Market Insights
Market Insights
The Case for Investing in Fixed Income Globally The global fixed-income market offers significant potential benefits for U.S. investors. We believe that by building a globally diversified bond portfolio, investors may be better positioned to pursue long-term financial goals. 10 Year Period – December 2010 Asset Class
2. P otentially Attractive Risk/ Return Characteristics 3. Diversification Opportunities 4. Currency Opportunities
Annualized Return
Standard Deviation
Sharpe Ratio
U.S. Equity
S&P 500 Index
$11.4 trillion
1.41%
16.31
-0.05
MSCI EAFE Index
$11.1 trillion
3.50%
18.55
0.07
U.S. Fixed Income
Barclays Capital U.S. Aggregate Index
$15.1 trillion
5.84%
3.80
0.94
Global Fixed Income
Barclays Capital Global Aggregate Ex U.S. (hedged)
$22.6 trillion
4.71%
2.45
1.00
Source: FactSet. Past performance is no guarantee of future results. See definitions on back page. Investors cannot invest directly in any index. Actual results will vary.
As shown above, global fixed income is one of the largest asset classes with among the best risk/return characteristics as indicated by its high relative Sharpe Ratio. The U.S. fixed-income market continues to be among the most dynamic and liquid securities markets in the world. However, the growth in the U.S. federal debt coupled with the threat of higher U.S. interest rates in the future make the fundamentals in the U.S. market potentially less compelling. A portfolio that also contains foreign bonds can provide investors with diversification in the event of worsening domestic conditions for U.S. debt investing and also an opportunity to invest in potentially more attractive foreign markets. Total U.S. Federal Debt as a Percentage of GDP 120 100 80
Projected
1. A Larger and More Diverse Opportunity Set
Market Size
International Equity
% of GDP
Reasons to Consider a Global Fixed Income Approach:
Representative Index
60 40 20 0
1970
1975
1980
1985
1990
1995
2000
2005
Source: Office of Management and Budget. Data for 2010 and beyond is based on projections.
2010
2015
Global Fixed Income Landscape
Larger and More Diverse Opportunity Set
The Barclays Capital Global Aggregate Index, a widely used measure of the global fixed-income market, includes 13,474 securities representing $38.3 trillion in market value. The index: • Represents 64 countries covering North America, Europe and Asia
The universe of fixed-income securities globally has undergone significant expansion thanks in part to improving fundamentals abroad. This has led to a deepening of the fixed income securities market outside the U.S. As the chart illustrates, the value of foreign bonds over the past 20 years has grown significantly vs. U.S. bonds and is now larger in market size.
Growth in Global Bond Market Barclays Global Aggregate Index
• Sectors include Treasuries, Agencies, Supranational, Corporate and Securitized
40
Market Size ($ Trillions)
35
Country Diversification* Other Canada 4% 3% U.K. 5%
30 25 20 15 10
U.S. 37%
Europe Ex U.K 28%
5 0
91
92 93 94 95 96 97 98 99 00 01 Foreign
Asia Ex Japan 2%
09 10
U.S.
Source: FactSet, Barclays Capital. Japan 19%
Emerging Market Debt Local Currency
Sector Diversification* Securitized 17%
Gov’t Related 14%
02 03 04 05 06 07 08
Sovereign 52%
An example of the diversity of investment opportunities available abroad is emerging market debt denominated in local currencies, a relatively new asset type. Historically, most emerging market bonds were denominated in currencies such as the U.S. dollar. However, due to economic improvements and greater fiscal discipline in the developing world, more countries have the ability to issue debt in their local currency. For U.S. investors, this presents both increased diversification benefits and higher return potential, though it also involves additional risks, including from the changing value of local currency. (See ‘Main Risks’ on last page.)
Corporate Bonds 16%
*As of 12/31/10. Index composition is subject to change at any time.
2
Not FDIC-Insured. Not Bank-Guaranteed. May Lose Value.
Yields (%) 13
Brazil
12 Indonesia
11 10 9
Mexico
8 7 Australia
6
South Korea U.S U.K. Euro Area
5 4 3
Japan
2
30 year
20 year
15 year
10 year
7 year
1 0
5 year
Conversely, global bond managers can seek to take advantage of higher yields in other parts of the world when the opportunity presents itself. As interest income remains a primary source of overall bond returns, the higher rates available abroad can be a powerful source of additional total returns in a global portfolio. (It should be noted that higher yields often correspond with increased risks and can be achieved as the result of prior price declines.)
Global Sovereign Bond Yield Curves
3 year
For example, as illustrated in the accompanying chart, Japan is currently one of the lowest yielding markets in the world. Yields on Japanese Government Bonds (JGB) have remained in the low single digits for a prolonged period as Japan attempts to spark growth. Yet, we believe investing in Japanese sovereign bonds may be advisable in times of rising yields elsewhere or during periods of global uncertainty. As yields have risen in other parts of the world, decreasing the value of these bonds, JGBs have historically retained more of their value relative to higher-yielding options. (Of course, JGBs could also decline in value if and when their yields rise.)
