A unique combination of daring and caution

Templeton Global Bond can play a valuable role as a portfolio diversifier, but risk-averse investors should look elsewhere.

Jeffrey Bunce, CFA 31 January, 2018 | 6:00PM
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Templeton Global Bond is among the boldest entrants in the Global Fixed Income category. Most notably, its emerging-markets-heavy profile has caused it to move in sync with riskier assets and sport one of the highest correlations to equities in the group over the longer term.

The fund's lack of exposure to safe-haven currencies like the yen and euro has hurt relative returns when those currencies strengthen against the Canadian dollar. However, lead manager Michael Hasenstab's investment themes and shrewd bond and currency selection have led to topnotch long-term performance. His experience, a skilled and generally stable analyst bench and the fund's consistent approach make it a compelling long-term investment for those looking to diversify their domestic bond portfolio and for those more concerned with absolute returns over benchmark-relative returns. As a diversifier, the fund can also play a valuable role in more conservative target-risk portfolios but on a stand-alone basis, risk-averse investors or those with shorter time horizons may be better served elsewhere.

Hasenstab began his career at the firm in 1995 as an emerging-markets sovereign credit analyst, then left to get a doctorate in economics from the Australian National University, before rejoining the firm in 2001 and becoming a co-manager on the version of this fund sold in the United States. He became the fund's sole manager in 2006. Sonal Desai joined Hasenstab as co-manager in 2011, though Hasenstab makes all final portfolio decisions.

The core team of portfolio managers and six country analysts are based in San Mateo, California. This team hits the pavement when conducting its country research, though, traveling to meet with local policymakers, business leaders, journalists and others. The team's ample experience and resources, as well as the managers' significant investments in the U.S. versions of the funds they manage are a positive.

Hasenstab and his team aim to identify value among currencies, sovereign credit and interest rates in countries with healthy or improving fundamentals that they think the market underappreciates. The portfolio is benchmark-agnostic and built on the team's meticulous fundamental research, with feedback from local market participants. The contrarian-minded group attempts to find those opportunities early on and then watches as their theses unfold over several years. They don't require fiscal perfection, just improving trends.

For years, Hasenstab has mostly avoided low-yielding debt issued by the United States, the eurozone and Japan, which dominate most peer funds' portfolios. Instead, he has preferred emerging-markets bonds and currencies given what he views as those countries' better fiscal prospects. That includes long-time portfolio anchors Indonesia (10% as of September 2017) and South Korea (9%), as well as more recent additions of Mexico (9%) and Brazil (10%). As Mexican and Brazilian debt sold off in 2015's third quarter, Hasenstab significantly built out those positions. Over time, he has shown ample willingness to buy what the rest of the market shuns. He loaded up on Irish bonds in the depths of the 2011 eurozone crisis. And he stuck with a low-single-digit stake in conflict-torn Ukraine in 2014 and into 2015 as the country restructured its debt. Because the team is more cautious lately on China's growth potential, it recently sold its Malaysia holdings and built up a position in India (9%), which it views as less dependent on China.

The fund also stands out from the crowd thanks to its significant, and long-time, avoidance of the yen and euro, which Hasenstab believes will weaken as U.S. interest rates rise and each region's central bank continues with quantitative easing, albeit at a slower pace.

Though the fund courts ample currency and credit risk, it shuns interest-rate risk given Hasenstab's concerns about global inflation, which he believes could lead to permanent loss of capital. As a result of his cautious tack, the fund's duration (a measure of interest-rate sensitivity) has run close to zero since late 2015. This focus helps the fund maintain a decent liquidity profile with its current cash level clocking in at 32%.

Hasenstab's often-contrarian approach, patience and knack for finding value in emerging-markets bonds and currencies have paid off over the longer term. Over the past 10 years through November 2017, the fund's 6.4% annualized return ranked second out of 17 distinct peers with records that long. That said, the fund's emerging-markets currency positions have smacked it during risk-averse markets. It returned just 1.2% compared with a category average of 5.2% during the 2011 U.S. debt downgrade and European financial crisis. In a similar vein, the environment for emerging-markets currencies was tough during the 12 months ending February 2016, sending this fund down 2.5%, which was worse than approximately three-quarters of its peers. Conversely, the fund tends to rise to the top of the heap when emerging-markets bonds fare well, as was the case in 2012. While the manager has been successful over the long term, it's important to note that the fund's key themes can and have worked against it at times and can weigh on results in the short-to-medium term.

While Franklin Templeton has lowered its management fee on the commission-based and fee-based share classes over the past few years, the fund's management-expense ratio for both share classes still rank close to the median within the Global Fixed Income category.

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Jeffrey Bunce, CFA

Jeffrey Bunce, CFA  Jeffrey Bunce, CFA, is a senior investment analyst for Morningstar’s Investment Management group.

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