Is Your Bond Strategy Wrong? – Wall Street Journal – 10/27/12

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The Wall Street Journal

Weekend Investor – October 27, 2012

Is Your Bond Strategy Wrong?

By Joe Light

Some prominent investors say danger is lurking in the decades-old method used to build bond portfolios. If they are right, small investors might want to rethink their strategies.

The crux: The traditional method of weighting government bonds by “market capitalization”—the value of a country’s bonds in the market—is leading to risky allocations to highly indebted countries, experts say.

Instead, some money managers are switching to other measures, such as gross domestic product, that reflect countries’ capacity to pay off their debts.

Comments October 27, 2012

One of the most critical criterion to evaluate when making international investments is currency exposure. This is even more important when making international fixed income investments, as currency fluctuations have historically had a greater impact on fixed income total returns than equity total returns.

For example, a positive 1% currency fluctuation on an international fixed income portfolio that generates a 5% return in local currency generates a total return of 6% for a U.S. investor. This translates into a 20% higher return in favor of the U.S. investor. The same positive 1% currency fluctuation on an international equity portfolio that generates a 10% return in local currency generates a total return of 11% for a U.S. investor. This translates in a 10% greater return in favor of the U.S. investor.

Hedging all, some or none of the currency exposure of an international portfolio can dramatically alter the total return in U.S. dollars. When utilizing a mutual fund, understand if currency hedging can be used, as returns will surely be impacted.

Let us research the market and design a portfolio to meet your risk and return profile at:

http://skloff.com

Aaron Skloff, AIF, CFA, MBA
CEO – Skloff Financial Group

Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies.  He can be contacted at www.skloff.com or 908-464-3060.

 

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