What is an emerging market local currency bond fund?
For several years, we've owned a particular type of investment with a complicated name. After the trades complete, before the end of April, our Foundation Income portfolios will no longer hold emerging market local currency bonds. Let's break it up into the parts to define it, then we'll talk about why you might care about what we're selling and bring it back to the big picture.
An emerging market is a region with social or business activity in the process of rapid growth and industrialization. Naturally, investors expect higher long-term returns from higher-growth areas, and with an increased chance of short-term bounciness.
Local currency means that the investment we are making is not denominated in dollars, but a foreign currency. This means that we add another layer of complexity, and opportunity, to the investment. If the US dollar loses value compared to the foreign currency, then your investment increases in value. The opposite is also true, that if the dollar increases in value, a local currency investment would lose value.
Bond fund. The final part of the investment we just sold is a "bond", not a "stock," which means that it is a group of investments that promised a specific rate of return for a specific time, with a promise to give you your money back at the end of that period of time.
Why did we sell?
The reason we sold is likely the opposite perspective of what you hear in the media and/or might expect.
First, the investment is no longer appealing compared to the amount of risk that it is producing. Our Foundation Income research team, lead by Litman Gregory, finds that emerging markets, although stronger than they used to be on an absolute basis, are relatively weak compared to the developed markets. Investing here is like grabbing the dog by the tail--we lose a lot of control, if we hold on at all.
Second, the risk of a declining dollar is lower than it used to be in the wake of the Quantitative Easing from the US Federal Reserve. That's right, the research team views the chances of a precipitous dollar decline as lower, in spite of fiscal spending problems. Instead, our concerns are reasonable returns from developed economies and we are less concerned with diversifying our dollars among other currencies.
We lean on the many experts of Litman Gregory, and the research teams of the funds we are invested in, to scour the world in search of opportunities. This investment served its purposes and soon, will no longer be a part of our portfolios.