What is your foreign-bond asset allocation?

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What is your foreign-bond asset allocation?

Postby DualCitizen » Fri Aug 14, 2009 10:27 pm

Within your bond asset allocation (ignore your stock allocation for this question), what is your foreign bond allocation, as a percentage of your overall bonds, and why?

I have 10% of my bond allocation in BWX (SPDR Barclays Capital Intl Treasury Bond).

My reason is for currency diversification from the USD in case of dramatic devaluation in the USD.
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Postby bnw2001 » Fri Aug 14, 2009 10:34 pm

0%

:shock:
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Postby avalpert » Fri Aug 14, 2009 11:47 pm

0% the only reason I would add any currency risk to my fixed income would be if I thought it a decent likelihood of me retiring to another country.
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Postby KyleAAA » Sat Aug 15, 2009 12:42 am

0%. I get my currency diversification on the equity side.
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Postby MWCA » Sat Aug 15, 2009 1:46 am

0%

I must enter a message when posting
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Postby LH » Sat Aug 15, 2009 2:02 am

0

I have not read a reason to own foriegn bonds as of yet.

But I am open to it if someone has a reason to share : )
Last edited by LH on Sat Aug 15, 2009 3:32 am, edited 1 time in total.
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Postby tetric » Sat Aug 15, 2009 3:04 am

0%

If Vanguard doesn't have it; I don't need it. Keep it simple :lol:
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Postby Valuethinker » Sat Aug 15, 2009 3:49 am

LH wrote:0

I have not read a reason to own foriegn bonds as of yet.

But I am open to it if someone has a reason to share : )


DFA has a good piece.

1. currency diversification

2. foreign bonds should be on an interest rate cycle different from the US, so there is a diversification gain there

Balanced against this are higher costs, withholding taxes etc.

Generally I think the sentiment around here is that you get 1 through equity, and the volatility of currency (which is largely uncorrelated, however), drowns out the returns from 2.

Given the currency moves are uncorrelated, however, 2 doesn't really hold as an argument.

Costs certainly do.
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Postby IndependentlyPoor » Sat Aug 15, 2009 9:12 am

I too have about 10% of my bond allocation in BWX. I must admit, its behavior during October of 2008 and March of 2009 disappointed me. The flight to quality was clearly to U.S. treasuries only. BWX fell along with almost everything else, although it "only" fell about 10% and then recovered.

Part of the reason I own it is irrational. It is part of my doomsday stash. It was either BWX or gold, and at least BWX pays some interest.

I also own it for diversification. It "ought" to be poorly correlated with other securities. To see if this has proved true, I grabbed the daily closings and looked at the correlations. What little data there is shows BWX has been weakly correlated to other broad markets:
VTSMX 0.37
VBMFX 0.27
VGTSX 0.43

There are lots of things I don't like about it, fees, taxes, etc., but the main thing is that the fund can own derivatives. This seems like one of those loopholes in the prospectus that allows the managers to do pretty much whatever they want.
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Postby bluto » Sat Aug 15, 2009 9:31 am

I have none, but I was thinking about adding foreign bonds. In my situation, I think it makes a lot of sense.

I borrowed some Yen at a very low fixed rate, carried it to $ and invested 70% of it ( I originally intended to use it as home down payment ). Rather than keeping the other 30% in $, I want to hedge against the $/Yen. I guess I should buy Japanese government debt, but dislike the paltry rate. Maybe an international fund would be a better idea? Any ideas?

Edit: Yes, in this case, I am comfortable with investing with borrowed money.
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What is your foreign-bond asset allocation?

Postby YDNAL » Sat Aug 15, 2009 9:35 am

DualCitizen wrote:Within your bond asset allocation (ignore your stock allocation for this question), what is your foreign bond allocation, as a percentage of your overall bonds, and why?
Zippo, because I purchase Bonds to mitigate Equity risk.
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Re: What is your foreign-bond asset allocation?

Postby petrico » Sat Aug 15, 2009 9:50 am

17% in BWX.

--Pete

EDIT: Oh, forgot the "why?".

