Franklin Templeton’s Hasenstab Sees Buying Opportunity in Bonds, Currencies

currency imageBy Min Zeng

Bond fund manager Michael Hasenstab said battered emerging-market bonds and currencies present a buying opportunity after a frenzied selloff in May and June.

Mr. Hasenstab, manager of the $70.1 billion Templeton Global Bond Fund (TPINX) at Franklin Templeton Investments, said concerns that a pull back by the Federal Reserve of monetary stimulus will undermine the growth of emerging-market nations are overblown.

“The fear that the Fed tapering equates to a level of monetary policy tightening that would squeeze emerging markets is incorrect,” said Mr. Hasenstab in a phone interview with The Wall Street Journal. His bond fund, with a heavy focus on investments outside the U.S., is one of the world’s biggest by assets.

Emerging-market bonds and currencies were among the hardest hit in June amid a global market reshuffle. Many of these markets have been among the biggest beneficiaries since the 2008 financial crisis as the Fed’s easy policy, together with a major economic slump, sent interest rates tumbling and drove investors to seek out higher-yielding assets.

On Tuesday, the International Monetary Fund cut its global economic growth outlook for this year and next, saying the prospect of the Fed unwinding its easy-money policy is aggravating a slowdown in emerging markets.

Mr. Hasenstab disagreed.

He argued that even as the Fed dials back its bond-buying program from the current $85 billion per month, the Bank of Japan is picking up the slack. The bank ramped up its easy policy in April.

“Global liquidity is as loose as ever,” said Mr. Hasenstab, adding that emerging-market nations now have lower levels of debt compared to a decade ago, when they heavily relied on liquidity from the U.S. for funding.

Still, Mr. Hasenstab has been buying very short-dated government bonds in emerging markets–those maturing in two years or less–as a way to cushion his portfolio from the broad rise in bond yields. Bond prices fall when yields rise.

“We are buying very short-dated local currency government bonds or just the local currency which minimize impact from rising yields globally,” said Mr. Hasenstab.

In the interview, Mr. Hasenstab didn’t specify whether he has already scooped up emerging-market bonds in the past week as emerging markets have shown some signs of stabilization, citing company policy.

But he highlighted four countries as favorites: Korea, Singapore, Malaysia and Mexico.

While he is bearish on the U.S. dollar against many emerging-market currencies, Mr. Hasenstab said he would continue to wager that the dollar will rally more against the euro and the yen in the next couple of years.

The Fed is going to pull back its monetary stimulus while the Bank of Japan and the European Central Bank remain in accommodative mode, said Mr. Hasenstab. Loose monetary policy typically dims the allure of a currency as investors seek alternatives for higher returns.

Mr. Hasenstab said concentrating on shorter-dated bonds and a rallying dollar have helped cushion the fund’s losses.

His fund lost 2.78% in the second quarter as the broad market turmoil hit bond funds broadly, but it outperformed the benchmark, the Citigroup World Government Bond Index, which lost 2.97%, according to Morningstar.

Mr. Hasenstab’s fund handed investors a loss of 0.94% this year through Tuesday, but still ahead of its benchmark, which lost 6.73% over the same period, according to Morningstar.

Mr. Hasenstab’s fund posted an annualized return of 8.58% in the past 15 years as of Tuesday, outpacing 5.33% gain on the benchmark index and beating 98% of its peers, according to Morningstar.

The outperformance has helped the fund to lure in new clients in May even as many other bond funds suffered outflows.

Mr. Hasenstab’s fund took in $1.07 billion new cash in May, bringing in the total net inflow for 2013 to $5.62 billion, according to Morningstar. This year’s inflow through May already surpassed the total inflow of $2.1 billion in 2012, according to Morningstar.

The fund’s June flow data isn’t available until later this month, said Morningstar. Bond funds suffered a record outflow of over $60 billion in June, according to estimates from Investment Company Institute.

In the interview, Mr. Hasenstab also addressed concerns about his exposure to Irish government bonds.

He is the biggest holder of the nation’s sovereign bonds and some investors have fretted over the past year that this could make the fund vulnerable to losses if the Irish market seizes up, amid weak European growth and fears that stretched European nations could require additional financial support.

Mr. Hasenstab argued that Irish government bonds account for less than 10% of his bond portfolio, and that his portfolio is diversified enough to fend off potential market stress.

“We have gone through volatility periods, and we don’t need to sell in a stressed market,” said Mr. Hasenstab. “That gives us a lot of flexibility.”

Mr. Hasenstab said he hasn’t added more Irish bonds into the portfolio in recent months but he added that the market has good value.

“We still think Ireland has strong ability to repay its debt,” said Mr. Hasenstab. “We are quite comfortable on our holdings there.”

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