Robert Devlin and Neil Parish are portfolio managers at the Broward Investment Group. At their regular Monday strategy meeting, the topic of adding international bonds to one of their portfolios came up. The portfolio, an ERISA-qualified pension account for a U.S. client, was currently 90 percent invested in U.S. Treasury bonds and 10 percent invested in 10-year Canadian government bonds. Devlin suggested buying a position in 10-year German government bonds, while Parish arguedforapositionin10-yearAustraliangovernmentbonds.
a. Briefly discuss the three major issues that Devlin and Parish should address in their analyses of the return prospects for German and Australian bonds relative to those of U.S. bonds. Having made no changes to the original portfolio, Devlin and Parish hold a subsequent strategy meeting and decide to add positions in the government bonds of Japan, the United Kingdom, France, Germany, and Australia.
b. Identify and discuss two reasons for adding a broader mix of international bonds to the pension portfolio.