The Most Important Fundamental Factor Than Should Affect High Yield Bond Prices Looks Positive

Ultimately the most important risk factor that should be reflected in high yield bond prices compared to investment grade bonds is the risk of default. Effectively high yield bond investors are being paid higher interest because they are taking higher default risk (i.e. not getting paid back).

On that front the recent report from Moody's rating agency is good news for high yield bond investors. As Barrons reports 

High-Yield Default Rate Down To 1.7%, Should Stay Low – Moody’s

Of all the things that make high-yield bonds prone to the occasional market shock, defaults really aren’t one of them for the moment or for the foreseeable future. A Moody’s report out today says the default rate among U.S. companies with speculative-grade ratings fell to a mere 1.7% at the end of the third quarter. That’s near a six-year low and down from 1.9% a quarter earlier, and it’s well below the market’s 4.4% long-term average since 1993. The Federal Reserve’s ultra-low-rate policies since the financial crisis have enabled even the junkiest of junk-rated companies to refinance debt and issue new debt at uncommonly low interest rates...

This One is A Little Perplexing

FT

Global turbulence triggers flight from EM equities

Elaine MooreAuthor alerts

Global market turbulence has triggered the biggest outflows from emerging market equities in more than a year.

Investors removed $9bn from stocks and shares across Africa, Latin America, eastern Europe and Asia in October, according to figures from the Washington-based Institute of International Finance, which tracks all cross-border investment into developing countries by non-residents.

But here are returns for October

GMF emerging asia  +2.1% (blue)

VWO overall emerging markets  +1.4%(green)

SPY S+P 500 +1.1% (gold)

One month growth of $100,000 total return

This comparison is interesting flows into emerging markets (top) and price movements for VWO (bottom) seems to be evidence of quite a bit of performance chasing buying high and selling low

WSJ on The Rebound of the High Yield Bond Market

Junk Bonds Rally

Plunge in Yields on Government Debt Fuels Resurgence

Junk bonds have bounced back after their steepest decline in more than a year as investors once again push aside concerns about overheated prices in pursuit of higher-yielding investments.

Portfolio managers are snapping up speculative-grade debt after a selloff that last week took the yield of a major index above 5% for the first time since the “taper tantrum” of mid-2013. Yields rise when prices fall

Have performance chasing individual investors been selling while professional investors have been buying ? The article notes:

Some $19.2 billion has been withdrawn from U.S.-based high-yield bond funds and exchange-traded funds, according to fund tracker Lipper. The record annual outflow was $7.1 billion in 2005.

WSJ on Those One Decision Stocks

I promise I didnt read today's paper yesterday before writing yesterday's post.

From the WSJ

Clouds Darken for America’s Blue-Chip Stocks

Coke, IBM, Others Find Once-Reliable Formulas Leave Them Too Big to Change Direction Quickly

The approach was time-tested and hard to beat: Put your money in blue chips, decades-old companies that could be counted on to perform through thick and thin.

But now the market’s stalwarts are showing their age. Steady has become stagnant as companies once considered among the market’s most reliable post poor growth, quarter after woeful quarter.

The list of stumbling stars is remarkable: AT&T Inc., which on Wednesday lowered its revenue forecast; Coca-Cola Co. , whichposted flat sales; International Business Machines Corp. , whichthrew out its profit forecast; Wal-Mart Stores Inc., whose same-store sales haven’t increased in the U.S. since 2012; General Electric Co. , whose stock price hasn’t topped $30 since the financial crisis.

There are No One Decision Stocks

Occasionally I peruse what goes on at places like Seeking Alpha where individual investors produce homegrown stock analysis and recommenstations.

A craze over there for a long time has been "dividend growth stocks" often household name companies which are seen as guaranteed to produce a growing stream of income often with the extra imprimatur than Warren Buffett owns them. If the price declines...no matter..it's temporary market movement and besides there's that dividend.. And of course as the name implies the many individuals posting and reading there think it is relatively easy to generate alpha--better than maket returns on a risk adjusted basis. And since there is no systematic way to track the stock picks generated by the many that write on the site there would be no way to test if anyone actually is successful in doing so.

