Here We Are Now! Unconstrain Us!

On Saturday I started to think about and then do a little research on unconstrained bond funds in relation to what we talk about here and what I do in client accounts. Then as a coincidence, Idea Farm included this short paper from PIMCO about unconstrained bond strategies in their weekly email.

The paper doesn't use the word unconstrained but it talks about trying to differentiate a bond portfolio with foreign exposures. PIMCO didn't focus on a specific fund so I am guessing the paper connects to the PIMCO Dynamic Bond Fund (PFIUX) which repeatedly says it is flexible without using the word unconstrained.

I think of that result as being differentiated. It held up much better in 2022 but still went down some. Per the paper, PIMCO thinks foreign exposure is the way to differentiate currently, the way to add alpha. Managing a bond mutual fund, I'm sure they are  trying to isolate outperformance versus something like AGG or a ten year Treasury which makes sense.

The primary objective here is to build a portfolio sleeve that behaves reliably in terms of offsetting equity market declines with a steadier result than plain vanilla bonds have had over the last few years. If prevailing interest rates go down a lot from here, then my approach would lag and if rates go up then my approach will outperform but I am very confident that the strategy of pulling together low volatility strategies each with their own risk factors and with very little interest rate sensitivity will continue to be much steadier than AGG or the ten year.  

I asked Grok for any five star unconstrained bond funds to see whether they do differentiate from AGG. The point is not to pick an unconstrained bond fund but to see if I can learn something new about my approach. It gave me T. Rowe Price Dynamic Credit Fund (RPELX), Carillon Reams Unconstrained Bond Fund (SUBFX) and Artisan Global Unconstrained Fund (APHPX) but the info about their being five star might be stale. Grok threw in MetWest Unconstrained Bond (e.g., MWCIX) with batch of secondary choices. There could be others.

The area  in the black circle is when people needed differentiation the most. A couple of the funds clearly avoided the worst of it in 2022 while a couple only had slight improvement. They have obviously all outperformed for the entire backtest which is nice of course but the volatility numbers are more interesting to me as well as the drawdowns. RPELX and APHPX have meaningfully lower standard deviations than AGG, MWCIX is somewhat lower and SUBFX isn't that much lower. 

APHPX is an obvious outlier, it looks nothing like the others, so what's the story there? I found this on the fact sheet;

That doesn't seem very bond like-unconstrained or otherwise. I asked Copilot if it really is an unconstrained bond fund or some sort of macro strategy. "No, Artisan Global Unconstrained is not really a bond fund. It is a global macro / absolute‑return credit strategy with hedge‑fund‑like tools, exposures, and return profile."

It focuses on foreign exchange, interest rates, various types of credit spread trades, has small equity exposure and can be long/short just about anything. I'm intrigued so a next step is to try to figure out how it compares to a few things. 

It seems pretty alt-ish, with some similar results to other alternative strategies we look at but with different risk drivers. Copilot says they are completely different "risk engines." A couple of the comparison outputs from Copilot;

The fund does take quite a bit of risk but that is not apparent in the numbers, just the strategies it runs. The way I think of the risks that the fund takes is that it has done a good job so far of balancing and mitigating those risks. 

Finominal weighs in on Portfolio 2;

The simplification suggestion is a little more interesting than what we looked at the other day but the suggested portfolio is clearly not superior. It has a similar result with much more volatility. 

Is there enough differentiation with this idea? What this has going for it is it gets a slightly better return with just 50% equity exposure versus 60% for VBAIX with much lower volatility. The drawdowns are generally shallower. 2022 is truncated due to APHPX's start date but I think my conclusion is that there is a decent amount of robustness without massive differentiation. The conclusion is about Portfolio 2, 50% in one alt like in Portfolio 1 is a nonstarter in real life.

The title of this post is a reference to the Nirvana song Smells Like Teen Spirit. 

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