The expanding opportunity set abroad can allow professional money managers to seek to exploit divergent economic and interest rate cycles across the investing universe. Economic conditions, as well as the shape and level of global yield curves, can vary by country and region as the chart below illustrates. These differences provide active managers with the potential to add value by overweighting markets with better fundamentals and underweighting less attractive markets.
1 year
Countries with the lowest current yields may not always represent poor fixedincome investments.
Risk/Return Characteristics Vary by Country
Source: Bloomberg; yields as of 12/31/2010. Euro area bonds are represented by German Bunds. Yields are for local currency bonds.
Potentially Attractive Risk/Return Characteristics Besides helping to diversify domestic-oriented portfolios, international fixed income has historically provided among the best risk/return characteristics of any asset class as demonstrated in the chart below. Also, as a source of international diversification, global bonds have exposed investors to much less volatility relative to international equities.
Historical Risk vs. Return (20 Years Ended 12/31/10) Annualized Total Returns %
Investing in Different Global Bond Markets
11 10 9 8 7 6 5 4 3 2 1 2
Global Bond (hedged)
U.S. Inv Grade Corporate Bond
U.S. High Yield Bond
U.S. Equity Global Equity
International Bond (unhedged)
U.S. Bond
International Equity
International Bond (hedged)
4
6
8
10
12
14
16
18
Annualized Standard Deviation %
Source: FactSet. Past performance is no guarantee of future results. Representative indexes are: Barclays Capital Global Aggregate (Global Bonds), Barclays Capital U.S. Aggregate (U.S. Bonds), Barclays Capital Global Aggregate Ex-U.S. (International Bonds), Barclays Capital U.S. Corporate (U.S. Inv Grade Corporate Bonds), Barclays Capital U.S. High Yield (U.S. High Yield Bonds), S&P 500 (U.S. Equities), MSCI EAFE (International Equities) and MSCI World (Global Equities). See definitions on back page. Investors cannot invest directly in any index. Actual results will vary. Risk is measured by standard devision. Standard deviation is the statistical measure of the degree to which the individual value in a probability distribution tends to vary from the mean of the distribution. 3
Diversification Opportunities
An allocation to foreign bonds can help diversify individual portfolios that may be too heavily weighted to U.S. debt securities.
A diversified portfolio of fixed-income securities with issuer, country, and currency diversification can help diversify individual portfolios that may be too heavily weighted to domestic securities. The correlation of returns among domestic fixed-income sectors has historically been high compared to international fixed income. In essence, international bond exposure provides a way to perhaps mitigate domestic risks such as higher U.S. interest rates or increases in domestic inflation rates. Additionally, international fixed income has traditionally exhibited lower correlation to U.S. equities, providing added diversification benefits to U.S. focused portfolios. Correlation of Returns — 20-Year Period Ended 12/31/2010 Asset Class
Representative Index
U.S. Equities
U.S. Equities
S&P 500 Index
1.00
Global Equities
U.S. Fixed Income
Global Fixed Income
—
—
—
Global Equities
MSCI EAFE Index
0.77
1.00
—
—
U.S. Fixed Income
Barclays Capital U.S. Aggregate Index
0.11
0.08
1.00
—
Global Fixed Income
Barclays Capital Global Aggregate Ex U.S. Index
0.15
0.39
0.48
1.00
Source: FactSet. Past performance is no guarantee of future results. See definitions on back page. Asset allocation and diversification cannot ensure a profit or protect against loss in declining markets.
A diversified approach that incorporates bonds from multiple countries, including the U.S., can reduce the chances of missing investment opportunities worldwide. Asset allocation and diversification cannot ensure a profit or protect against loss in declining markets.
Performance Leadership Tends to Vary A diversified approach that incorporates bonds from multiple countries can reduce the chances of missing investment opportunities worldwide. As the chart below illustrates, the best performing fixed-income markets are often found outside the U.S. and performance leadership often varies from country to country.
Best and Worst Performing Bond Markets in U.S. Dollars Largest 25 Countries in Barclays Capital Global Aggregate 40
Total Return (%)
30
S. Africa
Australia
Australia
Japan Canada
20
South Korea Poland
0
Taiwan
Japan
-10
-30
Mexico
Mexico
10
-20
New Zealand
United States
South Africa
Switzerland Singapore
Japan
Japan
Japan
2001
2000
United Kingdom
Greece 2010
Luxembourg
2009
2008
2007
2006
2005
2004
2003
2002
United States Source: Barclays Capital. Past performance is no guarantee of future results. This example is for illustrative purposes only. It is intended to illustrate the changing country leadership in terms of bond market performance over time, the divergence in performance from year to year, and the potential benefits of a diversified investment approach. It is not intended to promote investment in any single country or market. Returns from emerging market countries have been historically more volatile than those of the U.S. and other developed countries.
4
Dollar Dynamics
Currency Opportunities
Despite recent official statements declaring a strong U.S. dollar policy, the dollar has been in a decade-long overall decline (see dollar chart) brought about in part by low levels of U.S. interest rates, high current account deficits and rising public indebtedness. Dollar rallies during this time have tended to coincide with periods of financial crisis, as occurred in 2008 during the subprime meltdown. Despite its decline in relative value, the U.S. dollar continues to be sought after for its perceived safety and has generally increased in value during “flight to quality” periods.
