Fund Highlight: T. Rowe Price Emerging Markets Bond Fund (PREMX)
If the idea of investing in emerging markets is appealing, don’t forget to include emerging market debt. A good option for this unique investment niche is T. Rowe Price Emerging Market Bond Fund (PREMX). The fund, however, is not for risk averse souls.
When it comes to investing, stocks get all of the attention even though the bond market is a larger venue. To some extent this makes complete sense, since stock issued by a company is, generally speaking, homogenous, while the bonds issued by a company can vary greatly from bond issue to bond issue. This makes things particularly complex on the bond side since a single company can have many different bonds—all with their own terms.
This complexity gets even worse when you venture abroad. Foreign investing is more complex because one has to take into account the intricacies of the nations in which companies operate. The homogenous nature of the stocks, however, largely remains. Bonds, meanwhile, still have the extra layer of complexity attached to the individual bond issues. So, investors need to understand the unique bond issues being considered and the markets in which companies operate. Going one step deeper, investing in emerging market bonds can be even more complex since these growing economies often have less well developed financial markets.
This complexity can lead investors to “play it safe” with regard to bonds (sticking to U.S. government securities, for example), an understandable decision. However, riskier debt can provide an important boost to a diversified portfolio’s returns. Outsourcing to a mutual fund is usually the best choice. For those intrigued by the growth of emerging markets, T. Rowe Emerging Market Bond Fund is a good option to consider.
Manager Michael Conelius usually invests at least 80% of the fund’s assets in the debt securities of emerging market governments and companies located in emerging market countries.
The manager generally favors companies that it believes will receive credit upgrades, which means that he will often delve into below investment-grade debt. In fact, there are no quality constraints on the fund. There are no duration constraints, either, though management normally tends toward the intermediate to long end of the yield curve.
The selection of individual bonds is research intensive. Particular points of interest are the political and economic trends of the country in which the bond issuer is domiciled and the creditworthiness of the individual issuer. As noted above, Conelius is seeking to benefit from selecting bonds issued by companies with improving credit profiles or those that have been, in his opinion, misjudged by bond ratings agencies.
This focus allows the fund to meet its objective of income and capital appreciation. On the income side, stepping down the credit ladder allows for a higher ongoing yield. On the capital appreciation side, bond prices rise to reflect the lower yields available to higher rated companies. (Bond prices and yields have an inverse relationship.) The approach is logical, though somewhat value oriented. At the end of July, about half the fund was in investment-quality debt, with the remainder in below investment-grade or unrated debt. The fund will sell a holding to adjust its maturity or credit quality profile, to invest in bonds it believes offer a better risk/reward profile, or to alter its geographic or currency exposure. The fund has the option to hedge currency exposure.
Investors should note that T. Rowe Price Emerging Markets Bond Fund is non-diversified. Thus, it can invest a material portion of assets in just a few markets or securities. In fact, as of the end of July, it had nearly 30% of its assets in Brazilian and Russian debt. Turkey, Mexico, and Venezuela, the next three largest country positions, account for about 20% of assets, bringing the top five country weighting to about 50% of assets. The ten largest individual bonds, meanwhile, made up almost 22% of assets.
T. Rowe Price Emerging Markets Bond Fund resides in Value Line’s International Bond Objective group. It has handily outperformed that broad group over the trailing 1, 3, 5, 10, and 15 year periods, residing in the top 20% of funds in every period. This is why adding an emerging market fund can be beneficial to performance. However, the fund is not for the risk averse, as it receives Value Line’s worst rank for Risk (5). Moreover, when the fund underperforms, it tends to do so with gusto—materially lagging funds with an international focus. That said, the fund’s specialization on emerging market debt largely explains this trend.
The fund’s $2,500 minimum initial investment is reasonable and its expenses have historically been notably below those of other international funds tracked by Value Line. Investors looking to add some emerging market exposure to their bond investments would do well to consider T. Rowe Price Emerging Markets Bond Fund.
At the time of this articles writing, the author did not have positions in any of the securities mentioned.