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Private Wealth Manager - question on international bond portfolio.

1,302 Views | 10 Replies | Last: 5 yr ago by cheeky
AgBank
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AG
While I am against the concept for myself, I do think one may provide peace of mind for my wife in the rare occurrence that I pass away, someone would be there to help her manage her and our money.


We just got off the phone with a Vanguard manager and most of what he said made sense except his desire to put at least 20% of the bond portfolio into international bonds. He used the broad US bond portfolio's YTD return of negative 1% as an example.

This all seems silly to me. Why would I want to invest in Japanese or German bonds. Their fed yields are 0.35% and 0.09% respectively. The international bond portfolio that he recommended has an SEC yield of 1%. This sounds like Buffett or Munger's "Diworsification", at least in the short term.

Am I incorrect?
jh0400
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Disclaimer: I'm not in PWM or that familiar with international bond funds.

How are the fx gains or losses handled within the fund? I'm assuming that these are not dollar denominated bonds, so you'd be short USD.
Thriller
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I was looking at some of their funds yesterday since they just opened up several of their Admiral Class funds to lower minimums. I wanted to see some of the options for my mom, but any who

They only listed two Intl Bond funds in this particular group of Admiral funds. VTABX has an average annual return since inception (2013) of 3.31%. VGAVX (Emerging Markets) had a 3.06% return in the same timeframe.

Seems low to me. I'd prefer my international exposure to have some more upside (equities) and any bond exposure to br in the US personally. I just don't trust many of the central banks around the world enough, not that I have a ton of knowledge in that arena.
Casey TableTennis
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I strategically allocate ~25% of fixed income to international. The primary reason is for the currency play to reduce correlations in the overall portfolio, and increase rebalancing opportunities. Of course with this goal, the fx exposure is almost never hedged.

For those with a stomach for risk, and no near-term cash flow needs from the portfolio, I am considering if a minor tactical overweight to more international fixed income is appropriate. The driving reason is the $ being "expensive" relative to other major currencies and a belief that capital can flow relatively unrestricted around the glove that should mean-revert currencies over long-cycles.

I haven't looked it up recently, but something like 2/3 of all debt is foreign. Having anything less than that, even for a US investor, is an overweight to US fixed income whether intentional or not.
AgBank
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jh0400 said:

Disclaimer: I'm not in PWM or that familiar with international bond funds.

How are the fx gains or losses handled within the fund? I'm assuming that these are not dollar denominated bonds, so you'd be short USD.
The PWM said that the positions would be currency hedged and that the fund would distribute cash flow from those hedges.
AgBank
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Quote:

The driving reason is the $ being "expensive" relative to other major currencies and a belief that capital can flow relatively unrestricted around the glove that should mean-revert currencies over long-cycles.
I haven't looked at the historical returns for this strategy, but mean reversion is logical. Isn't the primary reason that the U.S. $ is "expensive" is that we have higher interest rate?

Do you have a favorite international fund or two that isn't hedged that you would recommend?

Quote:

I haven't looked it up recently, but something like 2/3 of all debt is foreign. Having anything less than that, even for a US investor, is an overweight to US fixed income whether intentional or not.
Understood. It is something to keep in mind.
AgBank
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I agree on the international stock comment.
ATXAdvisor
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Ok, I'll bite. The TLR answer is your expected returns are higher in a globally diversified bond portfolio.

First of all, the two main factors that drive fixed income returns are the length of maturity (term) and the creditworthiness of the borrower (credit). Varying these factors when prices show a premium/discount for taking more/less term or credit risk have shown to be a better tradeoff between return and expected volatility than strategies that maintain a constant exposures. For that reason, I typically only use tax-free municipal bonds in taxable accounts when taxable equivalent yields are higher than taxable alternatives.

But a global allocation in fixed income enhances diversification and also broadens the opportunity set for varying maturities across and within yield curves. So in tax-deferred accounts, I take a dynamic approach that considers the tradeoffs between increased diversification and increased expected returns of global bonds.

