New fund takes unconstrained approach to returns

Neuberger Berman product joins ranks of similar funds from Goldman, JPMorgan and Pimco

Feb 27, 2014 @ 9:41 am

By Carl O'Donnell

Neuberger Berman Group has introduced a new fixed-income mutual fund that promises to explore every nook of the bond market in pursuit of positive absolute returns.

Rather than limit itself to a particular benchmark, the actively managed Neuberger Berman Unconstrained Bond Fund (NUBAX) will pursue opportunities in all fixed-income sectors — from U.S. Treasuries to emerging markets and high yield — and adopt both long and short positions.

"Our fund utilizes a broad set of tools to take advantage of market mispricing," said Tom Marthaler, managing director and co-manager of the fund. "This flexibility provides us with the ability to express investment views and to have positive, negative or zero duration."

The mutual fund joins a popular and growing market of unconstrained bond funds, including the Goldman Sachs Strategic Income Fund (GSZAX), JPMorgan Strategic Income Opportunities (JSOSX) and the Pimco Unconstrained Bond Fund (PFIUX). Both the Goldman Sachs fund and the JPMorgan fund saw inflows of $2.3 billion in 2013. Through Jan. 31, GSZAX had inflows of $324 million and JSOSX had inflows of $173 million, according to Lipper Corp.

(See also: Goldman attracts record deposits to bond fund)

"These funds have attracted a lot of flows in the past year and a half as people became more concerned about rising interest rates," said Barry Fennell, a senior research analyst at Thomson Reuters Corp. "The 30-year bond rally is also coming to an end, suggesting low rates for some time."

The main appeal of the fund is the promise of a positive absolute return even during poor market conditions. Unlike most other actively managed funds, unconstrained funds can allocate assets in any way that maximizes returns, rather than sticking close to the allocations in a particular index, Mr. Fennell said.

"The unconstrained funds are better for taking advantage of short-term, tactical opportunities," he said.

(Plus: Guess who's running Pimco's unconstrained fund)

The downside of this strategy is that the asset allocations can stray from what investors may consider ideal. For example, many constrained strategic income funds are required to stay within close range of a specific asset allocation. A typical mix might be 30% in U.S. Treasuries, 30% in high yield, 15% in emerging markets and 15% in other developed countries, Mr. Fennell said. Unconstrained funds, on the other hand, can look quite different.

"The unconstrained funds are very attractive to financial advisers," Mr. Fennell said. "However, if they tried to substitute such a fund for a core bond fund, they might find that their portfolio is overweight or underweight in certain assets, or takes on too much credit risk."

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