Advising a client to include international exposure in their portfolio is akin to advising them to include protein in their diet; so obvious it’s almost not worth the explanation. But in which sector of the international market should they invest; which product, countries, asset classes?
Alpha that comes from an international play, combined with lower risk associated with fixed income, could be the perfect fit. Zacks Investment Research lists the top five international bond mutual funds currently out there.
“Investing in international bond funds is one of the best ways to balance losses incurred from U.S. markets, since interest rate fluctuations differ from country to country,” according to the research firm. “This is because they show little correlation with domestic equities and only moderate correlation with investment grade domestic debt. They also help in diversifying currency exposure and protecting assets against a long-term secular decline in the U.S. dollar."
Each of the five funds, listed in no particular order, has earned a Zacks No. 1 rank (strong buy), and the firm expects the fund to outperform its peers in the future.
1) Consulting Group International Fixed Income (NASDAQ:TIFUX).
The fund invests the majority of its assets in non-dollar denominated fixed-income securities. According to Zacks, “it focuses on acquiring securities rated investment grade. Not more than 10% of its assets may be utilized to purchase high yield securities. A maximum of 15% of its assets may be invested in merging market securities. The international bond mutual fund returned 5.86% in the last one-year period.”
Mohamed El-Erian (left) the fund manager (yes, that Mohamed El-Erian) manages the fund.
2) GMO Currency Hedged International Bond III (NASDAQ:GMHBX).
That crank of cranks, cynics of cynics (and yet incredibly successful) Jeremy Grantham (left) lands at No. 2 on Zacks' list. The fund seeks total return higher than its benchmark, the J.P. Morgan Non-U.S. government Bond Index (Hedged) (ex-Japan). “The fund invests a large share of its assets in bonds and is non-diversified. The international bond mutual fund returned 7.97% in the last one-year period,” according to the research firm.
As Zacks notes, “The international bond mutual fund has an expense ratio of 0.39% compared to a category average of 1.11%.”
3) JPMorgan Emerging Markets Debt (NASDAQ:JEMDX)
The fund “invests the majority of its assets in debt securities issued in emerging markets. These securities may be dollar-denominated or may be issued in foreign currencies. The fund is nondiversified and may also purchase securities rated below investment grade. The international bond mutual fund returned 6.08% in the last one-year period.”
As of November 2011, Zacks reports, this international bond mutual fund held 177 issues, with 8.66% of its total assets invested in Russian Federation 7.5%.
4) Goldman Sachs Emerging Market Debt A (NASDAQ:GSDAX)
The fund seeks both capital growth and income, according to the firm. “The fund invests the majority of its assets in fixed income securities issued from emerging markets. It purchases both government and corporate debt securities and acquires securities regardless of their credit rating. The international bond mutual fund returned 6.56% in the last one-year period.”
5) Fidelity New Markets Income (NASDAQ:FNMIX)
Taking on emerging markets is no easy play, but this fund invests “a large proportion of its assets in emerging market securities and other instruments with economic linkages to such markets,” Zacks concludes. “The fund focuses on acquiring debt securities and is non-diversified. The international bond mutual fund returned 7.94% in the last one-year period.”
As the research firm notes, “The international bond mutual fund has a minimum initial investment of $2,500 and an expense ratio of 0.88% compared to a category average of 1.26%.”
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