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Hasenstab: What's So Attractive About Ukraine

Karin Anderson

Karin Anderson: I'm Karin Anderson, a senior analyst with Morningstar. I'm here today with Michael Hasenstab, the portfolio manager of Templeton Global Bond.

Michael, thank you for being with us.

Hasenstab: My pleasure.

Anderson: You've invested very heavily in emerging markets in the global bond portfolio for years, and one thing that you and a lot of other managers that look at this space have been talking about lately is the importance of country differentiation right now. Why is that so key now, versus, say 10 or 15 years ago?

Hasenstab: I think it's always been important, first of all, and we've always spent a lot of time and resources to ensure that we understand the differences country by country.

The first objective is really go to these countries, understand the macroeconomic political differences between a Korea and a Turkey or a Mexico and a Brazil. But the second is, then, within those countries to understand there are so many different levers and opportunities as well as risks--the currency side, the interest rate side, the sovereign credit.

When we go into a market, our goal is to be able to isolate the exact source of alpha that we want and hedge out the risks we don't. If you look back over the last five to seven years, our positions in Korea have gone from full hedged to unhedged; they've gone from long duration to short duration. There are a lot of levers to pull, but it requires a fair amount of effort to understand those differences, because the behavior, both of countries and assets within those countries, is quite divergent.

Look at 2013: The best-performing market was Hungary, up over 10%. The worst-performing was Indonesia, down 30%. So, you can't just talk about the asset class. You have to go country by country and within those countries, isolate the different variables.

Anderson: Staying along the emerging-markets theme for a moment… Your Ukraine debt position has gotten a lot of attention lately. What attracted you to it, initially--I believe you added that maybe a few years ago? And where do you stand now given that the election has happened and there has still been a turmoil in the region?

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Hasenstab: Ukraine's a country that we've been interested in for a number of years, and we've picked our spots selectively. Over the last couple of years, Ukraine has gone through periods where they're out of favor with the market and you've had panic-selling and spikes in yields, and so we have cherry-picked those opportunities to accumulate a position.

What attracted us to it was, on the solvency side, Ukraine has very little debt. As a dollar-based investor, we're not taking foreign-exchange risk, we're taking dollar-denominated Ukrainian government bonds, in a country that has 40% debt to GDP. It was never a solvency issue. It was more one of liquidity, and recently with the IMF package, International aid support, Ukraine will access over the next couple of years, because of their good reform agenda, over $30 billion of international assistance. So with solvency intact, with liquidity intact, what we liked was that everyone was just looking at some of the noisy headlines and not going to the country and understanding the underlying fundamentals, and we think long-term it's a good investment opportunity.

Frankly, over the last month, since the elections, we think Ukraine is moving in a much better path. The new president, Poroshenko came in with a very strong mandate, and he has been working to remove Ukraine from this tug-of-war between East and West, create the country as a buffer state in between NATO and Putin, and therefore allow the full potential of the country to really be realized. So, we're quite excited today.

Anderson: And how have those bonds done this year? Everyone is very nervous about them in the press. How have they actually performed?

Hasenstab: Quite well. If we look back on the course of our holdings, we've made a good amount of money through our investments in Ukraine. Bonds were trading in the mid-80s at the low point during certain parts of the years, and are now in many cases close to par. So, we've seen a pretty good recovery. Now, it's a volatile market; it ebbs and flows on a day-by-day basis. But I think we've seen a lot of the naysayers, a lot of the short-sellers out there, have realized that was a mistake, and we've seen a pretty good recovery in the bonds.

Anderson: One last question for you: You've mentioned in the past that you'd rather be early in investing--be it duration risk that you're going to take, currency plays that you're going to put on, maybe a more controversial position--and ride out the rough patches. Why does that give you an edge as a global bond investor?

Hasenstab: Our belief is that markets--whether it's interest rate, currency, credit--over the long-term, they're efficient. In the short-term, they are highly distorted. They are subject to panic, to the weaknesses of human behavior (fear, greed) that lead to excesses.

So our objective is to position for a three- to five-year horizon, when ultimately underlying macroeconomic fundamentals will determine market prices. We have the benefit of that longer-term horizon, which allows us to ride through periods of short-term volatility.

Frankly, if we were just judged on three-month periods or six-month periods, even one-year periods, it'd be very hard to execute a truly unconstrained contrarian strategy. We have the benefit of having that philosophy. Our view is always, we would rather be early than wrong, and ultimately the big payoff is to get the big move, not try to time some of the short-term moves.

So, we will continue to be contrarian. We will continue to be long-term investors. It has served our shareholders well. I don't see it changing.

Anderson: Thanks so much for your time, Michael.

Hasenstab: Thank you very much.