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By Christine Benz and Eric Jacobson | 05-29-2014 03:00 PM

Sizing Up the 3 Biggest Nontraditional Bond Funds

The big names in this category have more to prove before we can fully recommend them, says Morningstar's Eric Jacobson.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com.

The nontraditional bond category has been growing by leaps and bounds, but a handful of funds have been capturing most of the assets. Joining me to discuss the three largest funds in the category is Eric Jacobson, he's co-head of fixed-income manager research for Morningstar.

Eric, thank you so much for being here.

Eric Jacobson: Great to talk to you Christine.

Benz: Before we get into these specific funds and your opinion of them, I would like to talk about the nontraditional bond category. What are the general characteristics of the funds that land in this group?

Jacobson: The biggest component of the group is a bunch of funds that generally think of themselves as being unconstrained, and that typically means they have a really broad range available to them in terms of, not only the sectors they can invest in, but the amount they can hold in those sectors, and so on. Think, for example, of very large allocations to high yield or emerging markets. They can even generally do some currency.

And the other axis there is interest-rate sensitivity, duration. They have the ability in most cases to actually go negative a little bit in terms of duration and very often can go extremely long as well. So, in theory, at some time in the future, perhaps they could be building up a lot of rate sensitivity.

Right now they all tend to cluster, for the most part, around being relatively short in the one- to three-year range in terms of duration, with exceptions in both directions, and some of them being very tactical.

Benz: I wanted to get your thoughts on the three largest funds in the group. Let's start with the biggest--that's JPMorgan Strategic Income Opportunities. Let's talk about the general complexion of that fund and also Morningstar's view on that holding.

Jacobson: This fund is run by a fellow named Bill Eigen. He's very well-known in the industry, and he's a really a great speaker, by the way.

He has the entire tableau of investments available to him, but his history has mostly been focused on high yield. A lot of that has been relatively short-maturity high yield. I don't want to leave out the fact that he's doing a lot of other things in the portfolio, which he is very keen to talk about, including things that typically go on in hedge funds, like relative-value trades and things like that. But the dominant effect, for the most part, has come from that high-yield piece.

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