Emerging Market Bond Funds

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
hdas
Posts: 407
Joined: Thu Jun 11, 2015 8:24 am

Emerging Market Bond Funds

Post by hdas » Mon Oct 08, 2018 6:12 pm

Good new article from Vanguard here: https://advisors.vanguard.com/iwe/pdf/I ... IL:ET:2017

Somw points they make:
investors are advised to examine the case for adding non-market-cap-weighted emerging-market fixed income to their portfolio
historically, risk-adjusted returns improved when emerging-market bonds were substituted for a portion of an equity allocation
We performed a multivariate regression to determine the best explanation for emerging-market bond returns (the dependent variable). Over the sample period, we found that the independent variables term premium, high yield, and equity were generally statistically significant
We used option-adjusted spreads (OAS)6 to measure how much incremental yield an investor would receive over a risk-free asset and over
U.S. credit. The results show that the emerging-market bonds generally had higher yields and shorter duration
A nice graphic

Image

I use VWOB....for BH's the allocate to emerging market bonds what other fund you recommend and why?

*** Kindly abstain from "take risk on equity side" or "look how It got liquidated in 09" nonsense.
Stay the course and buy some more.

PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: Emerging Market Bond Funds

Post by PFInterest » Mon Oct 08, 2018 6:38 pm

Ill take my risk on the equity side.

User avatar
unclescrooge
Posts: 2697
Joined: Thu Jun 07, 2012 7:00 pm

Re: Emerging Market Bond Funds

Post by unclescrooge » Tue Oct 09, 2018 12:01 am

2 years ago, I added a small allocation to a closed end EMB fund that was trading at an 18% discount to net asset value. The holdings were bonds issued in US dollars.

That did very well until this year. I exchanged it for a local currency EMB fund.

User avatar
watchnerd
Posts: 1432
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Emerging Market Bond Funds

Post by watchnerd » Tue Oct 09, 2018 12:13 am

PFInterest wrote:
Mon Oct 08, 2018 6:38 pm
Ill take my risk on the equity side.
Ditto.

Equities for gains, bonds for risk reduction.

EM bonds have no role in my port.
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

AlohaJoe
Posts: 3930
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Emerging Market Bond Funds

Post by AlohaJoe » Tue Oct 09, 2018 12:49 am

watchnerd wrote:
Tue Oct 09, 2018 12:13 am
PFInterest wrote:
Mon Oct 08, 2018 6:38 pm
Ill take my risk on the equity side.
Ditto.
So your bonds have no term risk, no interest rate risk, no reinvestment risk, and no default risk? Nice trick, how'd you manage that?

Everyone takes risk with their bonds. Everyone. The only question is which risks but that becomes an actual conversation with tradeoffs instead of pithy one-liners.
hdas wrote:
Mon Oct 08, 2018 6:12 pm
I use VWOB....for BH's the allocate to emerging market bonds what other fund you recommend and why?
I also use VWOB. Well, the mutual fund version, since it is sitting in a Rollover IRA at Vanguard. I've never understood why EM equities are so often recommended and EM bonds aren't. If you get past the bond/stock nomenclature and just look at them both as bundles of factors, EM bonds have a stronger argument for being in a portfolio than EM equities, IMHO.

You could even imagine a "Larry Portfolio" that is 90% US bonds and 10% EM bonds. A "100% bond" portfolio that still has attractive returns.

I've never really looked at other EM bond options. I know Research Affiliates likes local currency EM bonds but I don't know what funds offer them; just never looked.

User avatar
watchnerd
Posts: 1432
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Emerging Market Bond Funds

Post by watchnerd » Tue Oct 09, 2018 12:58 am

AlohaJoe wrote:
Tue Oct 09, 2018 12:49 am
watchnerd wrote:
Tue Oct 09, 2018 12:13 am
PFInterest wrote:
Mon Oct 08, 2018 6:38 pm
Ill take my risk on the equity side.
Ditto.
So your bonds have no term risk, no interest rate risk, no reinvestment risk, and no default risk? Nice trick, how'd you manage that?
By investing in US Treasuries for most of my bonds.

Of course bonds all have interest rate risk.

But default purposes, I pick the risk-free asset. As do Swensen, Bernstein.
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

CarpeDiem22
Posts: 139
Joined: Tue May 22, 2018 11:20 pm

Re: Emerging Market Bond Funds

Post by CarpeDiem22 » Tue Oct 09, 2018 1:31 am

Note 7 on page 7 says:
This was a highly time-dependent finding and we would not expect it to be the case in the future. A number of trends—including falling interest rates, tightening spreads, and several equity bear markets—substantially explain what we expect was a historical anomaly. Over longer periods, we believe investors can reasonably expect to be compensated for equity risk through realization of the equity risk premium.
Also, when we say risk-adjusted return, I wonder whether that risk covers default risk, political risk, currency risk etc.

Valuethinker
Posts: 36691
Joined: Fri May 11, 2007 11:07 am

Re: Emerging Market Bond Funds

Post by Valuethinker » Tue Oct 09, 2018 3:17 am

CarpeDiem22 wrote:
Tue Oct 09, 2018 1:31 am
Note 7 on page 7 says:
This was a highly time-dependent finding and we would not expect it to be the case in the future. A number of trends—including falling interest rates, tightening spreads, and several equity bear markets—substantially explain what we expect was a historical anomaly. Over longer periods, we believe investors can reasonably expect to be compensated for equity risk through realization of the equity risk premium.
Also, when we say risk-adjusted return, I wonder whether that risk covers default risk, political risk, currency risk etc.
For an individual investor, default or collapse of an investment can be disastrous.

For the market as a whole, it's a nuisance. Thus, you see a risk spread that does include those risks moving in and out over time. Until the Fed started raising rates, my sense was that for EM it was very low. The market was not putting a huge premium on Argentina, Turkey, South Africa -- the current account deficit countries with political risk. Now it is.

That risk spread is just the market's best guess at any given moment as to whether default in some form is likely. And it changes constantly.

There is a strategy of buying when the risk spread over US Treasuries is high, and selling when it is low, over the cycle, looking at historic spreads.

Valuethinker
Posts: 36691
Joined: Fri May 11, 2007 11:07 am

Re: Emerging Market Bond Funds

Post by Valuethinker » Tue Oct 09, 2018 3:25 am

AlohaJoe wrote:
Tue Oct 09, 2018 12:49 am
watchnerd wrote:
Tue Oct 09, 2018 12:13 am
PFInterest wrote:
Mon Oct 08, 2018 6:38 pm
Ill take my risk on the equity side.
Ditto.
So your bonds have no term risk, no interest rate risk, no reinvestment risk, and no default risk? Nice trick, how'd you manage that?

