Wires

Emerging market bond funds post standout performance in Q3

* PIMCO, DoubleLine main funds take in most new money

* Emerging market bond funds outperform those bigger funds

By Sam Forgione and Jennifer Ablan

NEW YORK, Oct 9 (Reuters) - The flagship funds of closelywatched bond firms PIMCO and DoubleLine drew the most new moneyin the third quarter, but emerging markets bond funds grabbedthe spotlight with their higher yields and strong performance.

The PIMCO Total Return Fund , the world's largestmutual fund with about $278 billion in assets, attracted roughly$6.25 billion in new money in the third quarter, according toMorningstar.

Meanwhile, the DoubleLine Total Return Bond Fundwas second with $4.45 billion in assets. It leads all bond fundsthis year with nearly $16 billion in investor inflows.

But for investors seeking yield when the 10-year U.S.Treasury note is hovering around 1.71 percent, thebest place to be this year has been in an emerging market bondfund. The Barclays Capital Global Emerging Markets Index is up15.10 percent this year, compared with a 3.77 percent gain forthe Barclays Aggregate Bond Index - a far broader measurement ofbond performance.

One of the standout emerging market funds is the TCWEmerging Markets Income Fund , which attracted nearly$784 million in new money in the third quarter, the most amongemerging market debt funds, according to Morningstar. The TCWfund is up 16.17 percent this year, beating the 14.62 percentgain in the Standard & Poor's 500 Index .

"The emerging-market story is more than just about 'yield,'"said David Robbins, portfolio manager for TCW Emerging Marketsstrategies. "It is a long-term credit improvement story."

In the late 1990s, roughly 10 percent of emerging-marketcountries' bonds were rated high-quality investment grade. Todate, more than 60 percent of emerging-market debt carriesinvestment-grade ratings.

Emerging markets have been the darling of the financialworld since 2009 as global investors have pursued strongerreturns. The demand for emerging markets debt has been driven bya belief that countries such as China and Brazil would leadglobal growth in the next few years, while economies in thedeveloped world would remain nearly stagnant.

But this year, China's economic growth began to slow downmore than expected.

"I think everyone knew that China would not see 10 percentGDP forever," said William Braman, chief investment officer ofBallentine Partners, in Waltham, Massachusetts. "China is stillposting solid growth relative to other countries."

Braman said the firm has been rotating out of U.S. equitiesand into emerging market securities. He said the economic growthprospects look better in emerging markets at 6 percent versusdeveloped countries at 2.5 percent.

NO LONGER EMERGING MARKETS?

The sector is the highest performing among bond types, saidJeff Tjornehoj, head of Lipper Americas Research, in Denver,Colorado. The funds that hold emerging market debt are reapingthe rewards, he noted.

Emerging market bonds could even oust "junk" bonds as thisyear's debt darling as some analysts say that high-yield debt isstarting to look overvalued and higher risk, compared withemerging market debt.

Investors are looking at emerging market bonds as a "truesubstitute" for investment-grade bonds, said Luz Padilla, aportfolio manager for the DoubleLine emerging markets fixed-income fund, in a webcast on Tuesday by the Los Angeles-basedcompany.

So far this year, high-yield funds worldwide have gained$63.7 billion in assets while emerging market bond funds havegained $39.9 billion, fund-tracker EPFR Global said.

Padilla said the move into emerging market debt as a"flight-to-quality trade" is "well-justified." He also cited thestrong fundamentals of emerging economies and how they continueto strengthen despite the European debt crisis.

Padilla added that emerging markets could be lesssusceptible to a global economic slowdown, which theInternational Monetary Fund recently warned about when it cutits growth forecasts for the second time since April.

"If the situation in the developed countries continues todeteriorate further, a situation that the IMF recently statedhas a one-in-six chance of occurring, emerging market countrieshave room to implement growth-supportive policies as theirfiscal deficits average a mere 1 percent versus over 5 percentfor the developed markets," Padilla said.

(Editing by Matthew Goldstein and Jan Paschal)

((Sam.Forgione@thomsonreuters.com)(+1 646 223 6189)(ReutersMessaging:)(sam.forgione.thomsonreuters.com@reuters.net))

Keywords: INVESTING EMERGINGBONDS/INFLOWS