How This Vanguard Emerging Markets Bond Fund Outperforms

concept of emerging markets with digital globe and financial charts superimposed on city skyline — (Image credit: Getty Images)

A debt crisis is brewing in Africa. The continent's debt obligations – which topped $1 trillion at the end of 2023 – could compromise future economic growth, according to the African Development Bank. And in recent years, a handful of countries, including Ghana, Zambia and Ethiopia, have defaulted.

This news prompted us to check in with the Vanguard Emerging Markets Bond Fund (VEMBX) – a member of the Kiplinger 25, our favorite no-load mutual funds.

Managers Dan Shaykevich and Mauro Favini invest mostly in dollar-denominated government debt issued in developing countries. At last report, the fund held 13% of its assets in African IOUs. That's a greater percentage than in the fund's benchmark, the JPMorgan Emerging Markets Bond index, but less than that of the fund's typical peer.

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The managers are not worried, though. Despite the hefty debt burden in Africa overall, defaults in African sovereign bonds so far have been small in size relative to the benchmark, says Favini. And the "overall asset class of dollar-denominated emerging-markets debt hasn't experienced material drawdowns or contagion,” he says.

Meanwhile, the fund is still outpacing its peers. Over the past 12 months, it returned 14.4%, beating 65% of other emerging-markets bond funds. A "cautious" positioning heading into 2024 contributed to the fund's performance over the past year. The managers took profits in their "down-in-quality" holdings, for instance.

Making the right macroeconomic calls in 2023 helped, too, says Favini. Among them: Bumping up the fund's duration, a measure of interest rate sensitivity, to 6.5 years from 3 years. Bond prices and interest rates move in opposite directions, so a duration of 6.5 years implies that if rates fall by one percentage point over the course of one year, the fund's net asset value will rise by 6.5%. Over the past 12 months, some emerging central banks, including China, Brazil and Mexico, have cut interest rates. The fund yields 6.4%.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Nellie joined Kiplinger in August 2011 after a seven-year stint in Hong Kong. There, she worked for the Wall Street Journal Asia, where as lifestyle editor, she launched and edited Scene Asia, an online guide to food, wine, entertainment and the arts in Asia. Prior to that, she was an editor at Weekend Journal, the Friday lifestyle section of the Wall Street Journal Asia. Kiplinger isn't Nellie's first foray into personal finance: She has also worked at SmartMoney (rising from fact-checker to senior writer), and she was a senior editor at Money.