Currency fluctuations between countries provide both diversification benefits to portfolios predominantly denominated in a local currency as well as a potential source of alpha. Currency can be viewed as a separate investment decision providing active managers with an additional source of potential returns.
Because of its perceived quality, the dollar continues to be sought after as the primary international reserve currency, which has generally been supportive of dollar value as more market participants seek to hold dollars. The decline in the U.S. dollar and thus the value of these reserves has led some to seek an alternative reserve mechanism. While no viable alternative has yet to appear, it bears watching if some alternatives do develop.
Changing U.S. Dollar Environment
Currency Drivers • Inflation Expectations • Monetary Policy • Debt Levels • Balance of Payments • Supply and Demand Dynamics
The potential for further dollar weakness exists as higher inflation expectations and increased U.S. government debt levels, plus persistently large U.S. account deficits, contribute to a weaker environment for the dollar. A portfolio of international bonds denominated in foreign currencies can help protect the purchasing power of U.S. based investors during these periods, as the value of many foreign denominated bonds rises in dollar terms. (Of course, the opposite may occur when the dollar strengthens, resulting in greater volatility to the downside.)
Real Trade Weighted U.S.$ vs. Major Currencies — 1991-2010 125 115 105 95
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
75
1991
85
Source: FactSet.
5
Hedged Currency Exposure To dampen volatility, investors may seek to hedge their foreign currency exposure, as this can provide many of the benefits of a global portfolio without the volatility of currency movements. As the chart below illustrates, U.S. dollar movements tend to be cyclical, offering opportunities for domestic investors to increase returns during periods of declines while reducing returns when the dollar strengthens. In a hedged portfolio, this currency volatility is reduced or eliminated by entering into derivative contracts that seek to negate the effects of currency fluctuations.
Performance: Barclays Capital Global Aggregate Ex-U.S. Index (U.S.$ Hedged) vs. Barclays Capital Global Aggregate Ex-U.S. (Unhedged) Barclays Capital Global Aggregate Ex-U.S. Index (U.S.$ Hedged) Barclays Capital Global Aggregate Ex-U.S. (Unhedged)
500 Unhedged index outperformed U.S.$ hedged index by 52% during weak dollar environment
450
350 300 250
2010
2009
2008
2007
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
50
1992
100
2006
150
2005
Unhedged index outperformed U.S.$ hedged index by 68% during weak dollar environment
200
1991
To dampen volatility, investors may seek to hedge their foreign currency exposure, as this can provide many of the benefits of a global portfolio without the volatility of currency movements.
Index Value = 100
400
U.S.$ hedged index outperformed unhedged index by 75% during strong dollar environment
Source: Barclays Capital. Index performance is historical and not indicative of future results. Investors cannot invest directly in any index. See definitions on back page.
Conclusion In short, the addition of non-U.S. bonds, including those from both developed and emerging markets, may help increase returns and decrease overall portfolio risk. U.S. investors should consider a global approach to fixed income investing to take advantage of: • A larger opportunity set • Attractive risk/return characteristics • Diversification benefits • Currency opportunities overseas
6
Bond with Fixed Income Leaders The Dreyfus Corporation, established in 1951, has a strong heritage in fixed-income management. Standish Mellon Asset Management Company LLC (Standish) is a Dreyfus affiliate that manages Dreyfus-branded funds, including those listed below, under a dualemployee arrangement. Standish is a world-class fixed-income specialist based in Boston, with a history dating to 1933.
Dreyfus International Bond Fund*
Dreyfus/Standish Global Fixed Income Fund*
Dreyfus Emerging Markets Debt Local Currency Fund*
Ticker Symbols
Class A: DIBAX Class C: DIBCX Class I: DIBRX
Class A: DHGAX Class C: DHGCX Class I: SDGIX
Class A: DDBAX Class C: DDBCX Class I: DDBIX
Investment Goal/ Approach
Seeks to maximize total return by investing primarily in fixed-income securities of foreign governments and companies
Seeks to maximize total return (consistent with preserving principal and liquidity) by investing in fixed-income securities of U.S. and non-U.S. governments and companies
Seeks to maximize total return by investing in emerging market bonds and other debt instruments issued by foreign governments
Key Characteristics
Considerable latitude in determining whether to hedge the fund’s currency exposure and to what extent
Normally hedges most of its foreign currency exposure to protect the U.S. dollar value of its assets
Focuses primarily on emerging markets debt issued in local currencies
Geographic Focus
Non-U.S. developed market countries worldwide; limited emerging market exposure
Developed market countries worldwide; limited emerging market exposure
Emerging market countries worldwide
Holdings (as of 12/31/10)
Top 5 Countries: U.S. 20.7% Japan 14.1% U.K. 13.7% Italy 13.0% Germany 11.4%
Top 5 Countries: U.S. 29.5% Germany 17.3% U.K. 11.2% Japan 10.7% Italy 10.5%
Top 5 Currency Exposures: Polish Zloty 11.66% Malaysian Ringgit 11.53% Mexican Peso 11.02% Russian Ruble 10.88% Turkish Lira 10.54%
Other Information
Inception Date: 12/30/05 # of Holdings: 171 (as of 12/31/10) Portfolio Turnover: 153.71% (as of fiscal YE 10/31/10)
Inception Date: 01/01/94 # of Holdings: 182 (as of 12/31/10) Portfolio Turnover: 131.97% (as of fiscal YE 12/31/09)
Inception Date: 09/12/08 # of Holdings: 85 (as of 12/31/10) Portfolio Turnover: 74.25% (as of fiscal YE 5/31/10)
Portfolio composition is subject to change at any time. *The Dreyfus Corporation is the investment adviser for the above funds. Portfolio managers from Standish Mellon Asset Management Company LLC, a Dreyfus affiliate, manage these funds pursuant to a dual-employee arrangement with Dreyfus, applying their proprietary investment processes to the funds. Both Dreyfus and Standish are subsidiaries of BNY Mellon. BNY Mellon Asset Management is the umbrella organization for BNY Mellon’s affiliated investment management firms and global distribution companies.
