The recent clamour to decry unconstrained bond funds as illiquid and potentially hazardous ignores the long-term potential for this approach, JPM’s Bob Michele has said.
Michele, who is global chief investment officer for global fixed income, currency and commodities, said fears about the asset class were misguided.
‘No, as global unconstrained fixed income managers we have strong conviction in this investment style,’ he said.
‘In fact, we are recognising among investors that there is a “great realignment” underway of fixed income portfolios from more traditional, benchmark-oriented strategies to more unconstrained and flexible approaches.
‘Investors are increasingly looking to next-generation debt strategies, investing more globally and leaning to more benchmark-agnostic strategies.’
Michele said these bond fund types, which are proving popular amid the uncertain rising rates environment, have many advantages over standard bond funds.
‘There are three key challenges with traditional fixed income benchmark strategies,’ he said. ‘Duration: significant sensitivity to changes in interest rates, concentration: highest allocation to the most stressed and frequent borrowers, and constraints: limited flexibility to capture returns outside the confines of the index.’
The bond market veteran said the lack of an index for unconstrained bond funds would also prove vitally important if there are any liquidity concerns in the market.
‘A global unconstrained fixed income approach is arguably better poised to handle liquidity challenges if/when they should arise in the bond markets because they have the flexibility to invest without being limited to a benchmark,’ he said.
‘And they can seek out the most compelling opportunities and manage liquidity without the limitations that a traditional bond fund manager would encounter.’