A version of this article was published in the December 2021 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by .
Emerging-markets local debt has been among the worst-performing fixed-income sectors in recent years, and 2021 was no exception. Last year, the JPMorgan GBI-EM Global Diversified Index, which tracks local-currency emerging-markets sovereign debt, lost a whopping 8.9%; meanwhile, the JPMorgan EMBI Global Diversified Index, which tracks U.S.-dollar-denominated emerging-markets sovereign and quasi-sovereign debt, lost a more modest 1.8%. Rising U.S. rates and inflation concerns as well as slowing Chinese growth and issues in the Chinese property sector contributed to the sell-off in emerging-markets debt. However, the strength of the U.S. dollar relative to many emerging-markets currencies explains why local currency did so much worse.
Despite the recent turmoil in emerging-markets local bonds, they could be an attractive option based on valuations. At the end of 2021, the emerging-markets local-currency bond Morningstar Category had a median SEC yield of 5.0%, which topped the median high-yield bond fund's SEC yield of 4.0%. In addition to the attractive yield, many emerging-markets central banks have proactively raised real rates (interest rates adjusted for inflation) at a much faster pace to their developed-markets peers, as many emerging-markets central banks have been less willing to test if current inflation will prove transitory. As a result, the difference between emerging-markets real rates and developed-markets real rates is at a 15-year high. This combined with supportive oil dynamics, continued growth recovery, and peaking inflation could lead to a rebound in emerging-markets local debt.
Still, emerging-markets bonds carry amplified risks alongside their lofty yields and can move more in line with equities than developed-markets debt. Political, macroeconomic, and regulatory developments can all impact credit risk and introduce volatility. Sovereign issuers are a mix of investment-grade and junk-rated. Local-currency-denominated emerging-markets debt is particularly volatile given its potent currency risk. Given the elevated risks, emerging-markets local bonds are best suited for a supporting role in a portfolio.
For investors seeking a pure-play emerging-markets local-debt strategy, Pimco Emerging Markets Local Currency and Bond PELBX offers exposure to local rates and currencies. However, we give the fund a Morningstar Analyst Rating of Neutral because its emerging-markets debt team has struggled to distinguish itself.
Another way to gain exposure is through a wide-ranging fund with a meaningful allocation to the sector. Gold-rated Western Asset Core Plus Bond WACPX, which resides in the intermediate core-plus bond category, sports a well-diversified portfolio focused on the investment-grade space but typically carries more emerging-markets local debt than peers. In recent years, the team has not hedged its local-currency exposure back to the U.S. dollar, which can create more volatility. Fortunately, the strategy has a deep and experienced team to lean on. While its emerging-markets local-debt bet has faced some challenges in recent years, the team's investment theses have a solid track record of panning out: The institutional shares' 10-year 4.5% annualized return through December 2021 blew past its typical category peer.
Dodge & Cox Global Bond DODLX, which has an Analyst Rating of Gold, is a world-bond fund with a tilt toward corporate bonds. The experienced managers here build a concentrated, high-conviction portfolio with a notably high corporate credit stake, which typically represents half of the portfolio. The bulk of its emerging-markets allocation (29% of assets in December 2021) is in local-currency sovereign debt (20%). The managers tend to keep foreign-currency exposure to around 20% on average. Its helping of emerging-markets local debt has helped it serve investors well over time. From its May 2014 inception through December 2021, it outpaced all peers.
Carefully consider the investment objectives, risks, charges and expenses before investing. A prospectus, obtained by calling 800-669-3900, contains this and other important information about an investment company. Read carefully before investing.
A mutual fund is not FDIC-insured, may lose value, and is not guaranteed by a bank or other financial institution.
Performance quoted represents past performance, is no guarantee of future results, and may not provide an adequate basis for evaluating the performance of the product over varying market conditions or economic cycles. Current performance may be lower or higher than the performance data quoted. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost.
TD Ameritrade receives remuneration from mutual fund companies, including those participating in its no-load, no-transaction-fee program, for recordkeeping, shareholder services, and other administrative and distribution services. The amount of TD Ameritrade's remuneration for these services is based in part on the amount of investments in such funds by TD Ameritrade clients. PLEASE ALSO SEE IMPORTANT ADDITIONAL FUND FEE DISCLOSURE INFORMATION
No-transaction-fee funds and other funds offered through TD Ameritrade have other fees and expenses that apply to a continued investment in the fund and are described in the prospectus.
Mutual funds, closed-end funds and exchange-traded funds are subject to market, exchange rate, political, credit, interest rate, and prepayment risks, which vary depending on the type of fund. International investments involve special risks, including currency fluctuations and political and economic instability. Asset allocation and diversification do not eliminate the risk of experiencing investment losses. Fund purchases may be subject to investment minimums, eligibility and other restrictions, as well as charges and expenses.
1You could lose money by investing in a money market fund.Although the fund seeks to preserve the value of your investment at $1 per share, it cannot guarantee it will do so.The fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the fund's liquidity falls below required minimums because of market conditions or other factors. An investment in the fund is not insured or guaranteed by the FDIC or any other government agency. The fund's sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time.
2You could lose money by investing in a money market fund. Although the fund seeks to preserve the value of your investment at $1 per share, it cannot guarantee it will do so. An investment in the fund is not insured or guaranteed by the FDIC or any other government agency. The fund’s sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time.
