- The Washington Times - Sunday, May 4, 2003

   Investors still nervous about the stock market are pouring money into a potentially high-yield but also high-risk investment: Emerging-market bond funds.
   Financial planners caution that while these investments might offer good returns, their fortunes can change quickly along with the political situations in regions such as Latin America and parts of the Pacific Rim.
   “These funds can be very volatile,” says Andrew Clark, senior research analyst at Lipper Inc. “They will have these terrific returns, but because these are investments where politics play as big a role as market fundamentals, my suggestion is that you review your allocation at least once a quarter.”
   The funds invest in bonds of developing countries and have proven to be a surprising safe haven in recent months as U.S. stocks have lurched up and down and money market yields have dropped below 1 percent.
   Indeed, emerging-market bond funds returned 12.5 percent so far this year and 11.2 percent in 2002, according to Chicago-based Morningstar Inc. That surpasses returns for the average taxable bond fund (2.9 percent this year; 6.3 percent last year) and domestic stock fund (3.2 percent gain this year; 20.8 percent loss in 2002).
   The international investments also beat the 8.3 percent return this year for corporate junk bonds, another area attracting investor interest because of their high yields.
   Investors have responded, pouring $581 million into emerging-market bond funds in the first quarter, more than the $538 million invested in all of 2002. Through mid-April, inflows came to $649 million, according to AMG Data Services, based in Arcata, Calif.
   “My view is that you have quite a few emerging markets in light of what’s happening locally that offer attractive returns,” says Thierry Wizman, global emerging market strategist at Bear Stearns.
   His company favors investment in regions such Brazil, whose bonds have yielded more than 10 percent recently after new President Luiz Inacio Lula da Silva stuck to austere economic policies to revive the struggling economy. That helped soothe investors who feared Mr. da Silva would push unconventional approaches espoused by the radical fringe of his Workers Party.
   South Korea also remains promising, Mr. Wizman says, citing undervaluation and strong regional growth, although Asian countries could see trouble as fears of severe acute respiratory syndrome dampen business.
   “People are increasingly concerned about Asia’s growth prospects in light of SARS,” he says. “If you’re taking pause as far as traveling to Asia, you should take pause as far as investing in Asia.”
   Benjamin A. Tobias, a certified financial planner in Plantation, Fla., says Latin America and China are vulnerable because of government instability and corruption. South Korea, meanwhile, faces tensions with North Korea, which is suspected of developing nuclear arms.
   “Emerging-market bond funds, I would think, are not as good of a potential investment return as maybe they were a couple of years ago,” Mr. Tobias says. “That is because with the world situation being the way it is, a little [political] blip happens, and they fall apart.”
   Advisers say investors could consider devoting about 5 percent of their portfolios to emerging market bonds if they review their holdings regularly. A good fund would invest in a diverse set of regions to minimize volatility and be led by a manager with a strong record.
   Of the 19 emerging-market bond funds tracked by Morningstar, top performers so far this year are AllianceBernstein and PIMCO. Only two, Evergreen Offit Emerging Markets and Van Kampen Worldwide High Income funds, had negative returns last year.
   Still, some advisers who believe the funds may have already reached their peak say investors shouldn’t simply chase returns.
   “I think the time to be getting them is after they’ve collapsed, as opposed to an increase in value,” Mr. Tobias says.

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