portfolios, according to financial expert Carl Bang. Business writer Ahmed ElAmin reports Bond buyers should look at reducing their risk exposure and gain better returns by diversifying into the global marketplace says Carl Bang, senior portfolio manager with State Street Global Advisors in Canada.

"With a US portfolio there is a limit as to how you can diversify with fixed income,'' he said yesterday at a talk before the Bermuda Society of Financial Analysts. "...You can configure a portfolio with treasuries. You can add mortgage backed bonds etcetera. But in the final analysis, the level of risk and the level of return in this portfolio is predicated on the level of US interest rates. What the international market allows you to do is diversify into other interest rate regimes.'' Different economies are in various stages of fiscal, monetary and business cycles, not all correlated with each other. This lack of correlation allows the bond buyer the opportunity to diversify portfolios into different interest rates.

The correlation in performance between US government bond market returns and some non-US government bonds can vary widely. State Street analysts found Canada had the highest correlation -- 76 percent -- with the US. The high correlation is to be expected as the two economies are so closely linked.

Meanwhile, Italy's bond returns correlated with the US only 18 percent of the time, while Australian bonds had a correlation of 32 percent.

"What this shows me is there is opportunity to diversify your risk by adding foreign bonds into your portfolio,'' he said.

In the last 12 years the US market outperformed foreign markets in only three years. The investor, therefore, not only has the opportunity of reducing risk, but also of getting better returns.

For example, in a mock up of three different bond portfolios -- one US-based only, one foreign based, and one with an equal spread between US bonds and foreign bonds -- a mixed portfolio would have outperformed the other two by about four percent over the past ten years.

The global market of publicly held debt is about $20 trillion in size, of which US holds about a 43 percent share. The markets are diverse and fairly liquid. However with the formation of the European Monetary Union, the opportunity for portfolio managers to diversify will diminish somewhat.

As of June 30 this year the company rated Italy's bonds as attractive, was neutral on Canada, and found Japan unattractive. State Street tries to outperform the global bond indices by two percent.

"If you expand your investment universe, you are gaining the opportunity to not only reduce risk but also to try and add return to your portfolio,'' Mr.

Bang said. "Even with large changes in the global capital markets, if you apply a disciplined approach you can add value to a global bond portfolio.'' Mr. Bang manages Canadian and international fixed income portfolios at State Street and is involved with developing quantitative approaches to asset allocation.