Earnings reports over the last few days show that investing is seldom if ever so simple.

 I am certainly a believer that price can deviate from value...certainly there is no economic rationale for the price fluctuations we have seen in the overall market of the past couple of weeks. And no doubt many stocks have been knocked down in prices that don't reflect value during that selling.I also do not in any way consider myself a stock picker...

But sometimes price does reflect underlying fundamentals (in the long term it does) and sometimes there are changes that can impact the long term prospects for a company.

I am not a stock picker in my approach but the recent news on IBM, McDonalds and Coke seems to point towards some real change in prospects

For IBM the problems seem most daunting . As Andrew Ross Sorkin reports in the NYT dealbook. IBM may gave known how to keep shareholders happy through dividends and buybacks...but it took its eye off the ball in terms of building the business.

The company’s revenue hasn’t grown in years. Indeed, IBM’s revenue is about the same as it was in 2008.

But all along, IBM has been buying up its own shares as if they were a hot item. Since 2000, IBM spent some $108 billion on its own shares, according to its most recent annual report. It also paid out $30 billion in dividends. To help finance this share-buying spree, IBM loaded up on debt.

While the company spent $138 billion on its shares and dividend payments, it spent just $59 billion on its own business through capital expenditures and $32 billion on acquisitions. (To be fair, Ms. Rometty has been following a goal set by her predecessor, Samuel J. Palmisano, to return $20 a share to stockholders by 2015. Ms. Rometty abandoned it only on Monday.)

All of which is to say that IBM has arguably been spending its money on the wrong things: shareholders, rather than building its own business.

Mr Buffett as Sorkin notes has been a big fan of IBM because of its stock buybacks and dividend growth investors have their eyes on the dividend. But as Buffett in his latest letter to investors  has noted (quoted by Sorkin)

“In the end, the success of our IBM investment will be determined primarily by its future earnings.”

The question for Ms. Rometty is whether she can figure out how to turn around IBM — not just its numbers, but also the company itself.

Both McDondalds (MCD) and Coke (KO) seem to be facing trends in consumer tastes away from their core products. More disturbing to long term investors is that the CEOs of both companies seem to be surprised by the developments and arent too clear on what they will be doing to turn things around.

Here's a great graphic from the WSJ illustrating the dilemma for both

Here is the WSJ on MCD  and here on KO I wont review the ugly details here.

One sign that is not very positive for KO is the CEOs statement that a cost cutting program will be implemented to improve profitability. Given the size of the companies revenues there would have to be massive cuts in expenses to have much impact on earnings. In my experience citing cost cutting to generate a major improvement in earnings is a sign that management doesnt have any real ideas on how to grow the company.

In any case these three examples point out that stock picking is never as simple as it looks, there are no one decisions stocks....and most investors are likely better off with a diversified portfolio of passive ETFs and/or index funds.

High Yield Bonds Individual Investors Selling and Professional Investors Buying Again ?

Two recent reports in the FT note the large swings in high yield bond markets, particularly in the high yield bond ETFs which offer an easy way for retail investors and traders to invest in the high yield market. The result is often high volatility and large moves in the prices of these bonds. Recent weeks have shown a large selloff, as occurred in August (graph below is of HYG the largest high yield bond ETF). At that time the selloff driven by retail investors and short term traders pushed prices down to levels that many professional portfolio managers saw as attractive. Many are expressing similar views in reaction to the recent selloff.

Ft Reports:(Oct 17) Junk bonds caught in flight from risk

Vivianne Rodrigues in New York

©Getty

A sell-off in US stocks this week hit the junk bond markets as investors shunned the riskier securities amid fears about the outlook for the global economy.....

Markets have stabilised after mutual funds and ETFs investing in junk bonds experienced record outflows.

