4 Top Fund Picks for Aggressive Foreign-Bond Exposure

Mutual funds that focus on foreign bonds, while not especially large in number or in assets, are an especially eclectic group. 

One of the big distinctions is currency exposure, with some funds opting for bonds denominated in foreign currencies--and the extra fluctuations that can accompany them--and others choosing hedged exposure, aiming to press mute on the foreign-currency noise. Fund options also vary significantly in their geographic exposure, with the more staid options sticking with bonds from developed markets, often including the U.S., and the more adventurous offerings moving heavily into emerging markets. Other funds focus exclusively on emerging markets and land in Morningstar's emerging-markets bond category. I discussed the key questions investors should ask before delving into a foreign-bond fund in this article. 

From a role-in-portfolio standpoint, I separate funds that buy foreign bonds into two key groups. The first group consists of lower-volatility, hedged offerings that could reasonably serve as part of your core fixed-income portfolio, even into retirement. Their role is to provide a bit of diversification by capturing interest-rate environments outside of the U.S. but otherwise deliver a risk/reward profile not too far out of line with high-quality U.S. bonds. 

The other group is dominated by funds with heavy exposure to foreign currencies, as well as emerging markets. Because of their higher-risk, higher-reward profiles, such funds are best slotted in the longest-term portion of an investor's portfolio, alongside more volatile bond categories like junk bonds. 

This week, let's take a look at some of the best funds in the latter group--aggressive funds that invest in foreign bonds. I'll highlight some of our analysts' favorite world-bond funds that have historically taken aggressive stances--maintaining largely unhedged portfolios or delving heavily into emerging-markets bonds, for example--as well as some of Morningstar's favorite funds that focus exclusively on emerging markets. 

 Templeton Global Bond (TPINX) 
Category: World Bond | Analyst Rating: Gold
This world-bond fund has ballooned in assets in recent years, but it still continues to employ a highly idiosyncratic approach. The overarching theme of manager Michael Hasenstab's strategy is value: If he thinks a market or its currency has been unduly beaten down, he'll dive in. Whereas some rival world-bond managers focus largely on bonds from the U.S., Europe, the U.K., and Japan, Hasenstab has heavily emphasized emerging-markets countries and currencies during his tenure here, pointing to many such countries' better fiscal prospects relative to developed markets'. Hasenstab's nose for value has taken the portfolio off the beaten path at times: Its stake in Ukrainian bonds is just one of many bold positions in the portfolio, and Morningstar senior analyst Karin Anderson warns that "investors shouldn't be looking to this offering for portfolio protection." Nonetheless, its unique strategy, combined with Hasenstab's experience and the backing of a deep team, suggests that it's an aggressive kicker for investors' otherwise conservative bond portfolios. The fund's A share class carries a sales charge. 

 Loomis Sayles Global Bond (LSGLX)
Category: World Bond | Analyst Rating: Silver
Like the Templeton fund, this offering's managers employ a bargain-hunting, contrarian strategy, but the end portfolio looks quite different from that of its more famous rival. Its managers aren't shy about venturing into emerging markets--their stake has historically been larger than the broad world-bond average--but they also make ample room for developed-markets bonds. A heavy stake in corporate bonds is another distinguishing feature; in addition to investment-grade corporates, the managers can invest up to 20% of assets in junk bonds. Senior analyst Karin Anderson says the fund falls between the two extremes in the world-bond group--neither exceptionally volatile nor extremely tame. Loomis' strong research effort in the global- and corporate-bond arenas is the key selling point here. 

 Fidelity New Markets Income (FNMIX)
Category: Emerging-Markets Bond | Analyst Rating: Silver
While funds focusing on emerging-markets corporate bonds and bonds denominated in emerging markets' local currencies have proliferated in recent years, this fund's manager, John Carlson, generally keeps the bulk of the portfolio in U.S. dollar-denominated sovereign bonds. That can help limit losses in "risk-off" markets: The fund landed at the top of its peer group amid 2011's tough third quarter and again in the summer of 2013, when emerging markets again sold off sharply. But don't mistake this fund for a conservative vehicle: As a dedicated emerging-markets bond fund, its volatility, as measured by standard deviation, has been higher than that of aggressively positioned world-bond offerings like Templeton Global Bond. The fund earns points for its highly experienced manager and reasonable expenses. 

 PIMCO Emerging Markets Local Bond (PELAX)
Category: Emerging-Markets Bond | Analyst Rating: Gold
With a focus on emerging-markets bonds denominated in local currencies, this fund looks different from many peers in the emerging-markets bond category, which focus on dollar-denominated bonds. That focus increases the fund's value as a diversifier but can also lead to volatility that's higher than that of its already-volatile category peers. That said, the fund takes a more measured tack than other funds focusing on local currency-denominated debt, emphasizing countries with superior fiscal pictures and governments with policymaking flexibility. The fund's A share class carries a sales charge.

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