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 Aberdeen Asia Bond Fund (CSABX), which focuses just on one geographic region, RiverSource Emerging Markets Bond A (REBAX), which looks at countries at a particular stage of economic development, and T. Rowe Price International Bond Fund (RPIBX), which can invest pretty much anywhere. 

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.

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 July 31, 2010, the group had an annualized gain of 6.9%, while the Barclays Aggregate Bond Index reported an annualized gain of 6.4%.  For five and three years, the group had returns of 5.6% and 6.5% respectively, while the Barclays Aggregate Bond Index reported gains of 5.8% and 7.4%, respectively.  During the past year, the International Bond objective group reported a return of 12.0%, compared with 8.9% 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 above-average tolerance for risk that wish to participate in international bond investments.

The International Bond objective group has not performed as well as the broader market in the seven-month period through July 31, 2010, underperforming the Barclays Aggregate Bond Index over that span.  The group reported a gain of 5.1%, compared to a gain of 6.5% for the index. 

One fund with a very high year-to-date (YTD) return through July 31, 2010 is Payden Emerging Markets Bond Fund (PYEWX).  This fund’s investment objective is a high level of total return.

To achieve this objective, under normal circumstances, the fund invests at least 80% of its assets in debt securities and similar debt instruments issued by governments, agencies, and instrumentalities of emerging market countries, and other issuers organized or headquartered in these regions.  The fund invests a substantial portion of its total assets in debt securities of issuers whose securities are rated below investment grade.  It invests in securities it believes are undervalued relative to securities of similar credit quality and interest rate sensitivity. 

The fund may invest up to 20% of its total assets in other debt securities and similar debt instruments, including those of issuers in countries with developed markets.  It may also invest up to 20% of its assets in equities from U.S. or foreign issuers.  Management may also invest in derivatives, such as swaps, futures, and forward contracts to hedge the fund’s portfolio as well as to enhance its return. 

Another fund with a very good year-to-date return through July 31, 2010 is PIMCO Emerging Markets Bond Fund A (PAEMX).  This fund seeks maximum total return, consistent with capital preservation and prudent investment management.

It pursues this objective by investing, under normal circumstances, at least 80% of its total assets in fixed-income instruments that are economically tied to emerging market countries, including bonds, debt securities, and similar instruments issued by various U.S. and non-U.S. public or private sector entities. 

The fund states that it will likely concentrate its investments in Asia, Africa, the Middle East, Latin America, and the developing countries of Europe.  It may also invest in instruments whose returns are based on the returns of emerging market securities or the currency of an emerging market country, rather than investing directly.

The fund may invest in both investment-grade securities and high-yield securities, subject to a maximum of 15% of its total assets in securities rated below B by Moody’s or the equivalent rating by other agencies.  It may also invest, without limitation, in derivative instruments such as options, futures contracts, or swap agreements, mortgage- or asset-backed securities, and real estate investment trusts.  It may also invest up to 10% of its total assets in preferred stocks. 

A third fund with a good year-to-date return through July 31st is Federated International High Income Fund A (IHIAX).  This fund’s investment objective is to seek high current income.  The secondary objective is capital appreciation. 

To pursue these objectives, under normal market conditions, it invests primarily in emerging market debt securities.  The fund may invest in securities of any duration. Also, the fund does not limit the amount it may invest in securities rated below investment grade.  It may also invest in convertible securities, equity securities, or pooled vehicles such as exchange-traded funds.  It may also invest in derivatives to enhance its investment results. 

In the table below, we have listed 10 top-performing International Bond funds through July 31, 2010 that we follow in our Fund Advisor database.

10 Top International Bond Funds Performance