News and analysis from Standard & Poor's MarketScope Advisor
More than $16 billion has flowed into bond mutual funds each and every month since the start of 2009, with a massive $47.7 billion arriving in September alone. At the same time, inflows and outflows for equity funds have stayed roughly equal, meaning no net inflows, even though the Standard & Poor's 500 was up 23% for the year.
Much of the money is flowing into bond funds with the highest yields, either "junk" bond funds or foreign market bond funds. For the week ending March 10, 2010, emerging market bond funds brought in more than $1 billion in new assets, according to a Reuters report citing data from fund flow tracking firm EPFR Global, the highest weekly total since it started keeping records.
Even Greece, which was forced to pull a bond sale in February due to a collapse in investor confidence, found a very different situation a week later when it offered twice the yield available from German government bonds; it received bids to lend three times the five billion euros it wanted to borrow.
For those willing to lend their money to, say, European governments, Australian television networks, Air Jamaica, or the national oil company of Kazakhstan, international bond funds are a popular place to be. They offer an escape from the "exceptionally low" interest rate environment now being maintained by the Federal Reserve in the United States, and funds that hold bonds denominated in foreign currencies provide a hedge against a declining U.S. dollar.
To identify attractive foreign bond funds, we screened for funds with at least $20 million in assets, open to new investors, with no sales load, and an annual expense ratio of less than 1%. Among that group of about 17 funds, we choose three that had above average performance over the past one- and three-year periods and a ranking of at least three stars from S&P, which uses a five-star system to rank funds (five being highest).
(A note: Standard & Poor's Mutual Fund Methodology has moved from the industry standard for ranking funds based solely on backward-looking risk-adjusted performance to a more holistic approach, which incorporates a holding-based analysis that includes performance, risk, and cost factors.)
