Understanding International Bond Advantages?

Posted on August 11, 2015 by Dr. David Edward Marcinko MBA MEd CMP™

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In Global Investable Markets

tim[By Timothy J. McIntosh MBA CFP® MPH]

International bonds now account for more than 35% of the world’s investable assets, and yet many physicians and other investors have little or no exposure to these types of securities. International fixed income securities make up a noteworthy portion of the global investable market.

While investors in international bonds are exposed to the hazard of interest rate movements and political risks, the principal factors driving international bond prices are actually uncorrelated to the most common U.S. risk factors. This indicates a true diversification benefit for any investor. International bonds have become more prominent and attractive due to the increase in globalization and the pervasive expansion of debt issuance overseas, primarily by governments. There has been a near doubling of the relative weight of the non-U.S. bond market from approximately 19% in 2000 to approximately 37% in 2011.  Thus, there is more selection of international bonds than ever for U.S. investors.

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[Global Debt Markets]

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Investing in international bonds involves contact to the movements of global currencies. This is the primary component of determining international bond returns.  Alternations in currencies create an extra layer of volatility in these types of securities.

However, that volatility actually enhances diversification benefits.  One of the key considerations of any purchase of international bonds is whether or not to hedge the currency impact.  These deviations create return volatility above the level inherent to the underlying investment. An allocation to an unhedged international bond does reflect an investor’s bearish view of the U.S. dollar.  This is because as the dollar depreciates against a foreign currency, an international bond will gain in value.  The last 25-plus years have witnessed a long-term decline in the U.S. dollar, actually providing a tail wind for international bond investors.

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russian bonds

[Russian Bond]

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In fact, according to data from Vanguard, unhedged international bonds outperformed hedged bonds by 2.2 percentage points a year since 1987. The diversification benefit from international bonds is also attractive.

For example, from January 1, 1992 to March 31, 2013, the correlation between the Citigroup World Government Bond Index ex-US 1-3 Years index and five-year U.S. Treasury notes was a mere 0.35.  An allocation to international bonds can amplify portfolio diversification across economies, currencies, and yield curves.

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[iMBA Inc., in Moscow]

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ABOUT

Timothy J. McIntosh is Chief Investment Officer and founder of SIPCO.  As chairman of the firm’s investment committee, he oversees all aspects of major client accounts and serves as lead portfolio manager for the firm’s equity and bond portfolios. Mr. McIntosh was a Professor of Finance at Eckerd College from 1998 to 2008. He is the author of The Bear Market Survival Guide and the The Sector Strategist.  He is featured in publications like the Wall Street Journal, New York Times, USA Today, Investment Advisor, Fortune, MD News, Tampa Doctor’s Life, and The St. Petersburg Times.  He has been recognized as a Five Star Wealth Manager in Texas Monthly magazine; and continuously named as Medical Economics’ “Best Financial Advisors for Physicians since 2004.  And, he is a contributor to SeekingAlpha.com., a premier website of investment opinion. Mr. McIntosh earned a Bachelor of Science Degree in Economics from Florida State University; Master of Business Administration (M.B.A) degree from the University of Sarasota; Master of Public Health Degree (M.P.H) from the University of South Florida and is a CERTIFIED FINANCIAL PLANNER® practitioner. His previous experience includes employment with Blue Cross/Blue Shield of Florida, Enterprise Leasing Company, and the United States Army Military Intelligence.

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This comprehensive volume from Dr. David Marcinko, and his co-authors, will go a long way toward educating physicians on these critical subjects that were never taught in medical school or residency training.”

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Are Physicians Investing in International Bonds?

Posted on February 4, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

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A Global Approach to Investing

By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com

Rick Kahler CFPUS investors and fans of the St. Louis Rams have something in common. Both have seen their home teams fall from prominence to mediocrity in the past ten years. In 2000 the Rams won the Super Bowl, but in 2011 they ended the season tied for the worst record in the league. The US ranked as the world’s third freest economy in 2000, but by 2010 had fallen to number 18.

So, how do physicians and other investors allocate their funds in a country that’s in economic decline? Much like an ardent fan of the Rams who is also an astute gambler! You cheer for your team to win, but you place your bets on the stronger opponents.

Global Investing

It’s critical today to take a global approach to investing. Since the US now makes up less than half of the world’s wealth, it makes sense to invest the majority of your portfolio in the stocks and bonds of other countries. This is simply another form of diversification. Not only does it make sense to have US government bonds and the bonds from a wide range of companies in your portfolio, it also makes sense to diversify and hold a wide range of bonds of international companies and foreign governments.

While it isn’t uncommon for physician investors to have some exposure to international stocks, I find it is unusual for them to have investments in international bonds.

Investing in Bonds

When you invest in bonds, you are lending to a borrower who promises to pay interest and to repay the loan on a certain date. Bonds represent an IOU from a US or foreign corporation or government.

As with any bond, an important factor to consider is the credit quality of the issuer. This can become more complex with foreign bonds, as many countries don’t have the same standards of accounting required in the US.

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Foreign Bonds

A unique feature of foreign bonds is the effect that currency exchange rates have on your investment. Fluctuations in the local currency can enhance or depress your returns.

For example, if you want to purchase bonds denominated in the Australian dollar (AUD) you will first need to exchange your US dollars (USD) for AUD and then purchase the bonds. If the USD drops in value against the AUD, then the value of your Australian bonds goes up because your AUD now buy more USD. The reverse happens if the USD appreciates against the AUD.

Global investing

Direct Purchase of Mutual Funds

There are two ways to purchase international bonds. You can buy bonds directly from a securities broker or purchase shares of a mutual fund that invests in foreign bonds. Any fund with “international” in its name invests only in bonds of countries outside the US. If the fund has “global” in its name, it includes both foreign and US bonds in its mix.

The two categories of international bonds include those issued by developed nations like the United Kingdom, Japan, or Germany, and those issued by emerging market nations like India, Brazil, or Morocco. Emerging market bond funds invest in bonds from developing nations, risking greater losses for the chance of higher returns.

In my portfolios, I generally split my bond allocations 50/50 between the US and foreign bonds. Currently, our fund manager favors the bonds of Australia, New Zealand, and Canada.

Assessment

The Rams did better in 2012 than in 2011, so fans can hope they regain their top status in 2013. We can also hope the US can stop its economic slide and regain its global prominence in the next decade. But, until there is evidence of a turnaround, international bonds are one way physicians can avoid betting too heavily on the home team.

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