A reader left a comment asking about international fixed income that you can read here.
I am a big believer in foreign diversification for stocks, bonds and cash. Many clients have foreign bonds with a CEF that is mostly Australia and an individual issue from Norway. As time goes on I can see adding individual issues from other countries. These are difficult to access for individuals as the minimum at Schwab is $100,000 per trade. I can allocate to clients as small as I want however.
There are several reasons why I believe in doing this. While I think the dollar is generally headed lower, slowly over time there will be periods where it is strong (bonds from other countries is one way to benefit from a weak dollar). The strategy here needs to be one looking at the long term. Also the blending of fill in the blank from different countries tends to reduce volatility. This especially makes sense when you consider that the middle of the US curve is very low by historical standards. I think it makes sense to expect that the curve will normalize at some point and when it does I think intermediate and further out maturities will be higher in yield and shorter maturities will be a touch lower.
This normalization, if it happens, means bond prices would go down. As a rule of thumb a 1% increase in rates works out to about an 8% decline in price--of course shorter maturities work differently.
Another aspect to this is that I think other countries are better off economically which makes for a compelling investment destination for stocks, bonds and cash.
I am far from the gloomiest guy on the future prospects for US capital markets but I do think that better results will be had over the next decade or so by looking more to foreign. I have been about 35% in foreign and can envision increasing that to 50% (a point I have made quite a few times in the past). My foreign exposure to bonds is quite low currently but I could see that going to 25% in the future. Of course if things really come unglued in the US I could go heavier with foreign bonds but I don't think it will come to that.
Constructing a foreign bond portfolio is not dramatically different from constructing a foreign stock portfolio. I would have a mix of different countries some with surpluses and some with deficits, countries with different types of economies at different points in their respective economic cycles and varying interest rates.
The big point here is you probably need to learn about this if you have not already done so in order to make your own decision. There is no way, now, to know how important this will become. Having to learn about this on the fly during some sort of unraveling seems less than ideal.
I would expect that accessing this market will get easier as fund providers bring product to the market (at least I expect this to happen). MSCI has created a lot of indices for this space, someone just needs to license them and create the funds.
Now from the where are they now file; Kirk Gibson, yes that Kirk Gibson, is a coach for the Arizona Diamondbacks. Maybe I'm the last to know.
7 comments:
Very informative. I'm learning a lot from your blog. Thanks.
Maria
thank you
Roger,
I would think you already know this but there are some foreign bond CEFs that provide pretty decent diversification (country-wise) in one fund. Still, now that every country in the world has its' own equity ETF (or so it seems), I would also love to see some low-cost, country-specific bond ETFs.
Question. Many foreign bonds are still actually denominated in US dollars. I took this into consideration when researching my Bond CEFs. Would you give much weight to this when selecting any foreign bond vehicle?
Yes it does matter to me. I would not want a foreign bond fund in dollars.
Well, I learned about gibby from here, so I guess you're not the last to know (although I don't live in Arizona, but was a lad of 10 living in Detroit in 1984, so gibby will always have super human powers to me).
Roger,
re: dollar denominated bonds.
Actually, my point was that it may be difficult to find a foreign bond CEF that has zero percent holdings that are dollar denominated - especially if they include "emerging" countries. Other than the new JGT fund, I'm not even aware of any (though they may exist). I could see this changing in the future if countries begin to issue more bonds in their local currency . Meanwhile, just wanted to suggest that anyone considering exposure in this area might want to check out the prospectus and holdings (if available) to get an idea of the dollar vs local currency ratio.
What's with the illustration if I may ask. From all the possible foreign fixed income instruments you were lucky to select the country that has only one bond issue that will mature within a month ;)
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