Emerging-Markets Exposure in Medalist World-Bond Funds
Emerging-markets stakes run the gamut.
Emerging-markets stakes run the gamut.
Global bond indexes have allocated increasingly more to emerging-markets debt over the past several years--for example, the widely used 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. Higher-yielding emerging-markets bonds come with amplified risks, though.
Emerging-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 fundamentals can change quickly with shifts 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. This was especially clear in this year’s third quarter, when emerging-markets currencies were hit especially hard, and world-bond funds with heavier emerging-markets exposure suffered mid-single-digit losses.
Generally, Morningstar Medalists with higher emerging-markets stakes have benefited from those exposures over the long haul, though it has resulted in higher levels of volatility. These funds also exhibit more downside risk and higher correlations with equities, whereas funds that have lower emerging-markets exposure and/or hedge overseas currencies back to the U.S. dollar offer much smoother rides.
Medalists With Lighter Emerging-Markets-Bond Exposure
Some Morningstar Medalist world-bond funds have more than one third of assets staked in emerging-markets debt, whereas others have levels of exposure ranging from none to midteens stakes. Those with little or no exposure as of June 2015 include DFA Five-Year Global Fixed-Income (DFGBX), DFA Two-Year Global Fixed-Income (DFGFX), AB Global Bond (ANAGX), and Loomis Sayles Global Bond (LSGBX). These four funds use either the Barclays Global Aggregate or Citi World Government Bond index, but their approaches vary in some key ways.
The DFA offerings have no exposure to emerging markets, as they invest closely in line with the developed-markets-focused Citi WGBI. The funds also remove currency risk from the equation, hedging exposures back to the U.S. dollar. AB Global Bond has a similar approach to currency hedging, though it allows for some small tactical bets. It does invest in some emerging-markets bonds--a mid-single-digit stake is common--but the portfolio is consistently anchored in developed-markets government and corporate debt. Loomis Sayles Global Bond, which has had a midteens stake in emerging-markets debt lately, has taken a more conservative stance overall 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.
Medalists With Heavier Emerging-Markets Stakes
Templeton Global Bond (TPINX), Templeton Global Total Return (TGTRX), Legg Mason Brandywine Global Opportunities Bond (GOBIX), PIMCO Foreign Bond (Unhedged) (PFUIX), PIMCO Global Bond (Unhedged) , and PIMCO Global Advantage Strategy Bond (PSAIX) are on the other end of the spectrum in terms of their emerging-markets exposure, and their allocations look very different from their benchmarks'. These funds use the Barclays Global Aggregate, Barclays Multiverse, Citi World Government Bond, and the JPMorgan GBI Global ex US indexes as benchmarks, though the latter two exclude emerging-markets debt.
Sovereign-debt-focused Templeton Global Bond sports the most emerging-markets exposure, which recently clocked in at just over half of assets but gets closer to two thirds 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. Sibling Templeton Global Total Return has similar levels of emerging-markets exposure but differs in that it invests across sovereigns and corporates. Legg Mason Brandywine Global Opportunities Bond sports a bit less emerging-markets exposure than the Templeton funds, but it is still higher than average at 30%-40% of assets. Depending on their currency views, the managers leave certain currencies unhedged and fully hedge others back to the U.S. dollar.
PIMCO Foreign Bond and PIMCO Global Bond, which come in U.S.-dollar-hedged ((PFORX), (PGBIX)) and unhedged versions, invest broadly across sectors and recently had a 20% emerging-markets stake though they have gone as high as one third of assets. The U.S.-dollar-hedged versions of these strategies have experienced about half the volatility of their unhedged siblings over the long term. By design, PIMCO Global Advantage Strategy Bond offers even more exposure to emerging-markets bonds (typically 40%-50% of assets) and mimics its custom benchmark, the PIMCO Global Advantage Bond Index, which weights regions by gross domestic product rather than debt outstanding.
Karin Anderson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.