Everyone takes risk with their bonds. Everyone. The only question is which risks but that becomes an actual conversation with tradeoffs instead of pithy one-liners.
hdas wrote:
Mon Oct 08, 2018 6:12 pm
I use VWOB....for BH's the allocate to emerging market bonds what other fund you recommend and why?
I also use VWOB. Well, the mutual fund version, since it is sitting in a Rollover IRA at Vanguard. I've never understood why EM equities are so often recommended and EM bonds aren't. If you get past the bond/stock nomenclature and just look at them both as bundles of factors, EM bonds have a stronger argument for being in a portfolio than EM equities, IMHO.

You could even imagine a "Larry Portfolio" that is 90% US bonds and 10% EM bonds. A "100% bond" portfolio that still has attractive returns.

I've never really looked at other EM bond options. I know Research Affiliates likes local currency EM bonds but I don't know what funds offer them; just never looked.
What are the factors that you think are in EM bonds (government?) that are not in EM stocks?

If there was an EM corporate bond fund - that would be racy. But the Agency costs of corporate bonds are lower than for equities - so in theory at least it might be a better investment (it's easier to enforce creditor rights than shareholder rights, even in western legal systems). However Swensen takes one through the logic as to why corporate bonds are just a bad idea for individual investors.

You live in Vietnam? Is it a concern that if you hold EM bonds you are therefore increasing your correlation with the EM in which you live?

I accept that EM are now much more differentiated than in 1998. But we have not had an (EM) crisis of that scale since. Remembering the daisy chain, which started with Thailand and then SE Asia but wound up in Brazil, Argentina and Russia.

If there is a China crisis of some kind (say geopolitical standoff in the S. China Sea, or a real property-debt bust so huge the Party cannot manage it) then I could see all of SE Asia going down, again. (Australian and New Zealand markets would also get slammed, ditto Singapore, probably Canada). If it extended to supply chains (see below) then it could get really messy - world GDP would probably take a stutter if iphone production were interrupted for a significant period.

If someone came out of the blue here as a new poster, and said they lived (and owned property?) in Vietnam, I would suggest they don't need any EM exposure (debt nor equity) at all**.

** reading in The Economist how integrated the smartphone supply chain is across SE Asia - components made in various countries (chips, screens, antennae, keypad etc), then assembled in China (or Vietnam). So there is certainly a risk factor there with the tech sector - if Apple gets a cold, then probably also Samsung and (insert name of Chinese mobile phone manufacturer) do as well, and the knock on effect will be in a series of countries that are part of that supply chain (it's really a supply web, rather than a chain).

Kevin8696
Posts: 155
Joined: Mon Oct 08, 2012 7:45 pm

Re: Emerging Market Bond Funds

Post by Kevin8696 » Tue Oct 09, 2018 7:53 am

From the VWOB page on the Vanguard site:

"Returns of emerging market bonds, even dollar-denominated bonds like those owned by the fund, can be quite volatile, and tend to correlate more closely with U.S. and foreign stock returns than the returns of developed market bonds in general. Consequently, if your goal is to lower risk and volatility, this fund is not an appropriate investment."

Since these assets are correlated to the US stock market, it might be better to take the risk in US equities, which offer a higher Sharpe ratio.

Otherwise, have fun with those Chinese, Mexican, Brazilian, Indonesian, Russian... etc government bonds !!
Last edited by Kevin8696 on Tue Oct 09, 2018 11:04 am, edited 2 times in total.

ChinchillaWhiplash
Posts: 571
Joined: Sat Jan 20, 2018 5:40 pm
Location: Colorado

Re: Emerging Market Bond Funds

Post by ChinchillaWhiplash » Tue Oct 09, 2018 8:00 am

I hold some actively managed CEF TEI. Has a good track record, selling at a large discount, pays enough dividend to justify the risk. I think it is worth paying a higher ER for an asset class such as this and active management can give it an edge.

chisey
Posts: 225
Joined: Mon Apr 16, 2007 10:47 am

Re: Emerging Market Bond Funds

Post by chisey » Tue Oct 09, 2018 8:38 am

We hold a small allocation of the iShares ETF, EMB. It is part of our "risk" portfolio, so it replaces stocks in our overall portfolio rather than bonds.

Adding EMB is a relatively recent change, but I like how it has played with the other assets in our portfolio in the past and I think EM bonds add a low(ish) correlation source of pretty decent potential returns.

User avatar
watchnerd
Posts: 1432
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Emerging Market Bond Funds

Post by watchnerd » Tue Oct 09, 2018 8:53 am

chisey wrote:
Tue Oct 09, 2018 8:38 am
We hold a small allocation of the iShares ETF, EMB. It is part of our "risk" portfolio, so it replaces stocks in our overall portfolio rather than bonds.

Adding EMB is a relatively recent change, but I like how it has played with the other assets in our portfolio in the past and I think EM bonds add a low(ish) correlation source of pretty decent potential returns.
Lowish correlation to what?

EMB:VTI = 0.38

GOVT:VTI: = -0.34

If I want something that acts like 40% of a stock......why not just reduce my equity exposure by the same amount, at a lower ER?
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

chisey
Posts: 225
Joined: Mon Apr 16, 2007 10:47 am

Re: Emerging Market Bond Funds

Post by chisey » Tue Oct 09, 2018 9:04 am

watchnerd wrote:
Tue Oct 09, 2018 8:53 am
Lowish correlation to what?

EMB:VTI = 0.38

GOVT:VTI: = -0.34

If I want something that acts like 40% of a stock......why not just reduce my equity exposure by the same amount, at a lower ER?
Correlation of 0.38 doesn't mean "acts like 38% of a stock." You have to square it to get that kind of interpretation: (0.38)^2=0.144. 14.4% of its movements can be explained by movements in VTI. That's quite low for an asset with pretty strong potential returns. Correlation doesn't have to be negative to provide diversification benefits.

It also has a reasonably low correlation to US bonds, which US treasuries do not.

User avatar
watchnerd
Posts: 1432
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Emerging Market Bond Funds

Post by watchnerd » Tue Oct 09, 2018 9:10 am

chisey wrote:
Tue Oct 09, 2018 9:04 am
watchnerd wrote:
Tue Oct 09, 2018 8:53 am
Lowish correlation to what?

