Finding Jewels in Emerging Markets Bond Funds

Worried about the uncertain economic outlook, investors have been dumping emerging marketplace bonds and racing to buy Treasuries. During the previous three months, emerging market bond money have lost 3.4%, while extended government funds have gained 19.8%, according to Morningstar.

But definitely not all emerging bond funds have suffered equally. During the previous three months, Fidelity Brand new Markets Income (FNMIX) about broke even. The fund avoided trouble by following the cautious approach favored by portfolio manager John Carlson. The Fidelity manager shuns the lowest-quality bonds and emphasizes government securities that are issued in dollars -- not in foreign currencies. The dollar bonds frequently prove resilient in downturns. "Our first rule is to play good defense as well as avoid blowups," says Carlson.

Is the recent turbulence a sign of trouble to come in the emerging markets? Probably certainly not, says Carlson. He says that the emerging markets have been pulled down by concerns regarding debt problems in Europe. But the panic has subsided, and the bonds have been recovering as international markets have rebounded. Now the bonds seem poised to deliver decent returns, he says. "The basics of many emerging countries are in good form," he says.

Fidelity and other emerging bond money have attracted bigger followings lately. During the previous year, investors poured $14 billion into the funds. That's a huge flood of money for a category that just has $43 billion in total assets. Investors have been attracted by the improving outlook for emerging markets. At a time whenever the U.S. and Europe struggle with crushing debt burdens, many countries in Asia as well as Latin America have solid balance sheets as well as fast growing economies. As their prospects have improved, emerging marketplace bonds have strengthened. During the previous three years, emerging bond money have returned 17.3% yearly, ranking as the top-performing fixed-income category tracked by Morningstar.
Besides providing a chance to benefit from growing economies, emerging bonds additionally offer competitive yields. Emerging bond benchmarks yield around 6.0%, an attractive payout at a time when 10-year Treasuries give 2.18%.


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