International bond funds offer high yields, and risk


As recent violent events in Russia indicate, Americans can't control what happens in the rest of the world. American investors, however, are increasingly willing to accept a greater HTC degree of risk as they desert puny U.S. investment yields for the superior returns of international bond funds.

These often-volatile vehicles boast an average return of more than 12 percent this year, 3 percent higher than the U.S. bond market. Declining European rates, a strong Japanese yen and solid returns from emerging markets have been positives.

There are now 74 international bond funds, with $15 billion in assets, compared with 47 funds, and $9 billion in assets, last year.

Yet high yield requires risk. Besides normal vagaries of rates and maturities, a particular country's currency, creditworthiness or political climate can spell trouble.

Need for currency hedging strategies can also slice a portion of yield.

Performance wasn't great for several years before 1993. It lagged behind that of the U.S. bond market. Still, as a diversification move and an opportunity for higher yields, these funds make sense.

Credit quality must be scrutinized. For example, the high return of GT Global Strategic Income Fund, up 26.35 percent over the past 12 months, is due largely to a portfolio restructuring.

Besides the 50 percent of its portfolio that it must keep in investment-grade bonds, the fund was permitted to put up to 50 percent in below-investment-grade debt of emerging countries.

It has done so with a passion, investing in 12 percent 15-year Moroccan bonds; Polish bonds that appreciated in price because of economic reforms in that country; and 10 percent Philippine bonds, benefiting from improved competition and lower inflation.

"In the investment-grade half of our portfolio, our focus is Europe, with emphasis upon Spain, Italy, Ireland and Sweden," said Gary Kreps, portfolio manager of GT Global Strategic Income Fund.

"They have declining inflation and offer 10-year bonds at 4 to 6 percent."

Prudential Intermediate Global Income Fund "B," up 22.77 percent, has one-third of its portfolio in 10-year U.S. bonds, the rest in debt of European countries, especially France. Japan and Mexico are other holdings.

"International bond funds aren't for the faint of heart, because they have greater volatility," said the fund's manager, Andrew Barnett. "But they've performed well over time and are timely now, providing more income and capital gains as rates fall overseas."

With 60 percent of its portfolio in U.S. bonds, Bull & Bear Global Income Fund, up 19.35 percent, keeps the rest in Latin American, European and South African bonds.

"We've scaled back Latin American holdings because of concerns over the North American Free Trade Agreement but see positive change in South Africa, where we've invested in 13 percent 20-year AAA-rated government agency credits," said Clifford McCarthy, portfolio manager, who predicts annual returns of 12 percent to 15 percent over the next three years.

Don't buy strictly based on yield, but examine each fund closely, said Amy Arnott, international bond fund analyst with the Morningstar Mutual Funds investment advisory. Two no-load (no sales charge) funds that Arnott particularly likes as long-term choices are the $1 billion Scudder International Bond Fund, up 14.14 percent in the past 12 months, and the $625 million T. Rowe Price International Bond Fund, up 10.03 percent.

Top-performing international bond funds over the past 12 months, according to Morningstar, were:

* GT Global Strategic Income Fund; $468 million in assets; 4.75 percent load; $500 minimum; up 26.35 percent.

* Prudential Intermediate Global Fund "B"; $40 million in assets; 5 percent back-end load, declining each year by 1 percent; $1,000 minimum; up 22.77 percent.

* FFTW Worldwide Fixed Income Fund; $146 million in assets; no load; $100,000 minimum; up 19.59 percent.

* Bull & Bear Global Income Fund; $59 million in assets; no load; $1,000 minimum; up 19.35 percent.

* Fidelity Yen Fund; $3.2 million in assets; 4 percent load; $5,000 minimum; up 19.34 percent.

* GT Global Government Income Fund "A"; $836 million in assets; 4.75 percent load; $500 minimum; up 18.22 percent.

* Merrill Lynch Global Convertible Income "A"; $4 million in assets; 4 percent back-end load, declining each year by 1 percent; $1,000 minimum; up 17.39 percent.

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