EMB:VTI = 0.38

GOVT:VTI: = -0.34

If I want something that acts like 40% of a stock......why not just reduce my equity exposure by the same amount, at a lower ER?
Correlation of 0.38 doesn't mean "acts like 38% of a stock." You have to square it to get that kind of interpretation: (0.38)^2=0.144. 14.4% of its movements can be explained by movements in VTI. That's quite low for an asset with pretty strong potential returns. Correlation doesn't have to be negative to provide diversification benefits.

It also has a reasonably low correlation to US bonds, which US treasuries do not.
Thanks, I forgot my correlation math.

But I still don't get the use case, as it seems like neither fish nor fowl.

If EM bonds have equity like risk and returns, why not just hold equities? And if I want to diversify away from US equity correlation, why not hold EM stocks?

Conversely, if I want to maximally reduce correlations to US equities, why not hold more Treasuries?

I don't see the purpose of a 'tweener' asset.
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

chisey
Posts: 225
Joined: Mon Apr 16, 2007 10:47 am

Re: Emerging Market Bond Funds

Post by chisey » Tue Oct 09, 2018 9:17 am

watchnerd wrote:
Tue Oct 09, 2018 9:10 am
If EM bonds have equity like risk and returns, why not just hold equities? And if I want to diversify away from US equity correlation, why not hold EM stocks?

Conversely, if I want to maximally reduce correlations to US equities, why not hold more Treasuries?

I don't see the purpose of a 'tweener' asset.
It's not a "tweener." There are additional risks that affect EM bonds that affect neither developed stocks nor developed bonds. If you do a factor regression on EMB you see that it loads on credit risk, term risk, and market risk, but that still leaves almost 40% of its variability unexplained. There is more going on than just thinking of it as part stock, part bond.

For my portfolio I seek to bring together the most risky and least correlated assets for the "risk" portion, and EM bonds fit that just as nicely as EM stocks do. So do long term US treasuries, so they're in there too.

User avatar
watchnerd
Posts: 1432
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Emerging Market Bond Funds

Post by watchnerd » Tue Oct 09, 2018 9:28 am

chisey wrote:
Tue Oct 09, 2018 9:17 am
watchnerd wrote:
Tue Oct 09, 2018 9:10 am
If EM bonds have equity like risk and returns, why not just hold equities? And if I want to diversify away from US equity correlation, why not hold EM stocks?

Conversely, if I want to maximally reduce correlations to US equities, why not hold more Treasuries?

I don't see the purpose of a 'tweener' asset.
It's not a "tweener." There are additional risks that affect EM bonds that affect neither developed stocks nor developed bonds. If you do a factor regression on EMB you see that it loads on credit risk, term risk, and market risk, but that still leaves almost 40% of its variability unexplained. There is more going on than just thinking of it as part stock, part bond.

For my portfolio I seek to bring together the most risky and least correlated assets for the "risk" portion, and EM bonds fit that just as nicely as EM stocks do. So do long term US treasuries, so they're in there too.
Given that the 40% variability is some unknown x-facor (political risk?), how do you model that when deciding how much EM bonds to hold?

And how much do you allocate to EM bonds?
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

chisey
Posts: 225
Joined: Mon Apr 16, 2007 10:47 am

Re: Emerging Market Bond Funds

Post by chisey » Tue Oct 09, 2018 9:36 am

watchnerd wrote:
Tue Oct 09, 2018 9:28 am
Given that the 40% variability is some unknown x-facor (political risk?), how do you model that when deciding how much EM bonds to hold?

And how much do you allocate to EM bonds?
Here's the really scientific part: I don't try to model that. I just hold about as much in EM as I hold in anything else.

We have about 10% in EM (half stock, half bonds), 10% in developed ex-US small cap, 10% in US LC, 10% in US SCV, and 10% in LTT. That's the risky half. The "stable" half includes ITT, TIPs, and a stable value fund.

Valuethinker
Posts: 36691
Joined: Fri May 11, 2007 11:07 am

Re: Emerging Market Bond Funds

Post by Valuethinker » Tue Oct 09, 2018 9:38 am

EM bonds have been a tremendous bull market.

Spreads at the time of the 1997/98 crisis blew out to what 1400 bps (14.0%)? Russian bonds were giving a 90% yield at one point I recall?

Post 2008 EM bonds have not been part of the Eurozone crisis but have had an ongoing rally and rerating. Indonesia got to something under 300 bps? Mexico "emerged" into a developed bond market? (amazing revelation for those of us who remember 1994).

However you did have the "taper tantrum" (was that 2014?) and recently you have had Turkey/ Argentina and knock-on effects.

You have had a one-off, secular rerating of EM bonds. Some EM countries have conservative finances and will not get knocked off course by global macro events. We also discovered that a "Developed" country bond market could revert to Emerging - Greece. This is not news to students of economic and financial history (there was an EM bond crisis in the 1920s & 30s) but it was kind of news to markets. But we have also just been re-reminded that EM have macro risk - and it's quite real.

I am not statistically minded, but if you have a time series with a distinct trend in it - of falling yields and of falling volatility in this case - does your Ordinary Least Squares regression tell you what you think it does?

Maybe the 40% unexplained variation is that rerating going on ? That secular trend in the underlying data? Which might now be reversing? The 40% is actually Fed policy?

BTW in all of this I assume we are talking dollar EM bonds? (there are some that are issued in Euros, too). i.e. not "locals" - EM bonds issued in their own currency? Because credit risk and currency risk are correlated, that gets really messy if you include locals in your analysis.

User avatar
watchnerd
Posts: 1432
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Emerging Market Bond Funds

Post by watchnerd » Tue Oct 09, 2018 9:50 am

chisey wrote:
Tue Oct 09, 2018 9:36 am
watchnerd wrote:
Tue Oct 09, 2018 9:28 am
Given that the 40% variability is some unknown x-facor (political risk?), how do you model that when deciding how much EM bonds to hold?

And how much do you allocate to EM bonds?
Here's the really scientific part: I don't try to model that. I just hold about as much in EM as I hold in anything else.

We have about 10% in EM (half stock, half bonds), 10% in developed ex-US small cap, 10% in US LC, 10% in US SCV, and 10% in LTT. That's the risky half. The "stable" half includes ITT, TIPs, and a stable value fund.
So 5% in EM bonds?
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

chisey
Posts: 225
Joined: Mon Apr 16, 2007 10:47 am

Re: Emerging Market Bond Funds

Post by chisey » Tue Oct 09, 2018 9:51 am

Valuethinker wrote:
Tue Oct 09, 2018 9:38 am
I am not statistically minded, but if you have a time series with a distinct trend in it - of falling yields and of falling volatility in this case - does your Ordinary Least Squares regression tell you what you think it does?

