International bond funds can reduce risk


Mr. Moore also said that when investing internationally, he and his co-manager, Michael Plage, favor developed countries such as France and Germany. They are financially sound, he said, but their savings and interest rates do not necessarily move in sync with those of the United States.

Another crucial difference between indexed and actively managed funds is the cost. As a general rule, index funds are cheaper. The mutual fund version of Vanguard’s international index offering, for example, has an expense ratio of 0.11%, while the Hartford fund has one of 0.7%.

Active managers in many sectors do not, on average, outperform their passive competitors. But international bond investing has been an exception.

Over the past 10 years, actively managed global bond funds tracked by Morningstar have returned an annualized average of 1.9%, while their indexed counterparts have returned an average of 1.1%.

“Bond managers can color outside the lines in ways that can consistently add value,” said Ben Johnson, director of global ETF research at Morningstar. “Take the Bloomberg Aggregate – if I’m benchmarked against that index, I’m not limited to that universe. I can add a bit more credit risk, for example, by diving into high yield bonds and getting returns .

While US investors buy their funds in dollars, international bond fund managers can adjust risk in search of returns with currency bets. Some actively managed funds choose to hedge the effects of rising and falling currencies — as broad international index funds typically do — while others try to exploit those moves, Johnson said.

“Often the price movement and volatility of an international bond fund is solely attributable to exchange rates,” Johnson said. “It can dominate everything else, like inflation expectations or credit exposures.”


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