Renewed selling this week has highlighted some of the potential pitfalls faced by holders of the securities – which are sold by companies with fragile balance sheets and a higher probability of default – in a risk-averse environment.

Investors withdrew a further $549m from high-yield funds and ETFs in the week ended October 15. That brings this year’s total outflows to $5.5bn.

However, the junk bond market still has many supporters. Mark Haefele, global chief investment officer at UBS Wealth Management, said the sell-off boosted the attractiveness on the debt.

With spreads on the bonds versus comparable US Treasuries at about 500bp and default rates still expected to remain low, total return on junk bonds could rebound and reach the 5-6 per cent mark in the coming six months, he said.

High-yield market analyst Marty Fridson estimated that, after being extremely overvalued for most of the year, the high-yield market had swung to “moderately undervalued”.

And this month Pimco said fundamentals remained compelling – given its view “for a lower-growth global economy and subdued interest rates over the foreseeable future – an outlook we call the New Neutral – the case for high-yield bonds is a compelling one, both as a tactical and strategic allocation”.

The FT also reported (Oct 20) that fickle retail investors as well as short term traders can produce large swings in the high yield market as they trade in and out of high yield bond ETFs

Embedded Investors turn to junk ETFs amid sell-off

Tracy Alloway and Michael Mackenzie – New YorkAuthor alerts

Investors are increasingly turning to exchange traded funds to dip in and out of junk bonds in times of market stress, according to new research from Fitch Ratings....

Such ETFs give investors the ability to dart cheaply and easily in and out of assets that would be more difficult for them to obtain in the so-called “cash market”.

Fitch’s analysis finds that trading activity in junk, or high-yield, bond ETFs increased sharply during 2013’s “taper tantrum” as well as three shorter periods of market volatility in January, July and then in September and October of this year.

The research suggests investors may be using ETFs as a convenient way to express changing views on low-rated corporate debt at a time when liquidity, or ease of trading, in the cash market is believed to have deteriorated....

The amount of junk bonds traded rose to $8.6bn on October 15, up from a daily average this year of $5.6bn, according to Trace data.

The amount of shares traded of BlackRock’s high-yield corporate bond ETF, known as HYG, reached more than $1bn on the same day, up from an average $5.6m.

More on HEDJ Currency Hedged Europe ETF

 I wrote recently about the strategy of investing in Europe through a currency hedged ETF ticker HEDJ

At ETF,COM an analysis makes the following points:

....it’s important not to become mired in euro pessimism. The important issue for tactical ETF asset allocators is to understand the risks and the opportunities. Heightened central bank activity always creates both. From that perspective, consider a more hopeful investment outlook:

• The eurozone is not an economic island. Contrary to sagging wages in the West, Asian incomes have been on a tear over the last decade. The OECD forecasts that 80 percent of the growth in middle class spending globally through 2030 will be driven by Asia. European consumer companies are ideally positioned to benefit from this trend, ...

• Valuations matter. The Eurozone has been accused of “turning Japanese.” While it’s true that the new, dismal normal of the eurozone is sluggish growth and more frequent recessionary relapse, the probability of eurozone stock markets following the Japanese experience is extremely low. Why? Simply because valuation is the best predictor of longer-term returns. During Japan’s epic decline, equity valuations started from lofty levels, and debt was concentrated in the corporate sector. Those conditions are not present in the eurozone today....

• Currency depreciation has gloriously arrived. ...With major policy divergence between the Fed and the ECB, a new era of currency depreciation is upon us (see Hahn’s April 2014 piece on ETF.com, “Position Now For a Weaker Euro”). Looking toward next year, the benefits of a weaker euro and, potentially less austerity, will feed through into the data and show up as improved profits. 

Here's An Interesting One

Alibaba IPO..the largest IPO of all time was on September 19
All time high on the S+P 500 September 19

Alibaba closed at a bit under 94 on its first day of trading..it closed on Oct 17 at $88.85

Blackrock Also Sees Opportunities in High Yield Bonds

From Blackrock

The Sell-Off Continues, But an Opportunity Appears

October 15, 2014

by Russ Koesterich

of BlackRock

• In recent weeks, investors have been contending with two trends: anxiety over a change in Fed policy and evidence of a slowdown in the global economy.
• While global growth is likely to remain below historic norms, it is not collapsing. This suggests that investors should be positioned for a slow growth environment, not another recession.
• This, in turn, implies taking some selective risk in asset classes that have become less expensive as a result of the sell-off.
• One example of an asset that warrants another look: U.S. high yield bonds......

At the same time, the current environment presents the opportunity to take another look at asset classes that had sold off and now look more attractive. One such asset class that had come under pressure, but is now looking relatively appealing, is high yield bonds. The yield difference between high yield bonds and higher-quality, lower-yielding U.S. Treasuries (known as the spread), has widened out to the highest level in a year. This indicates high yield bonds offer better value and yields now than just a few weeks ago. Given that corporate America remains strong and default rates low, high yield now looks likely to provide a reasonable level of income relative to the rest of the fixed income market

WSj Gives some "Market Analysis and Current"Professionals' Forecasts But Also Includes the Greatest Market Forecast of All Time

Here
 From the article

"It comes as little surprise to Wall Street veterans that the selloff began just after leading strategists at the major investment banks had upgraded their year-end stock market forecasts yet again.

In September, 15 top strategists had raised their year-end target for the S&P 500 to an average of 2010. At the end of last year, they were forecasting 1934. But in just over a month since the upgrades, the S&P has instead tumbled from 2000 to 1887."

The author offers this "insight" for investors

If this is merely a regular correction in the course of a regular economic expansion, the answer may be: Not much further.

Corrections of 5% to 20% are a normal part of the stock market. ...

But it is plausible that this correction might be the start of something much worse.

But the aurthor does make not of the most accurate stock market forecast of all time:

Legendary Wall Street mogul J.P. Morgan once asked for a stock-market forecast, confidently predicted that share prices would fluctuate. And he’s been right ever since

What Is Going on with Etf HYLD Advisorshares Short Term High Yield ?

I have written several times about HYLD advisorshares short term high yield  bond fund. I has sold off sharply in the last few weeks even in advance of the recent stock market selloff. It has also underperformed other high yield bond ETFs as of late. However even with the sharp decline in price (see below) the high yield on the fund is relatively low. The ytd total return is -2% and over the past 12 months the fund is +.1%

 The fund is composed of higher yielding bonds which are considered to have higher credit risk. In periods of panic High Yeild bonds will decline more than treasury bonds and investment grade corporate bonds. The recent readjustments at the major fund manager PIMCO likely led to some large sales of bonds in their portfolio and dislocations in the high yield bond market.

However HYLD has performed worse than other ETFs in its category. I would attribute that to 3 factors all of which should be monitored

• A concentration in holdings in the energy sector at a time of large declines in energy prices.A bloomberg video report mentions specific losses in energy related high yield bonds.

• Inclusion in the portfolio of some dividend paying stocks mostly in the energy industry into the portfolio.

• A lower dividend paid in September vs previous months. The manager attributes this to a missed payment on a bond they held. The bond has been sold at a loss and the impact of that on the portfolio is already reflected in price and asset value. Also many of the stocks held in the portfolio pay dividends quarterly so many of those dividends were paid after last month’s dividend payment on the 27 of September.

At present I don’t see much reason for changes in the fund that is part of the strategic bond allocation. The main long term risk factor for this sector is cashflow to pay interest and principal on the bonds. As the fund adjusts its portfolio the yield on its bonds should increase. Of course the fund is not for the faint of heart and investors should weight that in consideration of the decision as to whether to hold the fund, it likely should be only part of a bond allocation that includes investment grade corporate and US treasury bonds.

My communications with the fund manager indicates their expectation(there are no guarantees) that future dividends will be at the rate of previous months which is around $.45 a share which makes the yield on an annual basis of close to 9% annualized based on current prices. I am in contact with the fund manager on a regular basis.

I am monitoring the HYLD carefully particularly around the next dividend date which is in the latter part of the month. Another disappointment with the dividend would be a reason to reassess an allocation to HYLD.

The fund manager Peritus recently published an update on their blog as to theirviews. The article emphasizes that they concentrate on prospects for cashflow in dividends and interest payments rather than short term price performance. They include the following graph from JP Morgan indicating historical and forecasted default rates

They note that recent price movements have moved the spread of high yield over treasury bonds to over 5%. That has likely increased with the fall in treasury yields of the last few days. The manager views the volatility as an opportunity to make new purchases and has added bonds with yields higher than the spread indicated by the indexes.

Pertius expresses confidence in its holdings in the energy sector despire recent large declines in oil prices. 

Three Major Asset Managers Buying Junk Bonds as The Prices Fall

Three  articles of note from Barrons fixed income blog indicating some major bond managers are using the selloff to add holdings in high yield (junk) bonds

October 15 on Blackrock

BlackRock‘s fixed income head, Rick Rieder, says the firm has been adding to its high-yield bond holdings during recent days as the 10-year Treasury yield has plunged, capped by this morning’s free-fall that sent the 10-year yield below 2% for the first time since May 2013 before it rebounded to 2.05%.

Calling it “a bit of a crazy day,” Rieder says the rally followed a confluence of disappointing economic indicators, along with renewed worries about the spread of the Ebola viris, and those contributed to an unwinding of popular trades, namely long-dollar trades, shorts aimed at the front end of the Treasury yield curve, and long positions in risk assets, particularly stocks....

Rieder says BlackRock has been adding to its high-yield corporate bond holdings recently. “High yield is actually holding up incredibly well relative to everything else,” he says. “If nominal yield s are going to be persistently lower, led by other parts of the world, then high yield at 6.5% or 6.75% [yields] is not bad compared with a 10-year [Treasury] at 2%.”

Martin Fridson one of the most respected experts in the bond market Octiober 16:

For months, high-yield bond market guru Martin Fridson has been warning about overvaluation, first calling the market “extremely overvalued,” then upgrading that to “way, way overvalued” in May. After the market suffered a brief but intense sell-off in late July, Fridson removed the extreme overvaluation tag, or at least the “extreme” part of that label.

Today Fridson says the market, at long last, is back to being undervalued, or at least “moderately undervalued.” This comes after high yield got pounded amid yesterday’s broadermarket antics, which followed a more prolonged period of weakness.

Fridson, now chief investment officer at wealth management firm Lehmann Livian Fridson Advisors LLC, bases his assessments on his own model for high-yield bond spreads. The market’s average spread has climbed to 508 basis points (yielding 5.08 percentage points more than comparable Treasury bonds) as of the end of the day yesterday from a low of about 340 bps earlier this summer, per a benchmark Bank of America index. 

And October16   on UBS

The high–yield bond market has been suffering lately, and yesterday’s bizarre, wild ride for bonds and stocks alike didn’t do junk bonds any favors, with that market down another 0.55% yesterday, per a benchmark Bank of America Merrill Lynch index. High yield is now down 1.5% over the past week, 2% over the past month and 2.8% since July, trimming year-to-date returns to 2.5%.

Where there’s a rout, there’s a buying opportunity. The average high-yield bond spread over Treasuries has climbed to 508 basis points, meaning junk bonds now yield more than 5 percentage points more than comparable Treasuries. That’s up by 1.6 percentage points from the low spread of about 340 basis points seen in June, when the average junk-bond yield hadfallen to a record-low just under 4.9%. The market’s average yield is up to a much healthier 6.49% today.

