What is your foreign-bond asset allocation?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

Postby brxn » Tue Aug 18, 2009 12:38 pm

I would seem to hold about 1.5%, exposed via VBMFX.

I have not specifically targeted foreign bonds in any way. I am very young, and my investments are small compared to my income and my mortgage, so I don't perceive the additional risk of foreign bonds as worthwhile as insurance against a USD collapse in my case.
brxn
 
Posts: 150
Joined: Mon Aug 03, 2009 2:04 pm
Location: USA

Postby Doc » Tue Aug 18, 2009 12:38 pm

LH wrote:

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? ...

If I remember correctly most foreign equity funds hedge the currency exposure back to the US dollar. The MSCI-EAFE index that many (most?) of us look at is a hedged index. (There is also an unhedged version but it tends not to get a lot of attention.) I don't know what the hedging situation is with foreign bond funds. I suspect that there is a higher percentage of unhedged funds than on the equity side. In any case, whether you are looking for currency exposure or trying to eliminate it, you should be able to find a vehicle for a foreign bond fund that will meet your objective.
A scientist looks for THE answer to a problem, an engineer looks for AN answer. Investing is not a science.
User avatar
Doc
 
Posts: 4965
Joined: Sat Feb 24, 2007 2:10 pm

Postby DartThrower » Tue Aug 18, 2009 12:49 pm

I invoke Bogle's CMH (Cost Matters Hypothesis). Based on what I have read on this thread and elsewhere I still haven't seen solid evidence that I am getting much for the higher expenses.

Therefore 0% in international bonds, with 30% of the stock portion in international.

By the way this is at the upper limit of what the VG Portfolio Tester Tool recommends. That has been a useful guide for me, especially since most of my funds are VG.
The most amazing coincidence of all would be the complete absence of all coincidences. -John A Paulos
User avatar
DartThrower
 
Posts: 693
Joined: Wed Mar 11, 2009 5:10 pm
Location: Philadelphia

Postby stratton » Tue Aug 18, 2009 7:03 pm

Doc wrote:If I remember correctly most foreign equity funds hedge the currency exposure back to the US dollar. The MSCI-EAFE index that many (most?) of us look at is a hedged index. (There is also an unhedged version but it tends not to get a lot of attention.) I don't know what the hedging situation is with foreign bond funds. I suspect that there is a higher percentage of unhedged funds than on the equity side. In any case, whether you are looking for currency exposure or trying to eliminate it, you should be able to find a vehicle for a foreign bond fund that will meet your objective.

NO. Almost every foreign fund is unhedged.

There are only a few exceptions like Tweedy Browne Global Value.

Paul
User avatar
stratton
 
Posts: 10810
Joined: Sun Mar 04, 2007 6:05 pm
Location: Puget Sound

Postby AlohaJoe » Tue Aug 18, 2009 7:45 pm

I live in Australia so does my 15% US bond portfolio count as "foreign"?

Or do my Australian bonds count as "foreign" for bogleheaders?
AlohaJoe
 
Posts: 377
Joined: Mon Nov 26, 2007 3:00 pm
Location: Saigon, Vietnam

Postby spam » Wed Aug 19, 2009 6:32 am

Doc wrote:
LH wrote:

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? ...

If I remember correctly most foreign equity funds hedge the currency exposure back to the US dollar. The MSCI-EAFE index that many (most?) of us look at is a hedged index. (There is also an unhedged version but it tends not to get a lot of attention.) I don't know what the hedging situation is with foreign bond funds. I suspect that there is a higher percentage of unhedged funds than on the equity side. In any case, whether you are looking for currency exposure or trying to eliminate it, you should be able to find a vehicle for a foreign bond fund that will meet your objective.


The Vanguard Total International Stock Index Fund does not hedge currencies. On the other hand, "Yankee Bonds" are foreign debt that is denominated in dollars.

The US debt market is about 25% of what is out there.
User avatar
spam
 
Posts: 907
Joined: Tue Jun 10, 2008 10:47 am

Postby spam » Wed Aug 19, 2009 6:39 am

DartThrower wrote:I invoke Bogle's CMH (Cost Matters Hypothesis). Based on what I have read on this thread and elsewhere I still haven't seen solid evidence that I am getting much for the higher expenses.

Therefore 0% in international bonds, with 30% of the stock portion in international.


Image
User avatar
spam
 
Posts: 907
Joined: Tue Jun 10, 2008 10:47 am

Postby SpringMan » Wed Aug 19, 2009 6:50 am

DartThrower wrote:I invoke Bogle's CMH (Cost Matters Hypothesis). Based on what I have read on this thread and elsewhere I still haven't seen solid evidence that I am getting much for the higher expenses.

Therefore 0% in international bonds, with 30% of the stock portion in international.

By the way this is at the upper limit of what the VG Portfolio Tester Tool recommends. That has been a useful guide for me, especially since most of my funds are VG.

I would not put too much faith in Vanguard's Portfolio Tester Tool, even with Vanguard funds. Check VGPMX, for example. It counts it as domestic but it is over 80% foreign according to Morningstar.
Best Wishes, SpringMan
User avatar
SpringMan
 
Posts: 4292
Joined: Wed Mar 21, 2007 12:32 pm
Location: Michigan

Postby DrafterMan_MN » Wed Aug 19, 2009 7:46 am

0%
User avatar
DrafterMan_MN
 
Posts: 47
Joined: Wed Jan 28, 2009 9:35 pm

Postby Valuethinker » Wed Aug 19, 2009 8:25 am

AlohaJoe wrote:I live in Australia so does my 15% US bond portfolio count as "foreign"?

