Finding Safety in Asian Bonds

07/12/2010 1:00 pm EST

Focus: BONDS

Richard Band

Editor, Profitable Investing

Richard Band, editor of Profitable Investing,says Asian bonds offer refuge from European and US debt problems, and he says they’re attractively priced now.

Today’s financial-market anxieties are focused on the debt of several European Governments—most notably Greece, but also Portugal, Ireland and—to a lesser extent—Spain. (I doubt the sovereign debt of the United States will begin to raise investor hackles until the government’s gross debt/GDP ratio crosses 100%, which shouldn’t happen before 2012.)

In recent months, as we all know, fears of a pan-European sovereign-debt crisis have knocked down the euro. What many investors don’t realize, though, is that the panicky selling has also spilled over into the Asian currencies. They’ve fallen against the dollar, even though most Asian countries remain on a rock-solid financial footing.

When the currency drops, so does the price of the country’s bonds for a dollar-based buyer. So, I’ve been sniffing around for a bond fund that invests heavily in Asia. And I’ve found one!

Templeton Global Income Fund (NYSE: GIM) is run by one of the finest international bond managers, Dr. Michael Hasenstab. Over the past decade, this closed-end fund has rolled up a sizzling total return of 235% at net asset value (through mid-June).

Meanwhile, the Standard & Poor’s 500 stock index has lost 11%, even with reinvested dividends. At last glance, GIM had 90% of its portfolio in government bonds. If we were talking about US Treasuries, I wouldn’t give the fund another thought. But GIM is avoiding US bonds these days. Ditto for low-yielding Japanese bonds. Instead, Hasenstab owns a slug of bonds from the Asia-Pacific region (36%), followed by smaller stakes in Europe, Latin America, and Africa.

Result: GIM yields a healthy 5.6%, so you’ll earn about 75% more interest for every dollar you invest than you would with a ten-year Treasury note. What’s more, because the fund’s average maturity stands at 8.2 years, you aren’t taking a lot of interest-rate risk. When rates go up, bond prices fall—and the longest-dated bonds fall hardest.

As a closed-end fund, GIM doesn’t continuously issue and redeem shares, the way open-end mutual funds do. Instead, shares trade in the open market at whatever price two investors agree on. More often than not, because of the fund’s stellar track record, GIM fetches a premium to the value of the bonds in its portfolio (net asset value).

Lately, though, GIM shares have slipped to about par and have even, on some days, been quoted at a small discount. For the penny-chasers among us, it’s one more reason to pounce!

Buy GIM on a dip to $9.50 or less. (It closed just below $10 Friday—Editor.)

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