Why U.S. Bond Investors Should Look Internationally (GMDFX, GAMDX, PEBLX, RPIBX)

Bonds should be a part of almost all portfolios through time, particularly for those getting more elevated in age who need safety.  It is no secret that U.S. bond yields are just dismal regardless of which part of the yield curve you look into.  This has created a climate of appetite for international bond funds and the returns overseas may entice more U.S. investors as the U.S. bond market is infrequently among the top-performing bond markets in recent years.

By moving into foreign bonds, this also diversifies global currency strengths (and weaknesses) as a protection against a long-term drop in the value and relevance of the U.S. Dollar. We found that Zacks covered these four funds and others in its Strong Buy (#1 rating) category with the expectation that these fund will outperform peers.  We have compared these to Morningstar ratings and also showed performance history and expense ratio data.  Some are front-end loaded funds and some are not.

GMO Emerging Country Debt IV (GMDFX) is one which seeks capital growth and high current income with the aim of outperforming the J.P. Morgan Emerging Markets Bond Index Global. Assets are invested in emerging market debt securities issued by governments and also in companies with economic linkages to emerging markets. The international bond mutual fund has a ten-year annualized return of 15%. This fund carries almost $1.7 billion in assets and has an expense ratio of 0.6%.  The fund has had the fund manager since 1994.  This carries a 4-star (of 5-stars) rating from Morningstar versus the implied strong buy of Zacks..

Goldman Sachs Local Emerging Markets Debt A (GAMDX) is another loaded fund with a 4.5% front-end load, it has almost $2.4 billion in assets, and an expense ratio of 1.25%.  The company buys securities issued by emerging market governments or corporations. No more than 20% of its assets can be used to purchase fixed-income securities which are not issued from emerging markets. The international bond mutual fund has a three-year annualized return of 5.78%.  While having a Strong Buy equivalent at Zacks, Morningstar gives it only a 1-star (of 5-stars) rating.

PIMCO Emerging Local Bond (PEBLX) is a total return fund which invests in fixed-income securities denominated in currencies of emerging markets, and it can also use options, futures and swap instruments in the fund. The international bond mutual fund returned a very impressive 18.63% in the last one year period and it carries an expense ratio of 1.15%.  Assets in the fund are about $8.5 billion.  It carries a 4-star (of 5-stars) rating from Morningstar.

T. Rowe Price International Bond (RPIBX) invests 65% of its assets in foreign bonds rated “A” to “AAA” and its seeks capital growth and high current income. Zacks notes that the international bond mutual fund returned 17.1% in the last one year period.  It also has over $5.5 billion in assets and carries an expense ratio of 0.82%.  This fund carries a 4-star (of 5-stars) rating from Morningstar.

As a reminder, total returns do not always translate to “dividend yields” because the total return is measured by dividends and income, interest, and realized and unrealized capital gains.  Zacks also offers a full list of its #1 rated funds, implying the “Strong Buy” rating.  As a reminder, chasing returns can often be a dangerous games.  Asset classes do not perform year in and year out in the same manner.  That being said, watching for pullbacks and watching for attractive entry points is always a safer strategy than buying blindly in an asset class that many American investors have either never or only marginally ventured into.

JON C. OGG