Maybe the 40% unexplained variation is that rerating going on ? That secular trend in the underlying data? Which might now be reversing? The 40% is actually Fed policy?

BTW in all of this I assume we are talking dollar EM bonds? (there are some that are issued in Euros, too). i.e. not "locals" - EM bonds issued in their own currency? Because credit risk and currency risk are correlated, that gets really messy if you include locals in your analysis.
Correct-- dollars and not local currency. I don't see the benefit in going local.

As for your other questions, they are good and I don't have answers at my fingertips. I think in some sense those sorts of questions can be applied to any asset class without perfect correlation to known factors (so, any asset class). There's a hodgepodge of political, environmental, and financial risks that the market attempts to price in without full knowledge of how it affects various assets. It's a risk to put money in any asset class without full understanding of what affects its future returns, but to varying degrees that's the case with most of my portfolio.

EM bonds may not be affected by anything particularly unique or special, but at least in recent history they have been affected differently from other classes-- different enough to keep correlations fairly low. That says little about the future, of course.

MichCPA
Posts: 309
Joined: Fri Jul 06, 2018 9:06 pm

Re: Emerging Market Bond Funds

Post by MichCPA » Tue Oct 09, 2018 9:52 am

As far as "take your risk on the equity side" goes. Nobody has been able to convince me that I shouldn't invest in high yield bonds and just allocate that toward my my equity or "at risk" bucket. Considering that HY is the highest performing US asset class in the hdas graphic above, I think I can support the idea that HY makes sense in a reasonable amount. If you can cut volatility by 25% compared to stocks and not give up return, that is a trade that makes sense to me. HY presents arbitrage opportunities due to many entities (insurance funds, some pension funds) not being legally allowed to hold them. I would rather own something like SHYG and control duration risk vs owning a long term treasury, which as an aside, I also put in the 'at risk' bucket.

I agree with the OP that you shouldn't get complacent with your bonds, but EM is definitely 'at risk' and not a core bond holding.

chisey
Posts: 225
Joined: Mon Apr 16, 2007 10:47 am

Re: Emerging Market Bond Funds

Post by chisey » Tue Oct 09, 2018 9:53 am

watchnerd wrote:
Tue Oct 09, 2018 9:50 am
So 5% in EM bonds?
Correct. Barely enough to make a difference, but going forward I plan to let that drift up to make up a larger portion of the EM slice.

User avatar
watchnerd
Posts: 1432
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Emerging Market Bond Funds

Post by watchnerd » Tue Oct 09, 2018 9:59 am

MichCPA wrote:
Tue Oct 09, 2018 9:52 am
As far as "take your risk on the equity side" goes. Nobody has been able to convince me that I shouldn't invest in high yield bonds and just allocate that toward my my equity or "at risk" bucket. Considering that HY is the highest performing US asset class in the hdas graphic above, I think I can support the idea that HY makes sense in a reasonable amount. If you can cut volatility by 25% compared to stocks and not give up return, that is a trade that makes sense to me. HY presents arbitrage opportunities due to many entities (insurance funds, some pension funds) not being legally allowed to hold them. I would rather own something like SHYG and control duration risk vs owning a long term treasury, which as an aside, I also put in the 'at risk' bucket.

I agree with the OP that you shouldn't get complacent with your bonds, but EM is definitely 'at risk' and not a core bond holding.
That makes sense to me. If high-yield developed corps are correlated to US equities, but basically get leveraged returns, just swap them out on a 1:1 basis.
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

hdas
Posts: 407
Joined: Thu Jun 11, 2015 8:24 am

Re: Emerging Market Bond Funds

Post by hdas » Tue Oct 09, 2018 11:00 am

So, it appears nobody in the thread knows of either:

- A good active EM bond fund
- A good passive EM bond fund that is less concentrated in the 10 countries Vanguard warns in the paper, with lowish expense ratio.

Going to check what I can find and will report back. H
Stay the course and buy some more.

AlohaJoe
Posts: 3930
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Emerging Market Bond Funds

Post by AlohaJoe » Tue Oct 09, 2018 11:03 am

Valuethinker wrote:
Tue Oct 09, 2018 3:25 am
What are the factors that you think are in EM bonds (government?) that are not in EM stocks?
That's what the Vanguard white paper goes into :) But -- in short -- it seems to behave much like EM equities but with lower volatility making it better on a risk-adjusted basis.
You live in Vietnam? Is it a concern that if you hold EM bonds you are therefore increasing your correlation with the EM in which you live?
Well, Vietnam hasn't even made it to Emerging Markets status...it is still just a Frontier Market. 8-) But my "home country bias" is an order of magnitude less than most investors. Even counting home equity and local business ownership and whatnot my total exposure to Vietnam is well under 10%, which I see more as a hedge against location inflation than something to be worried about.

Angst
Posts: 1874
Joined: Sat Jun 09, 2007 11:31 am

Re: Emerging Market Bond Funds

Post by Angst » Tue Oct 09, 2018 1:57 pm

I remember in years past when the virtues and pitfalls of investing in newly indexed EM Equity funds were first being discussed, a common complaint was how some of the equity, and some of the most desirable EM equity in particular, was often privately held or held by the governments themselves and therefor not accessible.

Going under the assumption that this may well still be the case, might not that standard FI complaint about corporate bonds being too much aligned with the equity risk/return factor actually be a "feature" when talking specifically about EM Bonds, regardless of them being corporate or government?

To be clear, I'm asking: Might taking on "equity-like risk" by investing in EM Bonds be just the ticket for accessing certain otherwise inaccessible EM Equity investments? I'm not trying to state that it would be, but it seems reasonable to imagine. I've never gone through the portfolios nor thought specifically about which EM govt bonds might be desirable from this perspective, but perhaps someone else has?

SlowMovingInvestor
Posts: 916
Joined: Sun Sep 11, 2016 11:27 am

Re: Emerging Market Bond Funds

Post by SlowMovingInvestor » Tue Oct 09, 2018 3:14 pm

hdas wrote:
Mon Oct 08, 2018 6:12 pm
Good new article from Vanguard here: https://advisors.vanguard.com/iwe/pdf/I ... IL:ET:2017

Somw points they make:
investors are advised to examine the case for adding non-market-cap-weighted emerging-market fixed income to their portfolio
That would exclude most bond ETFs/funds that try to track a benchmark, right ?

