2 Emerging-Markets Bond Funds to Consider

Emerging fixed-income markets have struggled in recent years, as have mutual funds that focus on them.

In 2022, markets have endured the Russian invasion of Ukraine, China’s grappling with both coronavirus lockdowns and extreme weakness in its property markets, and a stronger U.S. dollar. As a result, the average fund in the emerging-markets bond Morningstar Category was down 14.5% over the trailing one year through Dec. 27, 2022, while the average emerging-markets local-currency bond fund was down 9.9% over the same period.

This is even more striking in the face of rising commodity prices, which typically benefit export-oriented emerging markets. In early 2021, oil, as measured by the Brent Crude Continuous Oil Contract, was under $60 per barrel; it climbed to more than $120 per barrel in early 2022 before dropping to around $83 on Dec. 28. Other major commodities, such as copper, aluminum, wheat, and soybeans, have all been similarly volatile. While that hasn’t quite dulled the pain for existing investors, it does mean that there may be opportunities underneath the hood of these various economies.

Meanwhile, rising global interest rates and recent negative returns do translate into one positive for future investors: higher yields. Yields on both the emerging-markets and local-currency categories are now on par with the high-yield bond category and much higher than the long-term-bond and corporate-bond categories.

Emerging economies are inherently risky in ways that differ from developed economies, but today’s competitive yields offer investors an attractive entry point. And should some of their ongoing tribulations recede, the many strengths of these economies—and the funds that invest in them—should shine through. Below are two options for investors to consider.

Fidelity New Markets Income FNMIX is, like the markets it invests in, going through some changes. Lead manager Tim Gill took over this strategy in September 2020, but he is a 15-year Fidelity veteran and is supported by comanager Nader Nazmi. Prior to Gill taking the lead, the strategy was run with a significant minority allocation to out-of-benchmark emerging-markets corporates. Gill intends to run the portfolio a bit closer to its JPMorgan EMBI Global Index benchmark, though he is still willing to deviate in high-conviction areas. The strategy is settling down from these various changes while simultaneously managing through markets that have shellacked emerging economies; should this tumult settle, it is likely to begin showing its strengths.

Pimco Emerging Markets Bond PEBIX benefits from a solid process and the size and experience of the firm’s investment teams. This strategy was adjusted a few years ago to limit the size of high-conviction positions such as in Brazil and Russia. That adjustment served investors relatively well in 2022; without it, the strategy’s 16.4% loss through Dec. 27, worse than two thirds of its category peers, might have been worse. The managers have taken a relatively conservative approach to position sizing and tread cautiously in both smaller and less liquid issuers. These qualities should keep the strategy from being too heavily battered and allow it to stay competitive in any market rebounds.