Does It Make Sense to Hold Strategic Bond Funds in Your Portfolio? – Morningstar
× Over the past five years, flexible bond portfolios have generally exchanged interest-rate risk for some other type of risk, whether high-yield corporate, emerging-markets debt, structured credit, or currency risk.
× High correlations to credit-sensitive sectors and equity markets reduce the appeal of funds in this sector. They belie the difficulty in successfully capitalizing on the freedom of unconstrained strategies to source alpha and simultaneously avoid market sell-offs.
× Flexible bond funds face a number of challenges, not least of which is the higher expense hurdles they continue to face in a low-yielding global bond market.
× Flexible bond funds are generally a poor substitute for conventional bond funds—which otherwise consistently carry marketlike levels of duration—as a ballast to counter equity-market turbulence. Sensitivity to the government-bond market embedded in conventional bond funds can often provide the single most-effective portfolio ballast when market shocks lead to extreme correlations among other bond and equity market sectors.
× Flexible bond strategies don’t all fit the same mould. They also require a high degree of confidence in a manager’s skill. A deeper dive is necessary to understand the different types of risks each fund takes in pursuing inherently challenging return objectives.