NEWPORT BEACH, Calif. ( TheStreet) -- Can any bond fund beat Bill Gross's Pimco Total Return ( PTTDX), which hasn't declined in a decade?

Yes, the U.S. bond giant says: Pimco's own Unconstrained Bond ( PUBAX) fund. While Unconstrained Bond comes with some extra risk, it should outperform the $186 billion Total Return over the long term, Pimco contends.

As its name suggests, Unconstrained Bond has considerable freedom to invest anywhere in the world. In contrast, Gross has stricter limits on how he manages his fund.

By charter, Gross must track the Barclays Capital aggregate bond index, placing only limited bets on the direction of interest rates. Unconstrained Bond isn't tied to any benchmark. Under extreme circumstances, the young fund can short the bond market, betting that bonds will fall as interest rates rise. While Pimco Total Return can only put up to 10% of its assets in junk bonds, Unconstrained Bond can put up to 40%.

Plenty of people are intrigued by the more aggressive approach. They have already invested $2.5 billion in the young fund. What has attracted much of the interest is Pimco's reputation for making shrewd market calls. In letters to shareholders and interviews with reporters, Gross and other Pimco managers present their outlook for the markets. They invest according to that view, and most often they have been right.

When banks suffered huge loan defaults in the early 1990s, Gross decided that the problems weren't as serious as many investors believed. He bought bonds from Citicorp, the precursor to Citigroup ( C), riding them to huge gains. Gross scored another coup in the 1990s by buying emerging-market bonds that had been crushed when Asian markets melted down.

One of the Pimco manager's most significant calls came in 2006 when he became convinced that housing markets were about to collapse. Steering away from mortgage-related securities, Gross sailed through the chaos of the credit crisis with solid returns. The dead-on market calls have enabled Pimco Total Return to produce 7.2% in annual gains during the past decade, outperforming 96% of its competitors, according to Morningstar.

While Gross attracts most of the attention, it's a mistake to see him as a solo operator. Over the years, he has assembled a large team of analysts and portfolio managers. Working as a group, they develop long-term forecasts. The predictions guide all the Pimco funds.

Pimco Unconstrained is designed to follow the same general approach as Pimco Total Return. But when manager Chris Dialynas of Pimco Unconstrained has a high conviction about a strategy, he can place an especially heavy bet.

So far the two Pimco funds have been roughly tracking each other. For this year, the no-load Class D shares of Pimco Total Return have returned 12.5%, while Pimco Unconstrained Bond D has returned 12.1%.

Dialynas hasn't been making any big bets recently because the markets present many uncertainties. He expects to exploit the fund's extra flexibility when tempting opportunities appear.

For the time being, both Pimco funds are staying cautious. In his speeches and commentaries, Gross has predicted that the economy is headed for a long period of sluggish growth. To avoid trouble, Pimco Unconstrained has big positions in AAA-rated mortgage securities that have government backing from agencies, such as Fannie Mae and Ginnie Mae.

Though most of its holdings have been bland, Unconstrained Bond has spiced up its portfolio a bit with some riskier small positions. Convinced that emerging markets have a bright future, the fund has scored gains recently with positions in Brazil. Other winning bets have included bonds from financial companies, which have revived as the economy has stabilized in recent months.

Investors with an aversion to paying Uncle Sam may want to try another new fund, Pimco Unconstrained Tax Managed Bond Fund ( ATMAX). This keeps at least half its assets in municipal bonds. The rest of the fund can be managed along the lines of Unconstrained Bond. The idea is that the manager of the tax-managed fund can hold taxable bonds when they seem likely to outperform municipals. The extra flexibility could enable the fund to outdo most tax-free competitors.

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Stan Luxenberg is a freelance writer who specializes in mutual funds and investing. He was formerly executive editor of Individual Investor magazine.