Bond Funds With Flexibility

With the broad bond market down 2% so far this year, it's easy to see the appeal of a fund that can invest in the corners of the market that are working. That's where so-called unconstrained bond funds and their cousins, multisector bond funds, can help.

As the name implies, unconstrained funds (classified as "nontraditional" funds by Morningstar) can invest in a variety of fixed-income assets, from investment-grade corporate debt to junk bonds issued by firms with below-average credit ratings to emerging-market IOUs. They can hold outsize slugs of the fund's assets in the bond sectors they prefer, or they can sell short (a bet that prices will fall) the securities they see headed south. Some of the funds can even hold stocks. Multisector bond funds are nearly as flexible, but some have