VWOB or iShares EMB, for instance
Last edited by SlowMovingInvestor on Tue Oct 09, 2018 3:43 pm, edited 1 time in total.

User avatar
jhfenton
Posts: 3532
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: Emerging Market Bond Funds

Post by jhfenton » Tue Oct 09, 2018 3:36 pm

I did open a position in VEGBX (Vanguard Emerging Market Bond Admiral Shares), Vanguard's active EM bond fund, when it went live last December.

Despite the fact that emerging market equities have tanked over that period, VEGBX has not. It is actually my best-performing bond fund over that period. (That is not saying much.)

(VEGBX is not connected in any way to VWOB/VGAVX, Vanguard's EM bond index funds. VEGBX is an active mutual fund. It has accumulated about $100 MM in assets.)

YTD Growth of $10K
VEGBX $9,939.86
VSIGX $9,779.18 (Vanguard Intermediate Treasury Index Admiral)
VBTLX $9,749.94 (Vanguard Total Bond Admiral)
VICSX $9,706.86 (Vanguard Intermediate Corp Index Admiral)
VWOB $9,631.63 (Vanguard Emerging Markets Government Bond ETF)

VEMAX $8,717.97 (Vanguard Emerging Markets Admiral)

I group VEGBX into my alternatives category. (It is currently the only thing in my alternatives category.) It is about 5% of our portfolio.
chisey wrote:
Tue Oct 09, 2018 9:17 am
It's not a "tweener." There are additional risks that affect EM bonds that affect neither developed stocks nor developed bonds. If you do a factor regression on EMB you see that it loads on credit risk, term risk, and market risk, but that still leaves almost 40% of its variability unexplained. There is more going on than just thinking of it as part stock, part bond.
This is exactly the way I see it. Compared to other "alternatives," Vanguard's active EM bond fund is cheap (45 bp) and offers both modest diversification and a reasonable risk/reward.

User avatar
nisiprius
Advisory Board
Posts: 37072
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Emerging Market Bond Funds

Post by nisiprius » Tue Oct 09, 2018 5:32 pm

Image

2002 through 2017? That's an irresponsible choice of year range. It's like talking about US stock performance and omitting 1987.

In 1998, emerging markets bonds fell -40% within six months.

Source
Image

Using PortfolioVisualizer on all available data for FNMIX,

Image .

I'm not going to redo the whole chart with 1993-2017 data, but just in the roughest way, comparing that 1993-2018 data to Vanguard's 2002-2017 data as presented, the CAGR was boosted slightly from 9.15% to 10.15%, the standard deviation is increased from 8.59% to 14.37%, and the Sharpe ratio drops from 1.07 to 0.57, so a chart that included 1998 might turn out to look something like this. More to the point, the risk-adjusted return for emerging market bonds might drop to the lowest of all bond categories instead of the highest.

Image

Shame on Vanguard. It's OK to show 1998 and put it into perspective, but it's misleading just to leave it out and not discuss it.
Last edited by nisiprius on Tue Oct 09, 2018 5:52 pm, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

pop77
Posts: 370
Joined: Wed Dec 12, 2007 7:57 pm

Re: Emerging Market Bond Funds

Post by pop77 » Tue Oct 09, 2018 5:37 pm

I have been using FNMIX for the past several years. Expense ratio is higher per boglehead standards but not super high. I am frequently thinking about swapping it out for EM stocks or Small cap stocks. Currently I am at 3.75% either I should get rid of it or go to 5%.

Hopefully the discussion here will help me in making that decision.

Angst
Posts: 1874
Joined: Sat Jun 09, 2007 11:31 am

Re: Emerging Market Bond Funds

Post by Angst » Tue Oct 09, 2018 6:00 pm

jhfenton wrote:
Tue Oct 09, 2018 3:36 pm
I did open a position in VEGBX (Vanguard Emerging Market Bond Admiral Shares), Vanguard's active EM bond fund, when it went live last December.

Despite the fact that emerging market equities have tanked over that period, VEGBX has not. It is actually my best-performing bond fund over that period. (That is not saying much.)

(VEGBX is not connected in any way to VWOB/VGAVX, Vanguard's EM bond index funds. VEGBX is an active mutual fund. It has accumulated about $100 MM in assets.)

[Snip...]
VWOB and VEGBX certainly approach Emerging Markets in different ways, and I think cap-weighted indexing may be problematic when it comes to EM bonds. VWOB is of course a "Government" index, but there are govt.-owned corporations issuing bonds which are also included in it. I suppose VWOB would fall under "USD sovereign" in Nisi's graphic above, contrary to VEGBX. Anyhow, here's a look at their holdings as posted in their respective Vanguard profile pages. Of course there's that elephant in the room - maybe call it a panda:

(Market allocations as of 08/31/2018)

Code: Select all

     VWOB/VGAVX                       VEGBX 
(Vang EM Govt Bond Index)      (Vang EM Bond "active")

