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Value Line’s International Bond objective group is a very broad grouping of funds. The funds in this category invest in foreign and U.S. bonds or exclusively in foreign fixed-income securities in pursuit of current income. Clearly, this allows for the inclusion of funds like Pioneer Global High Yield Fund (PGHYX), Federated International High Income Fund A (IHIAX), and Goldman Sachs Local Emerging Markets Debt Fund A (GAMDX), all of which invest in debt securities in emerging markets. 

“International” versus “world” is also an important distinction, as BlackRock International Bond A (BIIAX) is very different from BlackRock World Income A (MDWIX) even though the names are similar—one can invest in any country, while the other invests in any country outside of the United States. Key words to look for include international and foreign, which suggest that the fund does not invest in U.S. bonds, and world and global, which suggest the fund can own securities from any country.

There are even funds that focus on sections of the yield curve, such as Payden Global Short Bond Fund (PYGSX), which, as the name suggests, invests only in short-term bonds. And still others, such as Credit Suisse Global High Yield (RBSFX), that have a focus on bond-quality types. The variety here can be a bit overwhelming.

Among things to consider in this group is the broad mandate of the funds. With so much variety in this objective group, what does the fund you are looking at actually do? You want to be keenly aware of the fund’s objective and investment tactics so there are no surprises down the road. One of the more important tactics that should be reviewed is currency hedging. Some funds allow hedging, believing that it protects shareholders from changes in the value of currencies that have no relation to the bonds they own, while others believe these changes eventually reverse and, thus, are a “wash” over time. Unhedged portfolios, however, can be subject to heightened volatility, so investors need to be cognizant of a fund’s position on this matter.

While the International Bond objective group encompasses many types of funds, it also allows for a significant amount of leeway when creating a portfolio. Indeed, most investors would benefit from some exposure to foreign bond markets. Exactly how that exposure is achieved is up to the individual, and can be easily tailored to meet just about any taste from conservative to aggressive.

Over the long term, the International Bond objective group has been a good performer relative to the broader market, as measured by the Barclays Aggregate Bond Index. For the 10-year period ended September 30, 2012, the group had an annualized gain of 7.2%, while the Barclays Aggregate Bond Index reported an annualized gain of 5.2%. For five years and three years, the group had returns of 6.2% and 6.8%, respectively, while the Barclays Aggregate Bond Index reported gains of 6.4% and 6.2%, respectively. During the past year, the International Bond objective group reported a return of 10.3% compared with 5.2% for the Barclays Aggregate Bond Index. The group has a greater-than-average Risk Rank of 4, indicating that funds in this group might appeal to investors with an above-average tolerance for risk that wish to participate in international bond investments.

One fund with a very high year-to-date (YTD) return through September 30, 2012 is Columbia Emerging Markets Bond Fund A (REBAX).  This fund seeks a high total return from current income and capital appreciation.

To achieve this objective, the fund invests, under normal circumstances, at least 80% of its net assets in fixed-income securities of emerging markets issuers, or that earn 50% or more of their total revenues from goods and services produced in emerging market countries or from sales made in emerging market countries. Such securities may be denominated in either non-U.S. currencies or the U.S. dollar. The fund may invest 25% or more of its total assets in the securities of foreign governmental and corporate entities located in the same country, but will not invest 25% or more of its total assets in any single foreign government issuer. Management may invest up to 100% of its assets in lower rated “junk bonds”. It may also invest in securities of any maturity. 

Another fund with a very good year-to-date return through September 30, 2012 is Goldman Sachs Local Emerging Markets Debt Fund A (GAMDX). The fund’s investment objective is to seek a high total return through income and capital appreciation. It pursues this objective by investing at least 80% of its assets in sovereign and corporate debt of issuers located in emerging countries. Similar economic exposure is derived from currency investments.

An important part of its investment strategy is country selection. The fund selects those countries whose finances, political events, macroeconomic conditions, and fund flows make their debt relatively attractive investments. Derivative instruments are used to improve performance, and the fund may invest up to 20% of assets in developed countries without regarding credit ratings. In summary, the fund seeks to build a portfolio consisting of its “best ideas” in emerging markets and optimize risk/return potential by dynamically adjusting the mix of top-down and bottom-up strategies in the portfolio.

A third fund with a good year-to-date return through September 30, 2012 is Federated Emerging Markets Debt Fund A (IHIAX). The fund’s investment objective is to seek a high current income, with capital appreciation as a secondary objective.

It pursues this objective by investing at least 80% of its assets in emerging market fixed-income securities. These investments may be denominated in foreign currencies or U.S. dollars, and may be of any duration. It can invest in derivative contracts to enhance investment returns and/or reduce risk.


In the table below, we have listed 10 top-performing International Bond funds through September 30, 2012 that we follow in our Fund Advisor database.

10 Top International Bond Funds Performance

 

Fund Name

Ticker

% year-to-date

Total Return

% 1 Month

Total

Return

% 3

Month

Total

Return

% 6 Month

Total

Return

% 5 Year

Total

Return

Annualized

Columbia Emerging Markets Bond A

REBAX

15.78

1.85

7.96

7.88

10.30

JPMorgan Emerging Markets Debt A

JEDAX

15.79

1.87

7.40

8.73

6.98

TCW Emerging Markets Income

TGEIX

16.17

1.38

6.85

7.23

12.86

Goldman Sachs Emerging Markets Debt A

GSDAX

15.52

1.84

7.21

9.33

9.65

Fidelity New Markets Income

FNMIX

15.52

1.51

6.88

9.05

10.79

Goldman Sachs Local Emerging Markets Debt A

GAMDX

15.09

3.09

5.84

4.62

 

Fidelity Adv Emerging Mkts A

FMKAX

15.14

1.46

6.74

8.79

10.52

Federated Emerging Market Debt A

IHIAX

15.32

1.78

7.47

8.97

10.07

T. Rowe Price Emerging Markets Bond

PREMX

15.23

1.57

7.15

7.86

8.78

MFS Emerging Markets Debt A

MEDAX

14.91

1.77

7.21

8.62

9.79

International Bond Objective Group

  

8.58

1.61

4.60

4.91

6.20

At the time of this article's writing, the author did not have positions in any of the funds mentioned.