Foreign Debt Spices Up Multisector Bond Funds

Investors don’t have to look too hard for income in the multisector bond Morningstar Category—more than half the distinct strategies in this peer group tout “income” in their names.

In general, these funds deliver big yields. As of March 2025, the average multisector bond category fund yielded 5.4%. That compared favorably with figures from more-docile bond categories like intermediate core bond’s 4.1% or even intermediate core-plus bond’s 4.5%.

Producing those kinds of yields requires a fair amount of risk-taking, so finding a fund run by skilled managers and analysts is worth the time. Among managers’ income-generating approaches is allocating to non-US-dollar-denominated bonds, including those from emerging-markets countries. These positions aren’t the biggest part of multisector portfolios, but they are significant. The Morningstar US Core Plus Bond Index—a proxy for the category’s opportunity set—featured about 10% in non-US debt as of April 2025. Most of that came from developed-markets countries, and none of it included local-currency (non-US-dollar) exposure.

Even if these allocations appear small in absolute terms, they can play meaningful roles in a diversified portfolio. Indeed, idiosyncratic sovereign and currency risk can offer helpful diversification benefits. The weakening domestic growth story in the US only adds to the case for investors to hedge against US exceptionalism bias.

Two funds that are unafraid to lean into emerging-markets debt are Pimco Income PONAX and Hartford Strategic Income HSNAX. These funds, which have Morningstar Medalist Ratings of Silver, had respective trailing 12-month yields of 5.8% and 6.4% as of April 2025.

Pimco’s non-US bets tend to be long-term rather than tactical plays and are core to the fund’s diversified approach. Even though the fund’s net non-US currency exposure shrank to 4% of assets in 2024, down from an all-time high of 13% in 2020, the team continues to find high-conviction opportunities overseas, whether that be on the long or short side. Such flexibility has become paramount for the fund’s continued success as its asset base has skyrocketed over the years, as evidenced by the fund’s hefty non-US bucket, which often floats between 15% and 30% of assets. At $181 billion as of April 2025, Pimco Income was more than 8 times bigger than its next-largest multisector bond competitor.

Hartford’s approach to non-US-denominated debt is bold in its own right. Subadvisor Wellington Management is permitted to own up to 20% in foreign currencies, although in practice the portfolio rarely breaches midsingle digits. Still, the fund’s currency positions only represent a portion of its foreign playbook. Its aggregate emerging-markets debt bucket often sits between 20% and 30% of assets, and the team has shorted foreign developed markets by as much as 12% in recent years.

Many managers tread more carefully in their non-US debt sleeves. Two Silver-rated funds that have navigated these parts of the market with more caution over recent years are Fidelity Strategic Income FADMX and Loomis Sayles Strategic Income NEFZX.

Fidelity’s managers use a custom, blended index as a target portfolio. They adjust allocations up or down systematically depending on relative value opportunities across the various markets. While their emerging-markets debt allocation regularly hovers around 15% of assets, this portfolio hasn’t featured more than 2% in local-currency debt at any point since 2019.

Meanwhile, Loomis Sayles drastically cut its non-US dollar exposure on the heels of poor performance in 2020. After regularly running between 15% and 30% over the prior decade, this team has since scaled back foreign-currency bets to the low single digits.

This article first appeared in the April 2025 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.