I used to be far less knowledgeable about asset allocation prior to finding this forum, and I was easily persuaded. A series of Jonathan Clements articles touted the diversification through non-correlation aspect of foreign bonds. (A bunch of articles are linked here: The case for use as a diversifier.) As I've read further, learned more, and most importantly gained more experience with foreign bonds, nothing has convinced me to remove them from my portfolio. About the only thing that would at this point is cost.

Oh yeah, as long as CyberBob seems to be sleeping in this AM, I guess I'll make the obligatory post of Jack Bogle's 2004 "Rip Van Winkle portfolio":

Image
Last edited by petrico on Sat Aug 15, 2009 10:49 am, edited 2 times in total.
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Postby TheDan666 » Sat Aug 15, 2009 9:57 am

0%.
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Postby nisiprius » Sat Aug 15, 2009 9:58 am

0%. Bonds are supposed to be the safe, dull part of my portfolio. And by the way I just have them to dilute risk, if they do that uncorrelated modern-portfolio-theory thing that's just icing on the cake.

By any wild chance, are foreign-bond funds only just recently becoming available? Whenever anything new is introduced, suddenly there are bunches of articles describing their usefulness.

I'm not sophisticated enough to see any great advantages to things like riskier bonds (junk bonds, foreign bonds, long-term bonds) or safer stocks (high-dividend, preferred, etc.). I prefer mixes of mainstream things I have the illusion that I understand. Things that are explained in old books. If something is really sound in the long run, there's no great harm in being five or ten years late to the party.

I've sort of been bullied into having 25% of my stock allocation in foreign stocks, although I don't believe in my heart that that really does anything that different than a slight increase in domestic stock allocation would do. I am not a currency speculator and I don't like any element of currency speculation in my portfolio.

(Oh, OK, OK, I got into foreign stocks in the first place when I realized the dollar was falling, and, yeah, I toyed with the idea of buying some Canadian real return bonds but gave it up when I couldn't figure out an easy way to do it).
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Postby Valuethinker » Sat Aug 15, 2009 10:35 am

bluto wrote:I have none, but I was thinking about adding foreign bonds. In my situation, I think it makes a lot of sense.

I borrowed some Yen at a very low fixed rate, carried it to $ and invested 70% of it ( I originally intended to use it as home down payment ). Rather than keeping the other 30% in $, I want to hedge against the $/Yen. I guess I should buy Japanese government debt, but dislike the paltry rate. Maybe an international fund would be a better idea? Any ideas?

Edit: Yes, in this case, I am comfortable with investing with borrowed money.


Yes if you have a reason to hedge.

Japan is unusually dependent on foreign trade (aha!) and so on currency. So your labour income, asset wealth etc. has an unusual correlation with currency.

I have to say borrowing in Japan and investing abroad is risky though: the Yen has a propensity to rise (it should drop, but it rises).
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Postby CyberBob » Sat Aug 15, 2009 10:50 am

Just about everyone here probably has some 'foreign' bonds since the Vanguard bond index funds all include some. Although, while those bonds are issued by foreign entities, they are denominated in U.S. dollars, so since the original post mentioned currency diversification, those probably don't count as fully foreign.

Foreign bond holdings
3.5% - Total Bond Market Index Fund
6.4% - Short-Term Bond Index Fund
6.9% - Intermediate-Term Bond Index Fund
7.9% - Long-Term Bond Index Fund

Bob
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Postby Lucio » Sat Aug 15, 2009 11:17 am

You may not realize that you own foreign bonds:
Code: Select all
Symbol   Name                                Percent Foreign Bonds (07/31/2009)
VBISX    Short Term Bond Index               6.4
VFSTX    Short-Term Investment-Grade         1.1
VBIIX    Intermediate-Term Bond Index        6.9
VBMFX    Total Bond Market                   3.5
VFICX    Intermediate-Term Investment-Grade  1.7
VBLTX    Long-Term Bond Index                7.9
VWESX    Long-Term Investment-Grade          2.7

VWELX    Wellington                          3.9
VWINX    Wellesley                           7.6



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Postby yobria » Sat Aug 15, 2009 11:30 am

0%. High volatility, low return. Devaluation of the dollar won't affect me much, since that's what my expenses are in.
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Postby Alex Frakt » Sat Aug 15, 2009 12:31 pm

0%.

