Greece Debt Crisis Takes Toll on Bond Funds

NEW YORK (TheStreet) -- Greece's debt crisis has dragged down global stocks. But ground zero is bond mutual funds.

It may be hard to tell if Greece isn't listed among the top 10 countries or is consolidated under the banner of "Europe." Not all mutual funds post their complete holdings on the Internet and, even if they do, you should know that Greek government bonds may be listed as "Hellenic Republic."

Greece's budget turmoil has spread across Europe, prompting talks among German Chancellor Angela Merkel, European Central Bank President Jean-Claude Trichet, the International Monetary Fund and the Greek government. Governments may have to guarantee bonds, and the ECB may have to lend more to banks.

The international bond fund most exposed to Greek government debt, at 5.4% of total assets, is the Touchstone International Fixed Income Fund(TIFAX). The fund invests in a portfolio of non-U.S. fixed-income securities with a weighted average maturity of 9.6 years, with only Germany, France, Belgium and the U.K. in higher concentrations than Greece.

Augustus Asset Managers, the manager of the fund, chooses securities by starting with macroeconomic factors including fiscal and monetary policies before selecting holdings. The firm may need to revisit its models. The year-end commentary from the Touchstone fund cited underperformance due to "country selection" from being overweight in the euro zone and the "purchase of Greek bonds in the early stages of spread-widening."

A rebound by Greece would benefit Touchstone. However, investors who expect the worst may want to steer clear of this fund.

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