From the June 2008 issue of Investment Advisor • Subscribe!

Best World Bond Funds

You've heard it said dozens of times: Foreign assets pay off particularly well during times of a declining dollar. This is true not only about stocks, but also bonds.

When foreign countries or companies issue bonds that are purchased by U.S. investors, their value, upon maturity, will increase in dollar terms should foreign currencies strengthen against the U.S. dollar.

The dollar has been in a downtrend against other major world currencies (especially the euro and the yen) for well over a year. Most economists and currency watchers expect this downtrend to continue.

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One top performer for the 3-year period, as shown below, is the Prudent Global Income Fund (PSAFX). Portfolio manager David Tice is a well-known bear on Wall Street, who tends to run his fund differently from other world bond funds. The fund invests in short to intermediate term securities, typically with maturities of three months to three years, whereas most international bond funds typically invest in securities with longer maturities. In addition, the Prudent Fund's fixed income investments (both U.S. and non-U.S.) are primarily government securities. The fund may give up some yield by avoiding long maturities, corporate bonds, and agencies, but the manager does not want to risk having rising interest rates or credit concerns mitigate a favorable currency move. The fund may also invest in common stocks of gold mining companies--a major difference from other bond funds that do not own any stocks at all. This bet on stocks of gold mining companies has been paying off as gold went on a spectacular bull market rally over the past 12 months.

The top performer for the past 12 months is Dreyfus Premier International Bond Fund (DIBRX). Portfolio manager Thomas Fahey generally tries to invest in debt from at least five different countries (in addition to the U.S.), but is not opposed to taking a big position in just one country, if he thinks that country's economic outlook merits it. He focuses on identifying undervalued government bond markets, currencies, sectors and securities and de-emphasizes the use of an interest rate forecasting strategy. He looks for fixed-income securities with the most potential for added value, such as those involving the potential for credit upgrades.

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