Lots of int'l stocks though. EM bonds are tempting from a correlation perspective, but I'm not convinced about the available funds. If I were to invest in them, I would consider it part of EM equity holdings as far as my AA goes (and reduce EM Index appropriately).
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Postby bnw2001 » Sat Aug 15, 2009 12:43 pm

Lucio wrote:You may not realize that you own foreign bonds:
Code: Select all
Symbol   Name                                Percent Foreign Bonds (07/31/2009)
VBISX    Short Term Bond Index               6.4
VFSTX    Short-Term Investment-Grade         1.1
VBIIX    Intermediate-Term Bond Index        6.9
VBMFX    Total Bond Market                   3.5
VFICX    Intermediate-Term Investment-Grade  1.7
VBLTX    Long-Term Bond Index                7.9
VWESX    Long-Term Investment-Grade          2.7

VWELX    Wellington                          3.9
VWINX    Wellesley                           7.6



Lucio


Interesting point. Based on the above I actually own 0.35% foreign bonds (10% of my portfolio is TBM). Well it's pretty close to 0...
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Postby camper » Sat Aug 15, 2009 12:54 pm

well I guess I have some in total bond. I used to own a foreign bond fund in my 457. That was prior to converting. Expense ratio was 1.0% and that was with a plan waiver.
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Postby CaveatEmptor » Sat Aug 15, 2009 1:01 pm

28%

Reason: As stated by others + the fact that a foreign currency's strengthening against the dollar often hurts the earnings of that country's corporations (e.g., Japanese exporters) so the gain from a country's currency is often offset by a drop in that country's stock market because of the stronger currency. This does not happen with unhedged foreign bonds.
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Postby KyleAAA » Sat Aug 15, 2009 1:04 pm

CaveatEmptor wrote: the fact that a foreign currency's strengthening against the dollar often hurts the earnings of that country's corporations (e.g., Japanese exporters) so the gain from a country's currency is often offset by a drop in that country's stock market because of the stronger currency. This does not happen with unhedged foreign bonds.


True, but the stocks of foreign corporations doing business in that nation are usually helped by their currency depreciating relative to the target country's. So long as you are globally diversified, you get full currency diversification with equities.
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Postby bluto » Sat Aug 15, 2009 1:07 pm

Valuethinker wrote:
bluto wrote:I have none, but I was thinking about adding foreign bonds. In my situation, I think it makes a lot of sense.

I borrowed some Yen at a very low fixed rate, carried it to $ and invested 70% of it ( I originally intended to use it as home down payment ). Rather than keeping the other 30% in $, I want to hedge against the $/Yen. I guess I should buy Japanese government debt, but dislike the paltry rate. Maybe an international fund would be a better idea? Any ideas?

Edit: Yes, in this case, I am comfortable with investing with borrowed money.


Yes if you have a reason to hedge.

Japan is unusually dependent on foreign trade (aha!) and so on currency. So your labour income, asset wealth etc. has an unusual correlation with currency.

I have to say borrowing in Japan and investing abroad is risky though: the Yen has a propensity to rise (it should drop, but it rises).


I would not normally consider borrowing to invest, but in my circumstances, I think I'm pretty safe. The rate I'm baying is extremely low, so even a very strong Yen wouldn't kill me, and I have 10+ years to repay (lump sum). I have zero debt besides this, and my Brazilian Real income hedges against dollar weakness - maybe :D I cannot decide whether to go international bonds, or Japanese... but I guess I should move soon! Any advice?
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Postby Valuethinker » Sat Aug 15, 2009 1:10 pm

bluto wrote:
Valuethinker wrote:
bluto wrote:I have none, but I was thinking about adding foreign bonds. In my situation, I think it makes a lot of sense.

I borrowed some Yen at a very low fixed rate, carried it to $ and invested 70% of it ( I originally intended to use it as home down payment ). Rather than keeping the other 30% in $, I want to hedge against the $/Yen. I guess I should buy Japanese government debt, but dislike the paltry rate. Maybe an international fund would be a better idea? Any ideas?

Edit: Yes, in this case, I am comfortable with investing with borrowed money.


