The typical bond fund represents a quintessential static business model – always exposed to the same risks, always at the mercy of competitive and market forces, and challenged to effectively react to the rapidly changing financial world. Traditionally a staple of any investment portfolio, they have been a source of reasonably steady – if unspectacular – returns. Fast forward to the new reality: interest rates are at extremely low levels, so even in the best case scenario, future returns for these funds are likely to be lackluster at best. Moreover, the prospect of significant inflationary pressures is real, presenting huge dangers to fixed income holdings that are not dynamically managed.
The reason for the bleak prospects of traditionally managed bond funds in the foreseeable future is their structural exposures to interest rates, which are likely to greatly offset, if not overwhelm, any potential gains should inflation intensify and interest rates rise. Now there are new kinds of bond funds in the works designed to get around this problem.
It’s called the “Go-Anywhere” funds, and the name says it all.
Go-Anywhere funds are an attempt to introduce dynamism into the investment process of fixed income funds, hopefully making their returns less cyclical, market-dependant, and susceptible to inflation risks that plague conventional bond funds. They accomplish this by giving managers wide latitude to invest in bonds from a variety of issuers with varying maturities and credit ratings, including emerging-market bonds and non-U.S. currencies. But all this opportunity comes at a greater risk – and much higher reliance on the market-timing skill of portfolio managers.
So far those financial institutions that have created go-anywhere funds have been generally cautious. Instead of leaping into a range of potentially volatile investments they have kept investments in higher quality instruments and results have been modest at best.
The dynamism of the go-anywhere funds is part of a broader trend toward business model recalibration of financial institutions that is designed to respond to the challenges of today’s global economy and volatile and interconnected financial markets. The intention is the right one – and the available broad universe of asset classes and risks should give skillful portfolio managers an opportunity to create long-term value for their investors. However, it is important to note that this mode of operation is a significant departure from the traditional expertise of most fixed income managers, so results are likely to vary significantly. As always, let the buyer beware.