Over the past several weeks we’ve been discussing my favorite mutual funds. These funds were selected based on an in-depth, in-house analysis; last week I shared my favorite funds that invest in specialty bond offerings, specifically convertible, high-yield and non-traditional bond funds. This week, we’ll finish looking at the bond category with global and emerging market offerings.
My pick here is the Pimco Global Bond Inst Fund Hedged (PIGBX). This fund is also available in an unhedged version (PIGLX), however, I prefer the former. Managed by Scott Mather, the fund has an attractive risk/return profile, a modest expense ratio, and a very low standard deviation. Moreover, PIGBX is negatively correlated to the S&P 500 TR index over the trailing three-year period (-0.25), according to Morningstar. The hedged version’s standard deviation is about 40% lower than the unhedged offering which is a result of the currency hedge. Even though the unhedged fund has provided slightly higher returns, the hedged fund has a much better Sharpe Ratio, which of course indicates a better return for the risk taken. The hedged fund version began in 1998 and for the past four years, which is about the time Mather took control, the fund has ranked in the top of its peer group. Not too shabby for a fund with such low risk.
Emerging Markets Funds
I really like this category at this time. If the global economy continues to slow, then emerging market countries are more likely to cut interest rates, which would provide a tailwind for these funds. However, on the flip side, if the dollar continues to strengthen, that would be a negative. That said, I think it’s more likely that the value of the dollar will ebb and flow while interest rates will trend downward. Therefore, if you hold these funds through a business cycle (or until rates have fallen substantially), you should be rewarded.
My first pick in this category is the Fidelity Advisor Emerging Market Inc Inst fund (FMKIX). With a Masters from the University of Michigan in 1975 (Go Wolverines!), Manager John Carlson has done a fine job at the helm. Again, FMKIX has a good risk/return profile and a decent three-year Sharpe Ratio (1.80). It also has a sufficient track record dating back to the mid 1990s. This fund has spent a good deal of time in the top half of its peer group and 2012 is no different.
Starting next week we’ll look into alternative mutual fund categories. Specifically, we’ll discuss: Currency, Equity Long-Short, Market Neutral, Real Estate, Commodities, Multi-alternative, and although not an alternative investment, we’ll conclude with World Allocation.
Until next week then, thanks for reading!