A 2011 white paper by Joseph Kolerich and L. Jacobo Rodriguez of Dimensional Funds Advisors titled "Fixed Income Tradeoffs: Global Diversification vs Increased Expected Returns " provided a comprehensive view of the diversification benefits of a global, currency hedged, bond strategy over a bond strategy that focuses on just one yield curve and how such a strategy can potentially increase expected returns by pursuing term premiums globally. Other research has shown that selectively hedging only currencies that are currently offering lower yield curves than the home currency may also provide higher returns.

Ultimately, if a client tells me they won't invest internationally, we won't invest internationally. But I will provide the evidence and make my case for what I believe is in their best interest and hopefully help them make the best decision for achieving their own success. I hope that helps, good luck!
Casey TableTennis
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AgBank said:

Quote:

The driving reason is the $ being "expensive" relative to other major currencies and a belief that capital can flow relatively unrestricted around the glove that should mean-revert currencies over long-cycles.
I haven't looked at the historical returns for this strategy, but mean reversion is logical. Isn't the primary reason that the U.S. $ is "expensive" is that we have higher interest rate?

Do you have a favorite international fund or two that isn't hedged that you would recommend?

Quote:

I haven't looked it up recently, but something like 2/3 of all debt is foreign. Having anything less than that, even for a US investor, is an overweight to US fixed income whether intentional or not.
Understood. It is something to keep in mind.

I try not to concern myself with why US $ is high today as markets can be irrational for long periods of time. I'm simply looking a decade out and trying to align myself more closely to what has the best odds of happening. Included in that thesis is mean reversion of the $.

I am hesitant to recommend anything specific. If you are working with an advisor, it is important the security fits nicely with other investments in the portfolio. If they are open to you bringing them ideas, I am a big fan of Michael Hasenstab. Don't currently use Templeton Global Bond as it doesn't play well with my other holdings, but in a vacuum is where I would start. I use Templeton Global Total Return, because of portfolio fit, but prefer the former. He isn't always unhedged and can do cross currency hedges, so you are betting on him more than just the $ weakening.

Pimco has a few options from pure int'l (hedged) to more exotic styles (i.e. Pimco All Asset All Authority). I wouldn't use the latter simply for gaining fx exposure.

FWIW this is an area it is hard to be passive. Ultimately, you have to pick how you want to take active risk in this space, if you even want to invest in it.
nactownag
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Maybe I'm just not seeing things the way y'all do but why wouldn't I just invest in short term 1-2 year CDs right now for my fixed income exposure? Seems like a better risk adjusted return to me.
ATXAdvisor
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nactownag said:

Maybe I'm just not seeing things the way y'all do but why wouldn't I just invest in short term 1-2 year CDs right now for my fixed income exposure? Seems like a better risk adjusted return to me.


I don't necessarily disagree, as I build bond/CD ladders for clients that seek predictability or to match cash flow needs. I don't, however, believe ind bonds are inherently preferable to bond funds. In this case, the question was why buy international.

Academic research suggests there is a benefit. That being said, we're splitting hairs getting into this level of minutiae. The differences in good vs bad bond portfolios is literally defined in a few basis points.

The OP said he was considering a PWM for his wife in the event something happens to him. IMO, he's letting a minor detail get in the way of what is likely a great solution for his stated need. He probably will always be in the weeds because he has the time and inclination to pay attention at that level. That probably assures that any solution will ultimately fail in his eyes. JMO, not a criticism.
cheeky
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Short answer, developed market Ex.-US fixed income has a very unfavorable outlook currently. There is a time and a place, but this is neither. However, USD-denominated Emerging Market fixed income has a very favorable outlook currently. Fixed income strategy should be dynamic for the foreseeable future (3-5 years).

Soapbox warning: Private Wealth Management doesn't really exist at places like Vanguard, Fidelity and the like. Those are low-cost providers in part because their employees make industry minimums. But hey it sounds good. If you want that level of advice and expertise you'll need substantial assets and be willing to pay for it elsewhere. Caveat emptor.
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