Or do my Australian bonds count as "foreign" for bogleheaders?



1. Yes. A bond by a non-domestic issuer and/or a bond in which the currency of payment is different than your home currency.

2. yes if they are not resident in Oz.

Best way to think of 'foreign' is 'what is my home country for retirement liabilities?' Anything else is foreign.
Valuethinker
 
Posts: 25189
Joined: Fri May 11, 2007 12:07 pm

Postby fishndoc » Wed Aug 19, 2009 9:28 am

Looks like some prominent investors do find foreign bonds attractive:

Berkshire has been buying securities issued by governments outside the U.S. The company held about $11.1 billion in foreign government bonds in its insurance units as of June 30, compared with $9.6 billion three months earlier, Berkshire said in a regulatory filing on Aug.

and from the same article:
Pacific Investment Management Co., which runs the world’s biggest bond fund, said in an Emerging Markets Watch report that the dollar will weaken as the swelling U.S. deficit erodes its status as a reserve currency.

http://www.bloomberg.com/apps/news?pid= ... 3ayJvt3t3s

Wayne
" Successful investing involves doing just a few things right, and avoiding serious mistakes." - J. Bogle
fishndoc
 
Posts: 2316
Joined: Wed Apr 11, 2007 12:50 pm

Postby mikep » Wed Aug 19, 2009 2:47 pm

0%.. just US treasuries for fixed income. Take my risk in equities.

However my company controls a profit sharing fund that we can't touch (it's what they do instead of a 401k match) which has some foreign unhedged currency emerging market bonds. I wish I could change it but company says hands off.
mikep
 
Posts: 3111
Joined: Wed Apr 22, 2009 10:27 pm

Postby stratton » Wed Aug 19, 2009 5:15 pm

spam wrote:
DartThrower wrote:I invoke Bogle's CMH (Cost Matters Hypothesis). Based on what I have read on this thread and elsewhere I still haven't seen solid evidence that I am getting much for the higher expenses.

Therefore 0% in international bonds, with 30% of the stock portion in international.


Image

That chart is an apples to oranges to coconuts comparison.

FNMIX is emerging markets bonds issued in US dollars. It's probably 50% equity as far as market effects because they are rated as junk bonds.
VBMFX is Total Bond Maket in US bonds of high credit quality

These are both different than bonds this thread is discussing: unhedged, developed market, sovereign bonds which are similar credit quality to US treasury bonds.

Paul
User avatar
stratton
 
Posts: 10810
Joined: Sun Mar 04, 2007 6:05 pm
Location: Puget Sound

Postby AlohaJoe » Wed Aug 19, 2009 8:07 pm

Valuethinker wrote:Best way to think of 'foreign' is 'what is my home country for retirement liabilities?' Anything else is foreign.


Except I am both an American and an Australian citizen with the ability to retire to either country, depending on which is most desirable when I decide to retire. :)
AlohaJoe
 
Posts: 377
Joined: Mon Nov 26, 2007 3:00 pm
Location: Saigon, Vietnam

Postby joe8d » Wed Aug 19, 2009 9:09 pm

Zero.I have foreign currency exposure with my international stock holdings.
All the Best, | Joe
User avatar
joe8d
 
Posts: 3470
Joined: Tue Feb 20, 2007 9:27 pm
Location: Buffalo,NY

Postby spam » Thu Aug 20, 2009 9:58 am

stratton wrote:
spam wrote:
DartThrower wrote:I invoke Bogle's CMH (Cost Matters Hypothesis). Based on what I have read on this thread and elsewhere I still haven't seen solid evidence that I am getting much for the higher expenses.

Therefore 0% in international bonds, with 30% of the stock portion in international.


Image

That chart is an apples to oranges to coconuts comparison.

FNMIX is emerging markets bonds issued in US dollars. It's probably 50% equity as far as market effects because they are rated as junk bonds.
VBMFX is Total Bond Maket in US bonds of high credit quality

These are both different than bonds this thread is discussing: unhedged, developed market, sovereign bonds which are similar credit quality to US treasury bonds.

Paul


Hi Paul,

Some posters said 0% foreign bonds, but xx% allocated to international equities. There was a brief comment about currency risk as a reason to not own foreign bonds, and thoughts about foreign equity funds being hedged.

spam wrote:
The Vanguard Total International Stock Index Fund does not hedge currencies. On the other hand, "Yankee Bonds" are foreign debt that is denominated in dollars.


This chart is more appropriate to that discussion. I posted it above with the idea of comparison to foreign equities, rebalancing and hedged or not.

Image

This chart below was posted in response to a comment that higher fees were never justified.

Image

We do agree though. We were talking about apples, oranges, coconuts, and bok choy too. Are yankee junk bonds similar to a HEDGED international stock fund? That was my thought.

P.S. what has the same credit quality as US Treasuries?
User avatar
spam
 
Posts: 907
Joined: Tue Jun 10, 2008 10:47 am

Postby Valuethinker » Thu Aug 20, 2009 3:49 pm

AlohaJoe wrote:
Valuethinker wrote:Best way to think of 'foreign' is 'what is my home country for retirement liabilities?' Anything else is foreign.


Except I am both an American and an Australian citizen with the ability to retire to either country, depending on which is most desirable when I decide to retire. :)


Your 'home country' bonds are therefore, probably, bonds of either currency.
Valuethinker
 
Posts: 25189
Joined: Fri May 11, 2007 12:07 pm

The case for foreign bonds

Postby droodman » Tue Jan 04, 2011 5:41 pm

I am 70/30 stock/bond, and in both parts, I am 2:1 domestic:foreign, So that puts me at 10% foreign bonds. And within both foreign pieces I am 2:1 developed/emerging.

