Unconstrained bond funds disappoint

Unconstrained bond funds have yet to make a convincing case to investors. “It's got some potential, but [they've] largely disappointed people,” said Russ Kinnel, Morningstar Inc.'s director of mutual fund research. “Early on people inferred a free lunch — that somehow these were funds with greater flexibility that would be short duration when it was the right time.” Instead, those funds, whose managers are benchmark-agnostic, have largely lagged the Barclays Aggregate Bond Index, a widely watched measure, according to Mr. Kinnel. “You're paying more in fees for less in returns,” he said. “We're going to see some of the weaker players knocked out.” Mr. Kinnel spoke Thursday on an InvestmentNews webcast, Money in motion: The new world of fixed income. After taking in $89 billion over 26 consecutive months of inflows, funds in Morningstar's nontraditional bond category have seen redemptions since September. This year, that category — which captures a number of the unconstrained strategies — has returned an average 1.7%, as of Thursday, compared with the 5.6% for the Barclays index. That category captures a number of the unconstrained bond strategies. Many of the strategies promise to anticipate a widely expected increase in interest rates and to protect investors' fixed-income holdings from losing value. “The bond market's been picked clean, so I think there are risks everywhere,” said Mr. Kinnel.