July 25, 2003
Benefiting from a Weaker Dollar
Quick Take: As the three-year bear market sent droves of equity investors to the relative safe havens of bonds, funds investing in foreign fixed-income securities have flourished.
Among the best-performing global bond funds, the $517.5-million Templeton Global Bond Fund (TPINX), invests in sovereign debt in both developed and emerging markets as it keep a close eye on credit quality and currency strength.
What Your Peers Are Reading
For the three-year period ended June 30, the fund rose an average annualized 13.6%, versus 9.5% for its peers. That put it in second place among global bond portfolios over that time. For the five years ended in June, Templeton Global bond returned 7.7%, versus 6.6% for its peers.
Michael Hasenstab and Alex Calvo are the portfolio’s co-managers. Though the fund began operations in September, 1986, Hasenstab joined the management team in late 2001, and the firm in 1995.
The Full Interview:
S&P: How do you select securities?
HASENSTAB: Our process is research driven and uses rigorous macroeconomic analysis to evaluate growth, inflation, interest rate outlook, and long-term currency strength and valuation. From our research, we identify which countries offer the most attractive value and upside.
We typically insist on debt with high credit in order to minimize risk. We may, however, invest in lower-rated debt as long as we are comfortable that future returns will be significant on a risk-adjusted basis. The fund currently has an average credit rating of AA-. This particular fund does not invest in corporate bonds.
S&P: Where are your largest allocations?
HASENSTAB: On a regional basis, we have about 39.4% of our assets in ‘EMU-Europe’; 15.3% in ‘periphery Europe’ (primarily Scandinavia and the U.K.); 19.0% in the ‘dollar bloc’ (New Zealand, Australia, Canada), 0% in the U.S.; 0% in Japan, 9.5% in Eastern Europe/Africa (primarily Russia, Ukraine, Bulgaria); 8.2% in Latin America (mostly Mexico, Venezuela, Colombia); and 7.6% in Asia (mostly in Philippines, Thailand, South Korea). Our portfolio is spread out over about 30 countries.
S&P: How has your regional allocation changed over the past year?
HASENSTAB: Over the past 12 months, we have been buying up bonds issued by the dollar bloc and Scandinavian countries, as well as some smaller Asian countries like Thailand and South Korea. We have trimmed back some of our European holdings, but we still maintain an overweight position in the euro zone.
S&P: Must you by mandate limit your emerging markets exposure?
HASENSTAB: We have no limits on how much we can invest in the emerging markets. However, we have typically kept a ‘strategic allocation’ of between 15% to 20% there.
Within the emerging markets, we place heavier emphasis on nations with strong fundamentals and good credit profiles, like Mexico and Russia. We tend to minimize our exposure to highly volatile and credit-distressed markets like Argentina and Uruguay.
S&P: Some emerging markets’ debt have been upgraded to investment-grade status (e.g., Mexico, Poland). Any thoughts?
HASENSTAB: Although a number of emerging markets have been upgraded, for the sector, as a whole, credit risk remains highly dispersed with respect to sovereign credit, and sensitive to such elements as domestic political crises, and fluctuations in the global markets, etc. Therefore, country-specific selection and research is extremely important when investing in these markets.
However, an increasing number of cross-over investors have become more comfortable buying emerging markets securities. For one thing, the asset class has grown in size. Ten years ago, emerging markets essentially meant Mexico, Brazil and Argentina, and that was it. Now, you can invest across the globe since the breadth of possible investments has deepened. Also, the investor base has broadened: Aside from hedge funds, we are seeing pension funds, mutual funds, and insurance funds purchasing emerging markets securities.
S&P: What do you attribute the fund’s recent outperformance to?
HASENSTAB: I would cite the strong contribution of our emerging markets allocation. But, more importantly, I would cite our deft country and currency selection among the developed world. For example, we have had an overweight position in New Zealand, which isn’t even in most global bond indices.
We’ve also prospered from having little or no positions in Japanese and U.S. bonds.