Jut got into foreign bonds

[Rich_by_the_Bay]

I just slid some money from domestic commercial bonds into RPIBX, T. Rowe Price's foreign bond fund. TRP is where my DW has her 401k and after doing some homework it seemed better than average and has an ER of .8%, low average for its class, intermediate range mostly, better than average historic returns, focus on high quality issues, Europe, Asia. I thought it would be a nice diversifier for my fixed equities, something of a currency cushion. Holding about 15-20% of my fixed portfolio.

I realized (after the fact) that I didn't have a good handle on its volatility, and now wonder if it is likely to behave more like a bond than a stock. I'll be holding for at least 7 years or so. Anyone help me sort that out?

 

[retire@40]

I have two words for you:

Currency Risk

 

[Rich_by_the_Bay]

I have two words for you:

Currency Risk

Yup, the dollar sure is risky.

 

[mathjak107]

a little late in the game , dollar may rise now and wipe out any interest you get. sold mine on friday

 

[Rich_by_the_Bay]

a little late in the game , dollar may rise now and wipe out any interest you get. sold mine on friday

I'm waaay long. (like a bucket 2.5 )

 

[MichaelB]

Hi Rich

The easy money has most likely been made in Int'l bonds, but that doesn't mean there's no place for new additions in a portfolio, and the TRP fund is one of the top 3 IMHO (the other 2 are PIMCO and Loomis Sayles).

Volatility can be helpful if it is negatively correlated to other parts of the portfolio, and Global Bonds appear to have a slight negative correlation with just about everything. See Coaker "Emphasizing Low-Correlated Assets" for details. It can be found at FPANET but I can't get the link to work this morning.

As for currency value, it's not clear where the US$ will go. It has fallen sharply against the Euro and may actually recover a bit, but there are many other currencies in the world - and the fund - where US$ may still have room to fall. Especially emerging countries. The problem is that most of the non-US high quality gov't bonds are in Europe, so the universe is limited and the fund a bit concentrated in Euro issues.

A TRP fund to consider is their Emerging Markets Bond fund - PREMX. Most people see the US$ vs the Euro and worry/speculate on value, but the "real story" has been the four major world currencies (US$, Euro, yen, UK Pound) losing to the emerging currencies. There is lots of room for this to continue for the foreseeable future. The folks over a PIMCO have had emerging bonds in their core investment strategy for at least 3 years now and recently confirmed this to continue for the foreseeable future.

If you are comfortable in exposing your portfolio to non-US$ investment I think this is a very reasonable option. Not tax efficient, but fine for a 401(k).

Michael

 

[Rich_by_the_Bay]

The easy money has most likely been made in Int'l bonds, but that doesn't mean there's no place for new additions in a portfolio, and the TRP fund is one of the top 3 IMHO (the other 2 are PIMCO and Loomis Sayles).

Thanks, Michael. My investment goal for that piece is basically a bond diversifier with moderate volatility (along with some TIPS, some commercial, and intermediate treasuries). I'll hold for at least 7-8 years barring surprises, and it is about 5-6% of my entire portfolio.

 

[brewer12345]

Thanks, Michael. My investment goal for that piece is basically a bond diversifier with moderate volatility (along with some TIPS, some commercial, and intermediate treasuries). I'll hold for at least 7-8 years barring surprises, and it is about 5-6% of my entire portfolio.

Should be fine for your purposes. Keep an eye on GIM, too. If you can get it at a discount to NAV, its got a great track record.

 

[baldeagle]

Any opinions on Oppeheimer's OIBAX? Morningstar rates it 5 stars, and gives it number 1 rank in category.

 

[Gone4Good]

I realized (after the fact) that I didn't have a good handle on its volatility, and now wonder if it is likely to behave more like a bond than a stock. I'll be holding for at least 7 years or so. Anyone help me sort that out?

Hi Rich, it will definitely perform more like a bond fund than a stock fund. The currency impacts actually make it a good diversifier because it doesn't track exactly with either stocks or domestic bonds. I've been following the correlations but don't have exact numbers on hand. If memory serves, my Loomis Global Bond Fund has a ~.5 correlation with the Vanguard Bond Index and a slightly negative correlation with all my equities.

Although these funds are up a ton lately (giving stock like performance) the dollar swoon is a little unprecedented and probably (hopefully ) won't continue.

 

[MichaelB]

Any opinions on Oppeheimer's OIBAX? Morningstar rates it 5 stars, and gives it number 1 rank in category.

This is a load fund. You pay 4.5% to earn a 4.5% yield. Hmmmm.
It is also a global fund - investing in US and foreign debt. The fund Rich mentioned is Int'l only - no US investments.

Most int'l bond funds have some money invested in emerging market bonds. This juices up returns at the expense of slightly higher risk. Nothing wrong - just be aware. When comparing these funds you need to look at the portfolio very closely.

Michael

 

[Lancelot]

Hey Rich,

I'm in a similar boat (American Century, BEGBX) and I am betting that the fund peforms like a bond fund- at least thats my hope . I bought in last April and just added to my position yesterday.

I don't see US interest rates rising anytime soon and if the global economy weakens, then falling (global) interest rates should be good for foreign bonds. At least thats my theory

Time will tell.

Lance

 

[brewer12345]

Hey Rich,

I'm in a similar boat (American Century, BEGBX) and I am betting that the fund peforms like a bond fund- at least thats my hope . I bought in last April and just added to my position yesterday.

Lance

BEGBX is generally like watching paint dry, so I would say it behaves like a bond fund. I like non-USD bonds for diversification purposes, but they are unlikely to ever shoot the moon on performance. Wish some low cost ones would appear, though.

 

[Lancelot]

BEGBX is generally like watching paint dry, so I would say it behaves like a bond fund. I like non-USD bonds for diversification purposes, but they are unlikely to ever shoot the moon on performance. Wish some low cost ones would appear, though.

Yes, I am looking for diversification and a USD hedge. Watching paint dry is fine by me

 

[mathjak107]

I like fnmix fidelity new market income. just sold it though as the easy money i think is gone.. into high yield now

 

[MichaelB]

I like fnmix fidelity new market income. just sold it though as the easy money i think is gone.. into high yield now

This is an emerging markets sovereign bond fund. A totally different asset class with real credit risk and currency risk. Lots more upside potential - and downside as well.

I've always wondered if it's not better to skip EM fixed income and just include EM equities and high quality fixed income.

Michael

 

[Rich_by_the_Bay]

Maybe even as much as stocks, it seems to me you really need to know why you're holding or buying bonds. I've seen that some really do act like stocks and some aren't much better than a savings account.

As an unsophisticated buyer I want bonds to provide stability of principle with slight gain over a 5 year haul, low volatility, and liquidity. I want returns a point or so higher than cash or near cash can bring. I've chosen mostly short term federal, intermediate treasuries, and then a little diversity with TIPs and Foreign in lower doses. Back to the original post, the Foreign (nonemerging) seems to offer the above with neutral or negative correlation.

For real growth, I'll stick with my boring stock allocation.