My current foreign bond allocation is in 3 ETFs:
6.66% IGOV (expense ratio 0.35%, EAFE bond)
1.67% PCY (e.r. 0.50%, emerging market $ bonds)
1.67% EMLC (e.r. 0.49%, emerging market local-currency bonds)

I found the earlier discussion interesting but a little dissatisfying. It seems like there are two legitimate arguments against foreign bonds--both of which apply just as much to foreign stocks in principle. The first is cost. But Vanguard could solve that problem for us if it wanted to, to the same extent has done for stocks, so that doesn't explain why Vanguard avoids foreign bonds. As a practical matter for us, of course, cost remains a real concern since we lack a Vanguard fund.

The second argument is currency risk. There might be something to this: the key point here for me is that currency risk may not be compensated by higher return. We think of risk and return going together, but perhaps that does not apply to currencies? Is there reason to believe that currencies with higher volatilities appreciate more over time? If not, then this is indeed an argument for tempering investment in foreign currencies--and it applies equally to stocks and bonds.

There are some secondary arguments, such as that domestic funds actually hold foreign securities too. Actually that line of argument is probably stronger against foreign stocks, since just by owning stocks in U.S. corporations you get lots of international exposure (since they get half? of their profits from overseas).

Some people have argued that you should avoid foreign bonds because they are risky. But how is that not active management? How is that not second-guessing the market? Wouldn't pure indexers, diversification fanatics, true Bogleheads buy everything? That's what I try to do. I expect there are risky securities all over my portfolio--small companies with dubious ventures, Enrons & GM's, municipal bonds, maybe the U.S. government will default, etc. I don't see risk as an argument to start zeroing out certain sectors. On the contrary, judiciously taking on more kinds of risks reduces overall portfolio risk.

Where I come down on this is: 1) Own everything. 2) Don't be a pure indexer across borders. Even if the U.S. stock market is, say, 50% of world capitalization, it's fine to allocate more than 50% of your stock portfolio to it to reduce potentially uncompensated currency risk. And 3) Sometimes it is worth paying a bit extra to pursue a strategy you believe in.

And 4) Vanguard is doing a disservice to its clients by not offering foreign bonds.

But I'd be interested in counterarguments. The deep question is: how do you decide when to second-guess the market by zeroing out certain asset classes? For me, just saying "it's risky" doesn't suffice.
droodman
 
Posts: 13
Joined: Mon Jan 03, 2011 5:56 pm
Location: Washington, DC

Postby ruralavalon » Tue Jan 04, 2011 5:52 pm

0%.

Too lazy to complicate things with another fund, don't really see the point (I have only a meager understanding of US bonds, and shouldn't invest in foreign bonds where I don't really understand the risks at all), and there is no Vanguard fund to choose anyway.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
User avatar
ruralavalon
 
Posts: 5023
Joined: Sat Feb 02, 2008 11:29 am
Location: Illinois

Postby bpp » Tue Jan 04, 2011 6:44 pm

50%
bpp
 
Posts: 1624
Joined: Mon Feb 26, 2007 1:35 pm
Location: Japan Age:%bonds+10

Postby chaz » Tue Jan 04, 2011 6:57 pm

0% - just US bonds for me.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
chaz
 
Posts: 13264
Joined: Tue Feb 27, 2007 3:44 pm

Postby AndroAsc » Tue Jan 04, 2011 7:05 pm

I'm surprised at the number of responses with 0%. I would think that those with a large enough portfolio would place 10-20% in foreign bonds.

Almost everyone claim that bonds should be safe, therefore 0% foreign allocation. Doesn't anyone take into account that domestic bonds may default in the far future (hint: deficit)? I know that we are not supposed to discuss about future events, but let's assume that US treasury bonds get downgraded to BBB (barely investment grade). What do you think will happen then?
AndroAsc
 
Posts: 888
Joined: Sat Nov 21, 2009 8:39 am

Re: What is your foreign-bond asset allocation?

Postby dnaumov » Tue Jan 04, 2011 8:18 pm

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?

About 98%.

I live in Finland and own both EU goverment as well as EU investment grade bonds. "Non-foreign" for me would mean finnish goverment bonds and they constitue a rather miniscule part of the EU goverment bonds part of my bond allocation. I have nothing in US bonds of any sort.
User avatar
dnaumov
 
Posts: 469
Joined: Tue Jul 27, 2010 7:04 pm
Location: Finland

Postby gkaplan » Tue Jan 04, 2011 8:22 pm

Zero
Gordon
gkaplan
 
Posts: 5373
Joined: Sat Mar 03, 2007 9:34 pm
Location: Portland, Oregon

well

Postby midareff » Tue Jan 04, 2011 8:30 pm

spam wrote: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!






6% of my total is foreign debt and is in FNMIX held in a Roth.
User avatar
midareff
 
Posts: 2434
Joined: Mon Nov 29, 2010 11:43 am
Location: Biscayne Bay, South Florida

Postby rustymutt » Tue Jan 04, 2011 8:37 pm

00000
At the Very Least, Work Hard, Do Your Best, Know the Truth and the Facts and Always Be Honest!
User avatar
rustymutt
 
Posts: 2783
Joined: Sat Mar 07, 2009 1:03 pm

Re: The case for foreign bonds

Postby Alex Frakt » Tue Jan 04, 2011 10:59 pm

droodman wrote:I found the earlier discussion interesting but a little dissatisfying. It seems like there are two legitimate arguments against foreign bonds--both of which apply just as much to foreign stocks in principle. The first is cost. But Vanguard could solve that problem for us if it wanted to, to the same extent has done for stocks, so that doesn't explain why Vanguard avoids foreign bonds. As a practical matter for us, of course, cost remains a real concern since we lack a Vanguard fund.

