Someone attempted to hack into our home computer. By the end of the evening, I was on the phone to an Equifax security consultant in India who talked me into a monthly payment for a service that would create a "fraud alert" with all of the credit agencies simultaneously if it happens again. I have since learned that the service is free if you file a police report and send it to at least one of the credit bureaus, so it was a good lesson in caveat emptor -- global-style.
Meanwhile, the writer and columnist Thomas Friedman describes how the world is now "flat." What I experienced was an example of how technology and communication can link societies and businesses throughout the world -- for both good and bad.
In this new flat world, investors searching for higher income can feel more comfortable as they consider the temptations of emerging market bond funds. "Emerging markets" is a term coined back in 1981, and it applies to a total of 21 countries, the largest of which are Brazil, Russia, India and China -- otherwise known as BRIC.
Because emerging markets include countries in such places as Latin America, Eastern Europe, the Middle East and the Pacific Basin, investing in bonds from these turbulent areas requires the acceptance of more risk. However, we get paid more to take that risk. The so-called "risk premium" dealt by the invisible hand of economic forces appears to be as much as 5 percentage points currently. Why? Well, a risk-free return on 10-year U.S. Treasury bills is roughly 2 percent. If an emerging markets bond fund is yielding 7 percent in annual interest currently, then the risk premium is the difference of 5 percentage points. This is our reward for accepting the risk.
Is it worth it? Most emerging market countries actually have lower debt-to-GDP ratios than we do in this country. Compared to us, those former banana republics may not look so bad. In addition to less debt, they have stronger economic growth -- especially in Latin America.
Several emerging markets bond funds line up as candidates worth reviewing. They all earn interest of roughly 7 percent, and all have experienced gains in capital value since the collapse of 2008. My favorite for years has been T. Rowe Price Emerging Markets Bond Fund, but others include Columbia Emerging Markets Bond, Fidelity New Markets Income, Federated Emerging Market Debt and Pimco Emerging Markets Bond.
What can be deceptive, when you review total returns of these funds, is that they have all experienced capital gains increases in recent years. These increases have been added to returns over and above the 7 percent interest income mentioned above. And while yesterday's gains could become tomorrow's losses, on the whole these funds have been relatively stable to date; in fact, statistically speaking, a fund invested in all U.S. blue chip dividend-paying stocks has been more volatile in recent years.
Loaning money in other countries is essentially what we do when we invest in an emerging markets bond fund. Back in the day, our country was an emerging market, and foreigners helped us out. Most of the money that paid for our railroads in the early days came from Great Britain. Banks and trust funds investing for "widows and orphans" chose this country as a repository for their loan proceeds because we were a more profitable land of opportunity. The risk premium is an old concept, and unless fraud is involved, the return tends to outweigh the risk.
Steve Butler is CEO of Pension Dynamics. Contact him at email@example.com or 925-956-0505, ext. 228.