7
H H H H H Dreyfus International Bond Fund (Class A, C and I) Morningstar Overall RatingTM among 209 funds in the Morningstar World Bond category as of 12/31/10. Ratings reflect risk-adjusted performance and are derived from a weighted average of the fund’s three-, five- and 10-year (as applicable) Ratings. As of 12/31/10, the fund’s Class A, C and I shares received five stars for the three- and five-year periods among 209 and 160 funds, respectively, in the Morningstar World Bond category. Morningstar ratings reflect sales loads. Past performance is no guarantee of future results.
HHHH
Dreyfus/Standish Global Fixed Income Fund (Class I)
Morningstar Overall RatingTM among 209 funds in the Morningstar World Bond category as of 12/31/10. Ratings reflect risk-adjusted performance and are derived from a weighted average of the fund’s three-, five- and 10-year (as applicable) Ratings. As of 12/31/10, the fund’s Class I shares received five, four and three stars for the three-, five- and 10-year periods among 209, 160 and 107 funds, respectively, in the Morningstar World Bond category. Morningstar ratings reflect sales loads. Past performance is no guarantee of future results.
Morningstar Ratings reflect past performance, which is no guarantee of future results. Share price and investment return fluctuate and an investor’s shares may be worth more or less than original cost upon redemption. Go to Dreyfus.com for a fund’s latest month-end returns. Source: Morningstar Inc. Ratings are calculated using a formula that measures the amount of variation in a fund’s performance, and which gives more emphasis to downward variations. Ratings are subject to change every month. The top 10% of the funds in a category receive five stars; the next 22.5% receive four stars; the next 35% three stars; the next 22.5% two stars; and the last 10% one star. Ratings reflect sales loads.
Learn More
For more information on our broad range of global and international products, please contact your financial advisor.
Investors should consider the investment objectives, risks, charges and expenses of any mutual fund carefully before investing. Contact your financial advisor to obtain a prospectus that contains this and other information about a fund. Read it carefully before investing. MAIN RISKS Investing internationally involves special risks, including changes in currency exchange rates, political and economic instability, less market liquidity, lack of comprehensive company information, and differing auditing and legal standards. Emerging markets tend to be more volatile than the markets of more mature economies, and generally have less diverse and less mature economic structures and less stable political systems than those of developed countries. Bond funds are subject generally to interest rate, credit, liquidity and market risks, to varying degrees, all of which are more fully described in a fund’s prospectus. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes, and rate increases can produce price declines. Foreign bonds are subject to special risks including exposure to currency fluctuations, changing political and economic conditions, and potentially less liquidity. Investments in foreign currencies are subject to the risk that those currencies will decline in value relative to the U.S. dollar, or, in the case of hedged positions, that the U.S. dollar will decline relative to the currency being hedged. The use of derivatives involves risks different from, and possibly greater than, the risks associated with investing directly in the underlying assets. Derivatives can be highly volatile, illiquid and difficult to value and there is the risk that changes in the value of a derivative held by the fund will not correlate with the underlying instruments or the fund’s other investments. DEFINITIONS The Barclays Capital Global Aggregate Index is a widely used measure of the global fixed-income market. The Barclays Capital U.S. Aggregate Index is a widely used measure of the U.S. fixed-income market. The S&P 500 Index is a widely used measure of U.S. stock market performance. The MSCI EAFE Index is a widely used measure of the performance of European, Australasian and Far Eastern stock markets. The MSCI World Index is a widely used measure of the world’s developed equity markets. The Barclays Capital U.S. Corporate Index is a widely used measure of the U.S. investment-grade corporate bond market. The Barclays Capital U.S. High Yield Index is a widely used measure of the U.S. high-yield bond market. Standard deviation is the statistical measure of the degree to which the individual value in a probability distribution tends to vary from the mean of the distribution. Sharpe Ratio measures reward per unit of risk and indicates whether a portfolio’s returns are due to smart investment decisions or as a result of excess risk. © 2011 MBSC Securities Corporation, Distributor DRY-GFIBRO-0111
The Case for Investing in Fixed Income Globally The global fixed-income market offers significant potential benefits for U.S. investors. We believe that by building a globally diversified bond portfolio, investors may be better positioned to pursue long-term financial goals. 10 Year Period – December 2010 Asset Class
2. P otentially Attractive Risk/ Return Characteristics 3. Diversification Opportunities 4. Currency Opportunities
Annualized Return
Standard Deviation
Sharpe Ratio
U.S. Equity
S&P 500 Index
$11.4 trillion
1.41%
16.31
-0.05
MSCI EAFE Index
$11.1 trillion
3.50%
18.55
0.07
U.S. Fixed Income
Barclays Capital U.S. Aggregate Index
$15.1 trillion
5.84%
3.80
0.94
Global Fixed Income
Barclays Capital Global Aggregate Ex U.S. (hedged)
$22.6 trillion
4.71%
2.45
1.00
Source: FactSet. Past performance is no guarantee of future results. See definitions on back page. Investors cannot invest directly in any index. Actual results will vary.
