Unconstrained investing is not about being undisciplined, nor is it about ignoring the risk/return tradeoff. In fact, I would argue the opposite is true. By carefully choosing which risks to take and which risks to avoid, we can focus on finding what we believe is the best source of risk-adjusted return, regardless of how a benchmark is constructed.
So How Does It Actually Work?
So what does unconstrained investing look like in practice? The easiest way I can answer that is by looking at how we adjust our own unconstrained fixed income fund (BlackRock’s Strategic Income Opportunities Fund) over time.
In an environment, like the one we’re in today, where interest rate policy is evolving differently around the globe, we would seek to minimize interest rate risk. We could do this by decreasing our allocation to interest-rate-sensitive bonds in regions where rates are normalizing faster, and by increasing our interest-rate-sensitive allocation in areas where monetary policy is staying easy or getting easier. Meanwhile, if we’re in an environment where rates are rising across the board, we could lower our overall allocation to interest-rate-sensitive bonds. Or if we think economic conditions are getting better, we could up our exposure to credit-sensitive bonds.
The point is, we have the flexibility we need to make these sorts of moves without having to focus on how far we might be deviating from a specific market benchmark. Looking for more specifics? I’d invite you to check out this interactive chart, which shows exactly how we’ve tweaked the fund’s duration and asset allocation over the past several years in response to changing market conditions:
Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Fundamental Fixed Income, is Co-head of Americas Fixed Income, and is a regular contributor to The Blog. You can find more of his posts here.
Bonds and bond funds will decrease in value as interest rates rise and are subject to credit risk, which refers to the possibility that the debt issuers may not be able to make principal and interest payments or may have their debt downgraded by ratings agencies.