I sold my entire position in PIMCO Foreign Bond Fund (Unhedged) Institutional (PFUIX). According to its prospectus, this fund invests in
“… Fixed Income Instruments that are economically tied to foreign (non-U.S.) countries, … which may be represented by forwards or derivatives such as options, future contracts or swap agreements.”
I bought this fund in late 2004. At the time, there were a lot of talks about the “twin deficits” of United States (budget deficit and trade deficit) and how they would weaken the U.S. dollar. A foreign bond fund protects against a weakening dollar.
When I bought the fund, the dollar already went down against the Euro. This is how the dollar looked versus Euro in 3 years before I bought the fund:
As soon as I bought the fund, the dollar stopped going down. Then it went up! In the first 2-1/2 years I owned the fund, it went nowhere. It returned less than money market funds.
Then the fun started. The dollar weakened again. The fund took off until April 2008. Then it crashed big time. Then it rose again, recovering all the losses and then some.
I’m fed up with the M-shaped yo-yo and I decided to sell. Through my entire holding period, with reinvested dividends, my average return is 5.02% a year, which isn’t bad. It’s probably better than what I got from my other investments. Nothing did well in the last five years. I sold because I don’t want to speculate on currency movements.
The strength of the U.S. dollar dominates the performance of an unhedged foreign bond fund. When the dollar strengthens, the fund goes down. When the dollar weakens, the fund goes up. I don’t know where the dollar is heading. I only know I don’t want this kind of volatility in a bond fund.
One other reason I sold this fund is the opaqueness of its holdings. PIMCO is a reputable fund manager. I trust that they know what they’re doing but I have no clue in what they’re doing. By my calculation, the PIMCO fund returned higher than its competitors. I have no idea whether they did it by superior skills, excessive risk, or both.
The PIMCO fund’s semi-annual reports only include a few short sentences about what helped performance and what didn’t. The list of holdings includes many derivative contracts I have no hope to understand. If I ever invest in a foreign bond fund again, I would pick one that’s more transparent or a hedged one.
Here are some other choices in the foreign bond category:
|SPDR Barclays Int’l Treasury Bond ETF (BWX)||No||0.50%||2.26%|
|T. Rowe Price Int’l Bond Fund (RPIBX)||No||0.81%||2.27%|
* All data retrieved on fund company’s website on Sept. 23, 2009.
I distributed the proceeds from the sale into my other bond funds. What do I do about the dollar weakness? First I don’t know it’s a given that the dollar will go down. If everybody *knows* it will go down, it should go down now and not wait until next year. Next, if the dollar does go down, my international equity and inflation-indexed bonds will benefit. I’m not too worried.