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Hunting for Yield Overseas


Anyone who is truly trying to diversify and get out from under the weight of Bernanke's printing press should be looking at funds that have debt denominated in local currencies.

Now that Bernanke, Mario Draghi, and the newly elected government in Japan have all promised to crank up the printing presses, buying bonds in a local currency looks even more attractive. New Vernon's Turwari noted, "Developing countries such as Brazil and the original Asian Tigers all took their medicine two decades ago and now have much better balance sheets than the developed world. They also have greater growth prospects thanks to the demographics of urbanization and a younger population." While the race to debase remains in place, emerging market currencies should rise relative to the dollar over the next few years. The higher yields offered by Brazil or Turkey, while certainly due to many of the economic and potentially political challenges, are also simply remnants of a different decade when inflation conflict ran rampant.

Recognition of the power of local currency tailwind is evident in the recent growth in ETFs that focus on emerging markets bonds denominated in local currencies. Market Vectors Emerging Markets Local Currency (NYSEARCA:EMLC) and Wisdom Tree Local Debt (NYSEARCA:ELD) have seen inflows of 20% in 2012 and each now has in excess of $1.2 billion of assets under management. The iShares Emerging Market Local Currency Bond (NYSEARCA:LEMB), which only launched one year ago, saw $150 million net inflow during the last week of November, a 30% increase, to bring AUM to $750 million. These funds not only deliver approximately 3% to 5% in yield, but have also enjoyed from 9% to 20% price appreciation for year-to-date 2012. These funds own government issued bonds that have an investment grade rating and the yield is simply the coupon payment.

While the currency component can add to volatility, it should provide a nice tailwind over the next few years as the developed nations try to print their way out of debt. For those looking for yield and diversification away from the dollar, these funds make sense.

Twitter: @steve13smith

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