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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.

    • Occupy iTranche Euro bubble derivative crisis stimulus gross domestic product analysts estimate gold banking currencies undervalued credit default swap unsustainable growth welfare 1% nuclear terrorism summit creditors 99% basis points Sarkozy Merkels Obama’s Jobs. There you have it folks! Believe it or not, we’ve actually devolved down to a few keywords defining every aspect of our lives, our economies, and really…everything. Out of this gibberish that resembles actual news articles, there is a lesson to be learned. We’re all in this big hot mess together!

      http://slipposlappo.com

      Should you happen to think that any problem on this planet is NOT, in fact YOUR problem, but is instead THEIR problem, then have fun with that. You are wrong. The fact that the failure of an Icelandic bank can crush the housing market in Las Vegas, a Chinese New Year holiday can bring worldwide transport to a standstill, India’s CO2 emissions are killing plankton, and Justin Bieber can soar beyond the realm of a Japanese schoolgirl’s erotic fantasy to the tier of the most viewed human on this planet, is proof positive that we are all in this together. So, you might ask, what are our generalized outcomes? We will either grow or we will diminish.

      I’m not a subscriber of the zero-sum game. I do not believe it. For those not familiar, a zero-sum game is a situation where the gain or loss of anything is balanced by the gain or loss of something else. When all of these gains or losses are added up, they equal zero. A general economic argument for this would be: For corporations to make a profit of X, they need consumers to incur a loss of X. While that may sound about right, one large inaccurate assumption is that the two are somehow NOT intertwined. Somewhere along the way, the consumer decided the corporation was not a part of the consumer, and the corporation decided the consumer was not part of the corporation. The reality is that we are both. Consumers are employees at corporations; consumers, whether they realize it or not, are heavily invested in corporations. While corporations may seem to be separate entities from consumers, it’s amusing how much the actions of consumers positively or negatively affect corporations. The same can be said of governments, as governments are nothing more than another way of saying “us.” For a zero-sum game to occur there must be two separate entities (and here’s the kicker) where one entity’s gain is in NO WAY affected by the other entity’s loss, for that of course would cause the winner to become a loser and the loser to become a winner. For the proponents of doomsday, ashes to ashes and dust to dust, giant meteors impacting the Earth, and gold miners, please become aware that the position you are taking is one of a zero-sum game. Be it a hedge through religion, a healthy diet, or a bit of the shiny stuff, you believe that you can somehow realize a profit while others can incur a loss, and SUSTAIN that indefinitely. Ludicrous.

      I am a believer of a non-zero-sum game. Take a look, we live in one. A non-zero-sum game is where OUR AGGREGATE gains or losses are greater than or less than zero. Think about that: “our.” Using the previously mentioned corporation scenario, corporations depend on consumers, and consumers depend on corporations. Together, they advance society. Regarding governments, we ARE the governments, and together our aggregate advance moves us into the future, be that prosperity or poverty. It is humbling to believe in a non-zero-sum game, because it means that the stupid plankton, Bank of America, and the entire continent of Africa somehow matter. Regardless of what I may do or not do, the actions or inactions of someone else will influence me, and then the results of that stimulus influencing me reciprocates right back to them. The scientists reading this may have a difficult time believing in the non-zero-sum game with the conservation of mass and energy being so prominent a theory, but there is one important event that we just kind of skip: the Big Bang. At some point, our feeble science determines that nothingness turned into something. For the creationists out there, God or Gods decided things needed to exist, and so it was. There was a time when nothing became something, when us was them, when we were corporations, when governments were us, when everything affected everything else, and we all were in it together: November 2011.

      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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