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I'm just curious if there is any concrete evidence to support the notion that investing in global/international bond funds acts as a diversifier for an income/bond portfolio. Do you have any suggestions for funds in that area? Thanks in advance.
@willmatt72: I agree with the article linked by Ted. For a core fund which may and currently does venture into foreign and emerging markets FI, I would take a look at PIMIX. As of 3/31/2016, this fund has about 41% of the porfolio allocated to developed foreign and EM FI as shown HERE. I would be comfortable with 100% of my FI allocation being invested in PIMIX.
Another vote for the Vanugard paper; its very accessible and well done.
FYI, do a trend analysis on international stocks versus international bonds. I did not look at a super-long time series, but my quick look suggested some good play-off between the two; moreso than US stocks versus US bonds. But there's also no doubt that international can be more volatile.
These funds are too varied to make meaningful comparisons. I understand you want some concrete historical comparisons. But I think the wide variety of approaches precludes such an analysis.
- Some funds hedge against currency fluctuation vs the Dollar. The degree of hedging and methods vary. (I don't pretend to understand the technicals.) Expect more muted returns but an easier ride with funds that hedge. (Prospectus should clarify degree of hedging, if any.)
- Those classified as local currency funds normally don't hedge. It's a bit like adding rocket fuel to your tank. They outperform greatly during periods of weak Dollar, but are dangerous to own if the Dollar undergoes sustained strengthening. Since the Dollar can undergo multi-year periods of rising or falling against other currencies, performance of local currency funds cannot be predicted and tends to be erratic.
- Geographic concentrations vary widely. Lately, funds investing in Japan have outperformed others as the Yen has appreciated rapidly. In addition, the more aggressive funds dabble in risky places like Brazil and Russia where currencies can fall or appreciate 50% in a single year. Others avoid these markets, sacrificing potential gain in favor of stability.
- International or Global fund? International bond funds invest primarily in non-U.S. markets. Global funds are much more likely to include U.S. bonds. Dodge & Cox Global Bond DODLX (which I own) for example, has about 50% of assets invested in the U.S. If you're looking to offset your U.S. Dollar denominated assets, you're getting less impact with a fund like this.
- Since the question does not reference EM bonds, I'll assume you mean investment grade funds. But many of these (including OIBAX which I own) can invest in EM markets. A 20-30% weighting to EM or sub investment grade debt would not be uncommon for some of these. Result: Exposure to EM helps in healthy markets, but makes the manager look like an idiot when EMs falter.
- Finally (and very importantly), as with U.S. bond funds, considerations like duration, weighting to sovereign debt, industry concentration, and credit quality all affect the performance.
Yes, I've noticed that quite a few "Global" bond funds use the US as approx 50% of their respective portfolios. I own enough US bond funds so I'm thinking an international bond fund would work better for me.
Since reading this thread, I decided to do a bit of research myself in this category. PFORX ( or the D class available at Fidelity PFODX) caught my attention. Have never ventured into Pimco Funds, but this one certainly looks worth mulling over. Not meant for taxable accounts though, due to its very high turnover, but most of my assets are tax deferred or in my roth. Any one have any experience with it?
Comments
Regards,
Ted
http://www.vanguard.com/pdf/icrifi.pdf
Kevin
FYI, do a trend analysis on international stocks versus international bonds. I did not look at a super-long time series, but my quick look suggested some good play-off between the two; moreso than US stocks versus US bonds. But there's also no doubt that international can be more volatile.
- Some funds hedge against currency fluctuation vs the Dollar. The degree of hedging and methods vary. (I don't pretend to understand the technicals.) Expect more muted returns but an easier ride with funds that hedge. (Prospectus should clarify degree of hedging, if any.)
- Those classified as local currency funds normally don't hedge. It's a bit like adding rocket fuel to your tank. They outperform greatly during periods of weak Dollar, but are dangerous to own if the Dollar undergoes sustained strengthening. Since the Dollar can undergo multi-year periods of rising or falling against other currencies, performance of local currency funds cannot be predicted and tends to be erratic.
- Geographic concentrations vary widely. Lately, funds investing in Japan have outperformed others as the Yen has appreciated rapidly. In addition, the more aggressive funds dabble in risky places like Brazil and Russia where currencies can fall or appreciate 50% in a single year. Others avoid these markets, sacrificing potential gain in favor of stability.
- International or Global fund? International bond funds invest primarily in non-U.S. markets. Global funds are much more likely to include U.S. bonds. Dodge & Cox Global Bond DODLX (which I own) for example, has about 50% of assets invested in the U.S. If you're looking to offset your U.S. Dollar denominated assets, you're getting less impact with a fund like this.
- Since the question does not reference EM bonds, I'll assume you mean investment grade funds. But many of these (including OIBAX which I own) can invest in EM markets. A 20-30% weighting to EM or sub investment grade debt would not be uncommon for some of these. Result: Exposure to EM helps in healthy markets, but makes the manager look like an idiot when EMs falter.
- Finally (and very importantly), as with U.S. bond funds, considerations like duration, weighting to sovereign debt, industry concentration, and credit quality all affect the performance.