Finding Jewels in Emerging Markets Bond Funds
Carlson says that a major reason to own emerging bonds is to diversify fixed-income portfolios. His fund has holdings in more than 50 countries, including Argentina, Ghana, and Turkey. Those countries all present risks, but the outlook for the U.S. is also uncertain, says Carlson. "Instead of having all your holdings in one country, it makes sense to diversify globally," he says.
Emerging market bonds make sound diversifiers because they don't necessarily move in lockstep with Treasuries. As the financial crisis unfolded, investors sold emerging market bonds and fled to the safety of long Treasuries. During 2008, long government funds returned 27.7%, while emerging market bond funds lost 17.6%. But then the roles reversed as investors gained more confidence and interest rates rose. In 2009, long government funds lost 17.5%, while emerging bond funds gained 32.4%.
Carlson's broadly diversified approach has proved fruitful. During the past decade, the fund has returned 11.9% annually, outdoing 74% of peers. But Carlson doesn't excel every year. In 2010, he trailed most competitors as prices of low-quality bonds soared and local currencies appreciated against the dollar.
While Carlson focuses on bonds that pay interest in dollars, some competing funds hold issues that are denominated in foreign currencies. Such local-currency funds own bonds that pay interest in Russian rubles, Mexican pesos, or Thai baht. When the currencies rise against the dollar, the value of a local-currency portfolio appreciates for U.S. investors. If the currencies fall, the local-currency funds will suffer. In recent months, the dollar has strengthened. That has helped the Fidelity fund and other dollar-based portfolios.Despite the recent volatility, local-currency bonds can provide compelling yields and diversification, argues Michael Cirami, portfolio manager of Eaton Vance Emerging Markets Local Income (EEIAX). Local bonds yield more than dollar bonds. Cirami says that five-year Turkish bonds issued in dollars yield 4.0%, while comparable securities denominated in Turkish lira yield 8.7%. Investors demand the extra yield to compensate for the currency and inflation risks that could erode returns of local bonds.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV