In a previous post I wrote about the Templeton bond fund, praised in the WSJ for "thining different" in the words of the iconic Apple computer commercial.
Pimco, the bond powerhouse has also been aggressively promoting a bond fund with a heavy allocation to emerging markets.
Pimco launched its Global Advantage Bond Fund this year based on the index it created in 2009. The fund is listed on their website as a core bond holding and has a 30% weighting in emerging markets markets.
In fact larger holdings in emerging markets has emerged (pun intended) as a key part of their fixed income strategy. The WSJ reported
my bolds my comments from here on in blue
Pacific Investment Management Co., the world's biggest bond-fund manager, is increasingly investing in emerging-market corporate debt, part of a broader move to ramp up exposure to the fastest growing economies in the world and assets with the highest returns.
Pimco's clients, including pensions funds and insurance companies that are often the slowest to warm to the developing world, have progressively expressed more interest in this group of bonds, said Ramin Toloui, an emerging market portfolio manager at Pimco's Newport Beach, Calif., office. He was speaking via telephone en route to Washington for the International Monetary Fund's spring meetings.
Pimco, a unit of Allianz SE, has overall identified emerging markets as a growing opportunity, and last month increased its benchmark Total Return mutual fund's exposure from 5% to 6%.
However, the launch of Pimco's Global Advantage Bond Index last year is indicative of how much Pimco thinks investors should be exposed, said Mr. Toloui.
That index has a 30% allocation in emerging markets, he said.
On the currency front, we are long a basket of Asian currencies, anchored by the Chinese yuan and with satellite positions in the South Korea won and Taiwan dollar. We believe these regions’ currency appreciation is a natural response to the fundamental need of China to shift from an export-oriented toward a more consumer-led economy. The Asian region has fared relatively well recovering from the latest bouts of global recession, and has the resources, labor force and rising total factor productivity that we believe will lead to a currency correction. We also hold positions that may benefit from expected weakness in the British pound and euro currencies.
Secondly the yield spreads are so minimal as to offer extremely limited risk return vs US bonds the highest yielding asia bond was indonesia 1t less that 2% over treasuries ...and there is certainly potential for political instability there. I would much rather hold emerging market stocks for my emerging portfolio and if I were to put any fixed income on the risk side of the asset allocation do it through a purchase of a liquid high yield US dollar instrument like the HYG with a yield differential of well over 4.5% over treasuries.
A bond fund is in fact a very poor way to try to get a benefit from the growth in emerging markets.
In my view the new products that incorporate large allocations to emerging markets bonds are a classic case of a "product" that has to be "sold" as opposed to a financial instrument that actually makes asset allocation cheaper and better.
Interestingly in an interrview on the pimco website Lisa Kim one of their managers states the following:
In thinking about where this strategy fits in an investor’s asset allocation, consider why investors buy bonds in the first place. Typically, they are looking for (1) capital preservation, (2) diversification from equities, (3) income, (4) liquidity and (5) impact mitigation from an economic downturn. A core fixed income strategy and the Unconstrained Bond Strategy should really be no different in how they address each of the first four concerns.
law of economy or law of succinctness). When competing hypotheses are equal in other respects, the principle recommends selection of the hypothesis that introduces the fewest assumptions and postulates the fewest entities while still sufficiently answering the question..