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Help Your Clients Get More out of Their Bond Portfolios

This screen zeros in on globe-trotting fixed-income funds that could be welcome supporting players in a portfolio.

Karin Anderson, 08/04/2008

Regional diversification is just as important among fixed-income funds as it is to the equity funds in a portfolio. By holding fixed-income instruments from around the globe, the portfolio could benefit from foreign currency appreciation, higher yields (particularly from fast-growing emerging markets), and less direct exposure to U.S. interest rates.

Of course, there are trade-offs. Currencies do depreciate. Non-U.S. interest rates fluctuate, too, sometimes adversely affecting international bonds. And emerging-markets bond funds have been quite volatile over time, reflecting the risk associated with some markets' lower credit standings.

Over the long term, however, a more balanced portfolio makes sense in a world that is becoming increasingly global. It gives investors exposure to some interesting (and profitable) opportunities while at times smoothing out returns overall thanks to varying economic and interest-rate cycles.

Take emerging markets, for example. Although emerging-markets-bond funds sport impressive performance records and could thus be due for a breather--and when they fall, they tend to fall hard--many global-bond portfolio managers argue that emerging markets are becoming more-attractive places to invest for the long haul. Generally speaking, many of these developing countries are less reliant than they were on external capital flows to finance growth, which is a result of stronger economic and political institutions, as well as lower debt and inflation. As a result, some countries' sovereign debt boasts investment-grade status. Most recently, Standard & Poor's upgraded Brazil in April. Meanwhile, some emerging markets continue to grow at a clip much faster than the United States and other developed markets.

The best options for global fixed-income exposure are our handful of Analyst Picks, but Morningstar Principia and Morningstar Advisor Workstation are great tools for casting a wider net for world-bond, emerging-markets-bond, and multisector-bond funds. We included multisector-bond funds because many of them, particularly our favorites, invest a meaningful portion of assets in international bonds. We performed this screen in Advisor Workstation, but it can also be done in Principia.

First, we limited the screen to reasonably priced funds (those that levy 1.25% annually or less) that are still open to new investment

and require $10,000 or less as an initial investment. We also zeroed in on funds covered by Morningstar analysts.

Special Criteria = Distinct Portfolios Only
And (Morningstar Category = Emerging Mkts Bond
Or Morningstar Category = World Bond
Or Morningstar Category = Multisector Bond)
And Purchase Constraints not = Closed-New Investment
And Audited Expense Rati < = 1.25
And Analysis not= NA

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