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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.

Some things to consider in this group include 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 the 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 April 30, 2011, the group had an annualized gain of 7.4%, while the Barclays Aggregate Bond Index reported an annualized gain of 5.7%. For five years and three years, the group had returns of 6.6% and 6.7%, respectively, while the Barclays Aggregate Bond Index reported gains of 6.2% and 5.5% for the same time frames. In 2011, through April 30th, the International Bond objective group was a good performer to the broader market, it reported a return of 4.2%, outperforming the Barclays Aggregate Bond Index, which registered a return of 1.7%. The group has a greater-than-average Risk Rank of 4, indicating that funds in this group might appeal to investors with 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 April 30, 2011 is Loomis Sayles International Bond Fund (LSIAX). This fund’s investment objective is to seek outsized total investment return through a combination of high current income and capital appreciation.

To achieve this objective, the fund normally invests at least 80% of its total assets in fixed-income securities. The fund is non-diversified and may hold fewer issues than a diversified portfolio. At least 65% of its assets are the fixed-income securities of companies located outside the United States, including emerging markets. It invests primarily in investment-grade debt securities, although it may invest up to 35% of its assets in below investment-grade fixed-income instruments with no minimum rating. 

Typically, three themes drive the fund’s investment approach. First, management seeks securities of issuers whose credit profiles it believes are improving. The research team does deep fundamental and quantitative analysis on over 1,000 issuers worldwide. Second, the fund analyzes political, economic, and other fundamental factors to determine which securities may produce attractive risk/adjusted returns. Third, if a security is believed to be attractive and is denominated in a foreign currency, the fund analyzes whether to accept or to hedge the currency risk.

The fund may invest in public or private debt obligations issued by corporations, governments, partnerships, or trusts. Preferred stocks, convertible securities, mortgage- or asset-backed securities, zero-coupon securities, inflation- and index-linked securities, senior loans, structured notes, and derivatives are also acceptable. The fund can engage in active and frequent trading of securities and is not limited in the percentage of assets that it may invest in any instrument class.

Another fund with a very good year-to-date return through April 30, 2011 is Goldman Sachs Local Emerging Markets Debt Fund A (GAMDX). The fund’s investment objective is to seek a high level of 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 its performance, and it may invest up to 20% of its 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 April 30th is Pioneer Global High Yield Fund (PGHYX). This fund seeks to maximize total return through income and capital appreciation.

It pursues this objective by investing at least 80% of its total assets in below investment-grade debt securities and preferred stocks of U.S. and non-U.S. issuers in emerging markets. 

The portfolio consists of securities of corporate and government issuers located in at least three countries, one of which may be the United States. The fund may hedge foreign currency exposure by buying or selling foreign currency exchange contracts. Its bond investments may also have a broad range of maturities. Also, the fund may invest up to 20% of its assets in floating-rate obligations, and up to 10% of its assets in equity securities.
 
Management uses a value approach in selecting its investments. It also adjusts country allocations to reflect its outlook for the relative performance of interest rates and currencies. Under abnormal conditions, the fund may hold part or all of its assets in cash.

In the table below, we have listed 10 top-performing International Bond funds through April 30, 2011 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

Forward International Fixed Income

FFXRX

9.17

4.29

7.90

4.63

 

Loomis Sayles

International Bond A

LSIAX

7.82

4.99

7.15

4.66

 

Goldman Sachs Local Emerging Markets Debt A

GAMDX

7.56

5.55

10.06

5.67

 

Eaton Vance Emerging Markets Local A

EEIAX

7.53

5.05

9.76

5.76

 

Invesco International Total Return A

AUBAX

7.19

5.13

7.00

3.08

6.19

American Century International Bond A

AIBDX

6.98

4.62

6.13

1.59

5.98

PIMCO Developing Local Markets A

PLMAX

6.73

3.60

6.58

5.78

5.69

Putnam Global Income A

PGGIX

6.74

3.76

5.87

4.80

10.34

PIMCO Emerging Local Bond A

PELAX

6.51

4.63

8.73

4.41

 

Pioneer Global High Yield A

PGHYX

6.14

1.51

3.75

7.72

7.79

International Bond Objective Group

 

4.22

2.69

4.31

1.86

6.62

 

At the time of this article’s writing, the authors did not have any positions in any of the companies mentioned.