Go Global for True Fixed-Income Diversification
Global bond funds can help round out a fixed-income portfolio.
While investors often seek out exposure to foreign stocks when they're building portfolios, they overlook foreign bonds. Foreign-bond funds can be volatile, but they also provide substantial benefits. Foreign government and corporate debt typically offer higher yields to compensate for their perceived additional risks over their United States counterparts; in fact, yields on emerging-markets bonds in particular can be extremely juicy. Also, exposure to foreign governments and companies, as well as foreign currencies, can further diversify an investor's portfolio and can lower the correlations among investments.
A Cure for Dollar Doldrums?
As the dollar has declined in 2009 against the euro and pound, and emerging markets have rebounded sharply this year, foreign bonds have performed a lot better. Thus, they're not necessarily screaming values at the moment. However, as a number of equity-fund and bond-fund managers at Morningstar's annual investment conference earlier this year stated, the U.S. could very well endure a period of both slower economic growth (due to the massive deleveraging of the financial system) and higher inflation due to government stimulus programs and higher spending. So, many managers are looking beyond U.S. borders.
Steve Leuthold, longtime manager of Leuthold Core Investment (LCORX) and head of a firm that has specialized in asset allocation for more than 25 years, is particularly concerned about inflation in the U.S. (which has implemented more substantial stimulus programs than other countries). As a result, he's boosted his fund's stakes in both foreign stocks and foreign bonds to historically high levels. In particular, he's added exposure to bonds issued by Asian governments and Brazil, because he thinks those economies (and currencies) will fare relatively well.
Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.