Bonds, Foreign Bonds

A reader asked for my input on how to find and select foreign closed-end bond funds. Before I get too far into this, I should put a couple of caveats out there about this article and the funds that are available.

The nature of this part of the market is that there is unlikely to be a best fund for all times. Various dynamics, such as market conditions or shareholder activism, sometimes create issues. Generally, I believe that any find you might buy should have a discount to net asset value, invest in a segment of the fixed-income market you understand and have a track record of volatility you can live with.

My intention with the article is more along the lines of trying to teach you how to catch fish as opposed to giving them away.

Why Foreign Bonds?

There are several reasons to maintain some foreign bond exposure. One is that foreign bond funds offer protection from a decline in the dollar. While this is true, some of the currency ETFs may be a better tool for this purpose. While the dollar aspect is fine and dandy, I tend to view fixed-income investing similarly to equity investing. Other countries are often at different points in their interest rate and economic cycles, and that means foreign bond funds could offer diversification to your domestic bond holdings.

While I believe wholeheartedly in having foreign bond exposure, owning individual bonds is difficult for retail investors, so bond funds tend to be a better way to go.

To do research for this article, I went to ETFconnect.com and did a search for foreign fixed income. The original batch of results left me with 18 funds. From there, I eliminated any funds with a premium to NAV greater than 3%; that left 14 funds to inspect, to see what's under the hood.

Three Types, Three Choices

The group of 14 breaks down into three groups: developed market, a blend of developed and emerging, and emerging (most of them).

I have a feeling that somehow there could be more funds than this, but these were the results of my search.

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At the time of publication, Nusbaum's clients were long Aberdeen Asia Pacific Income Fund, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.