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Emerging-Market Bond Funds

Date: January 1, 2014      Publication: Bottom Line Personal      Source:  Todd Rosenbluth, S&P Capital IQ      Print:

The value of bonds issued by governments and companies in emerging markets fell by 8% in 2013 as of late November, based on the JP Morgan EMBI Global Core Index. And since the end of April, wary investors have yanked more than $22 billion from funds that invest in these bonds, even though they recently yielded an attractive 5% to 7%. So why would you want to invest in these risky bonds from countries such as Brazil and Indonesia?

Here’s why: Fears that growth of emerging-market economies will slow for prolonged periods are overblown. Those fears grew after the US Federal Reserve said that it expects to start scaling back its massive bond-buying program—a step that is expected to result in higher US interest rates and that caused many investors to turn away from emerging markets. But these markets are much more resilient than they used to be and than many investors realize. Also, the Fed will scale back only if the US economy is strengthening, and a stronger US economy will help emerging-market economies by increasing demand for their goods.

My favorite emerging-market bond funds…

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  • Fidelity New Markets (FNMIX) is a moderately aggressive fund with nearly 300 holdings in countries ranging from Slovenia and Serbia to Brazil, Mexico and Russia. Recent yield: 5%. Five-year-annualized performance: 16%.
  • TCW Emerging Markets Income (TGEIX) is a bolder fund with fewer than 120 holdings, including bonds from Iraq and the United Arab Emirates. Recent yield: 6%. Five-year-annualized performance: 17.6%.

Source: Todd Rosenbluth, senior director for S&P Capital IQ, which provides investment research to more than 4,000 banks, private equity firms and financial services clients, New York City. He oversees analysis and rankings of mutual funds. CapitalIQ.com