Best fund for international bonds

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Topic Author
Luckywon
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Best fund for international bonds

Post by Luckywon » Sun Apr 16, 2017 12:06 pm

My target allocation includes about 10% in international bonds. I have all of this in BNDX.

I read an article in the WSJ today that passively managed funds in emerging markets bonds have generally lagged actively managed funds over five years. BNDX only has a small component in emerging markets, but several sources have suggested to me that passively managed bond funds may not be as good as actively managed ones. I would be very interested to hear thoughts on what actively managed funds are good choices for exposure to international bonds.

Thanks :)

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SpringMan
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Re: Best fund for international bonds

Post by SpringMan » Sun Apr 16, 2017 12:24 pm

For good active management on the bond side give PIMCO a look. Vanguard brokerage has PIMCO institutional funds available with 25K minimums. Vanguard has no multi-sector bond funds. I own PIMIX which is multi-sector and has an expense ratio of .45%. Flagship clients can use one of their free trades to purchase PIMCO institutional funds. Many brokerages have a $1M minimum on these funds.
Best Wishes, SpringMan

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nisiprius
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Re: Best fund for international bonds

Post by nisiprius » Sun Apr 16, 2017 9:19 pm

The very first choice you need to make, before starting to look at specifics and questions of active versus passive, is whether you want a dollar-hedged bond fund or an unhedged bond fund. The choice is important.

Unhedged bond funds, which are the commonest, don't behave "like bonds" at all. They are basically interest-earning currency funds. They are volatile, have the potential for bigger gains and bigger losses than ordinary domestic bond funds... and, being basically currency-related, are more like speculation and less like investing. Unhedged bond funds are favored by those who want and seek currency risk, probably because they predict that the dollar will weaken.

Dollar-hedged bond funds do behave "like bonds." They are quiet, conservative vehicles that offer some degree of diversification based on national differences in economies, interest rates, and central bank policies.

Whether or not you decide to use the Vanguard Total International Bond Market fund, which is dollar-hedged, you should, for background, read Vanguard's Global fixed income: Considerations for U.S. investors. In my opinion, it makes a very weak case for international bond investing... but a very strong case for currency-hedged bond funds if you are going to do it at all.

The difference can be seen here. Blue is unhedged--PIMCO Global Bond (Unhedged), PIGLX; Orange is dollar-hedged--PIMCO Global Bond (USD-Hedged), PGBIX. Notice that both have about the same overall return--in fact the unhedged has had a lower return but other time periods would show it having a higher return--but it is much more volatile.

Source
Image

PortfolioVisualizer is showing, for (Jan 1997 - Mar 2017), a Sharpe ratio of 0.45 for the unhedged fund, 0.61 for the dollar-hedged fund. And, by the way, for the same period, 0.84 for a U.S. bond fund, Vanguard Total Bond. The Sharpe ratio is a measure of risk-adjusted return.

Source
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Topic Author
Luckywon
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Joined: Tue Mar 28, 2017 10:33 am

Re: Best fund for international bonds

Post by Luckywon » Mon Apr 17, 2017 12:40 pm

SpringMan wrote:For good active management on the bond side give PIMCO a look. Vanguard brokerage has PIMCO institutional funds available with 25K minimums. Vanguard has no multi-sector bond funds. I own PIMIX which is multi-sector and has an expense ratio of .45%. Flagship clients can use one of their free trades to purchase PIMCO institutional funds. Many brokerages have a $1M minimum on these funds.

Thanks Springman. PIMIX looks like a good choice. I think I'll be reducing my international bond exposure a bit and PIMIX seems like a good fund to include some exposure.
Last edited by Luckywon on Mon Apr 17, 2017 12:45 pm, edited 1 time in total.

Topic Author
Luckywon
Posts: 547
Joined: Tue Mar 28, 2017 10:33 am

Re: Best fund for international bonds

Post by Luckywon » Mon Apr 17, 2017 12:44 pm

nisiprius wrote:The very first choice you need to make, before starting to look at specifics and questions of active versus passive, is whether you want a dollar-hedged bond fund or an unhedged bond fund. The choice is important.

Unhedged bond funds, which are the commonest, don't behave "like bonds" at all. They are basically interest-earning currency funds. They are volatile, have the potential for bigger gains and bigger losses than ordinary domestic bond funds... and, being basically currency-related, are more like speculation and less like investing. Unhedged bond funds are favored by those who want and seek currency risk, probably because they predict that the dollar will weaken.

Dollar-hedged bond funds do behave "like bonds." They are quiet, conservative vehicles that offer some degree of diversification based on national differences in economies, interest rates, and central bank policies.

Whether or not you decide to use the Vanguard Total International Bond Market fund, which is dollar-hedged, you should, for background, read Vanguard's Global fixed income: Considerations for U.S. investors. In my opinion, it makes a very weak case for international bond investing... but a very strong case for currency-hedged bond funds if you are going to do it at all.

The difference can be seen here. Blue is unhedged--PIMCO Global Bond (Unhedged), PIGLX; Orange is dollar-hedged--PIMCO Global Bond (USD-Hedged), PGBIX. Notice that both have about the same overall return--in fact the unhedged has had a lower return but other time periods would show it having a higher return--but it is much more volatile.

Source
Image

PortfolioVisualizer is showing, for (Jan 1997 - Mar 2017), a Sharpe ratio of 0.45 for the unhedged fund, 0.61 for the dollar-hedged fund. And, by the way, for the same period, 0.84 for a U.S. bond fund, Vanguard Total Bond. The Sharpe ratio is a measure of risk-adjusted return.

Source
This is very interesting and new information to me, thank you! I read the Vanguard reference and I think I'll reduce my international bond exposure to about 5 % of my portfolio, and look for hedged funds.
Best regards.

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