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Templeton Global Bond Is Not for the Faint of Heart

We’re maintaining our Gold rating on Michael Hasenstab's fund, which is among the boldest world-bond funds we cover. 

Karin Anderson, 11/06/2016

The following is our latest Fund Analyst Report for Templeton Global Bond TPINX. Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

Templeton Global Bond is among the boldest entrants in the world-bond Morningstar Category. 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. And its shorts on the yen and euro are a significant drag when those currencies strengthen against the U.S. dollar. However, 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, the fund's consistent approach, and reasonable fees earn this fund a Morningstar Analyst Rating of Gold.

The fund has almost no exposure to the debt of the United States, eurozone, and Japan, which dominate most peer funds' portfolios. It also stands out for its significant, and longtime, bets against the euro and yen which Hasenstab believes are set to weaken on the back of further quantitative easing. Instead, he has preferred emerging-markets issues and currencies (roughly two thirds of debt exposure and four fifths of currency exposure as of August 2016) given what he views as those countries' better fiscal prospects. Where the fund looks less daring, however, is its interest-rate risk. Hasenstab believes global inflation pressures could lead to permanent loss of capital, which led him to further reduce duration to 0.2 years as of August down from roughly one year in late 2014.

Hasenstab has also shown a 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 bought up even shakier Hungarian debt. As Mexican and Brazilian debt sold off in 2015's third quarter, Hasenstab took the fund's stakes in those countries and their currencies up by several percentage points by the end of the year. Moves like that have led to sharp, short-term sell-offs, but over time, long-term-focused investors have been amply rewarded. Since Hasenstab took over as lead manager in December 2006 through September 2016, the fund's 6.1% annualized return ranked second out of 46 distinct peers.

Process Pillar: Positive | Karin Anderson 10/31/2016 
Michael Hasenstab doesn't construct this portfolio with traditional issuance-weighted global-bond benchmarks in mind, which are skewed toward the world's most indebted developed markets. Instead, he 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 contrarian-minded group attempts to find those opportunities early on and then watch as their 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 established a position in Ireland's government debt, arguing that Irish authorities had made strides toward fiscal sustainability that were not priced in.

The fund's significant and patient currency bets distinguish it, as well. Since late 2009, Hasenstab has maintained a short Japanese yen position (39% as of August 2016) as a hedge against an eventual rise in U.S. interest rates and a strengthening U.S. dollar. Over the same time frame he's shorted the euro, a position that stood at the higher end of its historical range (46%) reflecting the team's views that the ECB would continue in its program of quantitative easing. Overall, the fund's patient approach and the manager's eye for value earn a Positive Process rating.

Manager Michael Hasenstab has generally avoided low-yielding sovereign bonds of developed countries hindered by overindebtedness and has focused on emerging-markets debt and currencies. As of August 2016, roughly two thirds of the fund's debt exposure was in emerging markets while around four fifths of its currency exposure came from the developing world. He continues to emphasize well-run economies with direct and indirect exposure to China's economic strength in Asia (South Korea, Indonesia, and India). Controversial positions are also common here: Hasenstab built positions in Ireland and Hungary in 2011 when both faced significant headwinds, and he stuck with a low-single-digit stake in conflict-torn Ukraine in 2014 and into 2015 as the country restructured its debt and still holds the position (5%).

Another defining trait of the fund in recent years has been 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 below two years since early 2011, and reduced it even further to 0.2 years as of August 2016. Over the past few years, around one third of its assets were invested in bonds maturing within one year while the fund's cash level has clocked in at a midteens to high-20% stake.

Performance Pillar: Positive | Karin Anderson 10/31/2016 
The fund courts ample individual country and currency risk, and its emerging-markets skew has hurt it when those bonds and currencies sell off: Its 8% loss during 2011's third quarter and 11% 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. That said, the fund has other levers to pull. Its short duration (under two years) helped land it in the category's top decile in 2013. And in 2014, the fund's significant shorts on the yen and euro helped as those currencies weakened relative to the U.S. dollar, providing some insulation from weakness in its emerging-markets positions.

The fund's key themes have been working against it since mid-2015, as the dollar has weakened versus the yen and euro, interest rates have stayed low, and emerging-markets sold off from July 2015 to early 2016. Its recent slump has weighed heavily on its three-year record, but manager 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. Since taking over as lead manager in December 2006 through September 2016, the fund's 6.1% annualized return ranked second out of 46 distinct peers, supporting a Positive Performance rating.

People Pillar: Positive | Karin Anderson 10/31/2016 
In the spring of 2015, manager Michael Hasenstab became Franklin Templeton's Global Macro CIO, a move that distinguishes 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 and starting as a comanager on this fund. He became the sole manager on this fund in 2006. 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 in 2011, though Hasenstab makes all final portfolio decisions. 

The firm manages roughly $150 billion in global fixed-income, the majority of which is managed by Hasenstab's team. The core team of portfolio managers and six country analysts are 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 team's ample experience and resources, as well as the managers' significant investments in the funds they manage, support a Positive People Pillar rating.

Parent Pillar: Positive | 08/10/2015 
Public since 1971 and traded on the New York Stock Exchange since 1986, Franklin Resources is the parent company of Franklin Templeton Investments. Now a global asset manager with $866.5 billion in assets as of June 2015, the California-based firm has offices in more than 35 countries. That its assets are almost evenly split between fixed-income and equity strategies points to balance achieved through multiple acquisitions over the years, including major purchases in the 1990s of the Templeton and Mutual Series lineups.

The firm's "Ben Head" logo symbolizes what is in reality a diverse group of fund families. While they share back-office functions, the freedom to run their own strategies extends to hiring and training. This combination of support mixed with autonomy has led to above-average manager retention and investment as well as solid long-term performance, while keeping fees mostly in check. Credit goes to the Johnson family, whose members have led the firm since its 1947 founding, and an engaged board divided into three clusters.

To be sure, the firm's strengths have the potential to work against it. Steady leadership by the Johnsons concentrates power in the hands of a few, while managers' freedom can lead to risky bets in places like Ukraine and Puerto Rico. Overall, the firm's merits stand out, earning it a Positive Parent Pillar rating.

Price Pillar: Positive | Karin Anderson 10/31/2016 
Investors in the Advisor shares pay 0.63% annually, which is reasonable when compared with the 71-basis-point median fee in the institutional sales channel. That levy looks especially favorable when compared with the 1.10% median fee in the no-load sales channel. (Investors with access to the Advisor shares through an advisory fee-based account can get in with no minimum initial investment.) Compared with other world-bond fund front-load share classes, this fund's 0.88% annual expense ratio was one of the lowest in that distribution channel. Therefore, the fund receives a Positive Price Pillar rating.

 

Karin Anderson is a senior mutual fund analyst with Morningstar.

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