International bond fund managers continued to outperform the index in the latest Pensions & Investments Performance Evaluation Report.
The median international bond fund returned 3.3% for the quarter ended Dec. 31, 8% for the year and 10.1% for five years. The Salomon Non-U.S. World Government Bond Index returned 2.1%, 4.1% and 9.7% for the same periods. (All returns exceeding one year are compound annualized.)
Of the 55 funds in this PIPER category, the top five for the quarter were Smith Barney Capital Management's international fixed-income fund with 7.3%; Pyrford International PLC's international bond fund, 7.1%; Pacific Investment Management Co.'s foreign hedged fund, 5.6%; Delaware International Advisers Ltd.'s portfolio, 5.4%; and Baring Asset Management Inc.'s non-dollar fixed income fund, 5%.
PIPER international bond managers have done well vs. the benchmark as the returns show. With the exception of three-year returns, even the third quartile managers bested the index.
"It's a good universe of managers," said John E. Heskett, chief investment officer of Baring Asset Management, London.
Besides placing in the top five for the quarter, Baring's non-dollar fixed-income account placed fourth for the year, with 13.2%; sixth for five years, with 11.3%; and first for 10 years, at 13.9%.
Mr. Heskett said most of Baring's mandates are for investment-grade bonds. "We can add value by using some non-government sterling market and Canadian bonds." The duration of the portfolio is not restrained, except by plan sponsor request.
Baring focuses on European issues and avoids Japan. The real yield in Europe is more attractive than in Japan, he said. Hedging in U.S. and Canadian dollars adds value against the benchmark.
PIMCO has both a hedged and unhedged international bond fund reporting in PIPER.
Brent R. Harris, chairman of PIMCO Funds, said the first decision to be made when looking at international bonds is "if you like the bond market."
Investors should look at the "outlook for the economy, interest rate structure, the positions of the central bank and inflation." PIMCO does top-down analysis, he said.
Currency hedging is the second decision. The return on the bond hedged back to U.S. currency can cut the yield or raise it. The domestic bond yields have stalled since 1993, he said, and foreign yields are in a bull market. They have outperformed with less risk and even more risk-adjusted return.