anywhere in the world can expose unconstrained bond strategies to currency volatility, political instability and other risks related to international holdings.
Reduced interest rate risk: Managers have the ability to choose instruments with relatively short durations when threatened with rising interest rates, which may help protect the value of an overall fixed-income portfolio in rising-rate scenarios.