As shown above, global fixed income is one of the largest asset classes with among the best risk/return characteristics as indicated by its high relative Sharpe Ratio. The U.S. fixed-income market continues to be among the most dynamic and liquid securities markets in the world. However, the growth in the U.S. federal debt coupled with the threat of higher U.S. interest rates in the future make the fundamentals in the U.S. market potentially less compelling. A portfolio that also contains foreign bonds can provide investors with diversification in the event of worsening domestic conditions for U.S. debt investing and also an opportunity to invest in potentially more attractive foreign markets. Total U.S. Federal Debt as a Percentage of GDP 120 100 80
Projected
1. A Larger and More Diverse Opportunity Set
Market Size
International Equity
% of GDP
Reasons to Consider a Global Fixed Income Approach:
Representative Index
60 40 20 0
1970
1975
1980
1985
1990
1995
2000
2005
Source: Office of Management and Budget. Data for 2010 and beyond is based on projections.
2010
2015
Global Fixed Income Landscape
Larger and More Diverse Opportunity Set
The Barclays Capital Global Aggregate Index, a widely used measure of the global fixed-income market, includes 13,474 securities representing $38.3 trillion in market value. The index: • Represents 64 countries covering North America, Europe and Asia
The universe of fixed-income securities globally has undergone significant expansion thanks in part to improving fundamentals abroad. This has led to a deepening of the fixed income securities market outside the U.S. As the chart illustrates, the value of foreign bonds over the past 20 years has grown significantly vs. U.S. bonds and is now larger in market size.
Growth in Global Bond Market Barclays Global Aggregate Index
• Sectors include Treasuries, Agencies, Supranational, Corporate and Securitized
40
Market Size ($ Trillions)
35
Country Diversification* Other Canada 4% 3% U.K. 5%
30 25 20 15 10
U.S. 37%
Europe Ex U.K 28%
5 0
91
92 93 94 95 96 97 98 99 00 01 Foreign
Asia Ex Japan 2%
09 10
U.S.
Source: FactSet, Barclays Capital. Japan 19%
Emerging Market Debt Local Currency
Sector Diversification* Securitized 17%
Gov’t Related 14%
02 03 04 05 06 07 08
Sovereign 52%
An example of the diversity of investment opportunities available abroad is emerging market debt denominated in local currencies, a relatively new asset type. Historically, most emerging market bonds were denominated in currencies such as the U.S. dollar. However, due to economic improvements and greater fiscal discipline in the developing world, more countries have the ability to issue debt in their local currency. For U.S. investors, this presents both increased diversification benefits and higher return potential, though it also involves additional risks, including from the changing value of local currency. (See ‘Main Risks’ on last page.)
Corporate Bonds 16%
*As of 12/31/10. Index composition is subject to change at any time.
2
Not FDIC-Insured. Not Bank-Guaranteed. May Lose Value.
Yields (%) 13
Brazil
12 Indonesia
11 10 9
Mexico
8 7 Australia
6
South Korea U.S U.K. Euro Area
5 4 3
Japan
2
30 year
20 year
15 year
10 year
7 year
1 0
5 year
Conversely, global bond managers can seek to take advantage of higher yields in other parts of the world when the opportunity presents itself. As interest income remains a primary source of overall bond returns, the higher rates available abroad can be a powerful source of additional total returns in a global portfolio. (It should be noted that higher yields often correspond with increased risks and can be achieved as the result of prior price declines.)
Global Sovereign Bond Yield Curves
3 year
For example, as illustrated in the accompanying chart, Japan is currently one of the lowest yielding markets in the world. Yields on Japanese Government Bonds (JGB) have remained in the low single digits for a prolonged period as Japan attempts to spark growth. Yet, we believe investing in Japanese sovereign bonds may be advisable in times of rising yields elsewhere or during periods of global uncertainty. As yields have risen in other parts of the world, decreasing the value of these bonds, JGBs have historically retained more of their value relative to higher-yielding options. (Of course, JGBs could also decline in value if and when their yields rise.)
