Home' Trinidad and Tobago Guardian : February 8th 2015 Contents SBG10 STOCKS
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt FEBRUARY 8 • 2015
It would be nice---and so, so easy---to ignore what
bond markets are doing in Germany, Japan and Zam-
bia. But you shouldn t. If you own a bond mutual
fund, there s a good chance that you have some for-
eign-bond investments, even if you don t know it.
That s because many bond funds have been buying
foreign bonds in recent years, including some that
say they could serve as the only bond fund in your
portfolio. Also, most target-date mutual funds, which have
become the default way for many investors to save for retire-
ment, keep small portions of their portfolios in foreign bonds.
Some fund managers are going abroad for diversification,
while others are hungry for higher yields than what s available
in the United States. These global bonds, though, come with
risks. Bonds from emerging markets offer higher yields but
also much higher price swings. Changes in the dollar s value
against other currencies can quickly wipe out any returns. In
many developed markets, yields are even lower than in the
"Do people have more foreign bond (investment) than they
think? Yes, and it s very possible that it s been there a long
time," says Karin Anderson, a senior analyst at Morningstar.
To see how common foreign bonds have become, look at
target-date mutual funds. They put investment decisions on
autopilot, automatically morphing from a stock-heavy portfolio
to a bond-heavy one as the target retirement date approaches.
Their ease of use has made them very popular, and they control
more than $650 billion in total assets.
Nearly 60 per cent of the target-date fund series tracked
by Morningstar held foreign bonds at the end of 2013, says
Janet Yang, director of multi-asset research at Morningstar,
citing its most recent data. Perhaps more importantly, all three
of the industry s biggest players had them. Fidelity, Vanguard
and T Rowe Price control nearly three quarters of all target-
date fund assets.
It s not just target-date funds that are scouring the globe.
Bond mutual funds commonly have the freedom to invest as
much as 20 per cent of their assets outside the United States,
Anderson says. Managers have taken advantage, buying bonds
from developing economies in particular.
That means you should look at your funds and make sure
you re comfortable with how much and what kind of foreign
bonds they hold. Funds typically include a link describing
their composition on their websites.
Pay close attention to whether the fund "hedges." This refers
to whether it tries to limit the impact that shifting currency
values can have. When the euro, yen or peso fall against the
dollar, it can quickly wipe out foreign bonds returns.
Some funds invest in currencies to hedge against such risk.
Others prefer to remain unhedged, looking to benefit from
the boost received when the dollar is falling.
A primary reason to include foreign bonds is to diversify.
Foreign bonds altogether make up a larger market than US
bonds by value, and each country has its own set of interest
rates and inflation, the main factors that dictate bond returns.
Foreign bonds are generally split between two different
offerings. Here s a look at their pros and cons.
In Germany a 10-year government bond offers a yield of
just 0.33 per cent. In Japan it s 0.35 per cent.
Why would anyone be interested? Because they re among
the few investments that have historically held up well when
stocks are plummeting, says Fran Kinniry, principal in Vanguard s
Investment Strategy Group. And he says the primary purpose
of owning bonds is to have a stabilizer when stocks are sink-
Vanguard looked at the average monthly returns for more
than a dozen types of investments since 1992, from hedge
funds to dividend-paying stocks. High-quality foreign bonds
were one of only three to produce returns during periods when
stocks were getting hardest hit. That is, as long as currency
swings were ignored. Vanguard has included a foreign-bond
fund in all its target-date funds since 2013, one that tracks
a hedged index.
A risk with developed-market bonds is that their interest
rates may snap higher once central banks rein in their heavy
stimulus, which is pushing rates lower, says Brian Erickson,
director of fixed income research and strategy at Ameriprise
Financial. When rates rise, it knocks down bond prices.
Fund managers looking for yield have increasingly gone to
emerging markets, which include such countries as Brazil,
Indonesia and Zambia.
The attraction is easy to see: A Mexican 10-year government
bond has a yield above 3.0 per cent. A 10-year Indian gov-
ernment bond s yield tops 7.0 per cent.
But those higher yields come with higher risk. Emerging-
market bonds tend to have bigger swings in returns and carry
a higher risk of default. Emerging-market bond mutual funds
had an average return of nearly 18 per cent in 2012, for example,
but had losses in both 2013 and 2014.
Why foreign bonds are important
Many investors have foreign bonds in their mutual funds, even if they don't know it
Links Archive February 7th 2015 February 9th 2015 Navigation Previous Page Next Page