Characteristics of World Bond Funds

World bond funds (WBF) help US investors diversify and invest in foreign bonds. Morningstar defines world bond funds as portfolios that invest 40% or more of their assets in fixed-income instruments issued outside of the US Some funds follow a conservative approach and invest only in high-quality bonds from developed markets. Others may invest in lower-quality bonds in both developed and emerging markets. We evaluate the absolute- and risk-adjusted performance of WBF from January 1985 to August 2023 and compare them to several bond sectors and the world stock market. WBFs have underperformed the US investment grade and high-yield bonds with lower risk-adjusted performance (Sharpe, Sortino, and Omega ratios). However, WBFs have outperformed the sovereign debt while having similar risk-adjusted performance compared to world stocks. The four-factor alpha for WBF is negative but statistically insignificant. While WBF managers show skill (gross alpha), high expense ratios offset net outperformance. Overall, there is no evidence that WBFs have created excess value for their investors.