The second argument is currency risk. There might be something to this: the key point here for me is that currency risk may not be compensated by higher return. We think of risk and return going together, but perhaps that does not apply to currencies? Is there reason to believe that currencies with higher volatilities appreciate more over time? If not, then this is indeed an argument for tempering investment in foreign currencies--and it applies equally to stocks and bonds.

You missed the real argument. For most of us, the point of holding bonds is not to increase returns, it is to preserve existing assets. You hold equities to provide real returns, but the flip side of that is 10% of their value can be gone in a week, and 50% in a year or two. In other words, the paper worth of your equities is just paper (well, electrons) until you turn them into high quality, intermediate or shorter bonds in your local currency. Note, cash doesn't preserve existing assets either except for the very short term because inflation will inexorably chip away at the real value of your holdings.

That said, there are times when it appears to some people that other types of bonds, including junk, EM, or even foreign developed market bonds, look like a good returns play. If that is your belief, I can only suggest that you include your allocation to such types of bonds under your general equities allocation.
Alex Frakt
Founder
 
Posts: 9629
Joined: Fri Feb 23, 2007 2:06 pm
Location: Chicago

Re: The case for foreign bonds

Postby norookie » Tue Jan 04, 2011 11:10 pm

Alex Frakt wrote:
droodman wrote:I found the earlier discussion interesting but a little dissatisfying. It seems like there are two legitimate arguments against foreign bonds--both of which apply just as much to foreign stocks in principle. The first is cost. But Vanguard could solve that problem for us if it wanted to, to the same extent has done for stocks, so that doesn't explain why Vanguard avoids foreign bonds. As a practical matter for us, of course, cost remains a real concern since we lack a Vanguard fund.

The second argument is currency risk. There might be something to this: the key point here for me is that currency risk may not be compensated by higher return. We think of risk and return going together, but perhaps that does not apply to currencies? Is there reason to believe that currencies with higher volatilities appreciate more over time? If not, then this is indeed an argument for tempering investment in foreign currencies--and it applies equally to stocks and bonds.

You missed the real argument. For most of us, the point of holding bonds is not to increase returns, it is to preserve existing assets. You hold equities to provide real returns, but the flip side of that is 10% of their value can be gone in a week, and 50% in a year or two. In other words, the paper worth of your equities is just paper (well, electrons) until you turn them into high quality, intermediate or shorter bonds in your local currency. Note, cash doesn't preserve existing assets either except for the very short term because inflation will inexorably chip away at the real value of your holdings.

That said, there are times when it appears to some people that other types of bonds, including junk, EM, or even foreign developed market bonds, look like a good returns play. If that is your belief, I can only suggest that you include your allocation to such types of bonds under your general equities allocation.
-> I agree there are to many defaults to list in the global economy. USA,.....not quite yet. IIRC Brazil, and otheres like Spain, have defaulted on its bonds offerings many times in the last 20yrs. IIRC w/o google.
" Wealth usually leads to excess " Cicero 55 b.c
User avatar
norookie
 
Posts: 3016
Joined: Tue Jul 07, 2009 2:55 pm

Re: The case for foreign bonds

Postby droodman » Wed Jan 05, 2011 10:21 am

Alex, thank you for the substantive reply:
Alex Frakt wrote:You missed the real argument. For most of us, the point of holding bonds is not to increase returns, it is to preserve existing assets. You hold equities to provide real returns, but the flip side of that is 10% of their value can be gone in a week, and 50% in a year or two. In other words, the paper worth of your equities is just paper (well, electrons) until you turn them into high quality, intermediate or shorter bonds in your local currency. Note, cash doesn't preserve existing assets either except for the very short term because inflation will inexorably chip away at the real value of your holdings.


However, I guess I am still missing the point. The way I see it, you are citing an investment strategy here rather than an investment objective. It's a sensible strategy, one I'd happily support almost anyone in using, with the exception of an extreme I note below. And if you and others tell me that your strategy prohibits foreign bonds, I can't argue with that directly.

But the question stands: could such a strategy be improved, in the sense of helping one meet one's investment goal, by inclusion of foreign bonds? That begs the question of what the goal is. For most people, I'd guess it's something like "maximize expected returns within a certain risk tolerance" or "maximize the probability of having at least $1 million by age 70." Such goals refer to the entire portfolio, not the stock and bond parts separately.

Indeed, as I understand Modern Portfolio Theory, it says you should consider the portfolio as a whole, not ascribe goals to subsections of it. Doing the latter feels akin to me to what behavioral economists call "mental accounting," which I think is when people maintain different savings accounts for different goals even when one account would be more efficient. It's a trick we play on ourselves for the sake of discipline--and it may be a very useful trick, a good rule of thumb for the 99% who don't want to obsess with MPT.

I understand the philosophy of MPT to say that you should in general own everything (in judicious amounts) in order to reduce overall portfolio volatility. With that free lunch of lower risk, you can then tilt your portfolio somewhat towards higher-return, higher-risk assets.

To be more specific, what really is the essential difference between shares of GM, say, and bonds of the Philippine government? Both offer substantial risk and, to compensate, higher return than safe bonds. If we relabel the stock portion of the portfolio the "higher risk, higher expected return" portion, why not include emerging market bonds in it?

