The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition

FOREIGN INVESTMENT SELECTION

The tasks confronting a global fixed income portfolio manager become increasingly complex as global bond markets expand. The development of emerging economies’ capital markets have greatly broadened the opportunity set for bond investors. While the U.S. bond market remains the world’s largest single market, it accounts for only 35% of the overall global market. A portfolio manager who sticks solely with domestic bonds is missing out on 65% of the world’s fixed income opportunities.

The world capital markets present a huge and broadly distributed set of investment considerations and choices. In this analysis, these issues will be simplified at the outset, then a few layers of complexity will be added. Exhibit 20.4 is illustrative of how complex matters can become.

The value inherent to a bond is the enforceability of the bond contract. In a very real way, with substantial historical precedent, investments in bonds of foreign issuers can be void of enforceability powers. Investments in some foreign bonds are, perhaps, more akin to equity-type investments. In this regard, political default risk as opposed to corporate default risk is extremely low but real. This risk should be considered in addition to the volatility risks implied by the options markets for foreign bonds and currencies and should be reflected in the portfolio risk adjustments.

A region/country consideration set for the global fixed income portfolio manager today includes: (1) Canada, ...