With the December 2011 launch of the DFA World ex-US Government Fixed Income Fund (DWFIX), we are pleased to report the addition of international government bonds to our clients’ portfolios.

This new fund invests in top-rated, non-U.S. government bonds.  These bonds complement our existing holdings in high-quality U.S. Treasury Bonds, Treasury Inflation Protected Securities (TIPS), and tax-free municipal bonds.  When investing in bonds, our primary objective is safety and capital preservation during periods of stock market distress.  High-quality international government bonds help fulfill this objective.[1]

 

 

 

The fund is not only new to our portfolios, but also the first of its kind in the mutual fund industry.   While our research revealed the attractiveness of international bonds, no suitable fund existed to provide the desired exposure to this asset class.  While a handful of international bond funds did exist prior to the launch of DWFIX, all failed to meet—in one way or another—the strict standards we required.  Our close work with Dimensional Fund Advisors (DFA) led to the creation of a unique fund with the following characteristics:

  • Only the Safest Bonds—Most international bond funds available today hold non-government (i.e., corporate) bonds.  Corporate bonds are generally riskier than sovereign government bonds and are not, in our view, a suitable replacement for U.S. Treasury bonds.
  • Only the Safest Countries—Most funds include debt of less credit-worthy countries, such as the “PIIGS”:  Portugal, Ireland, Italy, Greece and Spain.  There are only a few dozen countries that can boast credit ratings and market reputation on par with those of the U.S Treasury;  DWFIX focuses exclusively on these top-rated countries.
  • Hedged Currency Exposure—Because interest and principal payments of international bonds need to be converted from the issuing countries’ currency to U.S. dollars, exchange rate fluctuations can overwhelm the attractive characteristics of international bonds.  To eliminate this risk, international bonds should be hedged.

The combination of the above characteristics makes DWFIX unique.  We are proud to have played a role in its creation, and pleased to enhance the diversification and safety of our clients’ bond portfolios.

1 International Bonds are represented here as the weighted average of the following countries’ 1-5 Yr hedged government bonds: Japan—20%; France—15%; UK—15%; Germany—14%; and 4% each of Austria, Canada, Denmark, Finland, Netherlands, New Zealand, Norway and Sweden. U.S. Bonds: Barclays Capital Treasury Bond Index 1-5 Years. U.S. Stocks: S&P 500 Index. Average Return is 1995-2011. Great Recession is 11/2007-02/2009. Tech Bubble Burst is 04/2000-03/2003. All returns annualized.