Yesterday BlackRock said it’s been buying more junk bonds lately, particularly with high-yield bond yields moving in the opposite direction of plunging Treasury yields. Today UBS Wealth Management says it too is adding to its high-yield holdings,

 Here’s what UBS has to say today:

We believe there has been shift in the relative attractiveness between the equity risk premium and the more defensive credit risk premium, and we add to overweight position in US high yield credit. The recent sell off provides a spread to Treasuries of c. 500bps, or an absolute yield-to-worst of c.6.3%. With the fundamental economic situation in the US still positive, we expect default rates to remain below 2%, allowing for a total expected return of 5-6% over the coming six months, based on our forecasts.

Here is a 10 day price chart of HYG the largest high yield bond ETF

A "Risk Off" Moment in The Markets ?...Are You Sure ?

A standard part of most of the news articles about recent market moves has included the phrase "risk off" indicating investors fleeing from riskier asset classes. Certainly the large gains in price/fall in yields for US  Treasury Bonds fits that description.

But looking at the US stock market the view seems a bit different. Small Cap stocks are considered to be riskier than large cap. This chart shows that US small caps represented by the Russell 2000 (brown line below)  have performed far worse than the large cap S+P 500(SPY). It began its drop already during the first quarter of this year.

Year to Date

Yet here is how the charge looks for the past 5 trading days

5 Days

Looking internationally Emerging markets (etf IEMG) are also considered an asset class sold during "risk off " periods. But here is IEMG(brown) vs SPY ytd and below that the last 5 trading days

Year to Date

5 days

Bond Market Review Third Quarter 2014

The bond markets fluctuated in reaction to anticipation of future interest rate moves but US treasury bonds put in a strong performance in intermediate and longer term maturities. The long term US Treasury bond ETF gained 4.4% in the quarter. The meager yield of under 2.5% looks attractive vs long term European treasury bonds trading at far lower levels which explains part of the strong performance …German ten year govt bonds are yielding .91%.

 This creates a paradoxical situation for investors. A ten year US treasury bond at a yield under 2.5% is hard to see as a good long term investment. Yet traders looking shorter term at global investment opportunities with low European yields and prospects for a weaker Euro could easily drive yields lower and prices higher for US treasury bonds.

High Yield bonds faced a sharp selloff in July recovered, almost all those loses in August and then gave back all of those gains in September. Spreads between high yield bonds and treasury bonds had reached extremely low levels reflecting investors “search for yield”. Those investors likely included many with little experience in the asset class and little appetite for large fluctuations the market in high yield bonds and sold as prices fell. The high yield bond market has far less liquidity than other markets and thus is subject to large swings. This situation was likely aggravated by the changes in management at the world’s largest bond fund Pimco Total Return.

A stronger US economy would mean less rather than more default risk for high yield bonds. That would make the rationale for a sharp decline in high yield bonds relative to Treasury bonds a weak one. But that doesn’t mean momentum won’t continue this trend.

Internationally, emerging markets continued to exhibit high volatility. With the prospects of higher US interest rates in the US, emerging markets would be vulnerable both in terms of bond prices and currency fluctuations. With interest rates at extremely low levels and European Central Bank policies aimed at a lower dollar they are also vulnerable. Much like the US Eurozone bonds have had strong gains of late due to the sharp move down in interest rates. But they would carry a high level of currency risk and little room for capital appreciation looking forward.

As of Sept. 30,2014
Total Return (Price+Dividend)
	ticker	3q 2014	YTD	1 year	3 Year
US total bond market	AGG	4.1%	4.0%	4.1%	7.0%
Short Term High Yield	HYLD	-4.3%	2.1%	13.1%	36.9%
US Long Term Treasury Bonds	TLT	4.1%	16.0%	5.0%	5.0%
International Bonds	BNDX	1.8%	6.0%	-1.1%	5.5%
Emerging Market Bonds(local currency)EMLC	EMLC	-4.9%	1.0%	6.4%	7.2%

Equity Markets Review Third Quarter 2014

Equity markets were extremely volatile during the quarter with daily moves of over 1% not at all uncommon.

The first week of the first quarter (as of this writing October 7) has shown a sharp selloff in global stock markets, sparked by continued disappointing European markets now influencing US and Asian markets as well.