China	       17.40%		Mexico 		8.30%
Mexico 		8.20%		Indonesia 	8.10%
Brazil 		5.70%		Argentina 	7.50%
Indonesia 	5.70%		Chile 		6.20%
Russia 		4.70%		Guatemala 	3.60%
United Arab Emi	4.60%		Ukraine 	4.20%
Saudi Arabia 	4.20%		Colombia 	4.10%
Turkey 		3.80%		Hungary 	3.50%
Argentina 	3.60%		Philippines 	3.20%
Qatar 		3.50%		Russia 		3.20%
Colombia 	2.40%		Brazil 		3.10%
Philippines 	2.00%		Kazakhstan 	3.00%
South Africa 	1.70%		Egypt 		2.80%
Chile 		1.60%		Lithuania 	2.50%
Lebanon 	1.60%		Trinidad & Toba 2.50%
Oman 		1.50%		India 		2.20%
Egypt 		1.40%		Uruguay 	2.10%
India 		1.40%		Dominican Repub	2.00%
Kazakhstan 	1.40%		El Salvador 	1.90%
Malaysia 	1.40%		Romania 	1.60%
Bahrain 	1.20%		South Africa 	1.60%
Panama 		1.20%		Ghana 		1.50%
Ukraine 	1.20%		Oman 		1.50%
Dominican Repub 1.10%		Peru 		1.50%
Ecuador 	1.10%		Turkey 		1.50%
Hungary 	1.10%		United States 	1.50%
Peru 		1.10%		Angola 		1.30%
Uruguay 	1.00%		Honduras 	1.30%
Kuwait 		0.80%		Sri Lanka 	1.30%
Poland 		0.80%		Bermuda 	1.10%
Sri Lanka 	0.80%		Paraguay 	1.10%
Croatia 	0.70%		Mongolia 	0.90%
Nigeria 	0.70%		Senegal 	0.90%
Venezuela 	0.70%		Panama 		0.80%
Romania 	0.60%		United Kingdom 	0.80%
Azerbaijan 	0.50%		Armenia 	0.70%
Costa Rica 	0.50%		Croatia 	0.70%
Angola 		0.40%		Lebanon 	0.60%
Ghana 		0.40%		Saudi Arabia 	0.70%
Ivory Coast 	0.40%		Serbia 		0.60%
Jamaica 	0.40%		Venezuela 	0.70%
Morocco 	0.40%		Qatar 		0.50%
Pakistan 	0.40%		Jordan 		0.50%
El Salvador 	0.30%		Ivory Coast 	0.40%
Iraq 		0.30%		Latvia 		0.20%
Kenya 		0.30%		Costa Rica	0.20%
Mongolia 	0.30%
Paraguay 	0.30%
Serbia 		0.30%
Belarus 	0.20%
Bolivia 	0.20%
Gabon 		0.20%
Guatemala 	0.20%
Jordan 		0.20%
Senegal 	0.20%
Trinidad & Toba 0.20%
United States 	0.20%
Vietnam 	0.20%
Zambia 		0.20%
Armenia 	0.10%
Bahamas 	0.10%
Bermuda 	0.10%
Ethiopia 	0.10%
Georgia 	0.10%
Honduras 	0.10%
Namibia 	0.10%
Thailand 	0.10%
Tunisia		0.10%

ThisDinosaur
Posts: 50
Joined: Wed Mar 08, 2017 1:53 pm

Re: Emerging Market Bond Funds

Post by ThisDinosaur » Wed Oct 10, 2018 8:47 am

Should these be held in taxable or tax deferred accounts? Does the foreign tax credit compensate for the high yield taxed as income?

What are the relative strengths of USD denominated vs. National currency denominated EMB funds?

On that last question, Points to consider:

- the safety of home currency treasuries comes from the money printing protection from default.

- when the dollar is strong, you'd prefer payment in dollars. But a strong dollar means financing is more expensive, which would seem to increase default risk.

HEDGEFUNDIE
Posts: 1229
Joined: Sun Oct 22, 2017 2:06 pm

Re: Emerging Market Bond Funds

Post by HEDGEFUNDIE » Wed Oct 10, 2018 10:38 am

VWOB only down -0.2% today while the rest of the market (especially tech) is getting wacked.

Did a backtest on FNMIX, during the dotcom crash in 2000 it did not miss a beat.

Could emerging market bonds be the perfect antidote to the impending tech crash?

SlowMovingInvestor
Posts: 916
Joined: Sun Sep 11, 2016 11:27 am

Re: Emerging Market Bond Funds

Post by SlowMovingInvestor » Thu Oct 11, 2018 9:24 am

ThisDinosaur wrote:
Wed Oct 10, 2018 8:47 am
Should these be held in taxable or tax deferred accounts? Does the foreign tax credit compensate for the high yield taxed as income?
If you hold EM government bonds, then I think they are rarely, if ever, subject to foreign taxes. I don't recollect EMB ever passing through a foreign tax credit. So Tax deferred for sure.

pop77
Posts: 370
Joined: Wed Dec 12, 2007 7:57 pm

Re: Emerging Market Bond Funds

Post by pop77 » Thu Oct 11, 2018 10:06 am

nisiprius wrote:
Tue Oct 09, 2018 5:32 pm
Image

2002 through 2017? That's an irresponsible choice of year range. It's like talking about US stock performance and omitting 1987.

In 1998, emerging markets bonds fell -40% within six months.

Source
Image

Using PortfolioVisualizer on all available data for FNMIX,

Image .

I'm not going to redo the whole chart with 1993-2017 data, but just in the roughest way, comparing that 1993-2018 data to Vanguard's 2002-2017 data as presented, the CAGR was boosted slightly from 9.15% to 10.15%, the standard deviation is increased from 8.59% to 14.37%, and the Sharpe ratio drops from 1.07 to 0.57, so a chart that included 1998 might turn out to look something like this. More to the point, the risk-adjusted return for emerging market bonds might drop to the lowest of all bond categories instead of the highest.

Image

Shame on Vanguard. It's OK to show 1998 and put it into perspective, but it's misleading just to leave it out and not discuss it.
Thanks Nisi. I have been holding on to FNMIX because every time I evaluated the fund, it was for the past 15 years and it has great risk adjusted returns compared to US Small Cap, Emerging Market Stock etc.

I am trying to see whether this is an asset class worth holding or whether I can get similar or better risk adjusted return by combining EM Stock, Small Cap and US Bond (which I already hold). - I am trying to simplify my portfolio by reducing the number of asset classes I own.

I am having difficulty in finding a good EM Stock index fund that goes back to 1985 so that I can compare it to FNMIX from 1985. Any recommendations for a EM Stock index, Small Cap Index and Bond Index fund that is available from 1985?

SlowMovingInvestor
Posts: 916
Joined: Sun Sep 11, 2016 11:27 am

Re: Emerging Market Bond Funds

Post by SlowMovingInvestor » Thu Oct 11, 2018 10:21 am

HEDGEFUNDIE wrote:
Wed Oct 10, 2018 10:38 am
VWOB only down -0.2% today while the rest of the market (especially tech) is getting wacked.

Did a backtest on FNMIX, during the dotcom crash in 2000 it did not miss a beat.

Could emerging market bonds be the perfect antidote to the impending tech crash?
Was it around in 1998 and if so, how did it do then ?

It's been 20 years, surely we're due another EM market crisis :) ?

HEDGEFUNDIE
Posts: 1229
Joined: Sun Oct 22, 2017 2:06 pm

Re: Emerging Market Bond Funds

Post by HEDGEFUNDIE » Thu Oct 11, 2018 10:27 am

SlowMovingInvestor wrote:
Thu Oct 11, 2018 10:21 am
HEDGEFUNDIE wrote:
Wed Oct 10, 2018 10:38 am
VWOB only down -0.2% today while the rest of the market (especially tech) is getting wacked.

Did a backtest on FNMIX, during the dotcom crash in 2000 it did not miss a beat.

Could emerging market bonds be the perfect antidote to the impending tech crash?
Was it around in 1998 and if so, how did it do then ?