The expanding opportunity set abroad can allow professional money managers to seek to exploit divergent economic and interest rate cycles across the investing universe. Economic conditions, as well as the shape and level of global yield curves, can vary by country and region as the chart below illustrates. These differences provide active managers with the potential to add value by overweighting markets with better fundamentals and underweighting less attractive markets.
1 year
Countries with the lowest current yields may not always represent poor fixedincome investments.
Risk/Return Characteristics Vary by Country
Source: Bloomberg; yields as of 12/31/2010. Euro area bonds are represented by German Bunds. Yields are for local currency bonds.
Potentially Attractive Risk/Return Characteristics Besides helping to diversify domestic-oriented portfolios, international fixed income has historically provided among the best risk/return characteristics of any asset class as demonstrated in the chart below. Also, as a source of international diversification, global bonds have exposed investors to much less volatility relative to international equities.
Historical Risk vs. Return (20 Years Ended 12/31/10) Annualized Total Returns %
Investing in Different Global Bond Markets
11 10 9 8 7 6 5 4 3 2 1 2
Global Bond (hedged)
U.S. Inv Grade Corporate Bond
U.S. High Yield Bond
U.S. Equity Global Equity
International Bond (unhedged)
U.S. Bond
International Equity
International Bond (hedged)
4
6
8
10
12
14
16
18
Annualized Standard Deviation %
Source: FactSet. Past performance is no guarantee of future results. Representative indexes are: Barclays Capital Global Aggregate (Global Bonds), Barclays Capital U.S. Aggregate (U.S. Bonds), Barclays Capital Global Aggregate Ex-U.S. (International Bonds), Barclays Capital U.S. Corporate (U.S. Inv Grade Corporate Bonds), Barclays Capital U.S. High Yield (U.S. High Yield Bonds), S&P 500 (U.S. Equities), MSCI EAFE (International Equities) and MSCI World (Global Equities). See definitions on back page. Investors cannot invest directly in any index. Actual results will vary. Risk is measured by standard devision. Standard deviation is the statistical measure of the degree to which the individual value in a probability distribution tends to vary from the mean of the distribution. 3
Diversification Opportunities
An allocation to foreign bonds can help diversify individual portfolios that may be too heavily weighted to U.S. debt securities.
A diversified portfolio of fixed-income securities with issuer, country, and currency diversification can help diversify individual portfolios that may be too heavily weighted to domestic securities. The correlation of returns among domestic fixed-income sectors has historically been high compared to international fixed income. In essence, international bond exposure provides a way to perhaps mitigate domestic risks such as higher U.S. interest rates or increases in domestic inflation rates. Additionally, international fixed income has traditionally exhibited lower correlation to U.S. equities, providing added diversification benefits to U.S. focused portfolios. Correlation of Returns — 20-Year Period Ended 12/31/2010 Asset Class
Representative Index
U.S. Equities
U.S. Equities
S&P 500 Index
1.00
Global Equities
U.S. Fixed Income
Global Fixed Income
—
—
—
Global Equities
MSCI EAFE Index
0.77
1.00
—
—
U.S. Fixed Income
Barclays Capital U.S. Aggregate Index
0.11
0.08
1.00
—
Global Fixed Income
Barclays Capital Global Aggregate Ex U.S. Index
0.15
0.39
0.48
1.00
Source: FactSet. Past performance is no guarantee of future results. See definitions on back page. Asset allocation and diversification cannot ensure a profit or protect against loss in declining markets.
A diversified approach that incorporates bonds from multiple countries, including the U.S., can reduce the chances of missing investment opportunities worldwide. Asset allocation and diversification cannot ensure a profit or protect against loss in declining markets.
Performance Leadership Tends to Vary A diversified approach that incorporates bonds from multiple countries can reduce the chances of missing investment opportunities worldwide. As the chart below illustrates, the best performing fixed-income markets are often found outside the U.S. and performance leadership often varies from country to country.
Best and Worst Performing Bond Markets in U.S. Dollars Largest 25 Countries in Barclays Capital Global Aggregate 40
Total Return (%)
30
S. Africa
Australia
Australia
Japan Canada
20
South Korea Poland
0
Taiwan
Japan
-10
-30
Mexico
Mexico
10
-20
New Zealand
United States
South Africa
Switzerland Singapore
Japan
Japan
Japan
2001
2000
United Kingdom
Greece 2010
Luxembourg
2009
2008
2007
2006
2005
2004
2003
2002
United States Source: Barclays Capital. Past performance is no guarantee of future results. This example is for illustrative purposes only. It is intended to illustrate the changing country leadership in terms of bond market performance over time, the divergence in performance from year to year, and the potential benefits of a diversified investment approach. It is not intended to promote investment in any single country or market. Returns from emerging market countries have been historically more volatile than those of the U.S. and other developed countries.
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Dollar Dynamics
Currency Opportunities
Despite recent official statements declaring a strong U.S. dollar policy, the dollar has been in a decade-long overall decline (see dollar chart) brought about in part by low levels of U.S. interest rates, high current account deficits and rising public indebtedness. Dollar rallies during this time have tended to coincide with periods of financial crisis, as occurred in 2008 during the subprime meltdown. Despite its decline in relative value, the U.S. dollar continues to be sought after for its perceived safety and has generally increased in value during “flight to quality” periods.
