Jan. 7, 2003 — As the U.S. dollar weakened against many foreign currencies, particularly the euro, non U.S.-dollar denominated global bond funds posted the highest returns in 2002 as the entire sector delivered strong gains.
The most appropriate benchmark for foreign-currency denominated bond funds, the J.P. Morgan Global Government Bond Non-U.S. Index, rose 22.1% in calendar 2002. In comparison, the average global bond fund tracked by Standard & Poor’s posted a 10% return for the year.
Among the top performers in 2002 was the $48.7-million Federated International Bond Fund/A (FTIIX), which rose 22.6%. “Our portfolio has pure currency exposure to the countries we’re in,” said co-manager Ihab Salib, noting that most global bond funds are U.S. dollar denominated.
Salib attributes the fund’s outperformance mainly to the team’s insistence on currency strength and low credit risk. Out of the ten best-performing currencies versus the U.S. dollar last year, the fund was probably invested in five or six of them, he noted. “Aside from the euro, we were overweight in such currencies as the Norwegian krone and the Swedish krona, as well as the robust commodity-based currencies of Australia and New Zealand.”
The portfolio is primarily invested in the developed countries of Western Europe and North America, although it has dipped into such resurgent economies as Hungary, Poland, Czech Republic and South Africa. It currently has about 58% of its assets exposed to the euro. About 20% of its assets are in corporate bonds, and the remainder in government issues.
“We think European economies will muddle through and not get worse, so bonds will perform relatively well,” Salib said going forward. “More importantly, we believe the U.S. dollar will continue to weaken for the next 12-18 months relative to the euro and other currencies in Europe, primarily because of the growing U.S. current account deficit.”
Emerging Markets Shine
Emerging markets bonds had a strong year in 2002. The JPMorgan Emerging Markets Bond Index Global (EMBI Global) rose 13.1%. Brazil’s markets in particular, both equity and debt, have rebounded strongly. Bond spreads are narrowing and equity prices are rising. Not that long ago, Brazil had to devalue its currency, the real, by the maximum amount possible. Since the presidential election in October, the currency has appreciated.
While the Federated International Bond fund typically avoids emerging markets, the portfolio’s lead manager, Robert Kowit, co-manages other Federated products that emphasize emerging markets, including the $103.4-million Federated International High Income/A (IHIAX).
“What happens in Latin America depends to a large degree on what happens in Brazil,” he said. “This is because Brazil is the dominant economy on the continent — it represents a big chunk of South America’s overall market index capitalization.” Kowit noted that despite some “devastating debt crises” in Brazil and Argentina in the past few years, other Latin American countries have not really suffered any spill-over effects.