Yes if you have a reason to hedge.

Japan is unusually dependent on foreign trade (aha!) and so on currency. So your labour income, asset wealth etc. has an unusual correlation with currency.

I have to say borrowing in Japan and investing abroad is risky though: the Yen has a propensity to rise (it should drop, but it rises).


I would not normally consider borrowing to invest, but in my circumstances, I think I'm pretty safe. The rate I'm baying is extremely low, so even a very strong Yen wouldn't kill me, and I have 10+ years to repay (lump sum). I have zero debt besides this, and my Brazilian Real income hedges against dollar weakness - maybe :D I cannot decide whether to go international bonds, or Japanese... but I guess I should move soon! Any advice?


Your expected return for a bond fund (best proxy) is the Yield to Maturity (wtd avg) of the bonds in it.

Given Japanese bonds pay 1.5% yields, I don't find a 1.5% pa return attractive for the risk. At 4% I don't actually find *any* developed market government bonds attractive.

I've been wrong for over 10 years on this point ;-).
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Postby jeff mc » Sat Aug 15, 2009 1:14 pm

0%

(but half equity % is intl)
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Postby Petrocelli » Sat Aug 15, 2009 1:16 pm

0%
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Postby CaveatEmptor » Sat Aug 15, 2009 1:21 pm

KyleAAA: US large caps are indeed directly helped by a drop in the dollar (their costs are largely in dollars, they get a good chunk of their earnings in foreign currencies, etc) but this is much less directly the case for US small caps. For that same reason, international small caps' earnings are less hurt by a weakening dollar (e.g., Japanese small caps are more in tune with the Japanese domestic economy than the large exporters that are directly hurt by a stronger Yen).
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Postby Chuck T » Sat Aug 15, 2009 2:29 pm

0%

33% of equities in Intl
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Postby ruralavalon » Sat Aug 15, 2009 5:36 pm

0% foreign bonds.

But ~ 33% of equities are international.
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Postby Doc » Sat Aug 15, 2009 6:08 pm

I have a slightly different reasoning from the other people that responded zero.

Some of my international funds are not-hedged back into US dollars so I get some currency play from that.

That being said I would still have zero if all equities were hedged back to US dollars. It is just not that big enough of a factor to worry about. Currency play on say 20% of 50% is just not enough dollars to worry about.
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Postby speedbump101 » Sat Aug 15, 2009 6:27 pm

About 25% of my FI is Global structured short term (includes some investment grade Corps)... all hedged to the CAD... held in a CDN DFA fund.

SB...
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Postby SpringMan » Sat Aug 15, 2009 6:29 pm

Currently 0% but used to own FNMIX, Fidelity's New Markets Income. It is an emerging markets bond fund and it did quite well when I owned it. The expense ratio is high and I dumped it when we transferred our IRAs from Fidelity to Vanguard. If I were to buy foreign bonds today, I would consider ETFs, like BWX or PCY.
Last edited by SpringMan on Sat Aug 15, 2009 6:36 pm, edited 1 time in total.
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Postby stevewolfe » Sat Aug 15, 2009 6:31 pm

About 7% mostly from my holdings in PRCIX (T. Rowe Price New Income) and a very small amount from VBMFX.
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Postby Index Fan » Sat Aug 15, 2009 7:16 pm

0%

My equities are 50% international, that's where I get my foreign exposure.
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Postby marana » Sat Aug 15, 2009 9:31 pm

Surprisingly, VG does not offer a single low-cost intl. bond fund.

W.J. Coaker is his 2007 article entitled “Emphasizing Low-Correlated Assets: The Volatility of Correlation” (2007) reported the following long-term correlations:

Global Bonds vs. S&P 500: -0.03
U.S. Bonds vs. S&P 500: +0.23

His “lower correlated portfolio” had equal amounts of global bonds and U.S. bonds along with other asset classes. He concluded that he believed global bonds (and other asset classes) are “under-used and should have higher allocations than standard practice.”

http://spwfe.fpanet.org:10005/public/Un ... lation.pdf

In view of the potential problems with the US$ going forward, global diversification becomes more important for an asset-allocation type U.S. investor, IMO.
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Postby gkaplan » Sat Aug 15, 2009 10:20 pm

0%. Vanguard does not offer an international bond fund. Even if Vanguard did, however, I doubt if I would buy into it.