Currency fluctuations between countries provide both diversification benefits to portfolios predominantly denominated in a local currency as well as a potential source of alpha. Currency can be viewed as a separate investment decision providing active managers with an additional source of potential returns.
Because of its perceived quality, the dollar continues to be sought after as the primary international reserve currency, which has generally been supportive of dollar value as more market participants seek to hold dollars. The decline in the U.S. dollar and thus the value of these reserves has led some to seek an alternative reserve mechanism. While no viable alternative has yet to appear, it bears watching if some alternatives do develop.
Changing U.S. Dollar Environment
Currency Drivers • Inflation Expectations • Monetary Policy • Debt Levels • Balance of Payments • Supply and Demand Dynamics
The potential for further dollar weakness exists as higher inflation expectations and increased U.S. government debt levels, plus persistently large U.S. account deficits, contribute to a weaker environment for the dollar. A portfolio of international bonds denominated in foreign currencies can help protect the purchasing power of U.S. based investors during these periods, as the value of many foreign denominated bonds rises in dollar terms. (Of course, the opposite may occur when the dollar strengthens, resulting in greater volatility to the downside.)
Real Trade Weighted U.S.$ vs. Major Currencies — 1991-2010 125 115 105 95
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
75
1991
85
Source: FactSet.
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Hedged Currency Exposure To dampen volatility, investors may seek to hedge their foreign currency exposure, as this can provide many of the benefits of a global portfolio without the volatility of currency movements. As the chart below illustrates, U.S. dollar movements tend to be cyclical, offering opportunities for domestic investors to increase returns during periods of declines while reducing returns when the dollar strengthens. In a hedged portfolio, this currency volatility is reduced or eliminated by entering into derivative contracts that seek to negate the effects of currency fluctuations.
Performance: Barclays Capital Global Aggregate Ex-U.S. Index (U.S.$ Hedged) vs. Barclays Capital Global Aggregate Ex-U.S. (Unhedged) Barclays Capital Global Aggregate Ex-U.S. Index (U.S.$ Hedged) Barclays Capital Global Aggregate Ex-U.S. (Unhedged)
500 Unhedged index outperformed U.S.$ hedged index by 52% during weak dollar environment
450
350 300 250
2010
2009
2008
2007
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
50
1992
100
2006
150
2005
Unhedged index outperformed U.S.$ hedged index by 68% during weak dollar environment
200
1991
To dampen volatility, investors may seek to hedge their foreign currency exposure, as this can provide many of the benefits of a global portfolio without the volatility of currency movements.
Index Value = 100
400
U.S.$ hedged index outperformed unhedged index by 75% during strong dollar environment
Source: Barclays Capital. Index performance is historical and not indicative of future results. Investors cannot invest directly in any index. See definitions on back page.
Conclusion In short, the addition of non-U.S. bonds, including those from both developed and emerging markets, may help increase returns and decrease overall portfolio risk. U.S. investors should consider a global approach to fixed income investing to take advantage of: • A larger opportunity set • Attractive risk/return characteristics • Diversification benefits • Currency opportunities overseas
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Bond with Fixed Income Leaders The Dreyfus Corporation, established in 1951, has a strong heritage in fixed-income management. Standish Mellon Asset Management Company LLC (Standish) is a Dreyfus affiliate that manages Dreyfus-branded funds, including those listed below, under a dualemployee arrangement. Standish is a world-class fixed-income specialist based in Boston, with a history dating to 1933.
Dreyfus International Bond Fund*
Dreyfus/Standish Global Fixed Income Fund*
Dreyfus Emerging Markets Debt Local Currency Fund*
Ticker Symbols
Class A: DIBAX Class C: DIBCX Class I: DIBRX
Class A: DHGAX Class C: DHGCX Class I: SDGIX
Class A: DDBAX Class C: DDBCX Class I: DDBIX
Investment Goal/ Approach
Seeks to maximize total return by investing primarily in fixed-income securities of foreign governments and companies
Seeks to maximize total return (consistent with preserving principal and liquidity) by investing in fixed-income securities of U.S. and non-U.S. governments and companies
Seeks to maximize total return by investing in emerging market bonds and other debt instruments issued by foreign governments
Key Characteristics
Considerable latitude in determining whether to hedge the fund’s currency exposure and to what extent
Normally hedges most of its foreign currency exposure to protect the U.S. dollar value of its assets
Focuses primarily on emerging markets debt issued in local currencies
Geographic Focus
Non-U.S. developed market countries worldwide; limited emerging market exposure
Developed market countries worldwide; limited emerging market exposure
Emerging market countries worldwide
Holdings (as of 12/31/10)
Top 5 Countries: U.S. 20.7% Japan 14.1% U.K. 13.7% Italy 13.0% Germany 11.4%
Top 5 Countries: U.S. 29.5% Germany 17.3% U.K. 11.2% Japan 10.7% Italy 10.5%
Top 5 Currency Exposures: Polish Zloty 11.66% Malaysian Ringgit 11.53% Mexican Peso 11.02% Russian Ruble 10.88% Turkish Lira 10.54%
Other Information
Inception Date: 12/30/05 # of Holdings: 171 (as of 12/31/10) Portfolio Turnover: 153.71% (as of fiscal YE 10/31/10)
Inception Date: 01/01/94 # of Holdings: 182 (as of 12/31/10) Portfolio Turnover: 131.97% (as of fiscal YE 12/31/09)
Inception Date: 09/12/08 # of Holdings: 85 (as of 12/31/10) Portfolio Turnover: 74.25% (as of fiscal YE 5/31/10)
Portfolio composition is subject to change at any time. *The Dreyfus Corporation is the investment adviser for the above funds. Portfolio managers from Standish Mellon Asset Management Company LLC, a Dreyfus affiliate, manage these funds pursuant to a dual-employee arrangement with Dreyfus, applying their proprietary investment processes to the funds. Both Dreyfus and Standish are subsidiaries of BNY Mellon. BNY Mellon Asset Management is the umbrella organization for BNY Mellon’s affiliated investment management firms and global distribution companies.
