When rising interest rates threaten to hurt bond prices, most bond mutual funds have limited defenses they can deploy. They have to obey certain internal rules that limit what they can invest in. But for some untraditional bond funds, the shackles are largely removed, which could come in handy now as rates are expected to rise over the next few years. These ­“unconstrained” bond funds may be able to invest in high-yield (junk) bonds…foreign bonds…mortgage-backed securities…even some types of stocks…and they even may have the ability to “short” US Treasuries, meaning that they could profit by betting these bonds’ prices will drop.

There now are nearly 100 bond mutual funds in the US that could be called unconstrained. But their performance varies widely…and the relative lack of constraints can backfire when the fund managers make the wrong choices, choosing investments that are less vulnerable to rising interest rates but risky in other ways.

Two unconstrained bond funds that have been well-managed…

FPA New Income (FPNIX) is one of the oldest and most conservative unconstrained funds. It diversifies widely and emphasizes capital preservation, keeping at least 75% of its assets in high-quality securities. The fund hasn’t suffered a losing year since 1984. ­Recent yield: 2.8%.

Metropolitan West Unconstrained (MWCRX) takes more risks and returned an annualized 4% over the past five years, compared with 2.7% for its category. It recently had about 20% of its portfolio in junk bonds and spread the rest among commercial mortgages and residential mortgages that aren’t backed by government agencies…and asset-backed securities composed of car loans and student-loan receivables. Recent yield: 2.3%.

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