By guest contributor Damien McIntyre, CEO, Grant Samuel Funds Management
Like many managed funds, fixed income funds have customarily been managed against a relevant benchmark, such as the UBS Composite Bond Index or the Bloomberg Barclays Global Aggregate Index. However, in an environment with low yields, high volatility and lots of uncertainty, traditional benchmark-based approaches to fixed income investment, can be less effective.
A traditional bond fund is managed against an applicable bond index, which is generally most heavily weighted to the biggest debtors. Global fixed income indices measure two exposures: country exposure, generally weighted towards those countries that have issued the most debt, and security exposure, also weighted toward those that have issued the most debt. If the index has a longer duration profile, the fund generally reflects that duration too.
While many fixed income funds and most exchange traded funds maintain this traditional benchmark-driven approach, a new class of fixed income funds has emerged over the past few years; unconstrained funds.
What is an unconstrained investment strategy?
Often positioned as a ‘best ideas’ portfolio, an unconstrained fixed income strategy is one that is not beholden to a benchmark. It is designed to be better able to navigate the complexities of the evolving fixed income landscape and changing economic environment than traditional benchmark-aware bond funds. Such strategies are typically managed to outperform a cash or equivalent benchmark, rather than a bond index; this removes constraints around duration, geographic and sector positioning.