Going Global with High Yields

04/01/2009 10:54 am EST

Focus: GLOBAL

Nick Lanyi

Editor, High-Yield International

Although he says this fund is not for the risk-averse, Nick Lanyi, editor of High Yield International, finds its global diversification and high yield attractive.

AllianceBernstein Global High Income (NYSE: AWF) invests in foreign-government bonds from emerging markets and US corporate high-yield bonds. The fund represents a high-risk investment, with more than three-quarters of assets in bonds rated BBB or below. But it has low exposure to the toxic financial-services market, with only about 7% invested in financial-services or banking bonds.

About 45% of the assets are invested in the US; the rest is broadly diversified among emerging markets. The fund's top non-US country exposures represent modest stakes, though in potentially volatile markets: Brazil (9.5%), Russia (9.1%), and the Philippines (5.3%).

Management uses both quantitative screens and fundamental analysis of issuers to look for opportunities across the spectrum of high-yield funds. For example, in emerging markets, they spent last fall shifting assets towards countries with relatively strong balance sheets—fiscal surpluses, current-account surpluses, solid foreign-exchange reserves, and low debt-to-GDP ratios. They also looked for specific bonds with yield spreads out of whack with the team's perception of risk.

AllianceBernstein Global High Income pays a monthly dividend distribution of 9.25 cents, except in December when it pays capital gains. While some of the fund's holdings could default, its wide diversification—and focus on large emerging markets—give me confidence that the dividend will be maintained at the current level. Remember that bond funds can reinvest proceeds from maturing bonds into new securities, so the fund constantly takes advantage of new opportunities.

Just as a "value" stock fund can make sense for long-term investors in today's beaten-down market, this fund invests in the "value" side of the global fixed-income market. Emerging-markets bonds and high-yield corporates provide above-average yields now relative to the usual spread between their yields and those of US Treasury bonds.

AWF is currently trading at a discount to net asset value. But as the global economy begins to rebound, that discount should narrow even as the fund's asset value moves higher. So we should receive a solid capital gain, and get paid to wait with a double-digit yield.

In the meantime, whenever the global economic news looks bleak, the fund's value could fall as investors shy away from risky investments. But I think AWF represents a bottom-fishing purchase for these bonds.

An investor who wants to eliminate downside risk should avoid this fund. But for exposure to high-yield US and foreign bonds without adding much financial-services flavor, it's worthy of consideration. (It closed at $8.29 Tuesday—Editor.)

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