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By Christine Benz | 09-09-2011 12:33 PM

Templeton Global Bond Is No Ballast

Its long-term potential is bright, but investors looking for an anchor in volatile times might be disappointed in the fund, says Morningstar's Miriam Sjoblom.

Christine Benz: Hi, I am Christine Benz for Morningstar.com. Templeton Global Bond has been one of the fund world's biggest asset gatherers during the past few years, but it's still far from mainstream. Here to discuss the fund's current positioning and what could go wrong is associate director of fund analysis, Miriam Sjoblom.

Miriam, thank you so much for being here.

Miriam Sjoblom: Good to be here, Christine.

Benz: So, Miriam, Templeton Global Bond assets have gone from something like $20 billion to $62 billion in a short period of time. Do you think investors are responding mainly to performance?

Sjoblom: Well, it's tough to say exactly, but this fund has really just been dominating, not only the world bond-fund category, but all other funds so far this year in terms of the amount of inflows it's been getting.

It's hard to imagine that investors aren't looking at what is a great record. During the past five years alone, the fund is the top-performing fund in the world-bond category, gaining 11.6%, and it has shown very impressive results. Not only that, but Michael Hasenstab, the manager, has been very good at managing the risk of the fund, as well. So, you've got moderate volatility plus a great total return. I think, it's hard to imagine investors aren't just seeing great returns and piling in.

Benz: Right, but you've also noted that the correlation with other asset classes that people might hold has also historically been pretty low, so it's been a good diversifier?

Sjoblom: That's right. Especially lately, people are concerned about the U.S. Treasury market, even though it's continued to do very well again this year, especially in recent months. But this correlation with the Barclays U.S. Treasury Index, for example, has been zero during the last couple of years.

Benz: One thing that you've been talking about, you want investors newly arrived in this fund to know how different it is and also they should be aware that the fund is taking some pretty big bets that put it at odds with some of its competitors. Let's talk about some of those?

Sjoblom: Sure. Well, just to start, I think, whenever we see a huge amount of inflows into a fund very quickly, we get a little concerned that investors might not be in it for the long term, and they are just kind of chasing that great record, and if there is a bout of underperformance that they might not stick around. And I think understanding its idiosyncratic style is really important to be able to be a successful long-term investor in this fund.

So, I think, the big benchmark constituents for a global-bond fund, and you're talking about Japan, the U.S., countries in the eurozone, especially Italy, France, Germany…

Benz: U.K.

Sjoblom: …these are the world's most indebted countries. So, a more traditional approach tends to manage against this benchmark which might be flawed in some way, and that's a principle that Hasenstab has applied to running this fund. He doesn't want to have exposure to the most indebted economies in the world.

So, as a result you see positions that aren't very big in the index. They are very small in the index or not in the index at all, such as South Korea, Australia, Malaysia, Poland, and Scandinavian countries. These don't have very large representations in indexes and in many peers, and there's good fundamental sense for that. These are not highly indebted countries. They have responsible fiscal and monetary policy, yet it can still mean that the fund may not always act the way other funds do.

Benz: Right, and it sounds like a lot of the positions that you mentioned converge around the theme of trying to make a play on China and China's long-term growth. What's the thesis there?

Sjoblom: That's right. Well, he's a big believer in China and in the growth story there that even as growth is slowing and some commentators are concerned about a hard landing in China, Hasenstab doesn't see that happening. He thinks growth does need to moderate in China and other parts of Asia and he thinks that that's a good sign to the extent that policymakers can stay ahead of the curve in terms of fighting off inflation or what have you. He really thinks that so far what he's seeing there is promising.

So, the fund has a lot of exposure to Asian currencies, not to China directly, but to China's trade partners, such as South Korea, Malaysia, and Australia , that will benefit from the growth in China. And he's also been very concerned about interest-rate risk globally, not just here in the U.S. where Treasuries offer absolutely no value and have a lot of risk right now. He really thinks interest rates across the globe are set to rise at some point, and so he has taken the interest-rate exposure really low. So, he owns a lot of short-term bonds, and when rates rally as we've seen them do recently, this fund is going to lag.

Benz: So it's almost like he's trying to do a pure reflection of his view on the direction of these currencies but not pick up the interest-rate fluctuations?

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