It's been 20 years, surely we're due another EM market crisis :) ?
Down 40% in 1998, the biggest drawdown it has had.

Still better than the 50% crash of TSM during the financial crisis.

JackoC
Posts: 360
Joined: Sun Aug 12, 2018 11:14 am

Re: Emerging Market Bond Funds

Post by JackoC » Thu Oct 11, 2018 10:37 am

ThisDinosaur wrote:
Wed Oct 10, 2018 8:47 am

What are the relative strengths of USD denominated vs. National currency denominated EMB funds?

On that last question, Points to consider:

- the safety of home currency treasuries comes from the money printing protection from default.

- when the dollar is strong, you'd prefer payment in dollars. But a strong dollar means financing is more expensive, which would seem to increase default risk.
Foreign currency denominated they are more volatile. But that includes more long term upside potential if you believe in convergence to Purchasing Power Parity. Research Affiliates' projection of own currency EMB as among top expected return/top future Sharpe Ratio pick is based on that. It has been rougher sledding up to now though.

On safety of own currency issuance I think this is by same token more questionable though. A country will not always choose to 'run the printing presses' to avoid defaulting on local currency debt. That's only a temporary solution: the markets may demand such a high rate in response to the burst of inflation, and so soon afterward, to roll over that debt that it cancels out the effect of inflation in that short time and the real debt service burden actually goes up. Also high inflation might damage domestic constituencies the issuing govt cares about more than bond holders, who might tend to be foreigners. In 1998 Russia defaulted on local currency debt generally but only some forms of hard currency debt. It's a case by case economic/political question whether the theoretical ability to inflate away own currency debt in lieu of outright default will really be feasible or politically acceptable. The same goes IMO, though more hypothetically, for the own currency debt of highly indebted rich countries.

Also the issuers in some leading emerging markets local debt funds (EBND for example) are mainly tolerably rated. A big currency sell off is a lot more likely than a default in those cases.

My personal judgement though is to pick a time (there is *no* way IMO to pretend there's not a timing element to adding a feature like this to your portfolio) and go local currency for a small amount of what you view as *risk asset*, not a replacement for safe bonds, for the long term.

pop77
Posts: 370
Joined: Wed Dec 12, 2007 7:57 pm

Re: Emerging Market Bond Funds

Post by pop77 » Sat Oct 13, 2018 8:57 am

bumping this up to continue conversation

desafinado
Posts: 119
Joined: Wed Dec 28, 2016 3:14 am

Re: Emerging Market Bond Funds

Post by desafinado » Sat Oct 13, 2018 10:12 am

I'm pretty persuaded by the MPT/factor idea that even a 60/40 world stock/intermediate treasury portfolio has substantially all of its risk dominated by equity beta. I think many accumulators have income and assets that is also pretty correlated with beta (e.g. if you work at Google or Goldman Sachs, own a home in San Francisco or New York, and get 40% of your compensation in stock, your job security, home equity, and cash flow are all pretty correlated). So I can believe that for these investors there can be meaningful diversification from risk assets that aren't stocks. I'm not sure if that means EM bond is the best one for those investors, and I don't think it's right for me at the moment (because I wouldn't put in enough money for it to matter) but I think there can be reasonable pitches for EM government bond, high-yield, consumer credit etc. I think it's probably not so important if you're a retiree or you're the only cardiologist in your town in Michigan or something.

Valuethinker
Posts: 36691
Joined: Fri May 11, 2007 11:07 am

Re: Emerging Market Bond Funds

Post by Valuethinker » Sat Oct 13, 2018 10:40 am

desafinado wrote:
Sat Oct 13, 2018 10:12 am
I'm pretty persuaded by the MPT/factor idea that even a 60/40 world stock/intermediate treasury portfolio has substantially all of its risk dominated by equity beta. I think many accumulators have income and assets that is also pretty correlated with beta (e.g. if you work at Google or Goldman Sachs, own a home in San Francisco or New York, and get 40% of your compensation in stock, your job security, home equity, and cash flow are all pretty correlated). So I can believe that for these investors there can be meaningful diversification from risk assets that aren't stocks. I'm not sure if that means EM bond is the best one for those investors, and I don't think it's right for me at the moment (because I wouldn't put in enough money for it to matter) but I think there can be reasonable pitches for EM government bond, high-yield, consumer credit etc. I think it's probably not so important if you're a retiree or you're the only cardiologist in your town in Michigan or something.
I think US Treasury bonds have about the lowest beta risk money can buy. They do however share interest rate risk w US equities. Perhaps US tips have even lower correlation w equities?

EM are generally quite USD sensitive as are Canada and Australia. Especially EM bonds.

I might go with DFA on this the EM small cap value sector has the lowest correlation w developed market equities. However you do need to clean the numbers because the accounting is anything but clear.

ThisDinosaur
Posts: 50
Joined: Wed Mar 08, 2017 1:53 pm

Re: Emerging Market Bond Funds

Post by ThisDinosaur » Sun Oct 14, 2018 7:15 pm

JackoC wrote:
Thu Oct 11, 2018 10:37 am
Foreign currency denominated they are more volatile. But that includes more long term upside potential if you believe in convergence to Purchasing Power Parity. Research Affiliates' projection of own currency EMB as among top expected return/top future Sharpe Ratio pick is based on that.
Do you hava a link to that Research Affiliates study?

What type of economic situation lends it self to USD-denominated sovereign debt performing better than own-currency?

Valuethinker
Posts: 36691
Joined: Fri May 11, 2007 11:07 am

Re: Emerging Market Bond Funds

Post by Valuethinker » Mon Oct 15, 2018 5:12 am

ThisDinosaur wrote:
Sun Oct 14, 2018 7:15 pm
JackoC wrote:
Thu Oct 11, 2018 10:37 am
Foreign currency denominated they are more volatile. But that includes more long term upside potential if you believe in convergence to Purchasing Power Parity. Research Affiliates' projection of own currency EMB as among top expected return/top future Sharpe Ratio pick is based on that.
Do you hava a link to that Research Affiliates study?

What type of economic situation lends it self to USD-denominated sovereign debt performing better than own-currency?
Re the 2nd point.

Any economic situation which is not good, but does not lead to a full default. The currency risk has been transferred from the investor to the borrower/ issuer.

One of the Canadian municipalities borrowed in Swiss Francs in the 1970s, 30 years later they were paying it off, the CAD had more or less halved against CHF in the time frame - it was a very expensive borrowing. It's not only EM that sometimes borrow in a foreign currency.

