Bond Managers Who Can Go Anywhere May End Up in the Wrong Place

Leon LaBreque, a financial adviser from Troy, Mich., was wowed back in 2011 when he heard the pitch for the Goldman Sachs Strategic Income Fund. It was a new kind of fixed-income portfolio whose managers had the freedom to buy just about anything. Along with bonds, they might bet on emerging-markets currencies or lend U.S. dollars to Japanese investors—and they could draw on the global expertise of Goldman Sachs. “The story was so compelling, and the people were so smart,” LaBreque says. “I thought, how could it not work?”

He wasn’t the only person looking for this kind of fund, and Goldman Sachs wouldn’t be the only company to offer one. By the early 2010s, bonds had been in a decades-long bull market, and the Federal Reserve’s benchmark interest rate was near zero, with nowhere to go but up. Because bond prices fall as rates rise, a nasty turn in the U.S. bond market seemed inevitable to many. That made the idea of a fund with the flexibility to make other kinds of bets more appealing. “This portfolio has a shot at making money in any rate environment,” said Mike Swell, co-manager of the Goldman Sachs fund, in a December 2013 interview with Bloomberg. Over the next several years, many other mutual fund companies introduced “unconstrained” bond portfolios with a similar pitch.