Emerging Market Bond Funds

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not4me
Posts: 640
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Re: Emerging market bonds as part of your equity allocation

Post by not4me » Thu Jan 03, 2019 8:49 am

danielc wrote:
Thu Jan 03, 2019 1:20 am
not4me wrote:
Wed Jan 02, 2019 3:34 pm
I stand corrected. I only skimmed the article & some posts & suppose I confused things. Thanks for the correction. However, it really adds to my larger point. What if the "original" portfolio was NOT all US?
Then their conclusions might not apply to you. It's that simple.

not4me wrote:
Wed Jan 02, 2019 3:34 pm
What if bonds were all corporates? all treasuries?
Those should behave similar to the US bond portfolio in the paper. The US bond portfolio is about 2/3 treasuries 1/3 corporate. If you feel that your particular portfolio is very different from the ones in the paper, then maybe ignore the paper. The Vanguard team was very clear about what experiment they did and what the result was. You can decide if that experiment is relevant to you or not.

not4me wrote:
Wed Jan 02, 2019 3:34 pm
I got mixed feelings as to whether they included ONLY government or some corporate (both are mentioned in certain parts of the paper).
The paper says:

"We started with a bond portfolio consisting of 70% domestic fixed income and 30% global fixed income hedged to USD. This allocation is consistent with Vanguard’s core portfolio construction methodology"


It is probably safe to assume that the domestic and global bond portfolios match the ones in Vanguard's mutual funds, which themselves are just diversified cap-weighted index portfolios. When people talk about a bond portfolio without qualifier, they generally mean a diversified cap-weighted portfolio; and that should be even more true if you are talking to a hard-core indexer like Vanguard. The domestic portfolio is likely 65% Govt, 25% investment-grade corporate. The ex-US portfolio is likewise going to be a cap-weighted portfolio of international government and corporate bonds. Expect that it is 56% Europe, 27% Pacific, 9% Canada, and that it is evenly spread in credit quality among the investment-grade universe.

not4me wrote:
Wed Jan 02, 2019 3:34 pm
I see clear distinction between equity & debt.

...

If you are building from scratch, include it in your debt allocation. If you are adding to an existing portfolio, be willing to admit that you are increasing the allocation to debt & decreasing equity.

Why does that matter to you? Why is your portfolio construction based on whether the label on the asset says "debt" or "equity"? A portfolio has to be constructed based on the risk, return, and correlation characteristics of the assets. When people talk about stock/bond allocations, those are proxies for "risky asset"/"safe-ish asset". If someone says that they have a 60% stock / 40% bond portfolio, most people expect that the guy did not buy 40% junk bonds. Short term treasuries and junk bonds are both "debt", but one is a near risk-free asset, and the other is a very risky asset which makes it more at home with other risky assets like equities.
Sat here several minutes trying to (1) decide if it was rhetorical to ask why it mattered to me if an investment was equity or debt; (2) how to acknowledge without violating some etiquette rule....So will skip past most of what would really answer the question & try this. I think the difference between us on this specific is two fold: (1) I'm looking for more specificity than you; I highlighted some of the language you used & reiterate I wished the paper had said more in areas I outlined in previous posts. I'd thought someone else might point to another source to answer "why"; (2) I underlined the sentence that may be at the heart of our difference.

I don't use stock/bond allocation in the manner you described. I don't see everything in my "stock" bucket as having the same risk. Same applies to bond -- & I don't think bonds are "safe-ish". I don't determine risk in the same manner for stock and bonds; so to determine which bucket to put them in I have to use that "label" as you call it. Don't mean to put words in your mouth if this isn't accurate, but I'm not sure this is adding light at this point.

Sounds to me that you've decided your course of action & I wish you good luck.

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danielc
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Re: Emerging market bonds as part of your equity allocation

Post by danielc » Thu Jan 03, 2019 9:05 am

not4me wrote:
Thu Jan 03, 2019 8:49 am
Sat here several minutes trying to (1) decide if it was rhetorical to ask why it mattered to me if an investment was equity or debt;
Well, let me ask non-rethorically: Other than the things I listed (risk profile, return, correlations) what does it matter to you whether an investment is equity or debt?
not4me wrote:
Thu Jan 03, 2019 8:49 am
I don't use stock/bond allocation in the manner you described. I don't see everything in my "stock" bucket as having the same risk. Same applies to bond -- & I don't think bonds are "safe-ish". I don't determine risk in the same manner for stock and bonds; so to determine which bucket to put them in I have to use that "label" as you call it.
I did not say that all stocks have the same risk. I said that stocks are risky. In any case, I would legitimately like to see an answer to my question. Given a risk profile, expected return, and correlations with other assets, what else do you gain from from saying that something is debt vs equity? In which way is a junk bond similar to a treasury but different from stocks?
not4me wrote:
Thu Jan 03, 2019 8:49 am
Sounds to me that you've decided your course of action & I wish you good luck.
This sounds a little bit passive aggressive. Have I offended you in some way? If you don't want to tell me why the debt vs equity distinction matters so much to you, then don't. No hard feelings.

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