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Fund Spy

International Isn't Just for Equities

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

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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.

Lawrence Jones does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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