While the adoption of unconstrained bond strategy mutual funds has increased markedly in recent years, some critics remain uncomfortable giving “free rein” to their portfolio managers. With transparency limited and often provided only on a lagged basis, investors are being forced to buy a manager as opposed to a portfolio of assets.
Yet, in today’s uncertain market environment, investors may need to permit a more flexible approach to fixed income portfolio management. However, discipline and transparency need not be inconsistent with an unconstrained bond strategy. In fact, these benefits of the exchange-traded fund (ETF) structure form the foundation of the WisdomTree Western Asset Unconstrained Bond Fund (UBND).
As we explained earlier, unconstrained bond strategies exist along a continuum of volatility that portfolio managers are comfortable with in order to generate total returns. Some are very aggressive and target equity-like volatility; some may also employ a fair degree of financial leverage.
Others seek to generate a risk profile that is more consistent with a core fixed income portfolio. For these funds, the goal is simply to give the portfolio managers the flexibility to take advantage of value in the global fixed income universe, while enabling them to mitigate exposure to less desirable characteristics.
Traditional Bond Volatility with Value-Seeking Mandate
The WisdomTree Western Asset Unconstrained Bond ETF targets 3% to 5% volatility—very representative of traditional bond indexes—while trying to find the most value in the fixed income universe. The Fund incorporates the best macroeconomic and credit selection ideas of Western Asset Management Company’s investment process into a single portfolio.
UBND: Target Allocation Ranges by Fixed Income Sector
The Fund intends to follow these guardrails1
• No financial leverage
• At least 50% invested in investment-grade fixed income
• No more than 25% in non-U.S. currency exposure