(PUB) Investing 2015

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Global bond indexes have allocated increasingly more
to emerging-markets debt over the past several
years—for example, the Barclays Global Aggregate
Index had a 16% stake as of September 2015.
Today, most world-bond funds invest at least 10% of
assets in emerging-markets bonds, and some have
40% –50% allocations. But higher-yielding emerging-
markets bonds come with amplified risks. Emerg-
ing-markets currencies have been extremely volatile in
recent years and can easily wipe away the bonds’
yield advantage, though managers may fully or partly
hedge this risk. Emerging-markets country funda-
mentals can change quickly with changes in political
regimes or geopolitical risk. Country and corporate
defaults are another consideration, as are commodity
price swings, which can weigh heavily on export-
driven nations. These risks, in addition to the illiquidity
of certain segments of this market, make emerging-
markets debt subject to swift sell-offs.
All of the global fixed-income funds in the Morningstar
500 have more than 10% in emerging-markets debt.
Those with lower levels of exposure had stakes in the
midteens as of June 2015. These include T. Rowe
Price International Bond RPIBX, American Funds
Capital World Bond CWBFX, and Loomis Sayles
Global Bond LSGBX. These three funds use either the
Barclays Global Aggregate Index or Barclays Global
Aggregate ex-US Index as benchmarks, but their
approaches vary in some key ways.
T. Rowe Price International Bond targets non-U.S.
government and corporate bonds and leaves its over-
seas currency exposure unhedged. Given that its
management team tries to keep country and currency
exposures roughly in line with the index, this fund’s
largest emerging-markets exposures will tend to be in
larger index constituents like Mexico, and the fund
takes on the most currency risk of the funds in this
group. American Funds Capital World Bond targets
sovereigns and corporates globally. Unlike the T. Rowe
fund, it has a bit more leeway to invest in higher-
yielding sectors like emerging-markets debt but
attempts to minimize currency volatility. For instance,
its managers kept emerging-markets currency
exposure dialed down to a mid-single-digit stake re-
cently. Loomis Sayles Global Bond has taken a
more conservative stance in the past few years, which
has included keeping its emerging-markets currency
exposure in the single digits given its team’s views on
volatility and a stronger dollar. This fund’s overall
emerging-markets exposure could go much higher if
its team finds valuations compelling.
Sovereign-debt-focused Templeton Global Bond
TPINX sports the most emerging-markets exposure,
which recently clocked in at just over half of assets
but gets closer to two thirds after including its
South Korean stake. The fund’s currency exposures
largely match the emerging-markets country it
invests in, with notable shorts on developed-markets
currencies including the yen and euro, which the
team has maintained for years based on its view on
a strengthening U.S. dollar. The other funds also
manage currency exposure tactically. Dodge & Cox
Global Bond DODLX, which invests broadly across
sovereigns, corporates, and securitized debt, recently
stashed nearly one third of assets in emerging-
markets debt with the heaviest concentrations in
Mexico and Brazil. Similarly, PIMCO Foreign
Bond PFORX, which comes in U.S.-dollar-hedged
and -unhedged versions, invests broadly across
sectors and recently had a 20% emerging-markets
stake though it has gone as high as one third of
assets. The U.S.-dollar-hedged version of this strat-
egy has experienced about half the volatility
of its unhedged sibling over the long term and has
been the least volatile of all the funds cited here.
Generally, the other funds have benefited from their
emerging-markets bond exposure over the long
haul, although it’s resulted in varying levels
of volatility. K
Contact Karin Anderson at
Wide Range of Emerging-Markets
Exposure in World-Bond Funds
Income Strategist | Karin Anderson