I do have fifty percent of my equity in international (thirty-six percent overall).
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Postby marana » Sat Aug 15, 2009 11:20 pm

The 36% intl. currency exposure that you have looks good to me and it is probably well above average, but it is not inconceivable that even that high an allocation could turn out to be underweight, depending on your situation. Additionally, intl. bond diversification goes beyond currency exposure.
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Postby fishndoc » Sat Aug 15, 2009 11:42 pm

marana wrote:Surprisingly, VG does not offer a single low-cost intl. bond fund.

W.J. Coaker is his 2007 article entitled “Emphasizing Low-Correlated Assets: The Volatility of Correlation” (2007) reported the following long-term correlations:

Global Bonds vs. S&P 500: -0.03
U.S. Bonds vs. S&P 500: +0.23

His “lower correlated portfolio” had equal amounts of global bonds and U.S. bonds along with other asset classes. He concluded that he believed global bonds (and other asset classes) are “under-used and should have higher allocations than standard practice.”

http://spwfe.fpanet.org:10005/public/Un ... lation.pdf

In view of the potential problems with the US$ going forward, global diversification becomes more important for an asset-allocation type U.S. investor, IMO.


I was impressed by that article also. I have ~5% of my bond portfolio in BWX.

However, I would be very curious to see the correlation data updated to include the last two years; I suspect the case for International Bonds would be weakened.

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Postby spam » Sun Aug 16, 2009 7:47 am

About 10% of my fixed income portfolio is foreign debt. It has been very good to me for a long time.

Somewhere down the road, the Fed will begin raising interest rates. At this point, It will be interesting to see what happens to the value of debt around the globe. My thought is that foreign bonds will respond a bit differently than domestic debt.

With so much money going into foreign equities, the purchase of foreign debt makes more sense to me. Corporations need infrastructure as do governments and workers. Why would the pairing of foreign equities with foreign debt not have benifits similar to domestic pairings?

Image

I own a variety debt asset classes, and I even rebalance my fixed income portfolio. This has the effect of pushing higher risk gains down the risk ladder towards cash.

Image

Edit for clarity:

FNMIX is one of my foreign debt holdings that I have had for a long time. I also own ANAGX and FSICX (which has a bit of foreign exposure). I love dividends!
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Postby spam » Sun Aug 16, 2009 8:13 am

Lucio wrote:You may not realize that you own foreign bonds:
Code: Select all
Symbol   Name                                Percent Foreign Bonds (07/31/2009)
VBISX    Short Term Bond Index               6.4
VFSTX    Short-Term Investment-Grade         1.1
VBIIX    Intermediate-Term Bond Index        6.9
VBMFX    Total Bond Market                   3.5
VFICX    Intermediate-Term Investment-Grade  1.7
VBLTX    Long-Term Bond Index                7.9
VWESX    Long-Term Investment-Grade          2.7

VWELX    Wellington                          3.9
VWINX    Wellesley                           7.6



Lucio


The average foreign holding for the above group is 4.6%
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Postby marana » Sun Aug 16, 2009 11:29 am

fishndoc,

Coaker’s impressive analysis was broad in that it used 18 asset classes. I would also like to see an updated study, perhaps with more emphasis on intl. bonds and total intl. currency exposure.

I checked Exhibit 13.3 on Strategic Asset Allocations from Roger Gibson’s book entitled “Asset Allocation, 4th Ed.” As an example of a portfolio allocation, he used 12% U.S. bonds and 8% Non-U.S. Bonds in his medium portfolio with greater diversification degree choice.
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Postby spam » Tue Aug 18, 2009 8:21 am

marana wrote:fishndoc,

Coaker’s impressive analysis was broad in that it used 18 asset classes. I would also like to see an updated study, perhaps with more emphasis on intl. bonds and total intl. currency exposure.

I checked Exhibit 13.3 on Strategic Asset Allocations from Roger Gibson’s book entitled “Asset Allocation, 4th Ed.” As an example of a portfolio allocation, he used 12% U.S. bonds and 8% Non-U.S. Bonds in his medium portfolio with greater diversification degree choice.


