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BlackRock, Goldman unconstrained bond funds double in assets

By Jessica Toonkel

Sept 17 (Reuters) - Goldman Sachs and BlackRock Inc have seen their unconstrained bond funds double in size over the past 12 months as investors continue to search for yield in this low interest rate environment.

Unlike traditional bond funds, where managers have to stick to a mandate, unconstrained bond fund managers can invest across the fixed income market. They are often called "go anywhere" bond funds.

Historically investors have been wary of such funds because they were not sure where they fit in carefully designed portfolios, said Barry Fennell, an analyst with Lipper, a division of Thomson Reuters. However, with interest rates so low, investors have increasingly been willing to "push the envelope," he said.

It is no longer just retail investors moving into these funds to avoid interest rate risk, said Rick Rieder, BlackRock's chief investment officer of fundamental fixed income.

"We are seeing pension funds and state funds grow significantly in this space to take advantage of this flexibility," Rieder told Reuters in an interview at BlackRock's offices on Wednesday.

Over the past 12 months, investors have poured more than $17 billion into Goldman's Strategic Income Fund, the biggest U.S. unconstrained bond fund at $25.8 billion in assets, according to Morningstar. The fund has returned 3 percent over the past year. The Barclays Aggregate Bond Index has returned 5.66 percent for the past year, according to Lipper.

BlackRock's Strategic Income Opportunities Fund, the second biggest fund of this kind at more than $20 billion, has seen $11 billion in inflows over the past 12 months. The fund has returned over 6 percent over the last year.

These funds tend to be more expensive than traditional bond funds. According to Lipper the average fees for unconstrained bond funds is 1.29 percent, compared to 0.83 percent for core bond funds.

Both BlackRock and Goldman may have benefited from a general outflow at Pacific Investment Management Co (PIMCO), the Newport Beach, California, firm that has seen fallout from a leadership shakeup and mediocre returns.

Over the past 12 months, investors have pulled a net $8 billion from the $21.6 billion Pimco Unconstrained Bond Fund , one of the firm's most important offerings. The fund has returned 2.5 percent over the past year.

Even PIMCO co-founder and chief investment officer Bill Gross, who took over management of the portfolio in December, has not been able to stem the cash outflows.

Rieder declined to comment specifically on Pimco but did say he believed that his fund is getting attention because it has provided returns and low volatility compared to competitors.

Pimco and Goldman did not immediately return a request for comment.

Despite the fund's popularity, Rieder does not anticipate capacity issues soon. "There are 15,000 securities around the world that we can look at," he said. "That's the beauty of being unconstrained."

(Reporting By Jessica Toonkel; Editing by Chris Reese; Additional reporting by Jennifer Ablan in New York; Editing by Linda Stern and Chris Reese)

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