Salient to Investors:

Money managers are betting that bond funds that are unconstrained by duration, strategy or region will attract money as interest rates rise and investors shift assets from traditional fixed-income offerings, which are limited in how they can react to falling bond markets. 

Unconstrained funds generally can increase in value when interest rates rise, and some can use hedge-fund techniques such as shorting.

Laurence D. Fink at BlackRock said they are seeing a rotation not from fixed income into equities, but within fixed income to flexible bond strategies.

Eric Jacobson at Morningstar said that by limiting duration risk – potential losses from an increase in interest rates – unconstrained bond funds often have to increase credit risk, and it is difficult for managers to pinpoint where rates are going and set the duration for these funds, which may range from minus 3 years to 8 years. Jacobson said very few managers are able to anticipate interest rate moves consistently, including Bill Gross, who has a history of being able to do it, in this last period.

Rick Rieder at BlackRock said being tethered to a duration and interest rate sensitivity of so long is dangerous in an environment where interest rates almost certainly have to rise from the levels they have been at.

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