That would be an interesting update. One of my International bond funds tends to focus on developed market, and another one tends to focus on emerging markets debt. I also have domestic and foreign real estate exposure.

I think this thread may have some merit, and it could have been prematurely scrolled to the bottom by a flurry of spurious posts.
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Postby dodonnell » Tue Aug 18, 2009 9:02 am

0%

I now want my "Bond Portfolio" to do the opposite of my "Equity/Risk Portfolio" in a financial crisis.

Only, US Treasuries went up, when everything else went down, in the great liquidity panic of 2008. (Gold is a judgment call, money markets almost broke, etc.).

My historical analysis of fixed income vehicles now just spans calendar year 2008 ;)

If i want a higher return on my "Bond Portfolio", i just increase my allocation to "Equity/Risk portfolio".
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Postby LH » Tue Aug 18, 2009 9:33 am

Valuethinker wrote:
LH wrote:0

I have not read a reason to own foriegn bonds as of yet.

But I am open to it if someone has a reason to share : )


DFA has a good piece.

1. currency diversification

2. foreign bonds should be on an interest rate cycle different from the US, so there is a diversification gain there

Balanced against this are higher costs, withholding taxes etc.

Generally I think the sentiment around here is that you get 1 through equity, and the volatility of currency (which is largely uncorrelated, however), drowns out the returns from 2.

Given the currency moves are uncorrelated, however, 2 doesn't really hold as an argument.

Costs certainly do.



The most common thing I remember cited on this board is
"currency risk"

that since you are going to "spend US money", you would want your bonds to be in US money. Never really made sense to me per se, but I have not thought much about it, seems more a withdrawal concern than a 15 year plus accumulator concern??

I also hear that currency is a "zero sum" game, that the expected outcome, is that the fluctuations will cancel out. Ergo, long term at least, whats the "currency risk" anyway? Ergo, whats the "currency diversification" benefit? I have always thought more that there is a benefit, than a risk myself. As long term, there is zimbawe, weimar germany, that more or less effectively go to zero in cash over short time periods, trillion dollar notes, yet the businesses stocks still go on..... And thats what I own anyway.... My bonds are treasuries and such mostly, so risk would be low there.

The whole issue has always seemed circular to me, my gestalt is that there is no reason to hold them really. I have never read a piece that shows much "diversification benefits" in a portfolio from foriegn bonds, I have never read the DFA reference, do you have a link to it? The books I have read, do not come out in favor of foriegn bonds, or if they do, its a very minimal thing that I do not recollect.... Swenson, swedroe, Ferri, LLL, Bernstein, Malkiel(?), etc.

Do you own foriegn bonds?

It seems a very hazy nebulous thing in terms of currency risk and benefit, and the costs are definitely there, in an asset that is expected to not produce much, so costs matter more percentagewise than foriegn stocks.

Need to find the DFA link. Costs seem to outweigh the benefits, which seem hazy at best to me.

Thanks for your help,

LH
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Postby Rick Ferri » Tue Aug 18, 2009 9:48 am

0% at the moment.

When Vanguard creates an intermediate-term investment grade international bond fund that has a 0.15% fee, then I might consider it. But, that is not in something that will happen anytime soon according to the people I speak with at Vanguard.

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Postby bigH » Tue Aug 18, 2009 10:45 am

Rick Ferri wrote:0% at the moment.

When Vanguard creates an intermediate-term investment grade international bond fund that has a 0.15% fee, then I might consider it. But, that is not in something that will happen anytime soon according to the people I speak with at Vanguard.

Rick Ferri


5% in RPIBX
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Postby jlhod1 » Tue Aug 18, 2009 11:01 am

This was a very interesting read. What type of options would one consider in a "long-short" fund?


EDIT: Never mind! A cursory reading of the different options out there tell me there is no way in HE!! that I would consider one of these funds!

John


marana wrote:Surprisingly, VG does not offer a single low-cost intl. bond fund.

