What makes the Aleph Blog such an incredible resource is David’s ability to simultaneously explain a concept for investors while relating it to real-world episodes from his money management career.
I blogged about the new trend of Unconstrained Bond Funds at the Wall Street Journal yesterday, merely focusing on the inflows to these new vehicles. Merkel’s post today is about what these funds do and what they aim to accomplish in actual practice…
The unconstrained strategy can be thought of in two ways: always trying to earn a positive return with high probability (T-bills are the benchmark, if any), or being willing to accept equity-like volatility while the bond manager sources obscure bonds, or takes large interest rate or credit risks.
I prefer the first idea, because it is more conservative, and fixed income management should aim for safety on average. As I have said before, I only believe in taking risks that are well-compensated…I like the concept of the unconstrained strategy; indeed, it is what I am doing for clients, but it is of the first variety, try to make money for clients in all markets, and not just be a wild man in search of yield or total return.
Before anyone even considers diversifying their fixed income into an unconstrained bond fund, they should understand the difference between managing toward a bond benchmark and managing for absolute returns. Merkel’s post lays it out perfectly.