To put it another way, I would think that if you run Harry Markowitz-type analysis just on the bond portion of a portfolio, asking how to maximize return for a given (low) level of risk or how to minimize risk while keeping expected returns above inflation, it would not assign zero weight to munis, junk bonds, foreign bonds, long treasuries, etc. It would give a little weight to them. (Maybe someone can prove I'm wrong.) As you made the case, the bond portfolio ought to take some risk in order to stay ahead of inflation. So it seems that even in the bond portfolio we are diversifying beyond the safest assets in order to boost return. In doing so, what is the criterion for which types of bonds to consider and which not?

To put it one more way, suppose an investor is super-conservative, having retired on an adequate nest egg. She's not interested in extra returns, just preserving what she's got. If I understand the strategy you presented, she would go 0/100 stocks/bonds. But a standard example in MPT (I think I read it in a book by Larry Swedroe) is that 5/95 can actually be less volatile than 0/100 because of diversification (while offering slightly higher return). A dollop of foreign bonds might do the same thing. The key point I think this illustrates is that, ideally, when assessing a strategy against goals one should think about the entire portfolio, not one piece at time.

Alex Frakt wrote:That said, there are times when it appears to some people that other types of bonds, including junk, EM, or even foreign developed market bonds, look like a good returns play. If that is your belief, I can only suggest that you include your allocation to such types of bonds under your general equities allocation.


Definitely not! :) Other than taking the "Malkiel step" a couple of times (buying small bits of deeply discounted closed-end funds) I have never gone in for that kind of short-term second-guessing of the market.
droodman
 
Posts: 13
Joined: Mon Jan 03, 2011 5:56 pm
Location: Washington, DC

Postby bearcub » Wed Jan 05, 2011 10:29 am

..
Last edited by bearcub on Thu Jun 23, 2011 9:10 pm, edited 1 time in total.
"Im gonna get my kicks in before the whole S--t house goes up in flames" | Jim Morrison- doors
bearcub
 
Posts: 807
Joined: Sat Mar 08, 2008 8:54 am

Re: What is your foreign-bond asset allocation?

Postby Valuethinker » Wed Jan 05, 2011 11:58 am

dnaumov wrote:
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?

About 98%.

I live in Finland and own both EU goverment as well as EU investment grade bonds. "Non-foreign" for me would mean finnish goverment bonds and they constitue a rather miniscule part of the EU goverment bonds part of my bond allocation. I have nothing in US bonds of any sort.


If I remember my history correctly, one of the reasons Americans cherish a special fondness for the Finns is that Finland is the one country that between WW1 and WW2 and even when it was on the opposing side in WW2, did not default on US dollar debts to the USA. (I presume they didn't actually pay during WW2, but simply resumed payment afterwards).

Which speaks volumes about the Finnish credit risk ;-).

That, of course, and the fact that you are the only people ever to beat the Soviet Union in a war (in a practical sense although you accepted Stalin's terms in 1940)... other than Afghans of course ;-). Actually I suppose the Poles did too, once, in 1919 ;-).

As I always say when watching the Winter Olympic Biathalon with my wife 'the Russians will probably win it, but beware the Finnish officers with rifles on skis ;-)'.

Bizarrely, watching the Biathalon on Eurosport was absolutely gripping.
Valuethinker
 
Posts: 25189
Joined: Fri May 11, 2007 12:07 pm

Re: The case for foreign bonds

Postby Valuethinker » Wed Jan 05, 2011 12:02 pm

droodman wrote:1.67% EMLC (e.r. 0.49%, emerging market local-currency bonds)

I found the earlier discussion interesting but a little dissatisfying. It seems like there are two legitimate arguments against foreign bonds--both of which apply just as much to foreign stocks in principle. The first is cost. But Vanguard could solve that problem for us if it wanted to, to the same extent has done for stocks, so that doesn't explain why Vanguard avoids foreign bonds. As a practical matter for us, of course, cost remains a real concern since we lack a Vanguard fund.


Possibly false premise.

Dealing costs in foreign bonds are higher.

I suspect VG has looked at it, and found the diversification gains to be small, and that investors won't understand that the currency risks will drown the returns.

The second argument is currency risk. There might be something to this: the key point here for me is that currency risk may not be compensated by higher return. We think of risk and return going together, but perhaps that does not apply to currencies? Is there reason to believe that currencies with higher volatilities appreciate more over time? If not, then this is indeed an argument for tempering investment in foreign currencies--and it applies equally to stocks and bonds.


Uncovered Interest Parity (with statistical noise). Turns out you don't lose as much from depreciation of high interest rate currencies, as you gain from the higher interest rate. But the data is noisy and there are 'black swan' collapses-- see Iceland 2008 whose bonds were paying 13%.

Lots of funds started to exploit this anomaly and, I gather, it's not as profitable as it was. Efficient markets at work ;-).

But I'd be interested in counterarguments. The deep question is: how do you decide when to second-guess the market by zeroing out certain asset classes? For me, just saying "it's risky" doesn't suffice.


When costs exceed prospective benefits (private equity, hedge funds).

Or when the risk is not compensated for in returns.

The institutional way to do this is a currency overlay which applies to the whole fund. But an individual cannot do that. And it's rank speculation on currencies.
Valuethinker
 
Posts: 25189
Joined: Fri May 11, 2007 12:07 pm

Re: The case for foreign bonds

Postby droodman » Wed Jan 05, 2011 1:54 pm

Valuethinker wrote:Dealing costs in foreign bonds are higher.