W.J. Coaker is his 2007 article entitled “Emphasizing Low-Correlated Assets: The Volatility of Correlation” (2007) reported the following long-term correlations:

Global Bonds vs. S&P 500: -0.03
U.S. Bonds vs. S&P 500: +0.23

His “lower correlated portfolio” had equal amounts of global bonds and U.S. bonds along with other asset classes. He concluded that he believed global bonds (and other asset classes) are “under-used and should have higher allocations than standard practice.”

http://spwfe.fpanet.org:10005/public/Un ... lation.pdf

In view of the potential problems with the US$ going forward, global diversification becomes more important for an asset-allocation type U.S. investor, IMO.
:shock: :shock:
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Postby marana » Tue Aug 18, 2009 11:27 am

LH,

Gibson's book was published in 2008, which may better reflect current academic research, current thinking and the current situation. I appreciate learning the latest views and the thinking behind them from academic researchers and highly regarded book authors. Thanks Rick.

I did not see analysis of developed market bonds in Larry S's 2008 book on Alternative Investments. Larry, I would love to hear your latest thinking on intl. bonds.
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Postby Valuethinker » Tue Aug 18, 2009 12:23 pm

LH wrote:
Valuethinker wrote:
LH wrote:0

I have not read a reason to own foriegn bonds as of yet.

But I am open to it if someone has a reason to share : )


DFA has a good piece.

1. currency diversification

2. foreign bonds should be on an interest rate cycle different from the US, so there is a diversification gain there

Balanced against this are higher costs, withholding taxes etc.

Generally I think the sentiment around here is that you get 1 through equity, and the volatility of currency (which is largely uncorrelated, however), drowns out the returns from 2.

Given the currency moves are uncorrelated, however, 2 doesn't really hold as an argument.

Costs certainly do.



The most common thing I remember cited on this board is
"currency risk"

that since you are going to "spend US money", you would want your bonds to be in US money. Never really made sense to me per se, but I have not thought much about it, seems more a withdrawal concern than a 15 year plus accumulator concern??


The rule of asset allocation is match your currency (and duration) of asset to liability.

So if your future spending is in things whose prices are in USD, then any allocation out of USD is taking a risk.

Most of what American retirees buy (healthcare, property taxes etc.) will be in USD.

I also hear that currency is a "zero sum" game, that the expected outcome, is that the fluctuations will cancel out. Ergo, long term at least, whats the "currency risk" anyway? Ergo, whats the "currency diversification" benefit? I have always thought more that there is a benefit, than a risk myself. As long term, there is zimbawe, weimar germany, that more or less effectively go to zero in cash over short time periods, trillion dollar notes, yet the businesses stocks still go on..... And thats what I own anyway.... My bonds are treasuries and such mostly, so risk would be low there.


The currency diversification benefit is that when one currency is falling, another is rising.

It is a source of volatility which is largely uncorrelated with domestic equities or bonds. therefore diversifying.

The whole issue has always seemed circular to me, my gestalt is that there is no reason to hold them really. I have never read a piece that shows much "diversification benefits" in a portfolio from foriegn bonds, I have never read the DFA reference, do you have a link to it? The books I have read, do not come out in favor of foriegn bonds, or if they do, its a very minimal thing that I do not recollect.... Swenson, swedroe, Ferri, LLL, Bernstein, Malkiel(?), etc.


I can't find it on the website, now.

The bond diversification argument (separate from currency ie assuming currencies are hedged) is that different countries have different interest rate cycles than the US, therefore a lower correlation with US bonds, therefore give diversification benefits.

Swensen makes this argument.

Do you own foriegn bonds?


Yes. If you live in a relatively small economy, then the benefits of currency diversification are correspondingly greater. More of what I consume is priced in Euros and Dollars, relatively than of what you consumed is priced in dollars, Yen or pounds.

It seems a very hazy nebulous thing in terms of currency risk and benefit, and the costs are definitely there, in an asset that is expected to not produce much, so costs matter more percentagewise than foriegn stocks.

Need to find the DFA link. Costs seem to outweigh the benefits, which seem hazy at best to me.

Thanks for your help,

LH


Costs are the best argument against.

The other is that an unhedged fund, you are really taking a punt on currency, as that will drown out any interest rate gains.
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