Africa is experiencing a debt crisis. The continent’s debt, which topped $1 trillion at the end of 2023, could hurt future economic growth, according to the African Development Bank. And in recent years, a handful of countries, including Ghana, Zambia and Ethiopia, have defaulted on their debts.
This news led us to check out Vanguard Emerging Markets Bond Fund (VEMBX), a member of the Kiplinger 25, our favorite no-load mutual fund.
Managers Dan Shakevich and Mauro Favini invest primarily in dollar-denominated government bonds issued by developing countries. In its most recent report, the fund held 13% of its assets in African debt. That’s a higher percentage than the fund’s benchmark, the JPMorgan Emerging Markets Bond Index, but lower than the fund’s typical peer index.
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But business owners aren’t worried. Despite Africa’s overall heavy debt burden, defaults on African government bonds have so far been small compared to benchmarks, Favini said. And “the dollar-denominated emerging market debt asset class as a whole has not experienced any significant declines or contagions,” he says.
Meanwhile, the fund continues to outperform its peers. Over the past 12 months, it returned 14.4%, beating 65% of other emerging market bond funds. “Prudent” positioning for 2024 has contributed to the fund’s performance over the past year. For example, managers profited from holdings of “degraded” stocks.
Making good macroeconomic decisions in 2023 also helped, Favini said. These include increasing the fund’s duration, a measure of interest rate sensitivity, from three years to six-and-a-half years. Because bond prices and interest rates move in opposite directions, a duration of 6.5 years means that if interest rates decrease by 1 percent in one year, the fund’s net asset value will increase by 6.5 percent. Over the past 12 months, some emerging central banks, including China, Brazil and Mexico, have cut interest rates. The fund’s yield is 6.4%.
Note: This item first appeared in Kiplinger Personal Finance Magazine, your trusted monthly source of advice and guidance. Subscribe to earn more money and keep more of what you earn here.