Would these costs show up in the expense ratio or are they below the radar?

(For what it's worth, maybe that's an argument for foreign bonds, on the assumption that trading costs will decline, increasing the value of owning foreign bonds. That's one theory for the historical small-cap premium.)

This part I can buy:
Valuethinker wrote:I suspect VG has looked at it, and found the diversification gains to be small...

Though I'd like to see the numbers, and am skeptical it's true for such a vast majority of investors that foreign bonds shouldn't be offered at all to Vanguard customers. (As it happens, I had a consultation with a Vanguard financial planner yesterday, who says he's going to look for Vanguard analysis of this question that he can share with me.)

This part may be true but I don't like it:
...and that investors won't understand that the currency risks will drown the returns.

Vanguard is not generally paternalistic like TIAA-CREF. It gives people all sorts of dangerous options, like actively managed health and energy sector funds.

When costs exceed prospective benefits (private equity, hedge funds).

Or when the risk is not compensated for in returns.

Agreed. How does this translate into practice in the case of foreign bonds?
droodman
 
Posts: 13
Joined: Mon Jan 03, 2011 5:56 pm
Location: Washington, DC

Re: The case for foreign bonds

Postby Valuethinker » Wed Jan 05, 2011 2:04 pm

droodman wrote:
Valuethinker wrote:Dealing costs in foreign bonds are higher.

Would these costs show up in the expense ratio or are they below the radar?


They'd be below the radar. And they'd get worse if unit holders invest/ redeem a lot.

(For what it's worth, maybe that's an argument for foreign bonds, on the assumption that trading costs will decline, increasing the value of owning foreign bonds. That's one theory for the historical small-cap premium.)


I guess. Swensen's view is that you can profit from the different cycles in interest rates between different economies. A small diversification benefit.

This part I can buy:
Valuethinker wrote:I suspect VG has looked at it, and found the diversification gains to be small...

Though I'd like to see the numbers, and am skeptical it's true for such a vast majority of investors that foreign bonds shouldn't be offered at all to Vanguard customers. (As it happens, I had a consultation with a Vanguard financial planner yesterday, who says he's going to look for Vanguard analysis of this question that he can share with me.)



They may simply have decided it is not worth the business risk to them.

This part may be true but I don't like it:
...and that investors won't understand that the currency risks will drown the returns.

Vanguard is not generally paternalistic like TIAA-CREF. It gives people all sorts of dangerous options, like actively managed health and energy sector funds.


One of the things I have noted here is the 'herd mentality': we discuss REITs when REITs have done well, Gold is the canonical example, etc.

Institutional investors do this too.

If was running VG, I'd be worried I'd get a flood of money into this fund just before the dollar strengthened and/or interest rates started rising.

When costs exceed prospective benefits (private equity, hedge funds).

Or when the risk is not compensated for in returns.

Agreed. How does this translate into practice in the case of foreign bonds?


[/quote]

They may have looked at the historic data and found that it does not.

It's orthodox in institutional investing (outside the USA) to hold global bonds, but there is also a currency overlay that is managed, often separately.

One reservation I've always had with bond benchmarks. Stock market indices are determined by the relative valuation of different corporate profit streams.

Bond indices, to an extent, simply by how much governments borrow. There's no economic judgement in that.
Valuethinker
 
Posts: 25189
Joined: Fri May 11, 2007 12:07 pm

Postby Random Musings » Wed Jan 05, 2011 2:40 pm

0%.

37% of equities are int'l

RM
User avatar
Random Musings
 
Posts: 5035
Joined: Thu Feb 22, 2007 5:24 pm
Location: Pennsylvania

Postby CaveatEmptor » Wed Jan 05, 2011 2:59 pm

5%, all fully unhedged.

The "high ER" argument against such funds isn't quite true anymore, now that we have the two unhedged iShares ETFs with a fairly low expense ratio, e.g., iShares S&P/Citi 1-3 Yr Intl Treasury Bd (ISHG) has an ER of 0.35% (duration = 1.8 years, there's another iShares ETF with longer duration for those inclined to take more interest-rate-risk). The iShares prospectus says it does not allocate to countries in proportion to the foreign borrowings of their governments (it says they actually do the opposite, although the last time I looked at their country allocation I did not see much evidence of that).
CaveatEmptor
 
Posts: 397
Joined: Thu Jan 01, 2009 1:48 am

Postby renditt » Wed Jan 05, 2011 6:12 pm

currently 7% in PIGLX. expense ratio is ok with 0.56%.

The purpose is to hedge my exposure to US assets; there is a chance that we may move overseas again and even if I knew we would stay in the US, I would like to have some hedge against a further devaluation of the USD.

Plan to increase the 7%, would just much rather do it when the dollar is stronger.
User avatar
renditt
 
Posts: 601
Joined: Fri Apr 25, 2008 3:05 pm

Postby zotty » Wed Jan 05, 2011 8:36 pm

Interesting discussion.

Something nags at me.

Didn't we have something like 30 years of negative real return in IT, LT treasuries from the early 50s to the early 80s?

How likely is this to recur? Would international bond exposure improve the outcome?

Probably not, but i haven't read anything looking back that far.
zotty
 
Posts: 684
Joined: Tue Sep 15, 2009 6:18 pm
Location: DFW, Texas

Postby patrick » Wed Jan 05, 2011 11:04 pm

zotty wrote:Interesting discussion.

Something nags at me.

Didn't we have something like 30 years of negative real return in IT, LT treasuries from the early 50s to the early 80s?