3You could lose money by investing in a money market fund. Because the share price of the fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the fund's liquidity falls below required minimums because of market conditions or other factors. An investment in the fund is not insured or guaranteed by the FDIC or any other government agency. The fund's sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time.
Most mutual funds charge 2.00% on the redemption of shares (including by exchange) held for less than a certain number of calendar days. Performance figures reported do not reflect the deduction of this fee. If reflected, the fee would reduce the performance quoted. Please refer to the fund's prospectus for redemption fee information. TD Ameritrade may also charge its own short-term redemption fee.
TD AMERITRADE RISKS OF INVESTING IN FUNDS: PLEASE READ IMPORTANT ADDITIONAL MUTUAL FUND, EXCHANGE-TRADED FUND, AND CLOSED-END FUND RISK DISCLOSURES
Research and planning tools are obtained by unaffiliated third-party sources deemed reliable by TD Ameritrade. However, TD Ameritrade does not guarantee their accuracy and completeness and makes no warranties with respect to results to be obtained from their use. The Investment Profile report is for informational purposes only.
Mutual Funds: Commentary
Commentary
A version of this article was published in the December 2021 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by .
Emerging-markets local debt has been among the worst-performing fixed-income sectors in recent years, and 2021 was no exception. Last year, the JPMorgan GBI-EM Global Diversified Index, which tracks local-currency emerging-markets sovereign debt, lost a whopping 8.9%; meanwhile, the JPMorgan EMBI Global Diversified Index, which tracks U.S.-dollar-denominated emerging-markets sovereign and quasi-sovereign debt, lost a more modest 1.8%. Rising U.S. rates and inflation concerns as well as slowing Chinese growth and issues in the Chinese property sector contributed to the sell-off in emerging-markets debt. However, the strength of the U.S. dollar relative to many emerging-markets currencies explains why local currency did so much worse.
Despite the recent turmoil in emerging-markets local bonds, they could be an attractive option based on valuations. At the end of 2021, the emerging-markets local-currency bond Morningstar Category had a median SEC yield of 5.0%, which topped the median high-yield bond fund's SEC yield of 4.0%. In addition to the attractive yield, many emerging-markets central banks have proactively raised real rates (interest rates adjusted for inflation) at a much faster pace to their developed-markets peers, as many emerging-markets central banks have been less willing to test if current inflation will prove transitory. As a result, the difference between emerging-markets real rates and developed-markets real rates is at a 15-year high. This combined with supportive oil dynamics, continued growth recovery, and peaking inflation could lead to a rebound in emerging-markets local debt.
Still, emerging-markets bonds carry amplified risks alongside their lofty yields and can move more in line with equities than developed-markets debt. Political, macroeconomic, and regulatory developments can all impact credit risk and introduce volatility. Sovereign issuers are a mix of investment-grade and junk-rated. Local-currency-denominated emerging-markets debt is particularly volatile given its potent currency risk. Given the elevated risks, emerging-markets local bonds are best suited for a supporting role in a portfolio.
For investors seeking a pure-play emerging-markets local-debt strategy, Pimco Emerging Markets Local Currency and Bond PELBX offers exposure to local rates and currencies. However, we give the fund a Morningstar Analyst Rating of Neutral because its emerging-markets debt team has struggled to distinguish itself.
Another way to gain exposure is through a wide-ranging fund with a meaningful allocation to the sector. Gold-rated Western Asset Core Plus Bond WACPX, which resides in the intermediate core-plus bond category, sports a well-diversified portfolio focused on the investment-grade space but typically carries more emerging-markets local debt than peers. In recent years, the team has not hedged its local-currency exposure back to the U.S. dollar, which can create more volatility. Fortunately, the strategy has a deep and experienced team to lean on. While its emerging-markets local-debt bet has faced some challenges in recent years, the team's investment theses have a solid track record of panning out: The institutional shares' 10-year 4.5% annualized return through December 2021 blew past its typical category peer.
Dodge & Cox Global Bond DODLX, which has an Analyst Rating of Gold, is a world-bond fund with a tilt toward corporate bonds. The experienced managers here build a concentrated, high-conviction portfolio with a notably high corporate credit stake, which typically represents half of the portfolio. The bulk of its emerging-markets allocation (29% of assets in December 2021) is in local-currency sovereign debt (20%). The managers tend to keep foreign-currency exposure to around 20% on average. Its helping of emerging-markets local debt has helped it serve investors well over time. From its May 2014 inception through December 2021, it outpaced all peers.
Morningstar’s Allocation Categories Get an Upgrade
Lessons Learned From Surviving Thematic Funds
Eric Balchunas: Assessing Jack Bogle's Monumental Legacy
Why Vanguard Value Index Is a Good Investment Today
Weekly Wrap: Franklin Templeton's Future, Award-Winning Managers, and the Wealth Divide
Weighting Bonds by Market Value Isn't as Bad as Some Make It Out to Be
American Funds American Balanced: Have Manager Changes Knocked This Fund Off Balance?
Weekly Wrap: Rising Inflation, Tobacco Stock, and Reproductive Rights
These 4 Fund Managers Are Rising Stars
Hello Risk Our Old Friend
3rd Party Research Disclosure /public-19:3:11
Market Data Disclosure