20
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.
These effects can be gauged by the results of two
world-bond funds:
PIMCO Foreign Bond (Unhedged)
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-
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
World-Bond Funds: Hedged
or Unhedged?
Income Strategist
|
Karin Anderson