How likely is this to recur? Would international bond exposure improve the outcome?

Probably not, but i haven't read anything looking back that far.


It was longer than that. From the end of 1931 to the end of 1981 you would have had a 30% loss in real terms in 10 year treasuries (per data from http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html and ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt).

Many other countries have seen far worse bond performance than the US. Look in https://emagazine.credit-suisse.com/app/_customtags/download_tracker.cfm?logged=true&dom=emagazine.credit-suisse.com&doc=/data/_product_documents/_shop/276532/credit_suisse_global_investment_yearbook_2010.pdf for some really scary bond graphs.
patrick
 
Posts: 819
Joined: Fri Sep 04, 2009 4:39 am

Re: The case for foreign bonds

Postby bpp » Wed Jan 05, 2011 11:17 pm

droodman wrote:Indeed, as I understand Modern Portfolio Theory, it says you should consider the portfolio as a whole, not ascribe goals to subsections of it.


Droodman, for an MPT-style approach to studying the role of foreign bonds in a portfolio, you might have fun playing with the simple calculator in the following thread:
http://www.bogleheads.org/forum/viewtopic.php?t=56705&start=0

That calculator assumes by default that foreign bonds have the same return as domestic ones, though you can change that if you want to simulate, for example, EM bonds.

Generally, from a pure MPT perspective, the case either for or against foreign bonds is not very strong. One really needs some other justification to decide one way or another, such as "diversification is good," or "bonds are for safety."
bpp
 
Posts: 1624
Joined: Mon Feb 26, 2007 1:35 pm
Location: Japan Age:%bonds+10

Postby kramer » Thu Jan 06, 2011 6:38 am

Generally, from a pure MPT perspective, the case either for or against foreign bonds is not very strong. One really needs some other justification to decide one way or another, such as "diversification is good," or "bonds are for safety."

Yes, I have really struggled with this question. If I were a regular investor, living and retiring in the USA, I would definitely not do it. Mostly due to the higher expenses.

Since I live abroad and spend mostly in non-dollar currencies, I do count my "foreign currency" exposure, or at least non-dollar exposure, as a separate diversification category (commodities futures, precious metals equity, foreign stocks, foreign bonds).

Also, a future social security income stream will be denominated in dollars.

The asset location issue seems less of an issue because the foreign taxes paid are much lower, apparently, than foreign equities.

My intuition tells me that I should be at least 40% in non-dollar currencies (I have no prediction for the dollar direction). Right now I am only about 31% (mostly because all of my bonds are USA), so considering about a 3% investment in IGOV.

Kramer
User avatar
kramer
 
Posts: 1302
Joined: Wed Feb 21, 2007 3:28 am
Location: Philippines

Re: The case for foreign bonds

Postby droodman » Thu Jan 06, 2011 10:45 am

bpp wrote:Droodman, for an MPT-style approach to studying the role of foreign bonds in a portfolio, you might have fun playing with the simple calculator in the following thread:
[link omitted]

Thanks, bpp. I think over the next few days I will try to do a simulation with two assets, U.S. and non-U.S. bonds, using ~20 years of data from VBMFX and BEGBX, including distributions. I can graph overall volatility as a function of various mixes of the two. That sort of thing. Or maybe I'll get stats for 4 assets and use that spreadsheet. I'll report back.
David Roodman
droodman
 
Posts: 13
Joined: Mon Jan 03, 2011 5:56 pm
Location: Washington, DC

Re: The case for foreign bonds

Postby droodman » Thu Jan 06, 2011 10:50 am

Valuethinker wrote:
droodman wrote:
Valuethinker wrote:When costs exceed prospective benefits (private equity, hedge funds).

Or when the risk is not compensated for in returns.

Agreed. How does this translate into practice in the case of foreign bonds?


They may have looked at the historic data and found that it does not.

It's orthodox in institutional investing (outside the USA) to hold global bonds, but there is also a currency overlay that is managed, often separately.


Thanks, Valuethinker. While I don't find this answer particularly satisfying ("a Vanguard analysis might exist and it might conclude X"), this feels like the sort of wisdom I was looking for when I resuscitated this thread.
David Roodman
droodman
 
Posts: 13
Joined: Mon Jan 03, 2011 5:56 pm
Location: Washington, DC

Re: The case for foreign bonds

Postby Valuethinker » Thu Jan 06, 2011 10:53 am

droodman wrote:
Valuethinker wrote:
droodman wrote:
Valuethinker wrote:When costs exceed prospective benefits (private equity, hedge funds).

Or when the risk is not compensated for in returns.

Agreed. How does this translate into practice in the case of foreign bonds?


They may have looked at the historic data and found that it does not.

It's orthodox in institutional investing (outside the USA) to hold global bonds, but there is also a currency overlay that is managed, often separately.


Thanks, Valuethinker. While I don't find this answer particularly satisfying ("a Vanguard analysis might exist and it might conclude X"), this feels like the sort of wisdom I was looking for when I resuscitated this thread.


One of the two Swensen books goes through the case for international bonds, and I would imagine Swedroe does as well.

There are also, I think, a couple of Vanguard Institutional papers on this? Not sure also DFA? Both those websites have troves of this sort of thing.
Valuethinker
 
Posts: 25189
Joined: Fri May 11, 2007 12:07 pm

Re: The case for foreign bonds

Postby droodman » Thu Jan 06, 2011 10:57 am

Valuethinker wrote:One of the two Swensen books goes through the case for international bonds, and I would imagine Swedroe does as well.

There are also, I think, a couple of Vanguard Institutional papers on this? Not sure also DFA? Both those websites have troves of this sort of thing.


