(PUB) Morningstar FundInvestor

20

World-Bond Funds: Hedged or Unhedged? Income Strategist | Karin Anderson

volatile quartile of world-bond funds. The dollar- hedged fund generated a 7 . 0% annualized gain for the period and outperformed its sibling by an aver- age of roughly 130 basis points per year thanks to a generally strengthening dollar. Of course, the U.S. dollar hasn’t given fully hedged funds an edge over all trailing periods, as proved by another pair of funds run by Mather. PIMCO Global Bond (Unhedged) PIGLX and PIMCO Global Bond (U.S. Dollar-Hedged) PAIIX include U.S. debt and have longer track records. Over the 10 - and 15 -year trailing periods, the unhedged version outperformed its hedged sibling. However, the volatility picture is similar to that of foreign-bond funds. Over Mather’s tenure and over the trailing 10 and 15 years, the hedged fund experienced about half the volatility of the unhedged fund. Emerging-markets currencies haven’t played much of a role in the aforementioned funds, but these currencies can be particularly volatile, experiencing dramatic sell-offs when investors flee to assets perceived as safer. Templeton Global Bond TPINX and Loomis Sayles Global Bond LSGBX have long had more exposure to currencies of the developing world than most world-bond rivals. That contributed to their losses during 2011 ’s rocky third quarter, when these funds slid by 7 . 7% and 3 . 4% , respectively. Those showings landed in the category’s bottom quar- tile, well behind the 1% gain of the Barclays Global Aggregate Index, a commonly used benchmark in this universe. The management teams behind these funds made various moves that helped offset last year’s tough market for many emerging-markets currencies. However, investors should note that these funds have historically been among the riskier choices in the world-bond category and have had higher correla- tions to the S & P 500 , according to Morningstar data. All told, an investor needs to decide whether the goal is total return or steadier results with limited down- side risk when selecting a world-bond fund, keeping in mind that the fund’s currency policy has a big impact on how bumpy the ride can be. œ Contact Karin Anderson at karin.anderson@morningstar.com

The world-bond category contains a wide variety of mandates. Regional approaches differ dramatically, with some funds excluding U.S. debt and others taking a truly global approach, not to mention many different levels of emerging-markets exposure. Currency exposure is one of the more important issues to consider. While some funds remain unhedged, thereby offering exposure to the currencies of their underlying bond exposures, several offer- ings in this group hedge all of their non-U.S. currency exposure back to the U.S. dollar. Still others take an active approach to managing currencies, over- weighting some and shorting others. Consider how much foreign-currency exposure your portfolio already has. Those who already own more wide-ranging core-bond funds may already have some exposure to the major foreign currencies (euro, yen, pound sterling) found in many world-bond portfolios. Another issue to consider is volatility. U.S. dollar hedged and unhedged approaches can perform quite differently under various market conditions, with the former typically providing lower volatility over the long haul. In general, staying fully exposed to the U.S. dollar has helped these types of offerings stay more resilient in risk-off markets. PFUIX and PIMCO Foreign Bond (U.S. Dollar- Hedged) PFORX . Both funds have been run by Scott Mather since February 2008 , though both plied their respective (and opposing) currency approaches for many years prior to that. From Mather’s start date through March 31 , 2014 , the unhedged version experi- enced the second-highest volatility (as measured by standard deviation) in the world-bond category. By contrast, the hedged offering experienced just under half the volatility of its sibling and was in the least- These effects can be gauged by the results of two world-bond funds: PIMCO Foreign Bond (Unhedged)