Could You Get More Out of Your Bond Portfolio? These globe-trotting fixed-income funds could be welcome supporting players in a portfolio. Regional diversification is just as important for fixed-income funds as it is for the equity funds in a portfolio. By holding fixed-income instruments from around the globe, a portfolio could benefit from foreign currency appreciation, higher yields (particularly from fast-growing emerging markets), and less direct exposure to U.S. interest rates.
Of course, there are trade-offs. Currencies can also depreciate. Non-U.S. interest rates fluctuate, too, sometimes adversely affecting international bonds. And emerging-markets bond funds have been quite volatile over time, reflecting the risk associated with some markets' lower credit standings. But over the long term we think a more-balanced portfolio makes sense in a world that is becoming increasingly global. Also, importantly, it gives investors exposure to some interesting (and profitable) opportunities, while at times smoothing out overall returns thanks to varying economic and interest-rate cycles.
Take emerging markets, for example. While emerging-markets bond funds are currently sporting impressive performance records and could thus be due for a breather--and when they fall, the tend to fall hard--many global-bond portfolio managers argue that emerging markets are becoming more-attractive places to invest for the long haul. Generally speaking, many of these developing countries are becoming less reliant on external capital flows to finance growth, which is a result of stronger economic and political institutions as well as lower debt and inflation. As a result, some countries' sovereign debt boasts investment-grade status--Brazil's being the most recent to be upgraded by Standard & Poor's in April 2008. Meanwhile, some emerging markets continue to grow at a clip much faster than those of the U.S. and other developed markets. More from morningstar.