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H H H H H Dreyfus International Bond Fund (Class A, C and I) Morningstar Overall RatingTM among 209 funds in the Morningstar World Bond category as of 12/31/10. Ratings reflect risk-adjusted performance and are derived from a weighted average of the fund’s three-, five- and 10-year (as applicable) Ratings. As of 12/31/10, the fund’s Class A, C and I shares received five stars for the three- and five-year periods among 209 and 160 funds, respectively, in the Morningstar World Bond category. Morningstar ratings reflect sales loads. Past performance is no guarantee of future results.
HHHH
Dreyfus/Standish Global Fixed Income Fund (Class I)
Morningstar Overall RatingTM among 209 funds in the Morningstar World Bond category as of 12/31/10. Ratings reflect risk-adjusted performance and are derived from a weighted average of the fund’s three-, five- and 10-year (as applicable) Ratings. As of 12/31/10, the fund’s Class I shares received five, four and three stars for the three-, five- and 10-year periods among 209, 160 and 107 funds, respectively, in the Morningstar World Bond category. Morningstar ratings reflect sales loads. Past performance is no guarantee of future results.
Morningstar Ratings reflect past performance, which is no guarantee of future results. Share price and investment return fluctuate and an investor’s shares may be worth more or less than original cost upon redemption. Go to Dreyfus.com for a fund’s latest month-end returns. Source: Morningstar Inc. Ratings are calculated using a formula that measures the amount of variation in a fund’s performance, and which gives more emphasis to downward variations. Ratings are subject to change every month. The top 10% of the funds in a category receive five stars; the next 22.5% receive four stars; the next 35% three stars; the next 22.5% two stars; and the last 10% one star. Ratings reflect sales loads.
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For more information on our broad range of global and international products, please contact your financial advisor.
Investors should consider the investment objectives, risks, charges and expenses of any mutual fund carefully before investing. Contact your financial advisor to obtain a prospectus that contains this and other information about a fund. Read it carefully before investing. MAIN RISKS Investing internationally involves special risks, including changes in currency exchange rates, political and economic instability, less market liquidity, lack of comprehensive company information, and differing auditing and legal standards. Emerging markets tend to be more volatile than the markets of more mature economies, and generally have less diverse and less mature economic structures and less stable political systems than those of developed countries. Bond funds are subject generally to interest rate, credit, liquidity and market risks, to varying degrees, all of which are more fully described in a fund’s prospectus. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes, and rate increases can produce price declines. Foreign bonds are subject to special risks including exposure to currency fluctuations, changing political and economic conditions, and potentially less liquidity. Investments in foreign currencies are subject to the risk that those currencies will decline in value relative to the U.S. dollar, or, in the case of hedged positions, that the U.S. dollar will decline relative to the currency being hedged. The use of derivatives involves risks different from, and possibly greater than, the risks associated with investing directly in the underlying assets. Derivatives can be highly volatile, illiquid and difficult to value and there is the risk that changes in the value of a derivative held by the fund will not correlate with the underlying instruments or the fund’s other investments. DEFINITIONS The Barclays Capital Global Aggregate Index is a widely used measure of the global fixed-income market. The Barclays Capital U.S. Aggregate Index is a widely used measure of the U.S. fixed-income market. The S&P 500 Index is a widely used measure of U.S. stock market performance. The MSCI EAFE Index is a widely used measure of the performance of European, Australasian and Far Eastern stock markets. The MSCI World Index is a widely used measure of the world’s developed equity markets. The Barclays Capital U.S. Corporate Index is a widely used measure of the U.S. investment-grade corporate bond market. The Barclays Capital U.S. High Yield Index is a widely used measure of the U.S. high-yield bond market. Standard deviation is the statistical measure of the degree to which the individual value in a probability distribution tends to vary from the mean of the distribution. Sharpe Ratio measures reward per unit of risk and indicates whether a portfolio’s returns are due to smart investment decisions or as a result of excess risk. © 2011 MBSC Securities Corporation, Distributor DRY-GFIBRO-0111
