PREMX: The Excellent Performance of the T. Rowe Price Emerging Markets Bond Fund

The T. Rowe Price Emerging Markets Bond Fund (PREMX) is one of the few bond funds with a historical record of delivering returns that are competitive with equities while also giving its investors current income that you’d expect from investing in government debt.

One of the few markets that is not in a bubble territory right now is lower-tier government debt. Everything else looks severely overpriced. Governments like Germany, Switzerland, and the United States are currently paying their bondholders interest that will almost certainly trail inflation over the coming decades, and thus, will leave such investors poorer in 2026, 2036, and 2046 than they were in 2016 (the only reason to make such an investment right now is for liquidity purposes). Meanwhile, large corporations like Microsoft are issuing thirty-year bonds that barely pay 3%, which like large governments, has almost no chance of giving its debtholders a return that will increase purchasing power between the 2015 issuance date and the 2045 maturity.

Since its 1994 offering, the T. Rowe Price Emerging Markets Bond Fund (PREMX) has delivered 10.72% annual returns and has a 6.36% annual dividend yield. If you purchased $10,000 worth of the fund back then, you’d have $81,000 today paying $5,151 in annual interest income. That’s pretty darn close to a best case scenario with a bond investment.

The fund spreads its bets across just about every government that is not considered a safe hazen. Each month, it collects income from the Mexican government, Brazilian government, Indonesian government, Argentinian government, Russian government, Venezuelan government (surprisingly, Venezuela has kept up its debt payments though I would expect some defaults here), South African government, Ukrainian government (again, a bit of surprise), the Turkish government, and the Serbian government, among dozens of others.

I don’t think you would want to buy a focused bond fund that derived its income solely in reliance on just one of those countries, but when the bonds are spread out so that you own a little bit of each, the risk profile improves. Even if, say, Venezuela were to default on all of its debt obligations, the T. Rowe Price Emerging Markets Bond Fund (PREMX) would still give investors a 2% return for the year. When you get into high-risk government debt, that is the best risk/reward return you can hope–if one country defaults per year on all of its obligations, you’d still end up positive.

An advantage of the fund is that it makes its debt payments monthly, and because you are dealing with a high-yielding fund, the frequency of compounding periods is an incremental benefit because you are raising your share count twelve times per year rather than the traditional four.

The interest payment usually amounts to a bit over $0.06 per month, and the payment is scheduled for the last calendar day of each month. So last week, on July 31st, investors in the T. Rowe Price Emerging Markets Bond Fund (PREMX) got to collect $0.0678. If you wanted to create passive income of $100 per month with this month, you’d have to get your hands on 1,500 shares. At a price of $12.60 per share, that would set you back $18,900.

The nice thing is that, if you’re able to sit still and reinvest it for a bit, you’d be acquiring about 95 shares per year to your share count. Within a year, you’d add nearly $10 to your monthly income and be up to $110 per month. Over the past five years, the PREMX holders that reinvested their dividend saw it increase by 39%. In other words, every $100 in monthly income grows to $139 in monthly income about five years later.

It’s a pretty tidy way to get passive income created without a whole lot of effort on your part. Consider this: If someone made the $2,500 minimum investment in the T. Rowe Price Emerging Markets Bond Fund (PREMX) twenty years ago, and then added $100 per month to their holdings in the fund, they would be sitting on $102,000 today that would be paying out $547 per month.

With most things that I study these days, the pursuit of income is usually a folly because it almost always involves the overpayment for those assets that produce cash and then share that cash with their owners.

The T. Rowe Price Emerging Markets Bond Fund (PREMX) is one of the few exceptions that I’ve found. It owns a wide collection of government debt, with most of it yielding between 6% and 8%, and then passes that income on to its owners each month. The capital appreciation that the fundholders have received over the past two decades may not be there, but I’d imagine that people that own this fund for the long haul ought to reap total annual returns of around 8% while collecting about 6.5% in income in a given year.

If you have a 25+ year time horizon, you’d probably end up substantially richer just buying something like Diageo that carries the possibility of 8% to 12% returns over the long haul (those extra percentage points add up over long measuring periods). Also, if you’re contemplating this investment in a taxable account, it probably doesn’t make that much sense if you’re a California investor that won’t be accessing the money for a long while. But if you’re investing in a retirement account, or in a taxable account and want to create a monthly income stream for the near future, the T. Rowe Price Emerging Markets Bond Fund (PREMX) ought to be worth a look.

Originally posted 2016-08-05 17:51:15.

Like this general content? Join The Conservative Income Investor on Patreon for discussion of specific stocks!