Benchmark unaware bond funds had a tough year in 2015, with the overall return for the sector failing to beat the AusBond Bank Bill Index, according to Lonsec.
The unconstrained bonds within Lonsec's fixed-interest fund universe returned 2.05 per cent throughout 2015, "significantly below" the AusBond Bank Bill Index.
Lonsec's 2015 Fixed Interest Sector Review labelled the performance of the unconstrained bond sector as "disappointing".
"[It reflects] a broader struggle for returns as volatility and bearish sentiment seized markets in the second half of the year," said Lonsec, adding that unconstrained bond funds have become "increasingly popular" in the past two years, and have experienced an "explosion in growth".
Lonsec's general manager for income and multi asset, Libby Newman, said the sector faced a "tough year" in 2015.
"While an unconstrained approach does provide flexibility, there is no guarantee that you will generate good returns regardless of which way the market moves," Ms Newman said.
"Our research shows that many unconstrained bond funds are highly correlated with equity and high yield, reflecting the additional credit risk inherent in some unconstrained strategies.
"This means that when equities are underperforming, unconstrained funds may tend to underperform as well, and that’s what we’ve seen in 2015.
"Ideally, unconstrained bond funds will meet their return and risk targets while avoiding high correlations with high yield and equity.
"The purpose of unconstrained investing is not simply to provide a direct substitute for these higher risk alternatives. Investors are looking for more flexibility, not necessarily more risk," Ms Newman said.
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