T.

Rowe Price International Bond ( RPIBX ) | 2013 Trowe Analyst Report

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T. Rowe Price International Bond RPIBX

Analyst Report

How well can this fund navigate shifting global debt dynamics?
by David Falkof 11/27/2012

Morningstar's Take

T. Rowe Price International Bond is guided by its benchmark, for better or worse.

Morningstar Analyst Ratin

Morningstar Pillars

This fund aims to provide exposure to high-quality non-U.S. bonds and currencies, while attempting to
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Process Performance People Parent Price

best its benchmark, the Barclays Global Aggregate Ex-U.S. Dollar Bond Index, by 1 percentage point annualized over a market cycle. Lead manager Ian Kelson doesn't stray far from the index, which means the portfolio typically has a sizable allocation to bonds from Western Europe and Japan (53% and 22% of assets, respectively as of June 30, 2012). The euro and the yen also dominate the fund's currency exposures (34% and 31%).

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Morningstar Analyst Rating Morningstar evaluates mutual fun analysts believe lead to funds tha long term on a risk-adjusted basi Analyst Rating Spectrum

These regions are heavily represented in many other world-bond portfolios, but depending on their strategies, some competitors have heftier stakes in dollardenominated or emerging-markets bonds. As a result, this fund's structural bias toward Europe and Japan can affect its relative rankings in different environments. It helped the fund from 2001 through 2007, when the euro gained against the dollar. Since 2008, however, the eurozone's debt crisis has caused the euro to decline against the dollar. The fund's heavy euro exposure and at times small allocations to weaker eurozone countries have been a drag relative to some peers, particularly those with greater flexibility to downplay heavily indebted countries in favor of emerging markets. But beyond the fund's recent struggles relative to peers, it also has lagged relative to its benchmark. The fund has managed to top the index during only 21% of all rolling three-year periods since Kelson took over in 2001; it trails the index by 0.5 percentage points annualized under his watch through Nov. 23, 2012. Kelson has sought to address the fund's challenges in Europe. He hired an analyst to take a closer look at the credit fundamentals of those countries in 2010. He also shifted most of the fund's eurozone debt exposure into German bunds and high-quality corporate bonds recently. But we'd like to see more evidence that this
Name

Role in Portfolio

Supporting Player. This fund markets.

Fund Performance
Year

YTD 2012 2011 2010 2009

Analyst Favorites by

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approach gives the fund a clear advantage before endorsing it. Process Pillar: Neutral

Templeton Global Bond A

World Bond Category Average

Manager Ian Kelson runs this fund with a focus on developed-markets non-U.S. bonds and currencies. The fund aims to provide diversification away from the U.S. dollar, so unlike some of its world-bond peers that take a global approach or hedge their currency exposures back to the dollar, this fund is fully exposed to foreign currencies. Kelson manages the portfolio relative to the Barclays Global Aggregate Ex-U.S. Dollar Bond Index, aiming to keep the fund's annual returns within 2.5 percentage points of the index's. The euro and the yen constitute large portions of the index (75% combined as of June 30, 2012), and hence the fund (64%). Kelson and his macro team draw on inputs from country and sector specialists. Each month, the research staff develops three- to six- and six- to 12-month forecasts for every bond and currency within the fund's investable universe according to the team's economic, valuation, and technical analysis. The team's process for analyzing developed-markets debt used to center on rates and currency, but in recent years they've accounted more for the credit risk in those markets. Kelson has some freedom to look outside the benchmark--holding small stakes in emerging-markets bonds, for instance--but such bets are modest. He historically has made his largest relative bets by selecting countries within the index, although he intends to allow for a bit more flexibility in the fund's currency calls going forward. Lately, Kelson has tried to overcome some of the index's vulnerabilities. For instance, he has held more corporate-bond exposure to offset the low yields available among developed-markets sovereign debt. The fund's 21% corporate stake (as of June 30, 2012) is nearly double the benchmark's. While the fund's total eurozone allocation of 43% is similar to the benchmark's 41% stake, the underlying positions favor countries that Kelson believes have better credit fundamentals and liquidity. German bunds, for instance, take up 16% of the portfolio (double the index's weighting), and U.S. and U.K. corporate bonds denominated in euros take up another 12%. The fund's exposure to the sovereign debt of peripheral Europe has been reduced, too. It now has no exposure to Greece, down from a 2.4% stake in mid-2009, Portugal, or Ireland. The fund's stake in Italian government bonds has also been reduced to 2.2% down from 4.6% in 2009. The portfolio heavily emphasizes the euro (34% of assets) and yen (31%). Although Kelson has an unfavorable view on both currencies and is slightly lighter than the benchmark for each, they remain significant holdings because of their large representation in the index. The portfolio does include small allocations to the Mexican peso (3%), South Korean won (2%), and Malaysian ringgit (2%), but such bets are modest relative to more flexible competitors.

