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July 28, 2011 at 08:00 PM
It’s only natural, says Scott Colyer, CEO and CIO of Advisors Asset Management, that U.S. investors have focused their international investing horizons on equities, since equities have dominated the investment universe and continue to hog the lion’s share of domestic investment portfolios.
Internationally, too, people have had a greater affinity for equity markets because they are more homogeneous, more developed and easier to understand and navigate than their bond counterparts.
Even today, Colyer says, most investors believe that they need look no further than equities to get the best out of their international exposure. But people who want to generate income, and who know that the best investment opportunities today are found overseas, are doing themselves a great disservice if they’re not investing in international fixed income as well. As much as foreign equity markets offer great potential for reward, so too, says Colyer, do overseas bond markets.
“The bond markets have been changing considerably over the past decade, and not only has international product become more prevalent, the ways in which one can trade it have always improved and many of the risks that used to exist have been mitigated,” he says. “Today, many U.S. investors have a genuine need and desire to diversify away from the U.S. dollar. Foreign bonds allow us to do just that.”
Whether it is in the form of emerging or developed market debt; sovereign or quasi-sovereign bonds; or straight corporate or structured products, the international fixed income markets today are a real treasure trove of opportunities that span the length and breadth of the globe.
“The market is so much bigger than it was 10 years ago, when it was mostly government bonds that were available,” says Mark Beischel, co-manager of Ivy Investment Management’s Ivy Global Bond Fund. “Not only do we now have so much more corporate issuance on a global basis, we’ve also seen so many changes in where the issuance is coming from.”
The international fixed income market, Beischel says, has come a long way since the days when top brass, quasi-sovereign issuers like Mexico’s state-owned oil company, Pemex, and Brazil’s Petrobras, were among the few issuers borrowing funds. Those names are still very much present, but today, there’s also a plethora of credit-worthy Latin American issuers with strong balance sheets from places like Colombia and Argentina. A couple of years ago, Ghana and Gabon—two African nations that many may not have expected to be able to issue debt internationally—successfully sold sovereign issues.
Today, the greatest amount of new corporate bond issuance is coming from the Asia-Pacific region, Beischel says, from places like Indonesia and Thailand, and new local currency corporate bond markets are also developing in unexpected places like China. As financial systems continue to modernize and strengthen, and as global corporate finance increasingly moves away from the traditional bank lending model, bond financing will become more and more popular, he says.
U.S. investors looking to get in on these new opportunities stand to gain immensely because they will be able to benefit from both the stability that is characteristic of bonds and the income stream that they provide.
“In the past 10 years, people’s portfolios have been blown up twice by equities and once by the housing market, whereas in the past 13 or 14 years, bonds have actually done better than the S&P, and with less volatility,” Beischel says. “Add that to the general aging of the U.S. population: People don’t need volatility, they need stability in their portfolios.”
While international bond funds have been in existence for years, the asset class is now attracting new participants who are finding different ways to play it. Advisors Asset Management has long been trading in and offering its clients individual international bonds, but the firm has only recently structured an investment product—a unit trust—dedicated to international bonds, which Colyer says was a runaway success.
“There is a huge amount of demand for these kinds of products as the interest in international fixed income grows,” Colyer says.
The trust invests in the tried-and-tested international fixed income marketplace, in investment-grade names that have global business, that have issued debt denominated in hard currencies and are highly liquid and tradeable.
“But given the success of the product, we would look to do more, and the natural progression would be to explore in greater depth companies from emerging and frontier markets,” Colyer says.
There are many different kinds of bond funds on the marketplace. Investment Advisor talked to a few managers with different approaches to getting the best out of the international bond asset class.
The Global Bond Fund—Part 1
On a recent roadshow, Michael Mata, portfolio manager of ING Investment Management’s Global Bond Fund, heard investors raise repeated concerns about inflation and the correlated value of the U.S. dollar.
“This is why having a global fixed income allocation with just a little bit of U.S. in it makes sense, and gives an investor a great deal of flexibility,” he says.
Being able to play against inflation and the falling value of the dollar is one of the greatest advantages of running a global fixed income fund. Mata and his team are able to go in and out of markets as they see fit. To do so, they score countries based on where respective governments are in their monetary policy cycles and the impact that that has upon individual company business cycles. Depending on their assessment, they will then invest in a range of bonds, including sovereign and corporate credit, and structured products such as commercial mortgage-backed securities (CMBS).
“A global, diversified fund is the best way to get the most out of international bonds,” Mata says.
The flexibility of a global portfolio like the ING Global Fund at once protects against and capitalizes on global interest rate and currency trends, Mata says.
“The [United States] is not anywhere near the point where we’d start to see rates rising, but elsewhere in the world there are places like Australia and Brazil where they are closer to the end of the tightening cycle, where economies have done well and yields are high,” he says. “It’s only because we have a flexible fund that we can modify our portfolio to take advantage of where we are in the cycle.”
The ING Global Bond Fund is currently invested mostly in investment-grade corporate credit with some CMBS holdings. On the sovereign side, Mata has taken on interest rate risk in places that are closer to the end of the tightening cycle, such as Brazil, Indonesia and South Africa, where the fund owns five- or 10-year bonds. It is also positive on some of the smaller developed markets, such as Norway and Sweden, which have robust economies and exposure to commodities.
