Have you considered the global fixed income allocations?

As financial markets experience unprecedented volatility, investors increasingly are questioning which asset classes can offer genuine diversification with the potential for enhanced risk-adjusted returns. An actively managed global-fixed-income strategy has the potential to achieve these goals through its ability to search beyond the traditional capital markets of the Eurozone, the United Kingdom, the United States and Japan, offering investors new opportunities.

Investors should consider fixed-income allocations that reach beyond the United States for three principal reasons:

• The variety and liquidity of available instruments outside the United States has expanded substantially in recent years, and this evolution provides opportunities for broad diversification and enhanced alpha.

• Although future results cannot be guaranteed, international bonds have lower historical correlations to U.S. stocks than the correlations between U.S. bonds and U.S. stocks, and historically have had a low correlation with international stocks.

• Global bonds allow investors to take advantage of differing economic conditions and business cycles around the world.


The number of countries opening their capital markets in recent years has significantly broadened the global-fixed-income universe. There are more than 100 countries with fully or partially functioning bond and/or currency markets. This geographic expansion has coincided with a deepening of local markets, which now offer improved liquidity and new instruments that can provide specialized exposures. Whereas investors were once limited to the bond markets of developed countries and a narrow range of currencies, their options now include a broad range of currencies, credits and duration exposures that enable investors to capitalize on developments around the world. Current examples of these relatively new opportunities include:

• Long-dated Mexican bonds that have pushed the local yield curve out to 30-year maturities (as of Oct. 31).

• Corporate emerging-markets debt that offers extra yield over sovereign bonds (as of Oct. 31).

• Cross-currency swaps allowing investors to take a relative currency position that can benefit from deteriorating fundamentals in one country against strong conditions in another, independent of the strength of an investor's home currency.


Correlations are an important consideration when constructing a well-diversified portfolio. U.S. fixed-income assets traditionally have served as a defensive allocation, based on their historically low correlation to U.S. equities. However, international bonds have a record of even lower correlation to U.S. equities and also have the potential to hedge against U.S. interest rate cycles, economic conditions and other domestic sources of uncertainty. Such diversification does not assure or guarantee better performance and cannot eliminate the risk of investment losses but needs to be considered when developing a portfolio of different asset classes.

Further, the performance of global bonds during the recent period of financial market volatility has reinforced their value as a diversifier within a broader portfolio. This resiliency has been accomplished without the extreme volatility observed across most asset classes and doesn't sacrifice the potential for longer-term upside.

Active management of global fixed income's three primary sources of alpha — currency, duration and credit exposure — enables investors to exploit country-specific differences and position for global trends. When assessing investment opportunities, the expected return from each potential source of alpha can be isolated to ensure that only attractive risks are held. New investment opportunities play a useful role here, primarily as a risk management tool that can isolate particularly attractive risk components within securities. For example, a strategy for a given country may keep the duration element and hedge out the currency by using currency forwards. Alternatively, external sovereign bonds offer exposure to a government's credit without local currency or interest rate risk.

Before developing these positions, however, an in-depth understanding of the macroeconomic fundamentals is necessary. Top-down economic research is combined with bottom-up security-level analysis to uncover fundamental value and highlight potential catalysts that may drive a revaluation.

Two global trends that have been shaping our strategy recently are the accelerating global economic slowdown and financial-market deleveraging. We have been positioning our fund to take advantage of long-term opportunities brought about by a tough global growth environment through duration exposure in countries where markets are not yet pricing in the likely monetary policy response to the slowdown. The International Monetary Fund's most recent World Economic Outlook update, released in November, lowers the world growth forecast from 3.7% in 2008 to just 2.2% in 2009, (a rate below 3% is generally consistent with a global recession). This forecast expects outright contraction in advanced economies and more- moderate growth in emerging markets. While yields already have fallen dramatically in the United States in anticipation of prolonged loose monetary policy from the Federal Reserve, we are positioned for similar responses from central banks in Europe, Korea and Mexico. These economies are quite vulnerable to the U.S. recession and global credit crunch, in addition to domestic factors such as past interest rate tightening, an overvalued currency or a housing bubble. However, we believe bond prices do not yet reflect the likely interest rate cuts as the balance of risks continues to shift from inflation toward growth.

While deleveraging and slower growth in developed economies is expected to have a negative impact on growth everywhere, there is still likely to be considerable differentiation between economies on which investors can capitalize. The IMF forecast highlights the growth differential of Asian economies over the rest of emerging-markets and advanced economies. This growth differential should support Asian currencies over the medium term by continuing to attract capital to the region. Up to now, we have seen currencies fall against the U.S. dollar fairly indiscriminately, but we are beginning to see some differentiation in the performance of individual currencies. We expect this differentiation to become more marked in the next couple of years. In our view, this is likely to result in the currencies of Asian countries with sound fundamentals appreciating against the U.S. dollar but making more significant progress against the euro.

We are confronting the current financial-market turmoil by selectively adding to positions that have been hit by deleveraging and forced selling, despite their strong fundamentals.

1 comment:

  1. Great tips, I believe fixed income allocation is the way to go at this moment. Not only it gives you wider choice and diversification but your money is more secure and returns are guaranteed.


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