June 8, 2010
Ultra-Short strategy considerations
We recently added RidgeWorth U.S. Government Securities Ultra-Short Bond (SIGVX) to some of our more conservative portfolios. We selected this strategy for its use of government securities, its focus on NAV volatility and for its fees (0.32 percent expense ratio according to Morningstar, Inc.). This fund is focused first on trying to maintain a stable NAV and then generate yield. In our most conservative portfolio, we allocated half of our money market allocation to this strategy (we went from 13 percent to 7 percent money market with the difference in ultra-short bonds).
2. International Fixed Income: Putting more variables into bond mix
Through currency movements and higher yields, international and emerging market debt can serve a portfolio well when rates rise. While the U.S. dollar may now be in a cyclical bull phase, the longer-term trend looks like a secular bear market, since our rapidly increasing debt-to-GDP ratio will most likely lead to higher borrowing costs and a weaker dollar. Obviously, that benefits international investments, since the decreasing dollar becomes an additional source of return for U.S. investors.
We aren't alone with our high debt-to-GDP problem. Many mature, developed nations have huge debt burdens that will lead to higher borrowing costs and slower growth. The U.K. comes to mind, and the PIIGS (Portugal, Ireland, Italy, Greece and Spain) of Europe have put the value, even the viability, of the euro in question.
On the other hand, many developed and emerging countries remain in excellent health and have avoided the massive debt accumulations of mature countries. While they may not be considered developed or even high quality, from a fundamental perspective (i.e., they can pay their debts) many of their balance sheets and GDP growth rates are very respectable. Investing in multiple markets also contributes to diversification, since most fixed income strategies used by advisors are exclusively U.S.-based.
International Fixed Income strategy considerations
When making the allocation decision to use international bonds, you'll need to determine if developed, emerging or both markets are right for the portfolio. In any of these markets, we use unhedged or selectively hedged strategies, since we view currency exposure as a diversifier and potential return enhancer.
Our preferred choice for international fixed income is Oppenheimer International Bond Fund (OIBAX) as it invests in both developed international and emerging markets. If you are looking to keep the number of positions you use in your portfolio low while providing good diversification, this is a two-for-one option. For emerging markets, we use PIMCO Emerging Local Bond (PELBX), which invests primarily in local markets, so you experience the currency fluctuations.
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