Foreign Bonds Also Have Allure--And Some Risks
Bond yields of 10% to 15% in many foreign countries are a continuing lure for American investors, who figure those yields handily beat 7% returns on U.S. Treasury bonds.
But last week, a big U.S.-based fund that invests in foreign bonds omitted its fourth-quarter dividend--angering and confusing shareholders.
The fund, the New York-based Global Yield Fund, is a “closed-end” mutual fund: It has a fixed number of shares outstanding, and they trade on the New York Stock Exchange.
Global Yield has about $560 million in assets, made up of government and corporate bonds in such nations as Norway, Sweden, Canada and Australia, among others. Interest earned on the bonds is passed through to shareholders via a quarterly dividend of 20 cents to 22 cents a share.
With the stock price at around $8.50 for much of 1991, earning 80 cents a year in dividends produced a yield of around 9.4% for shareholders--a pretty handsome return.
But last week the fund said it won’t pay a fourth-quarter dividend. The fund’s management, a unit of Prudential Insurance, said the fund was forced by federal tax rules to recognize currency losses incurred earlier in the year when the dollar rose in value, devaluing other currencies and thus foreign securities.
Basically, nothing’s wrong with the fund’s bonds--they’re still earning interest. This is an accounting technicality.
W. Douglas Dent, editor of Cappiello’s Closed End Fund Digest newsletter in Santa Barbara, argues that the fund could have paid the dividend, even if it simply returned some of shareholders’ capital to them.
The fund won’t detail how it incurred such large currency losses, but Dent believes that management ran “amok” trying to hedge the dollar’s moves with fancy trading games that ultimately failed.
The dividend omission hurts the image of all closed-end bond funds, whose shareholders above all want “regular, predictable income” rather than “super-complicated, commodity-oriented” trading accounts, Dent contends.
News of the dividend omission sent Global Yield’s stock down 87.5 cents Thursday to $7.75. It inched up Friday to $7.875. At that price, the fund may be attractive to bargain hunters, says Thomas Herzfeld, a Miami-based closed-end fund specialist.
Herzfeld, who says he bought the shares at $7.75 last week, figures it this way: If the fund avoids currency losses in 1992 (a good possibility if the dollar keeps falling) and thus pays around 80 cents in dividends, the yield is about 10% at the current stock price.
There are other risks, of course: Interest rates worldwide could rise, depressing bonds. Or the fund could face defaults. But those are risks faced by all bond investors.
Another attraction of Global Yield is that the stock price now is 8% below the actual value of the fund’s assets, which is $8.60 a share. That’s like buying $1 for 92 cents.
