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Greek Drama: Bad for Bond-Fund Investors?

Nov. 3, 5 pm: This post has been updated to include a comment from a fund manager.

American investors in foreign-debt funds are likely taking a hit today, as bonds issued by indebted euro-zone countries fell following news of a new standoff among Greek leaders over a proposed bailout plan.

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Unfortunately, investors in these world bond funds have little place to hide. The average foreign bond fund is about 40% invested in Europe, according to fund researcher Lipper. Before today’s news, which sent Italian and French bond prices down, most international-bond funds were struggling because of their high weightings to the troubled continent. Of the 34 international income funds tracked by Lipper, 85% are lagging the Barclays Capital Global Aggregate ex U.S. Total Return index, which is the most widely tracked by the category. Year-to-date, the average fund is up 5%, compared to 7% for the index.

Some foreign-bond managers are even more exposed to Europe. For example, the Touchstone International Fixed Income fund (TIFAX) is 62% invested in Europe and lagging the Barclays Capital index by about 1 percentage point. And the MassMutual Premier International Bond fund (MMNAX), which is underperforming the index by less than a percentage point, has a European allocation of 60%.  Tim Paulin, vice president of investment research for Touchstone Investments says the firm reduces volatility in the fund by hedging exposure to European currencies. 

Of course, a few foreign-bond funds have so far managed to minimize their risks by steering clear of the riskiest countries in Europe and holding only top-rated bonds.

The $4.2 billion Pimco Foreign Bond (Unhedged)  fund (PFBDX), for example, is about 40% invested in Europe, but is up 9% so far this year. Fund manager Scott Mather says the fund has stayed ahead this year by holding more high quality bonds like German bunds and covered bonds, which are backed by collateral.

Meanwhile, the $1.4 billion American Century International Bond fund (BEGBX), has also avoided Greece, Ireland and Portugal. John Lovito, manager of the American Century fund, which is up 7.6% year-to-date, says he sold the last of his Italian bonds in October. The fund is nearly 95% invested in Triple-A and double-A rated credits. That compares to roughly 75% for the typical world bond fund, according to a Morningstar report.

Even some bond funds with higher-than-average exposure to Europe have fared well. Avi Hooper, portfolio manager of the $70 million Invesco International Total Return fund (AUBAX), which is up 7.5% this year, says his 2% stake in high yield bonds is boosting the fund’s returns. The fund is about 50% invested in Europe, above the category according to Lipper, but Hooper has recently cut back his exposure to France. Instead, he is holding more German bunds and has upped his allocation to Spain and Italy, encouraged by a bond buying program from the European Central Bank.

But experts say investors may still see more trouble to their portfolios.  News that Greek leaders are divided on the bailout plan announced last week sent yields on French and Italian bonds soaring to euro-era highs.  Until the final details on the plan emerge, European bond performance is likely to remain unpredictable, analysts say. “Last week’s summit left investors with far more questions than answers,” says Hooper of Invesco. “We are still very cautious.”


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    • No drama for Greek..better say about usa england france germany they are responsible about this crisis. they are responsible about the world war 1 2 also.
      Have to admit that the EU cant fight bankers, but how you can fight a system who feed you?
      we know what they want to do we are not stupid ppl here in Greece. Our civilization exist for many years and will continue…
      sry for my barbarian lanquage.
      A proud Greek.

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      The plight of man is that humanity somehow thinks it can separate and classify itself, and that the process of doing so makes us all independent actors. The reality is that we do not live in a zero-sum game. Our universe is the product of the very opposite, a non-zero-sum game. Our aggregate gains and losses all affect each other. Our thought and our productivity will advance us. Our very metabolisms require multiple miracles to occur in sequence to sustain life. Given a long enough period of time, the Krebs cycle would have developed somewhere in the universe unless we were multiplying our statistical probability by zero, in which case the thought and productivity of humanity would never have come into existence. Given that we are in a non-zero-sum game, nothing can turn into something, and mankind is cumulatively capable of spontaneous acts of thought and productivity, I am certain that we will all grow together. Invest accordingly.

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