Portfolio manager Sara Zervos says that the balance sheets of emerging countries have been improving steadily for five years, while the developed world has become mired in debt problems.
In addition, emerging markets offer better yields. "You can get yields of 7% to 10% in the emerging markets local currency bonds," she says. "In the developed world you can't get more than 1% to 3% in government bonds."
Another fund that sees bargains in emerging markets is Wells Fargo Advantage International Bond (ESIYX), which has returned 9.3% annually during the past five years.
Although the fund is underweight Western European countries, it has big weightings in the emerging economies of Eastern Europe, including the Czech Republic and Poland."We are emphasizing economies where the governments have healthy budget deficits," says portfolio manager Tony Norris. He says that Poland and Czech Republic have deficits that total less than 3% of their gross domestic products. In contrast, many developed countries have deficits that are more than 7%. Norris also holds Mexican bonds. He says that the government has been improving its deficit. In the past, the Mexican economy depended heavily on the U.S. But now the country's economy is poised to grow faster than the U.S. When Norris thinks that the dollar is likely to appreciate, he can hedge to avoid suffering currency losses in his portfolio. In the late 1990s, the fund hedged. In recent years, the fund has been unhedged. That has allowed shareholders to benefit as the value of foreign currencies rose against the dollar.