Metropolitan West Unconstrained: A Bond Fund with a Lot of Room to Roam

Untied, unchained, unconstrained. No, this isn't a promo for "Bond Funds Gone Wild." It's an introduction to Metropolitan West Unconstrained Bond (MWCRX), one of the newest Kiplinger 25 funds.

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As its name suggests, the fund is not tied to any benchmark. Its managers, Stephen Kane, Laird Landmann and Tad Rivelle, have the leeway to concentrate on what they think are the best bonds for delivering superior returns to their shareholders. That's why Kane likes to call Unconstrained Bond a "best ideas" fund: "We can concentrate on our best ideas without being concerned about owning too much or too little relative to the index."

Though Kane, Landmann and Rivelle make the big-picture calls, they don't actually pick securities for the fund. Those decisions come from the firm's deep bench of analysts and portfolio managers — almost 70 people in all. "This is not us delegating to junior people," says Kane. "It's a process and approach to fixed income that relies heavily on expertise and resources at the sector level." Met West has about 40 analysts on its mortgage team. The U.S. corporate bond group numbers 13, and 15 people cover emerging-markets debt. "This is a fund that will rely on our core strength: bottom-up credit research," Kane says.

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Just don't mistake maximum flexibility for maximum risk. Actually, the fund does some have limits. At least 80% of the fund has to be invested in income-producing securities, such as bonds. But up to 5% of the fund's assets can sit in common stock, and up to 10% can be in preferred stocks (hybrid investments that behave like bonds and often yield more than a company's stock or its bonds). And even if the managers decide that emerging-markets debt is the single best idea at any given time, they may not devote more than half of the fund's assets to that sector. The same goes for high-yield bonds.

Lately, Kane and colleagues have built a portfolio designed to protect against rising interest rates. For starters, they have 26% of assets in mortgage securities that aren't guaranteed by U.S. government agencies (the nonagency mortgages have higher yields than government-backed mortgage securities, such as Ginnie Maes) and 10% in emerging-markets corporate bonds issued in local currencies. In addition, the managers have sold short Treasury futures, a position that will gain in value if Treasury yields rise (bond prices move in the opposite direction of interest rates). By doing so, they've shortened the fund's average duration to a super-low 1.2 years. That suggests that Unconstrained Bond would lose a mere 1.2% in value if interest rates rose one percentage point. The fund yields 2.9%.

Kane, Landmann and Rivelle started their careers at Pimco in the 1990s. After a brief interlude at Hotchkis & Wiley to launch a fixed-income division, they founded Met West in 1996. TCW, another California-based money-management company, bought MetWest in 2010. TCW and Met West sell funds under their own labels, but all 14 of the bond portfolios are run by the same group of managers.

That's one reason we're not worried about the relative youthfulness of Unconstrained Bond, which debuted in September 2011. Many of the TCW and Met West bond funds have stellar records. Metropolitan West Total Return Bond (MWTRX), for example, boasts an annualized 8.7% return over the past five years through April 2; that bests 94% of all intermediate-term taxable bond funds. As for Unconstrained Bond's record, so far, so good. Since its launch, it has returned a cumulative 27.1%. That beat its average peer — what Morningstar calls nontraditional, or go-anywhere, bond funds — by 18.1 percentage points.