Unheralded Times Call for Unconventional Bond Funds?

Yes, such things called unconventional bond funds do exist. They are a new instrument that allows the fund manager to invest in any type of fixed income security. This free reign allows fund managers to purchase US or foreign, municipal and/or junk bonds. Some managers may choose a buffet of all of the above and more. Managers are not required to invest in any category or any index and may follow any line of the yield curve.

Pacific Investment Management Company LLC (PIMCO) launched the first unconvential bond fund in June of 2008 with the PIMCO Unconstrained Bond Fund (PUBAX). It attracted $14.5 billion in initial investment. Since its inception there have been several share classes available, class R (PUBRX), class C (PUBCX), class P (PUCPX), class D (PUBDX) and an institutional fund (PFIUX). PIMCO’s Unconstrained Bond D (PUBDX) has had a year to date yield of 3.87%, proving this investment experiment may just have legs. Adding a slight bit of structure, PIMCO also offers Unconstrained Tax Managed Bond Funds in a variety of classes. These funds seek to maximize long term after tax returns. Currently the classes offered are: Unconstrained Tax Managed Bond Fund class A (ATMAX), class C (ATMCX), class D (ATMDX), class P (PUTPX) and an institutional fund (PUTIX).

Following PIMCO’s lead, J.P. Morgan launched the Strategic Opportunity Fund (JSOAX) and Highbridge Capital Management and Fidelity Investments with the Harbor Unconstrained Bond Fund (HRUBX). One must note that Highbridge is advised by PIMCO. AllianceBernstein, and Loomis Sayles have also created these types of funds.

While these bond fund look promising they have little track record. Indeed, their structure is somewhat like a hedge fund in which the manager is allowed free reign to purchase any type of security they want. Although confined to bonds, it will be some time before we can determine whether the returns are something to get excited about.