User avatar
willthrill81
Posts: 6500
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Emerging Market Bond Funds

Post by willthrill81 » Mon Oct 15, 2018 9:40 am

watchnerd wrote:
Tue Oct 09, 2018 12:58 am
AlohaJoe wrote:
Tue Oct 09, 2018 12:49 am
watchnerd wrote:
Tue Oct 09, 2018 12:13 am
PFInterest wrote:
Mon Oct 08, 2018 6:38 pm
Ill take my risk on the equity side.
Ditto.
So your bonds have no term risk, no interest rate risk, no reinvestment risk, and no default risk? Nice trick, how'd you manage that?
By investing in US Treasuries for most of my bonds.

Of course bonds all have interest rate risk.

But default purposes, I pick the risk-free asset. As do Swensen, Bernstein.
Add Larry Swedroe to that list.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

JackoC
Posts: 360
Joined: Sun Aug 12, 2018 11:14 am

Re: Emerging Market Bond Funds

Post by JackoC » Mon Oct 15, 2018 10:13 am

ThisDinosaur wrote:
Sun Oct 14, 2018 7:15 pm
JackoC wrote:
Thu Oct 11, 2018 10:37 am
Foreign currency denominated they are more volatile. But that includes more long term upside potential if you believe in convergence to Purchasing Power Parity. Research Affiliates' projection of own currency EMB as among top expected return/top future Sharpe Ratio pick is based on that.
Do you hava a link to that Research Affiliates study?

What type of economic situation lends it self to USD-denominated sovereign debt performing better than own-currency?
Here is the current version of their asset allocation tool showing their estimate of various asset classes in expected rtn/expected volatility space:
https://interactive.researchaffiliates. ... &_k=6kfnyi

You can poke around more to the backing calculations but simply put the high expected return for local currency EM bond is based on their assumption of a trend toward Purchasing Power Parity for the currency values v USD over a 10 yr horizon. The low returns on US equity assets likewise is heavily influenced by their assumption or a reversion toward, not necessarily all the way to, historical stock valuation levels.

On second point, there's first of all the inherent difference, considering a single bond held to maturity, of a binary default/no default on a USD denominated bond, v the 'sliding scale' of a principal pay off of a local currency bond, assuming no default, that's worth somewhat less because the currency has deprecated v the USD. That would tend to homogenize out in a fund to some degree. But I'd say in general it varies more by issuer than economic situation. For example the local EM bond fund EBND (Wisdom Tree's) is composed of govt bonds. The second biggest component is South Korea. There is no way to gain as much on spread compression on an ROK issued USD bond as you'd get from a 10% appreciation in the KRW, and likewise a 10% depreciation in the KRW would not increase the perceived default risk of the ROK govt by much. For lower rated and particularly corporate issuers this distinction would not be as great. At the other extreme consider a low rated EM corporate with lots of USD denominated debt but local currency revenue. There would be a much bigger variation in perceived default risk on the USD bonds as the local currency fluctuated v USD. And, the USD bonds by that issuer might be priced in a time of weak local currency value to allow for large upside if the currency strengthened.

ThisDinosaur
Posts: 50
Joined: Wed Mar 08, 2017 1:53 pm

Re: Emerging Market Bond Funds

Post by ThisDinosaur » Wed Oct 17, 2018 9:20 am

Thanks for the link, JackoC.

What are some good own-currency EM sovereign bond index funds?
And why does Vanguard only offer USD denominated?
JackoC wrote:
Mon Oct 15, 2018 10:13 am
the high expected return for local currency EM bond is based on their assumption of a trend toward Purchasing Power Parity for the currency values v USD over a 10 yr horizon.
Do currencies generally trend toward Purchasing Power Parity?
Do trends in currency strength tend to revert to the mean?
I have mostly invested under the assumption that they do, but I don't know of any evidence one way or the other.

PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: Emerging Market Bond Funds

Post by PFInterest » Mon Oct 22, 2018 9:52 pm

PFInterest wrote:
Mon Oct 08, 2018 6:38 pm
Ill take my risk on the equity side.
i am back. that is all.

hdas
Posts: 407
Joined: Thu Jun 11, 2015 8:24 am

Re: Emerging Market Bond Funds

Post by hdas » Thu Dec 06, 2018 1:00 pm

Very pleased with the behavior of my VWOB during this turbulent times. (also 2016 rout)
People forget the fundamentals/institutions and markets depth of EM are improving. (like most things in the world)
Also ppl forget that unless pandemonium is happening (aka 2008), EM bond funds have nice predictable patterns relative to US inflation and interest rates.
My retirement AA is 80/20, with half of the 20 being EM bonds.
Will perhaps split with VEGBX when we get more data on it.

Cheers :greedy

ps. There's perhaps a predictable post from the great Nisi, with dramatic images from 1997 Asian crisis carnage.
Stay the course and buy some more.

User avatar
jhfenton
Posts: 3532
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: Emerging Market Bond Funds

Post by jhfenton » Thu Dec 06, 2018 8:59 pm

hdas wrote:
Thu Dec 06, 2018 1:00 pm
Very pleased with the behavior of my VWOB during this turbulent times. (also 2016 rout)
People forget the fundamentals/institutions and markets depth of EM are improving. (like most things in the world)
Also ppl forget that unless pandemonium is happening (aka 2008), EM bond funds have nice predictable patterns relative to US inflation and interest rates.
My retirement AA is 80/20, with half of the 20 being EM bonds.
Will perhaps split with VEGBX when we get more data on it.
As I posted a couple of months ago, I've also been happy with my allocation to VEGBX. Today is VEGBX's one-year anniversary, and it is down 1.17% ($10,000->$9,883.24) since inception. VWOB is down 3.36% since 12/6/17 ($9,664.61), also not bad. (VEGBX did even better as VEMBX when VEMBX was in its closed incubation period, but I don't count that. They were playing with house money then. M*, though, credits VEGBX with the VEBMX performance prior to 12/6/17.)

During the same trailing 12 months, VEMAX (Vanguard EM Index) jumped 15% ($10K>$11,538.84) through 1/26/18, dropped 25% to $8,655.13 on 10/26/18, and is at $9,081.48 through today. On a comparison graph of the three funds, VEGBX and VWOB look like...well, like bond funds.

I'm perfectly happy to pay 13 bp for the active management on VEGBX, especially since I can buy the active mutual fund without the purchase fee found on the mutual fund share class of VWOB.

Post Reply