Key Takeaways
- The diversity and complexity of the bond market favors active managers over index tracking.
- The risk profile of a global flexible bond fund can change rapidly.
- The best funds in the category have an agile, wide-ranging investment process.
Given the inefficiencies, anomalies and variety in the bond market, there are large benefits to undertaking bottom-up research, both to uncover mispriced opportunities and to avoid defaults and downgrades. The challenges in price consistency and discovery, which make indexing difficult, are a blessing in disguise for active portfolio managers.
Flexible bond funds have the widest tool set of the fixed income coverage. Many are absolute-return oriented instead of being managed in relation to a traditional market index, and many present themselves as “all-weather” strategies that are expected to do well independently of the market cycle. Their flexibility is an enticing feature, as it allows the managers to express their views without constraints and to freely allocate to the bond market sectors that offer the best value over short, medium, and longer time frames.
At the same time, their wide leeway can make such funds more difficult to use in a broader portfolio: By definition, the risk profile of a global flexible bond fund can change rapidly. Therefore, while the category undoubtedly contains several gems, there are also many funds that have failed to use their flexibility for investors’ benefit.
How Should Investors Choose a Global Flexible Bond Fund?
Before investing in a global flexible bond fund, investors should consider the following key questions:
- Do the investment teams have relevant expertise in all of the different bond market subsectors they purport to scour for opportunities?
- Is there evidence of these teams getting tactical market calls consistently right?
- Have these teams experienced a full bond market cycle, including down markets, and how did they react when their strategy was out of favor?
- Global flexible bond funds tend to use derivatives-such as credit default swaps, futures contracts, and interest-rate swaps-more heavily than other, more traditional fixed income categories. Does the investment team have appropriate experience using derivatives, and are its risk management systems robust enough to monitor and stress-test these derivative exposures?
- What is a fair price to pay for potential alpha generation? The average fund in the EAA Global Flexible Bond category charges 1.06% in annual fees, or 1.28% for distribution share classes. That’s higher than its typical counterpart in the EAA Global Diversified Bond category, which charges 0.67%. and significantly more than a low-cost passive option tracking the global bond market.
Top Flexible Bond Picks from Morningstar’s Manager Research Team
Morningstar’s analysts have combed the flexible bond coverage to narrow it down to a select best-in-class group. We believe these offer the strongest potential to deliver superior results over time, earning High ratings for both People and Process pillars.
BGF Fixed Income Global Opportunities
Morningstar Medalist Rating: Gold
Why it’s exceptional: An exhaustive research process, effective risk management, and a deep bench of experts set this strategy apart.
Veteran manager Rick Rieder has led the strategy since 2010, supported by a long-tenured team. The team leverages BlackRock’s 350-plus fixed income professionals and risk specialists, combining macro leadership with deep sector specific expertise. Its unconstrained approach taps a broad investable coverage—including traditional bonds, high-yield corporates, bank loans, emerging market debt, and derivatives—guided by rigorous macro and sector research. Despite its flexibility—including a wide duration band from two-to-seven years—the team avoids concentrated bets and prioritizes repeatable, small gains.
Dodge & Cox Worldwide Global Bond
Morningstar Medalist Rating: Gold
Why it’s exceptional: A patient and disciplined approach, strong and experienced leadership, and attractive fees make this a compelling offering in the global-bond space.
This strategy’s seven-member global fixed-income committee averages 20 years’ experience, most spent at Dodge & Cox, with high personal investment in the strategy. While the firm has had some retirements in its senior ranks, leadership transitions have been orderly and Dodge & Cox invests heavily in talent development to prepare for the next generations of portfolio managers. In this strategy, the team builds a concentrated portfolio of 50-80 issuers, typically with a corporate bias and lower turnover than peers. Risk is managed via diversified allocations across corporates, governments, and securitized debt, with non-US currency exposure generally capped at 25%. The strategy has built an excellent long-term record while keeping risks under control.
Pimco GIS Diversified Income
Morningstar Medalist Rating: Silver
Why it’s exceptional: Topnotch leaders, extensive resources, and a unique but effective approach make it a commendable option for investors.
This strategy’s experienced leadership includes Sonali Pier, Alfred Murata, and Dan Ivascyn, collaborating for over six years, with two London-based veterans, Charles Watford and Regina Borromeo, strengthening the team. The strategy’s investable universe usually produces a credit-focused portfolio spread across developed-market investment-grade and high yield corporates, along with emerging-market corporate and sovereign debt. Duration is managed within three-to-eight years—typically four-to-six—longer than most peers; up to 30% can be allocated to out-of-benchmark assets like mortgage-backed securities, loans, currencies, emerging local debt. For investors comfortable with its unique qualities, it remains a compelling choice for global credit exposure.
This article was taken from the Morningstar Best of Breed report.
