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Gordon Pape: An ideal emerging-market fund for income investors

Interest rates are on the rise.

But the pace of the rate hikes is still painfully slow if you're an interest-oriented investor. Even with the recent U.S. increases, we are still near historically low levels.

A recent presentation to institutional investors prepared by Excel Funds estimated that the yields on about 65 per cent of sovereign bonds from developed countries were less than 1 per cent. Only a handful yielded more than 2.5 per cent.

By contrast, some emerging-market yields were in excess of 10 per cent.

The perception is that emerging-markets bonds involve a lot more risk, but it's not as much as you might expect. Most of the key emerging-market countries are rated triple-B or higher on their sovereign debt, including South Korea, China, Russia, the Philippines, South Africa and Colombia.

One way to take advantage of high emerging-markets yields is a Canadian-based mutual fund: the Excel High Income Fund Series A. I recommend the front-end load units, purchased at zero commission (code EXL111).

The fund is managed by Sergei Strigo of Amundi Asset Management Corp. The corporate name may not be familiar, but Amundi is the one of the largest firms of this type in Europe with more than $1-trillion (U.S.) in assets under management.

The fund's track record is very impressive. As of May 31, it showed a five-year average annual compounded rate of return of 8.69 per cent and has beaten the category average in all time periods from three months to five years. Investors receive a monthly distribution of 2.5 cents a unit (30 cents a year), for a yield of 5.7 per cent based on the recent price of $5.17.

From a risk perspective, the fund has done very well since it was launched in 2010. The only year in which it lost ground was 2013, when it was down 1.3 per cent. Twice it generated double-digit gains, in 2012 and 2014.

Currently, the fund is heavily weighted toward Latin America, with 17 per cent of the assets in Brazilian bonds, 9 per cent in Mexico, 5.8 per cent in Argentina and 3 per cent in Colombia. Other major geographic holdings are in Indonesia (8.9 per cent), Russia (7.5 per cent), Turkey (6 per cent) and South Africa (5.9 per cent).

Overall, 72.7 per cent of the fund is invested in foreign government bonds with 24.2 per cent in corporate issues.

If you want to add more diversification to your income portfolio, this fund is an ideal choice. The correlation between emerging-market bonds and Canadian equities is only 0.09, meaning they almost always move in opposite directions.

The main negative about this fund for fee-conscious investors is a high management expense ratio of 2.74 per cent. But in this case, you get what you pay for: a good performance record; strong cash flow; and an acceptable level of risk.

Ask your financial adviser if this fund is suitable for your account.

Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to buildingwealth.ca.

Follow Gordon Pape on Twitter at twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.

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