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Emerging-Markets Exposure in Medalist World-Bond Funds

Emerging-markets stakes run the gamut.

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Global bond indexes have allocated increasingly more to emerging-markets debt over the past several years--for example, the widely used Barclays Global Aggregate Index had a 16% stake as of September 2015. Today, most world-bond funds invest at least 10% of assets in emerging-markets bonds, and some have 40%-50% allocations. Higher-yielding emerging-markets bonds come with amplified risks, though.

Emerging-markets currencies have been extremely volatile in recent years and can easily wipe away the bonds' yield advantage, though managers may fully or partly hedge this risk. Emerging-markets country fundamentals can change quickly with shifts in political regimes or geopolitical risk. Country and corporate defaults are another consideration, as are commodity price swings, which can weigh heavily on export-driven nations. These risks, in addition to the illiquidity of certain segments of this market, make emerging-markets debt subject to swift sell-offs. This was especially clear in this year’s third quarter, when emerging-markets currencies were hit especially hard, and world-bond funds with heavier emerging-markets exposure suffered mid-single-digit losses.

Karin Anderson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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