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International Isn't Just for Equities

Our take on four globally minded fixed-income mutual funds.

Lawrence Jones, 10/23/2006

Investors have long been aware of both the diversification and performance benefits that come from holding a segment of their portfolios in non-U.S. equity investments, even if the experts can't always agree on the proper proportion for this international stake.

A similar case can be made for the fixed-income side of a portfolio. Holding international bonds can add useful diversification, as foreign bond markets' performance will often not correlate with domestic fixed-income return movements. And if the securities held are denominated in different currencies, international bonds can also provide investors with foreign currency exposure not easily attainable elsewhere.

And given the extraordinary growth of bond markets overseas, investors ignore international fixed-income markets at their risk. Bond giant PIMCO, for instance, has pointed out that while the U.S. has long been the dominant player in the world's fixed-income marketplace: "Bonds issued in the U.S. now account for less than half of the global bond market.... In other words, avoiding non-U.S. bonds is no longer an option because it limits investors to only half of the available universe of bonds."

Moreover, eminent investors as diverse as PIMCO's Bill Gross and Berkshire Hathaway's Warren Buffett (as well as many others) have long believed that the U.S. current account deficits will likely lead to downward pressure on the value of the dollar relative to other currencies. In fact, Gross believes that the situation could lead to the eventual abandonment of the "strong dollar" policy, and he has counseled investors to move part of their portfolio away from U.S. assets and "toward more competitive economies."

The upshot for investors is that there are several good reasons to consider fixed-income markets from a global perspective. With that in mind, we offer four funds that we think can play a role in many investors' portfolios.

Loomis Sayles Global Bond LSGLX
We like this world bond's experienced management and approach. Fund managers Kenneth Buntrock and David Rolley have significant international investment experience. Prior to joining Loomis Sayles in 1997, Buntrock worked at Mellon Bank in various capacities, including as manager of its foreign exchange currency-trading unit. Rolley's background is in macroeconomic analysis, having held positions as an economist at Drexel Burnham Lambert and as chief financial economist at Wharton Econometric Forecasting Associates (now Global Insight) before coming to Loomis in 1994.

Additionally, management is well supported by a seasoned research analyst team. The approach practiced here combines management's macroeconomic outlook, which helps determine the fund's country, currency, and interest-rate positioning, with the value-conscious fundamental research effort for which Loomis Sayles is well known. Depending on their market outlook, Buntrock and Rolley will take varying levels of country, credit, and interest-rate risk.

For example, although homebuilders in the United States are suffering from a slowing housing market in 2006, management saw an opportunity in purchasing bonds issued by Mexican homebuilder Homex HXM, which has a sound balance sheet, and has benefited greatly from the recent expansion of mortgage financing in that country. Additionally, while the Mexican peso has been lagging the dollar of late, the Homex bonds purchased are denominated in U.S. dollars, thus avoiding the peso's slide and preserving the bond's solid return.PAGEBREAK

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