Although the US economic news has been positive valuations remain high. The movements in the bond market continue to waver in their sentiment as to when the Federal Reserve will raise interest rates. And the future direction of interest rates adds another factor of uncertainty to the markets. Thus although the US market reached record highs during the third quarter there has been little follow through.  World Bank economic forecast for 2014 has been revised down a bit to 2.1%

European markets face two negatives: continued weak economic data and the political tensions related to the Ukraine. The European Central Bank has indicated that it will continue policies of low interest rates and a weaker Euro to try to stimulate economies. The overall Euro zone ETF fell 8.8%. Germany reflecting concerns over both political and economic concerns fell even more -11.9% World Bank economic growth forecast in Europe is 1.1%

The impact of the weaker Euro can be seen in the comparison between FEZ and HEDJ which invests in Eurozone stocks but hedges the currency risk fell only 1.6%. Despite the weak economic data from Europe investors should be aware that investing in European stock indices have significant weightings in multinational corporations. Therefore the beaten down European indices have potentially attractive valuations compared to US stocks, particularly if one makes use of currency hedging to protect against a weakening Euro. The valuation discount of German stocks vs. the US is over15% but for the near term pessimism on economic conditions will put a drag on markets.

Emerging markets showed a large divergence which raises the question as to whether investing in emerging markets as an asset class makes sense. The overall emerging markets index was -4%, the index includes Russia. Eastern Europe. Latin America and Emerging Asia. The emerging Asia index by contrast was up .3% and has actually outperformed the US market year to date

Within the emerging markets the outlook for Russia continues to be clouded by political conditions. Latin American growth has slowed considerably and is expected to show economic growth based on the World Bank of only 1.2% from 2.2%. This would be the slowest growth rate since 2009 as a point of comparison the average growth rate from 2003 -2010 was 4.8%.

Asia remains the region with highest forecasted growth despite the fact that the same World Bank report moved down its growth forecast for China down to 7.2% (last year’s growth rate was 7.7% the forecast for East Asia is 6.9%

From the perspective of short and long term economic growth and stock valuation Asia seems the most attractive of international markets. Market prices have yet to fully recover from several years of underperformance vs. US stocks with valuations currently at close to a 30% discount to US markets.

As of Sept. 30,2014
Total Return (Price+Dividend)
	ticker	3q 2014	YTD	1 year	3 Year
US total stock k market	VTI	-0.8%	7.9%	16.6%	92.5%
Emerging Markets	IEMG	-4.0%	5.0%	2.8%	44.0%
Emerging Asia	GMF	0.3%	11.8%	11.1%	62.5%
Eurozone	FEZ	-8.8%	-0.6%	5.2%	44.0%
Germany	ewg	-11.9%	-8.1%	5.0%	69.8%

About Using an Unconstrained Bond Fund

In my last post I wrote that:

 I do certainly hold to the view that "go anywhere" bond funds are not a good idea for investors...certainly not as a significant part of their bond allocation.

A bond allocation should be the anchor of relative stability for a portfolio and should be transparent. 

Jason Zweig in the WSJ weekend edition writes:

Investment-research firm Lipper estimates that 71% of the more than $70 billion in new money that has poured into taxable bond funds over the past 12 months has gone into alternative or nontraditional strategies.

That number will surely rise now that Mr. Gross is joining the Janus unconstrained fund. But a fund can pursue higher returns only by taking on greater risk....

Furthermore, such strategies tend to outperform safer bonds in a bull market—but can suddenly suffer when bonds (or stocks) collapse. Their returns are less bond-like and more like those of the stock market, so these funds are less likely to provide the diversification of conventional bond funds in the next stock-market decline, Ms. Bush says.

The ability to go anywhere, says Mr. Siegel of the CFA Institute Research Foundation, gives unconstrained managers an incentive to take unrestrained risks. “To let bond managers buy whatever they want and not be accountable is kind of crazy,” he says. “A lot of them will just take as much risk as possible.”