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Performance Pillar:

Neutral | David Falkof 11/26/2012

Since Kelson took the fund's helm in December 2001, its 7.5% annualized gain through Nov. 23, 2012, bests the world-bond category median by half a percentage point. The strategy has performed particularly well relative to peers when the dollar has declined in value, such as in 2006 and 2007. In fact, for the first seven years of Kelson's tenure, the fund's 8.6% gain bested 80% of its peers. Despite a strong start under Kelson, the fund has since struggled. From 2009 through Nov. 23, 2012, a period that has favored emerging-markets and corporate bonds, the fund's 5.6% annualized gain lags 70% of its peers. The category is diverse, and while funds like this one are exposed to the fluctuations of foreign currencies, others hedge their foreign currency exposures back to the U.S. dollar. During the past five years, the dollar has rallied relative to most foreign currencies, which means this fund's exclusion of the dollar has been a drag relative to some rivals. One consistent factor for the fund has been its above-average volatility. The fund's returns have been among the most volatile in its category and slightly more volatile than its benchmark's, the Barclays Global Aggregate Ex-U.S. Dollar Bond Index. Moreover, the fund has topped the index during only 21% of the rolling three-year periods since Kelson took the helm through October 2012. All told, the fund hasn't added much value over its benchmark.

People Pillar:

Positive

Lead manager Ian Kelson has run the fund since December 2001. He joined T. Rowe Price in December 2000 as head of the global fixed-income team. Prior to his arrival, Kelson spent 10 years as the head of fixed income for Morgan Grenfell/Deutsche Asset Management and before that worked as an economist and bond portfolio manager at Bank of America. Kelson leads the macro team that determines the fund's broad allocations and oversees the portfolio. That team includes Chris Rothery, Ju Yen Tan, and Andrew Keirle, who have been with T. Rowe for 17, seven, and six years, respectively; Rothery was named comanager on the fund in November 2012. All four of them also have responsibilities as developed-markets sovereign analysts. In late 2010, the team recognized the need for more credit analysis of developed European countries and hired Ken Orchard from Moody's to aid in that effort. The fund's allocations to corporate bonds and emerging-markets debt are run by other portfolio managers within the firm. David Stanley runs the corporate sleeve with the help of 13 credit analysts. Stanley has run a European corporate-bond fund for T. Rowe since 2003 with good long-term results. Mike Conelius, meanwhile, runs the emerging-markets debt allocation with the support of three sovereign analysts and five corporate analysts. He also manages T. Rowe Price Emerging Markets Bond PREMX.

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Parent Pillar:

Positive | Katie Rushkewicz Reichart, CFA 11/14/2012

T. Rowe Price has made a name for itself by putting investors' interests first, maintaining a disciplined investment process, and consistently turning in peer-beating performances. The firm's sturdiness stems from its ability to attract and retain top talent. Professionals often spend their entire careers at the firm, and many of T. Rowe's top executives have come up through the ranks, including CEO James Kennedy and CIO Brian Rogers. Unsurprisingly, T. Rowe Price's manager tenure and retention rates rank well above industry norms, and analyst retention has been good, too. When a manager change does occur, it's typically because of a preannounced retirement, allowing for a months-long transition period. Managers write detailed shareholder letters, T. Rowe's website is exemplary, and manager ownership of fund shares is decent. Security selection, based on the firm's in-house fundamental analysis, drives the funds' strategies and performance, which has proved remarkably good across the board with strong fixed-income and equity offerings that are often less volatile than peers. However, T. Rowe still hasn't established itself as a powerhouse on the international side following its decade-long build-out of a global team. Meanwhile, the huge asset bases of its small-cap funds bear watching. Overall, though, T. Rowe has kept investors' interests in mind.

Price Pillar:

Neutral

The fund has an expense ratio of 0.83%, which is slightly below the median fee for no-load world-bond funds. The fund's assets have grown substantially during the past few years, yet its expense ratio hasn't budged. Given the fund's now $5.3 billion in assets, its price tag could be lower.
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