Alternative fixed income products are in high demand among financial advisors looking to improve clients' risk-adjusted returns and protect portfolios from interest rate risk, according to a new Cerulli Associates report. In fact, non-traditional bond mutual funds drew $46.5 billion and $15.8 billion in 2013 and 2014, respectively, Cerulli says. But if you take out the impact of PIMCO’s unconstrained bond funds, net flows were nearly $32 billion last year.
Some popular non-traditional bond strategies include long/short credit, unconstrained or “go-anwhere” products, and multi-sector bond strategies. According to Cerulli, 31 new nontraditional bond products and five new long/short credit products hit the market in 2014.
One reason these products are becoming more popular among advisors is their ability to achieve diversification in a rising-rate environment. Nontraditional fixed income strategies are designed to be flexible enough to invest across fixed income sectors, geographies, and credit quality, and they aim to strategically increase or decrease credit and duration exposure.
Advisors are also looking to bond funds for income, with 90 percent of them saying income was either highly or somewhat influential in driving portfolio construction. Cerulli said that there is more demand today for income than total return, and it will likely remain that way until interest rates increase.