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Thursday, May 21, 2015

The Next Bond King Worries About Removing Shackles

News summary by MFWire's editors

The star PM who may take Gross' old "bond king" mantle is worried about taking shackles off of bond fund PMs.

In an interview with Trevor Hunnicutt of InvestmentNews, DoubleLine [profile] CEO Jeffrey Gundlach speaks out against unconstrained bond mutual funds. And Gundlach even PMs such a fund, and a successful but young one at that. Fundsters in fixed income product development may want to take heed.

The niche has been hot, prompting Kiplinger and Forbes to worry. The advisor-focused trade publication cites Morningstar data showing that $78.7 billion net flowed into nontraditional bond funds (Morningstar's category that includes unconstrained bond funds) in 2013 and 2014. In the last year, 29 new nontraditional bond funds have been launched. (Unconstrained funds are less in favor this year: $2.4 billion net flowed out of them in the first four months of 2015.)

"What's going to happen is that unconstrained investors are going to find themselves disappointed," Gundlach told InvestmentNews. "I think they will be surprised that they are actually doing worse in many of these funds -- in 2015, as interest rates are rising -- they're doing worse than they would in an index fund."

Gundlach describes many of the unconstrained bond fund strategies as exchanging interest rate risk (i.e. being hit by, say, rising interest rates thanks to a hypothetical bump up from the Fed) for being "long credit risk and short safety."

Rick Rieder, chief investment officer for fundamental fixed income at BlackRock [profile] and PM of a giant, $30.7-billion, BlackRock unconstrained bond fund, echoes Gundlach's credit risk concerns about many such funds. Yet he predicts that the category will "keep growing and growing because there's a limited supply of fixed income." 

Edited by: Neil Anderson, Managing Editor

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