Absolute-return bond funds might still hold promise

By Dian Vujovich

One of the panelist’s in the Palm Beach Business Group’s Wealth Forum breakfast meeting in early March talked about absolute-return bond funds. The “absolute” part has nothing to do with vodka,  a guaranteed return or yield for fund shareholders. It’s an investment style that gives a bond fund manager the ability to invest into  any type or rating of  bond found anywhere within the fixed-income universe. The returns are  allows referred to as  ”cash +”  meaning whatever cash is yielding plus an x amount.

In the March 2013 issue of the “No-Load Fund Analyst” a superb monthly investment commentary newsletter from Litman Gregory, was a look at PIMCO’s Unconstrained Bond fund.

The fund has had a good run in the recent low interest rate environment. From July 2008 though January 2013, the newsletter said that the Unconstrained Bond fund had gained 6.7 percent annually and hence beat a couple of benchmarks: The Vanguard Total Bond Market Index, 5.9 percent; and the 0.3 percent for T-bills.

It didn’t, however, outshine the performance of the  PIMCO Total Return fund’s 8.6 percent.

Even so, the folks at Litman Gregory continue to be fans of PIMCOs absolute-return fund. They write: ”As we have written previously, we like Unconsreained Bond’s duration flexibility given the significant risk of rising interest rates over the next three to five-plus years, and we believe it will be a net positive over the longer run.”

Also noted was the fact that  even though this fund has yet to wrestle  with and then perform in with a rising interest rate environment, they continue to recommend it along with the Harbor Unconstrained Bond fund because of their  respective managements and proven track records.

Billions have flowed into bond funds over the past few years and continue to do so this year given that equity funds have been on a tear and fixed-income is still rewarding its shareholders.

But there’s more to making money than merely following the crowd. Herd mentality can make a cluster-muck out of any good idea.

Stacey Solomon, fixed-income portfolio manager at JP Morgan Private Bank talked about how absolute-return funds can be a positive addition into one’s portfolio. But. finding the right portfolio manager is key.

“It’s an interesting sector, ” she said at the PBBG forum. “Five years ago there were about 40 managers that called themselves absolute-return managers. Today, there are 140. So making sure you do the due diligence to pick the right managers and understand the types of investments they re investing in is incredibly important”