When volatility emerges in the bond markets, due to rising interest rates or other factors, the effects can differ from sector to sector. This is when the flexibility inherent in active, unconstrained fixed income strategies may be very important. 


The Pillars of an Unconstrained Approach


Asset Allocation

Unconstrained1 fixed income strategies may invest in sectors of the bond market that are not represented in popular benchmark indexes like the Bloomberg Barclays US Aggregate Bond Index2, which excludes approximately 65% of the investable fixed income universe.

This expanded opportunity set offers the potential for higher yields, lower duration3 and less correlation4 to U.S. Treasuries, which can serve as effective diversifiers if U.S. interest rate volatility picks up.


Sector Rotation

Sector rotation involves shifting assets from sectors that may have become overvalued into assets that may be undervalued, or to sectors with less interest rate sensitivity, with the goal of improving risk-adjusted returns.5

While this flexibility doesn’t mean that unconstrained strategies will exhibit low volatility, it may enable active managers to generate a return profile with less correlation to other strategies, which could provide a degree of stability within a broader portfolio allocation.


Macro Strategies

Global, unconstrained managers apply their knowledge of macroeconomic and credit conditions to generate estimates of fundamental fair value that are compared against current market pricing.

This analysis informs allocation and sector rotation decisions with the aim of adding value in different environments and managing volatility.


In This Series

Unconstrained Fixed Income Investing

Volatile Markets Need Perspective, Not Panic.

While volatility is inevitable in investing, it still creates investor angst – but it can also create opportunities for those willing to look beyond the temporary.

Market Volatility: Here We Go Again

Investment steps to consider with the resurgence of market volatility. 

Confront Volatility with Equity Income

Dividend-paying equities may help manage volatility in a diversified stock portfolio.

Unconstrained strategies may be a valuable complement to traditional fixed income in a broadly diversified portfolio



Unconstrained strategies may offer an expanded opportunity set

Most fixed income opportunities are outside the Index (USD billions)


Unconstrained Fixed Income Strategies

Source: Bloomberg, as of 1/31/2017. Past performance is no guarantee of future results. This chart is for illustrative purposes only and does not represent an actual investment. Unmanaged index returns do not reflect any fees, expenses or sales charges. Indexes are unmanaged and investors cannot invest directly in an index.




1 The term “unconstrained” refers to investment strategies not constrained by traditional relative performance benchmarks.

The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index that measures the performance of the investment grade universe of bonds issued in the United States. The index includes institutionally traded U.S. Treasury, government sponsored, mortgage and corporate securities.

3 Duration measures the sensitivity of price (the value of principal) of a fixed-income investment to a change in interest rates. The higher the duration number, the more sensitive a fixed-income investment will be to interest rate changes.

4 Correlation is a statistical measure of the relationship between two sets of data. When asset prices move together, they are described as positively correlated; when they move opposite to each other, the correlation is described as negative or inverse. If price movements have no relationship to each other, they are described as uncorrelated.

5 A risk-adjusted return is a measure of performance relative to its level of risk exposure over a given period of time.

IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.

Diversification does not guarantee a profit or protect against a loss.

Active management does not ensure gains or protect against market declines.