To manage a world income fund well, George Putnam, chairman of the Putnam funds' trustees, once wrote in a report to shareholders, one must have the uncanny sense of timing of Fred Astaire and Ginger Rogers.
One has to display, he added, a similar knack of being in the right place at the right time.
The manager of a bond fund that is invested only in U.S. Treasury securities has a relatively simple job: to focus on the risk inherent in the fact that bond prices fall when interest rates rise and on the extent to which rate -- and price -- changes may vary with maturities.
One who invests in corporate or municipal securities also must be concerned with credit risk -- the possibility that an issuer might not pay interest or repay principal when scheduled -- and call risk, the likelihood that a bond will be called before maturity.
And one who invests in mortgage-backed securities must worry about the risk that homeowners will prepay mortgages when interest rates fall, requiring the fund to reinvest the proceeds at lower rates.
But a world income fund manager -- one who invests primarily in intermediate- and long-term bonds of foreign governments and companies -- has an additional worry: the risk that the currencies in which those bonds are issued will fall in value vs. the U.S. dollar.
Being "in the right place at the right time" means selecting securities of countries whose interest rates will fall, causing bonds to appreciate in local currencies, or whose currencies will strengthen, raising their dollar value.
The challenge of picking the right countries has been especially tough in the last year.
The U.S. economy was slowly recovering while other economies were weakening. Interest rates were falling in some nations, rising in others. The U.S. dollar rose, fell and rose again against some major currencies, such as the German mark. Amid all this, the European currency stabilization mechanism came unglued.
Managers could -- and did -- protect funds against currency losses through hedging strategies, such as agreeing to buy or sell certain currencies at specific prices in the near future. But such practices can add to funds' costs -- and could turn out to be wrong.
Some portfolio managers say they had anticipated last autumn's turbulence in Europe's currency markets and acted accordingly.
Lawrence Daly of the Putnam Global Governmental Income Trust, for example, maintained or raised its exposure to major markets -- Germany, France, Belgium and the Netherlands -- while reducing or avoiding exposure to peripheral markets such as Britain and Italy.
When the storm had passed, he says, the fund was able to pick up bonds whose prices had slipped, raising its European allocation by October to more than two-thirds -- twice what it had been six months before.
Daly continues to find Europe's prospects attractive because of the expectation that weak business conditions would lead to lower interest rates and, therefore, higher bond prices. He's not alone.
Adam M. Greshin of Scudder International Bond Fund has been over 70 percent invested in Europe but recently has built up the fund's position in Japanese bonds. He's neutral on the dollar bloc: U.S., Canada, Australia, and New Zealand.
Given Scudder's expectation of lower interest rates in Europe and Japan, the fund's average maturity has been extended to lock in a stream of income at attractive levels, Greshin says.
Leslie J. Nanberg, who has managed MFS Worldwide Governments Fund since 1984 -- longer than competing funds have been in existence -- shares the enthusiasm for European bonds but emphasizes the importance of focusing on countries with high "real" interest rates.
He likes Denmark, France, Ireland and Italy, for example, but finds the German market unattractive.
Subtracting Germany's 4 percent inflation rate from the 6.75 percent yield of a 10-year bond, Nanberg points out, results in a real rate of only 2.75 percent. In comparison, the 10-year bonds of France and Ireland, with inflation rates of 2 percent and 3 percent, respectively, offer real rates of about 5 percent.
Since the 10.7 percent average annual total return of Salomon Brothers' U.S. Government Bond Index led its Non-U.S. Dollar World Government Bond Index by about 3 percentage points over the last five years, you may wonder whether you should bother considering a global bond fund for your portfolio.
Note that the index of non-U.S. dollar government bonds led the U.S. index over the last year. And consider whether interest rates are more likely to drop in the United States than abroad.
( 1993 By Werner Renberg