Bonds
While carry-traders venture into emerging markets like Brazil to capture higher interest rates, Australia is likely a safer way to increase income by hundreds of basis points over U.S. Treasuries.  As of November 20, according to Sydney-based Citigroup senior economist Josh Williamson, Australian Commonwealth Government Bonds due in August 2010 were offering yields to maturity of 4.12%.  April 2012 sovereigns' annualized returns are 4.74%.  State bonds, like those issued by New South Wales, were paying even more-5.07% for May 2012 issues.   "Investors can be rewarded even more by going out longer," remarks Williamson, "but with interest rates likely to be trending higher over the next year, investors may be better served staying short-term and rolling over proceeds into perhaps subsequently higher yielding bonds."
"AA" rated corporates can deliver even greater yields with only marginally greater risk.  Citigroup's Australian credit strategist, Mark Reade, points to ANZ National Bank's September 2010 bonds that have a YTM of 5.1%, its March 2011 offering that delivers nearly 5.5%, and Westpac's June 2011 issue that's returning 5.9%.

A weakening Australian dollar versus the greenback is the significant risk in these plays.  But with Australia's solid macroeconomics and the Reserve Bank of Australia already in a rate-tightening mode, most currency analysts see a greater likelihood of the Aussie dollar strengthening, which would add to U.S. investor returns.

Funds
Investing in a market-cap weighted index of the Australian market has been a simple, liquid and inexpensive way of capturing the country's equity performance and alpha beyond traditional international equity exposure through EAFE.  An investor can purchase the iShares MSCI Australia ETF at the same cost as ordinary stock. The ETF passes on a tax-qualified dividend that's currently above 4%, and its annual expense ratio is 52 basis points.

Three-quarters of the performance of this $2.4 billion fund is driven by materials and resources (41%) and financial services (34%).  It's top five holdings are BHP Billiton (14%), followed by the country's big four banks-Commonwealth Bank of Australia, Westpac, National Australian Bank and Australian and New Zealand Bank, which comprise nearly 30% of the fund.

Through November 20, the ETF soared more than 127% over the previous 12 months, outperforming EAFE by 74.47 percentage points.  Three-year annualized returns were 6.24%, outpacing the benchmark by nearly 11 percentage points.  Five- and 10-year annualized returns were each slightly over 12%, outperforming EAFE by 7.77 and 10.19 percent points, respectively.

Philadelphia-based Aberdeen Asset Management offers the only actively managed portfolio, marketed in the U.S., that provides pure exposure to Australian stocks.  The Aberdeen Australia Equity Fund trades on the American Stock Exchange and has been outperforming the Australian MSCI benchmark.

The fund's liquidity differs from the iShares ETF.  It has smaller daily trading volume that averages about 61,000 shares.  Because it is a closed-end fund, investors are not buying shares of the underlying stocks at their net asset value but at what the market values the fund.  This produces a variable when purchasing and selling fund shares, as well as in measuring performance.

According to Morningstar, the fund's market price has generally deviated from its net asset value by as much as 10% since 2005.  In November of 2008, when investors were fleeing stocks, one could have purchased the fund at a 9.56% discount to the worth of its shares.  A year later, the fund's market value was actually 10.29% above the value of its portfolio, having temporarily spiked to nearly 20%. 

The fund's composition is a bit more diversified than the MSCI Index, with industrial materials making up 32.5% and financials 26.1%.  Its top five holdings, also representing more than 40% of the fund, are also different.  While it's topped by BHP Billiton (14.65%), manager Mark Daniels also has an 8.19% position in Rio Tinto, Australia's other major resource giant.  QBE Insurance represents 6.48%, followed by Westpac (6.31%) and Woolworths (5.30%).

The fund, which has a 1.47% annual expense ratio, had a 1-year return of 168.29% through November 20, exceeding the MSCI Australia index by more than 40 percentage points.  Three-year annualized returns were 6.94%, topping the local benchmark by about 70 basis points.  Five-year and 10-year annualized returns of 14.11% and 14.57%, respectively, topped the domestic index by more than two percentage points.  Inclusive has been a dividend that's currently near 4%.
Australia has a number of local investment trusts that are equivalent to U.S. mutual funds. They trade only in Australia, but several can be purchased directly by U.S. investors. Wilson HTM Asset Manager, for example, which runs more than A$8 billion, started its small-cap focused Priority Growth Fund in 2005 and has seen its assets grow to A$100 million on the back of 3-year annualized returns in local currency terms of 23.3% through October.  The minimum investment is A$40,000, its management fee is 1.25%, and it levies a performance fee of 20% annually on profits above the S&P/ASX Small Ordinaries Accumulation Index.