This Global Bond Fund Buys What the Market Shuns
Courting ample currency and credit risk, Silver-rated Templeton Global Total Return shuns interest-rate risk, given skipper Michael Hasenstab's concerns about global inflation.
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Templeton Global Total Return benefits from a skilled lead manager and analyst bench as well as a consistent approach, supporting a Morningstar Analyst Rating of Silver.
For years, lead manager Michael Hasenstab has mostly avoided low-yielding debt of the United States, 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 longtime portfolio anchors South Korea (10%) and Indonesia (8%), as well as the more recent additions of Mexico (16%) and Brazil (15%). As Mexican and Brazilian debt sold off in 2015's third quarter, Hasenstab significantly built out those positions. Over time, he's 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.
The fund also stands out from the crowd because of significant and longtime bets against the yen (36% as of July 2017) and euro (39%) that are meant to serve as a hedge against rises in U.S. interest rates, which would hurt emerging-markets bonds. 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, the fund's duration ran around one year in 2013 and 2014, already a very low level within the Morningstar Category, but it has run close to zero since late 2015.
The fund's cautious tack on interest rates and its currency hedges have held it back at various times in recent years, and 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. Still, patient investors remain in good hands given the manager's knack for finding long-term winners. From the fund's 2008 inception through September 2017, its 8.2% annualized return was nearly double the category median.
Process Pillar: Positive | Karin Anderson 10/19/2017
Michael 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 watch as its theses unfold over several years. The fund has held a double-digit stake in South Korea's government bonds since 2004, for example. Hasenstab doesn't require fiscal perfection, just improving trends. In the depths of 2011's eurozone crisis, he built a position in Ireland's government debt, arguing that Irish authorities had made strides toward fiscal sustainability that were not priced in. This fund takes more risk than its government-only sibling, Templeton Global Bond (TPINX), holding up to a third of assets in corporate bonds (it doesn't have any now because of valuation concerns).
The fund's significant and patient currency bets distinguish it, as well. Since late 2009, Hasenstab has maintained sizable shorts on the Japanese yen and the euro (up to 40% to 50% each) as a hedge against a strengthening U.S. dollar that would hurt emerging-markets local-currency bonds. Overall, the fund's patient approach and the manager's eye for value earn a Positive Process rating.
The team has generally avoided low-yielding developed-markets sovereign bonds and favored emerging-markets countries deemed to have good long-term prospects. Because the team is more cautious about China's growth potential compared with years past, it recently sold longtime Malaysia holdings and rotated into Indonesia and India, which it views as less dependent on China. Those stakes, along with exposure to South Korea, accounted for 30% of assets as of July 2017. The team also does a fair amount of bargain-hunting. Notably, it built midteen stakes in Brazil and Mexico in 2015's third-quarter sell-off. The team is sticking with larger stakes (15% to 16% apiece) in part because it believes that Mexico's conservative central bank is keeping an eye on inflation and that much-needed reforms are under way in Brazil whether or not the current president remains in place.
Another defining trait in recent years has been Michael Hasenstab's focus on short-dated bonds. Arguing that the loose monetary policy maintained by the developed world's central banks should ultimately unleash inflationary pressures globally, he's maintained the fund's duration close to zero over the past three years. He's also maintained a short yen position (36% as of July 2017), and he's shorted the euro (39%), reflecting the team's views that the Bank of Japan and European Central Bank would need to maintain quantitative easing for longer than the U.S.
Performance Pillar: Positive | Karin Anderson 10/19/2017
Michael Hasenstab's often-contrarian approach, patience, and knack for finding value in emerging-markets bonds and currencies has paid off over the longer term. From the fund's 2008 inception through September 2017, its 8.2% annualized return ranked first out of 53 distinct peers, supporting a Positive Performance rating.
That said, the fund courts ample emerging-markets rate and currency risk, which has smacked it during risk-averse markets. Its 8% loss during 2011’s third quarter and 10% slide from July 2015 through early February 2016 were among the worst in the world-bond peer group. Conversely, the fund tends to rise to the top of the heap when emerging-markets bonds fare well, as was the case in 2012 when it climbed by 19%. Such seesawing within the category has kept the fund's volatility (as measured by standard deviation) higher than 90% of its peers.
While the manager has been successful over the long term, it's important to note that the fund's key themes have worked against it at times and can weigh on results in the medium term. Its short duration (close to zero for the past few years) has weighed on the fund in periods of stable rates, and its significant shorts on the yen and euro have hurt when those currencies strengthen relative to the U.S. dollar, as was the case over the first nine months of 2017.
People Pillar: Positive | Karin Anderson 10/19/2017
In the spring of 2015, manager Michael Hasenstab became Franklin Templeton's global macro CIO, a move that separates Hasenstab's team and funds from the firm's taxable-bond group. He began his career at the firm in 1995 as an emerging-markets sovereign credit analyst, then left to get a doctorate in economics from Australian National University, before rejoining the firm in 2001. Hasenstab has run this fund since its 2008 inception. Sonal Desai, who conducted macroeconomic research at London hedge fund Thames River Capital, joined the group as its research director in late 2009 and became comanager on this fund in 2011.
The core team of portfolio managers and six country analysts is based in San Mateo, California. Five of these analysts have been on the team for more than five years, while one was replaced with an experienced hire in early 2016. This team hits the pavement when conducting its country research, meeting with local policymakers, business leaders, and journalists. The group also draws upon the work of the firm's 26 corporate research analysts who do much of the work filling out the fund's corporate stake when the managers find that space attractively valued. The team's ample experience and resources, as well as the managers' significant investments in the funds they run, support a Positive People Pillar rating.
Parent Pillar: Positive | 04/18/2017
Publicly traded but family controlled and managed, Franklin Resources (BEN) is the parent company of Franklin Templeton Investments. A global asset manager with $738 billion in assets as of early 2017, the firm has grown through multiple acquisitions over the years.
Franklin’s recent struggles highlight, albeit to an extreme, the challenges facing active management. Between mid-2014 and early 2016, the firm’s AUM fell by more than one fifth as investors increasingly opted for passive strategies and flagships like Franklin Income (FKINX) performed poorly. Franklin responded by cutting 300 personnel worldwide and launching seven exchange-traded funds in the United States, four of which passively track customized benchmarks built using a proprietary multifactor model for each.
The step toward passive investing illustrates the firm’s tendency to add to its investment capabilities rather than foster excellence across its lineup. The firm’s U.S. strategies are the most wide-ranging, and of the 36 U.S. open- and closed-end funds with a Morningstar Analyst Rating, half are Neutral. On the fixed-income side, although Templeton Global Bond remains a standout, the firm’s other taxable- and municipal-bond strategies have had missteps, including ill-timed bets on energy and Puerto Rico debt. We have downgraded the firm’s Parent Pillar rating to Neutral from Positive.
Price Pillar: Neutral | Karin Anderson 10/19/2017
The largest portion of the fund's assets reside in the Advisor share class, which has a 0.83% annual fee. That fee has come up by a handful of basis points over the past five years, and it lands above the 68-basis-point median fee in the institutional sales channel. That said, investors with access to the Advisor shares through an advisory fee-based account can get in with no minimum initial investment, and the median fee for no-load funds is 0.81%.
Compared with other world-bond fund front-load share classes, this fund's 1.08% annual expense ratio lands near the median. Larger sibling Templeton Global Bond is 15 basis points cheaper. Given that fees for most investors sit fairly close to the median for similarly sold offerings, the fund receives a Neutral Price rating.
Karin Anderson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.