Investing Beyond U.S. Bonds

Global bond funds offer high yields and lower volatility than global stock funds.

By + More

Lately, investors have been rushing into global bonds, leaving their global stock counterparts in the dust. From the beginning of the year through November 31, world bond funds have seen money flowing in to the tune of more than $20 billion, according to Morningstar. Meanwhile, world stock funds have seen outflows of almost $10 billion. For investors seeking diversification outside the United States, global funds offer a sampling of stocks from throughout the world (including stateside). As with domestic bond funds, global bond funds offer a safer ride than global stock funds. Daniel Vrabac, comanager of Waddell & Reed Advisors Global Bond Fund (symbol UNHHX), says global bond funds tend to offer an income stream with lower volatility than stocks, which is what makes them more stable over time. Year to date, global bond funds have returned an average of more than 15 percent, according to Standard & Poor's. "It's definitely been an area worth investing it," says S&P equity analyst Todd Rosenbluth.

But just because these funds are filled with bonds doesn't mean they're without risk. "They offer yield, they have low expenses and have lots of other positive characteristics, but not every one is positive on all the characteristics," says Rosenbluth. "If an investor is looking for above-average yield, going outside the U.S. adds to that." Here are the four funds that made the cut in the S&P rankings. S&P ranks the following global bond funds as "four-star" funds:

AllianceBernstein Global Bond (ANAGX). This fund evenly splits its investments between U.S. and non-U.S. bonds and includes a hefty weighting of government bonds. More than 40 percent of the fund's holdings are high-quality, AAA-rated bonds. Year to date, the fund is up 24 percent, and it has returned an annualized 8 percent since its inception in 1992. It takes on slightly more duration risk (a measure of interest rate sensitivity) than its peers. Bonds with longer durations are more susceptible to interest rate risk, but they also have the potential to pay a higher yield. The fund's top 10 largest holdings include one French government bond that doesn't expire until 2032, for example. The fund levies the cheapest annual fees of these four funds, 0.90 percent.

Putnam Global Income (PGGIX). Year to date, this fund has returned an astounding 41 percent, and it has gained an annualized 8 percent since its 1987 inception. It can be difficult sometimes to tell exactly what the fund holds because management uses hedging strategies. As of the end of November, the fund had more than 80 percent of its assets in U.S. securities. More than half of the fund's assets are AAA-rated, the highest credit rating assigned to securities. The fund yields almost 6 percent, which is almost double the average yield of its peers. It charges 1.13 percent in annual fees.

Templeton Global Bond (TPINX). Of the four funds listed, this one has the most international exposure. About 70 percent of Templeton Global Bond's assets are invested in foreign government bonds, and emerging markets play a large role in the portfolio. "Since 2001, it's been in the top half of its peer group in every calendar year, and it looks like it's going to finish that way again in 2009, so the strategy has been working," Rosenbluth says. "Investors just have to be comfortable with a greater emerging markets exposure, which of course could add some volatility to the fund." Year to date, the fund has returned 18 percent, and it has returned 8 percent since its inception in 1986.

Waddell & Reed Advisors Global Bond fund (UNHHX). This fund is somewhat different from the other three because it focuses on U.S. and foreign corporate debt instead of government debt. Year to date, the fund is up 15 percent, and it has returned an annualized 7 percent since its inception in 1986. The fund's average duration—of just over two years—is almost three years shorter than the average duration of its peers. Manager Vrabac says this shorter duration allows management to determine what will affect a company over the next few years as opposed to the longer term. Almost 50 percent of the fund's assets are in the United States, and the remainder is invested in countries throughout Europe and in emerging markets.