SATURDAY, DECEMBER 18, 2010
New World Explorer
By ERIC UHLFELDER | Top bond fund manager Michael Hasenstab finds lots of debt and currency opportunities in emerging markets. South Korea is especially attractive.
Michael Hasenstab does things differently. Where many would-be fund managers look to Northeast schools for MBAs, he went far to the south and west to earn his Ph.D. in economics—at Australian National University, in Canberra. And rather than relax on a secluded beach on his honeymoon, he and his wife, Mary Ann, climbed Mount Kilimanjaro. Little surprise, then, that when he took over Templeton Global Bond Fund (ticker: TPINX), Hasenstab didn't follow convention.
Unlike many global bond managers who buy government, corporate and supranational debt, Hasenstab focuses on sovereigns and foreign exchange. And it's worked. Since taking the helm in December 2001, he's produced annualized returns of 12.27% through Dec. 6. That's more than 5.60 percentage points better than the Barclays Capital US Aggregate Bond Index and nearly 7.41 percentage points above the Citigroup World Government Bond Index. And he's outdistanced equities, topping the Standard & Poor's 500 by 2.37 percentage points a year on average and the MSCI World Index by 4.47 percentage points.
More remarkable is that the 37-year-old, San Mateo, Calif.-based fund manager hasn't taken huge gambles or experienced high volatility. He has had only one down year, off a modest 3.07%, in 2005. Annualized standard deviation (the extent to which his returns vary from the fund's norm) over the decade has been 7.84%—about one percentage point higher than Morningstar's World Bond Category, and much less than half the volatility of the S&P 500 and MSCI World equity indices.
Where the vast majority of mutual-fund managers find cover by not straying too far from their respective benchmark weightings, Hasenstab has no qualms about abandoning big traditional states in favor of more obscure markets—no easy task when managing more than $100 billion. (His fund has $44 billion, with the rest primarily in offshore vehicles and separately managed accounts that he manages.) He also oversees a closed-end fund, the Templeton Global Income Fund (GIM).
To Hasenstab, most developed markets are overly indebted and overleveraged, and they offer far more risk than return potential from their paltry interest rates. However, bond benchmarks—based on issuance size—lead most managers into these least-attractive countries. His portfolio, instead, is dominated by emerging-market holdings: "I see growing economies with manageable debt-to-GDP ratios and flexible exchange rates—and strong foreign-currency reserves, trade and current-account surpluses, and improved economic policies that seek to avoid boom-and-bust spending cycles that had plagued emerging markets." But economic policies are now more focused on controlling inflation, and Hasenstab sees less corruption and more focus on corporate governance and investor rights.
These are pretty recent changes. In 2007, before the credit crisis, 70% of his portfolio was in mature markets. But then he realized the U.S. financial crisis would spread globally. So he shorted the euro, while buying currencies with current-account surpluses, including the Swiss franc and Japanese yen. He boosted holdings in countries where he expected sizable rate cuts, among them Australia, New Zealand, Chile, South Korea and Mexico. Anticipating the flight to the U.S. dollar, he hedged most of his emerging-market currency exposure.
His strategies were spot on, returning nearly 11% in 2007, adding another 6.28% in 2008 and soaring almost 19% in 2009. And through Dec. 6, the fund was up 11.58% in 2010, outperforming the Citigroup WGBI by more than seven percentage points.
Franklin Templeton Investments
Templeton Global Bond
|Leading Sovereign Holdings|
|Country||% Of Portfolio2|
|Leading Currency Positions (incl. Sovereign Hldgs)|
|1. All returns are as of Dec. 14; three- and five-year returns are annualized. 2. As of Nov. 30. 3. Currency position in won is less than Korean sovereign holdings because the fund holds some U.S. dollar-denominated Korean debt. Source: Franklin Templeton|
The current portfolio reflects a similar disposition. He has 9% in Australia, where overnight rates have been bumped up seven times in a little more than a year to 4.75%. And he has roughly the same amount in Scandinavia, where central banks have also been pushing rates up to restrain inflation.
But nearly two-thirds of Hasenstab's long government position is spread across Southeast Asia (31%), Latin America (12%), Central and Eastern Europe (12%), and the Middle East (10%). The fund is short the euro (27%) versus the Norwegian krone, Swedish krona and Polish zloty. And it is short the yen against the dollar (19%). (The total number tops 100% of assets because he uses derivatives that require him to put down a fraction of face value.) Hasenstab sets aside collateral to ensure he isn't forced out of these shorts before he's ready.
Soon after Reserve Bank of Australia started raising rates in the fall of 2009, Hasenstab began buying short-term state and sovereign debt. "Australia was one of the few developed markets that didn't fall into recession," he notes, because of strong demand for its commodities and services, especially from China. Its 18% debt-to-gross-domestic-product ratio in 2009 was among the lowest in the developed world. This year through Dec. 6, high yields and a rallying currency have delivered total returns exceeding 13%.
The portfolio manager believes steady improvement of the South Korean economy makes local sovereigns especially compelling. They account for 15% of his debt exposure, which has been completely unhedged since March of last year. Despite the recent exchange of fire on the peninsula, Hasenstab is encouraged by a rising current surplus and foreign reserves, healthy public finances and domestic growth that's expected to top 6% this year. Since being fully exposed to the won, his bonds have gained 31%, two-thirds of that from a strengthening currency.
The fund's Brazilian exposure has produced a gain of 15.77% so far this year. No secret here: Excluding 2009, when GDP sagged slightly, the country's consistent economic growth is fueling strong domestic demand, rising employment and real wages, and consumer confidence. While the economy had suffered from high inflation and high real interest rates, recalls Hasenstab, he now sees more credible monetary and fiscal policy containing inflation and forward risks.
Hasenstab has stumbled in the yen's rally versus the dollar. In mid-2009, as the U.S. economy stabilized, he turned bearish on the yen, and by year end had established his short position. The reason: There is a strong correlation between dollar-yen exchange rates and the interest-rate differential between the two countries. When the latter expands, the dollar rises. But the Federal Reserve's loose monetary policy and quantitative easing have kept U.S. yields low. So far this year, the position is off 11.57%, but he's holding firm, believing that over the next few years, U.S. rates will rise and the yen will fall.
Given Hasenstab's prescience, it seems like a good bet.