Unlike the two other funds represented on the symposium panel, which were focused primarily on equities in the global and emerging markets, the International Fixed Income Fund has a solid allocation in international bonds, the asset class on which Mr. Giannone was there to speak. The fund isn’t invested in some of the larger growth stories to emerge over the past couple years, such as China or Eastern Europe, but instead maintains a strict value orientation, focusing on longer-term returns.
One of the biggest notes he made was that the “US is handicapped because we view everything from a US perspective.” Mr. Giannone made reference to his trips to London, where Mondrian is headquartered, and the fact the news there focused not just on domestic economic conditions, as US media do, but often those for seven to eight other countries.
Being able to take a step back and see the larger picture like that is increasingly beneficial in understanding how we’re positioned within the global economy. Such an observation resonated well with many of the statements made by other representatives regarding how closely attached the US economy is to other developed economies around the world: The general consensus seemed to be that, although no country is completely decoupled from the US, there are a lot more moving parts in play than in previous slowdown periods such as this. Therefore, it seems increasingly important to know what’s going on elsewhere in the world.
As it so happens, using the Laudus Mondrian measurement of prospective real yield—which it calls “real” because the group backs out inflation from the initial yield numbers—the US is the worst bond market in the world. But, Mr. Giannone stated, this isn’t something that US investors are prepared to hear quite yet.
So what countries are attractive?
Surprising, Mexico’s 5 percent yield was actually one of note. Mr. Giannone noted that the country has an attractive, semi-developed economy, but its lower liquidity made it less attractive as a bond holding. (It’s worth noting here that Mondrian is primarily focused on institutional investments, in which liquidity is a large factor. And although the International Fixed Income Fund is available to individual investors, its strategy stills falls in line with the group’s institutional objective.)
Another interesting case he noted was Japan. The fund has a fairly high weighting to this country, which is partially attractive because its bonds aren’t correlated with other markets, dampening volatility. The yen is also viewed as undervalued—the fund considers any number outside two standard deviations to be over- or undervalued—so there’s still room for growth there.
Bonds from the Eurozone also comprise a larger part of the fund’s portfolio. In line with currency talk regarding the yen, the euro was point of interest for many at the symposium, given its continued strength against the weakening US dollar. The fund values the euro at around $1.17, so it obviously considers the currency way overvalued. The attractiveness of EU investment: its benign inflation outlook.
Another key point made about international bonds as a whole is that they tend to perform well in all market environments. In its outlook, the fund noted that such bonds handily outperformed US bonds, as well as international and US equities, in the third quarter 2007 with a return of 8.1 percent, compared with returns of 3.8 percent, 2.1 percent and 2.3 percent, respectively. Similar performance occurred in the recent downturns following the Enron/WorldCom scandals in the second quarter 2002 and the events of Sept. 11 in the third quarter 2001.
International bonds are certainly an area I’d never considered viewing prior to this conversation, especially with so much hype being devoted to more growth-oriented stories in the emerging markets. Hopefully this is something I can expound upon in future issue of our products.
