Tuesday August 07, 2012
by Mark Salzinger, editor The No-Load Fund Investor
Unconstrained bond funds allow their managers to invest with few limits across fixed-income asset classes and invest with as much, or as little, interest-rate exposure as they like. One such fund is Metropolitan West Unconstrained Bond (MWCRX), which launched last September.
The senior members of its team are Tad Rivelle, Laird Landmann and Stephen Kane, who make up one of the world’s most distinguished fixed-income portfolio-management teams.
The team invests in whatever looks good from a risk/reward basis, with the following very lenient constraints on some traditionally risky assets.
According to Kane, the group’s favorite fixed-income asset class at current prices is non-agency mortgages. The team also likes emerging-market debt, where it currently favors the dollar-denominated variety over bonds issued in currencies of the local markets.
Within the American corporate sector, the team likes investment-grade bonds from financial services companies, particularly the big, so-called money-center banks, as well as bonds from some insurance companies and REITs.
The Treasury exposure in the Unconstrained Bond fund is essentially nil. Instead, the Metropolitan West team is using Treasury derivatives to hedge away the interest rate sensitivity of other assets in the fund, especially investment-grade corporate bonds with intermediate duration.
As a result, the duration of the fund is currently only about 1, so changes in interest rates should have a very limited impact on the fund’s performance.
So far, performance for Metropolitan West Unconstrained Bond has been excellent. In the first half of this year, for example, the fund gained 7.9%.
Given the experience and past investment success of the fund’s portfolio managers, we think investors who need income should consider the fund, which has less interest-rate risk but probably more credit risk than a typical investment-grade intermediate-term bond fund.
The current yield of about 5% is likely to rise in the near future as the managers allocate the cash position.
Over time, the yield is likely to exceed that of most bond funds not devoted to the high-yield sector. The minimum initial investment for the retail shares is $5,000, and the net expense ratio is 0.99%.
Learn more about this financial newsletter at Mark Salzinger's The No-Load Fund Investor.