Our Favorite Emerging-Markets Bond Funds

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Our Favorite Emerging-Markets Bond Funds

by Lawrence Jones | 02-16-09 | 05-16 PM

The emerging-markets bond category saw a brutal 2008. While in the first half of 2008 it appeared as if the subprime-mortgage meltdown and liquidity crisis would miss the emerging-markets bond category, by late 2008 (particularly after the Sept. 15 bankruptcy of Lehman Brothers) these events had morphed into a generalized financial crisis that sent all risk asset prices tumbling, including emerging-markets bonds. In fact, the market stress resulted in an 18% loss for the category by year-end (nearly all post-Lehman), a disastrous decline even for this riskier segment of the fixed-income market and unlike any seen since the 1998 Russian debt default. There were few places to hide, as the sector was not only hit by a broad-based risk aversion, but by more fundamental concerns as well. For instance, while inflation was on the minds of most investors early in 2008, as a multiyear commodity price boom fueled growth in commodity-producing emerging-markets countries (increasingly large raw-materials purchasers themselves), commodity price declines characterized 2008's final months as global recession appeared inevitable. Moreover, the dramatic flight-to-quality seen in last year's final months not only represented a shift of capital away from emerging-markets credit exposure but also away from those nations' currencies and into hard currencies perceived safe, particularly the U.S. dollar and Japanese yen. That hurt the many funds that take modest degrees of local currency exposure. Also, this period exhibited a wide variance in credit differentiation, as the Brazil segment of the JPMorgan Emerging Market Bond Index Global returned 7.4% in the fourth quarter, while the index's Ecuador slice declined by 68%, as the country defaulted on its debt. Our two Analyst Picks in the category, Fidelity New Markets Income FNMIX and PIMCO

Emerging Markets Bond PEMDX, held up reasonably well over the trailing year, as we would expect given their restrained and cautious styles. In both cases, the funds offer strong managers combined with robust research resources, a prerequisite for navigating this turbulent market.
Analyst Picks: Category YTD Return (%) Fidelity New Markets Income 0.99 3-Year Return (%) -1.89 5-Year Expense Return Ratio (%) (%) 3.85 0.88

FNMIX
PIMCO Emerging Markets Bond D -0.2 -1.31 3.8 1.25

PEMDX
Average
1 2

-1.63

-2.55

3.06

1.31

Fund has a front load. Closed to new investors.

Returns through 2/13/2009.

Fidelity New Markets Income FNMIX This fund's moderate approach has served it well. Manager John Carlson doesn't typically make big bets against the index, limits local-currency debt, and runs a more diversified portfolio than many of his peers. Overall, the fund has weathered different environments successfully on Carlson's watch.

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Our Favorite Emerging-Markets Bond Funds

http://news.morningstar.com/FundAnalystPicks/printNews.asp?id=EB

PIMCO Emerging Markets Bond PEMDX This fund boasts one of the better long-term records in its group. Although veteran manager Mohamed El-Erian left at the end of 2005, we think Michael Gomez will prove a worthy successor. Gomez assisted El-Erian for two years before taking charge and has several years of experience in emerging-markets debt; he has the support of seven experienced comanagers and PIMCO's extensive research staff. What's more, he can again talk with El-Erian, who returned to PIMCO in 2008.

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6/11/2009 6:44 PM