Yes, I'll check my Swedroe book, unless my dad never returned it to me after I enthusiastically lent it to him. Vanguard has nothing--a Vanguard financial planner just checked for me. I haven't found anything on DFA either, but maybe I am looking in the wrong place.
David Roodman
droodman
 
Posts: 13
Joined: Mon Jan 03, 2011 5:56 pm
Location: Washington, DC

Postby Noobvestor » Thu Jan 06, 2011 2:07 pm

yobria wrote:0%. High volatility, low return. Devaluation of the dollar won't affect me much, since that's what my expenses are in.


orly? :shock: http://quote.morningstar.com/fund/f.aspx?t=FNMIX
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
User avatar
Noobvestor
 
Posts: 3927
Joined: Mon Aug 23, 2010 2:09 am

Re: The case for foreign bonds

Postby Valuethinker » Thu Jan 06, 2011 2:16 pm

droodman wrote:
Valuethinker wrote:One of the two Swensen books goes through the case for international bonds, and I would imagine Swedroe does as well.

There are also, I think, a couple of Vanguard Institutional papers on this? Not sure also DFA? Both those websites have troves of this sort of thing.


Yes, I'll check my Swedroe book, unless my dad never returned it to me after I enthusiastically lent it to him. Vanguard has nothing--a Vanguard financial planner just checked for me. I haven't found anything on DFA either, but maybe I am looking in the wrong place.


It'll be on the pieces for institutional investors.

Swensen had the clearest explanation:

- stripping out currency, the gains from investing in developed country bonds come from the desynchronisation of interest rate cycles

He doesn't judge that as a large gain.

Whether in the Swensen institutional or retail book, I can't say (they blur in my mind).

Probably also the 'Gibson' (?) or 'Gilson) book on asset allocation. I think it's Roger Gibson.
Valuethinker
 
Posts: 25189
Joined: Fri May 11, 2007 12:07 pm

Postby Valuethinker » Thu Jan 06, 2011 2:18 pm

kramer wrote:
Generally, from a pure MPT perspective, the case either for or against foreign bonds is not very strong. One really needs some other justification to decide one way or another, such as "diversification is good," or "bonds are for safety."

Yes, I have really struggled with this question. If I were a regular investor, living and retiring in the USA, I would definitely not do it. Mostly due to the higher expenses.

Since I live abroad and spend mostly in non-dollar currencies, I do count my "foreign currency" exposure, or at least non-dollar exposure, as a separate diversification category (commodities futures, precious metals equity, foreign stocks, foreign bonds).

Also, a future social security income stream will be denominated in dollars.

The asset location issue seems less of an issue because the foreign taxes paid are much lower, apparently, than foreign equities.

My intuition tells me that I should be at least 40% in non-dollar currencies (I have no prediction for the dollar direction). Right now I am only about 31% (mostly because all of my bonds are USA), so considering about a 3% investment in IGOV.

Kramer


And presumably 100% globally diversified as to equities?

Depending on where you want to retire, Phillipines is both historically linked to the USD, but also has big exposure to the Chinese phenomenon.
Valuethinker
 
Posts: 25189
Joined: Fri May 11, 2007 12:07 pm

Postby Valuethinker » Thu Jan 06, 2011 2:19 pm

patrick wrote:
zotty wrote:Interesting discussion.

Something nags at me.

Didn't we have something like 30 years of negative real return in IT, LT treasuries from the early 50s to the early 80s?

How likely is this to recur? Would international bond exposure improve the outcome?

Probably not, but i haven't read anything looking back that far.


It was longer than that. From the end of 1931 to the end of 1981 you would have had a 30% loss in real terms in 10 year treasuries (per data from http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html and ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt).

Many other countries have seen far worse bond performance than the US. Look in https://emagazine.credit-suisse.com/app/_customtags/download_tracker.cfm?logged=true&dom=emagazine.credit-suisse.com&doc=/data/_product_documents/_shop/276532/credit_suisse_global_investment_yearbook_2010.pdf for some really scary bond graphs.


Careful of the composition of that number?

What it shows is absolute decimation in certain years in the 70s?

In *real* returns that is. Nominal returns are positive in most years.

Most other sub periods positive?

Note of course that after tax returns for taxable investors were far far worse. With stocks you can defer capital gains taxes, at least.
Valuethinker
 
Posts: 25189
Joined: Fri May 11, 2007 12:07 pm

Re: The case for foreign bonds

Postby bpp » Thu Jan 06, 2011 7:29 pm

droodman wrote:
bpp wrote:Droodman, for an MPT-style approach to studying the role of foreign bonds in a portfolio, you might have fun playing with the simple calculator in the following thread:
[link omitted]

Thanks, bpp. I think over the next few days I will try to do a simulation with two assets, U.S. and non-U.S. bonds, using ~20 years of data from VBMFX and BEGBX, including distributions. I can graph overall volatility as a function of various mixes of the two. That sort of thing. Or maybe I'll get stats for 4 assets and use that spreadsheet. I'll report back.


Please do. It would be interesting to see what you come up with.

I've done backtesting for the case of a Japanese investor, and found that switching some domestic bonds to foreign bonds lowered volatility a tiny bit, but did not make a big difference overall.
bpp
 
Posts: 1624
Joined: Mon Feb 26, 2007 1:35 pm
Location: Japan Age:%bonds+10

PreviousNext

Return to Investing - Theory, News & General

Who is online

Users browsing this forum: 555, atwood, hmw, jdb, Kevin M, msi, N52570 and 41 guests