Question

Comment on the recommendation made by a junior investment analyst in 2012 to the Board of Directors

of a US mutual fund specializing in sovereign bond investment in developed markets:

‘’…The stimulus measures by the European Central Bank (ECB) has largely calmed the financial markets

and helped European countries gradually recover from the recent debt crisis…Now it is time for US

investors to increase their allocation to European sovereign bonds to benefit from both international

diversification and the supportive monetary policy in Europe.”

Note: Please focus your comments from a US investor’s perspective as of 2012

Answer 1

From a US investor's point of view I would like to highlight few points.

The investments in Sovereign Bonds are safer investments carrying no risk and thus providing risk free returns to the investor.

The funds invested in the Sovereign bonds are used by the government in special projects and foster growth for the country so it means that our investments are indirectly used for the development of the country.

These bonds also provide certain types of tax benefits and thus helps in tax savings.

However these bonds have a lower rate of investment as compared to others. For example the return on a stock of a good company.

Also the investors block their funds in these bonds for many years and are thus exposed to interest risk.

So overall the comment is well made for Risk Averse investors.