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Emerging Bond Funds Offer Steadier Bet

Stocks in this article: TGEIX PREMX MEDAX

NEW YORK ( TheStreet) -- Shareholders, excited about the prospects for countries such as Brazil and China, have been pouring cash into emerging markets stock funds. But the stocks can be dicey, as investors learned in 2008 when these funds lost 54%, according to Morningstar (MORN ).

For a steadier bet on developing countries, consider mutual funds that hold their bonds, which have proved less volatile than stocks during the crashes that have plagued emerging markets.

Emerging markets bonds are one of the top-performing fund categories of recent years. In the 10 years through June, these funds returned 11% annually, outdoing stock funds that invest in the same countries by more than a percentage point. They beat every other fixed-income category by a wide margin.

A bright outlook for emerging economies is fueling gains. While the developed world struggles to cope with the credit crisis, many emerging economies are in healthier shape because their consumers and banks didn't take on excessive debt. Countries such as Indonesia and Chile seem poised to grow faster than the U.S. for years to come.

The picture for emerging bonds began improving after the group suffered severe setbacks in the 1990s. When financial markets in Russia and Asia collapsed in 1998, the bond funds recorded their worst year ever, losing 26%. In 1999, the depressed bonds began a remarkable bull market, producing double-digit returns for eight straight years.

The bonds soared as governments in emerging economies reformed their ways. Once troubled by deficit spending and heavy debt loads, countries in Latin America and Asia tightened their belts. Governments balanced budgets and sought to control inflation. With global trade booming, emerging economies prospered. Instead of being debtors, many countries became creditors with big holdings of foreign currencies.

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