By Philip van Doorn, MarketWatch
Yields above 5% are difficult for investors to find, as very low interest rates and a bond boom have pushed yields lower.
If your main objective as an investor is to generate income while avoiding stock-market risk, an emerging-markets bond fund may not be what you would ordinarily consider. But the developed world is awash in cash, and debt with negative yields-to-maturity now exceeds $17 trillion, according to Bloomberg . Ten-year U.S. Treasury notes yield only 1.73% /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +3.13% and 30-year Treasury bonds /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y +2.02% are yielding a measly 2.18%.
So emerging markets beckon, and sufficient diversification may put you at ease. The $517 million TIAA-CREF Emerging Markets Debt Fund /zigman2/quotes/200388938/realtime TEDLX -0.10% , which carries a five-star rating (the highest) from research firm Morningstar, held 256 investments as of Aug. 31. Morningstar has the fund’s performance in the ninth percentile among 252 emerging markets funds run by U.S. companies over the past three years, with the percentile ranking improving to five for one year and four for 2019 (through Sept. 24). The fund has been around for five years.
The TIAA-CREF Emerging Markets Debt Fund’s benchmark is the J.P. Morgan Emerging Markets Bond Index (EMBI) Global Diversified. The index is tracked by the $15 billion iShares J.P. Morgan USD Emerging Markets Bond ETF /zigman2/quotes/202964510/composite EMB -0.60% , which makes for an ideal comparison.
Here’s how the TIAA-CREF Emerging Markets Debt Fund’s total return compares with that of the ETF over the past three years:
Here’s a chart showing returns from the fund’s establishment on Sept. 26, 2014, through Sept. 24 of this year:
So the fund’s retail shares have outperformed the ETF significantly, especially over the past three years, despite an annual expense ratio of 0.99% of assets, compared with 0.39% for the ETF. For 12 months through Sept. 24, the fund returned 13.1%, compared with 12.1% for the ETF. Year-to-date through Sept. 24, the fund returned 14.1%, while the ETF was up 12.7%.
The fund has other share classes, with lower expense ratios, available through distribution channels. The retail shares have a $2,500 minimum and no sales charge.
The fund quotes a 30-day yield of 5.08% for the retail shares, with a 12-month distribution yield of 5.71%. These compare to a 30-day yield of 4.29% and a 12-month trailing yield of 5.41% for EMB.
The fund can be considered a high-yield fund, as 59% of the portfolio was in bonds rated below BBB as of June 30. About 56% of the bonds in the ETF are rated BBB or higher.
Reasons for outperformance
Katherine Renfrew and Anupam Damani, the fund’s managers at TIAA subsidiary Nuveen in New York, explained in an interview Sept. 24 how the fund is differentiated from its benchmark index and EMB.
Corporate bonds made up nearly half of the portfolio as of Aug. 31. That’s in sharp contrast to the benchmark index and EMB, which are limited to government securities issued in U.S. dollars in emerging markets. That said, EMB is still diversified, holding about 480 bonds issued by more than 50 countries.