Debunking the Myth
Most investors may be surprised to learn that over 60% of bond opportunities reside outside the United States.
Investors have largely embraced the value of a globally diversified equity portfolio—US investors currently allocate about 14% of their portfolio to international equities. However, this same acceptance has not extended to international fixed income. According to The Cerulli Report on US intermediary distribution 2018, investors have just 4% exposure to international bonds.
Over 60% of bond opportunities come from outside the US
Sources: Bloomberg as of March 31, 2019 (left chart), The Cerulli Report, US intermediary distribution 2018 and FactSet as of March 31, 2019 (right chart). Totals may not add up due to rounding.
Not only are overseas fixed income markets collectively bigger than the US market, but they also have historically been the place to find the best performing bond markets. In fact, the US fixed income market, over the past 13 calendar years, has been the top-performing bond market only once (in 2007 – not shown).1
Ranked performance of top 8 fixed income asset classes each year
Source: Morningstar, annualized returns 20018-2018. Please see disclosure for a description of the indices used as proxies for the asset classes shown. An investor cannot invest directly in any of these indices. Past performance is no guarantee of future results.
Expanding investors’ fixed income allocation to include international fixed income has the potential to benefit portfolios in several ways, including:
Higher income potential, yields in certain areas of the international market (chiefly emerging markets) are currently higher than those available in the US.
Enhanced portfolio diversification through investment in multiple economies, yield curves, interest rate policies, and currencies.
Potential for capital appreciation, which may result from improving credit quality of issuers, falling interest rates, declining inflation in a country’s domestic market, or the strengthening of local currency exchange versus the US dollar. Even countries with negative interest rates may hold the potential for capital appreciation should accommodative monetary policies continue in those countries.
1 Bloomberg Barclays, as of December 31, 2018. It is important to understand that investing in international fixed income involves special risks and those risks should be considered before investing.