According to Wall Street Journal, Dr. Michael Hasenstab has led the Templeton Global Bond fund to the top of Morningstar’s world-bond category over the past decade.
What is his secrets to success?
He got to Top partly by saying no. “No” to modelling his portfolio after a bond index. In another word, unlike most other fund managers, he ignores his benchmark.
His portfolios of funds in the world-bond category read like a who’s who of countries with debt woes.
Most funds have very little exposure to Greece, which has asked the European Union and International Monetary Fund for help in paying its debts. But the average fund has lots of exposure to other larger countries, whose debt burdens loom large as a percentage of their overall economies. A typical global bond fund have nearly 30% of the typical portfolio in U.S. debt, 9% in Japan, 7% in the U.K. and smatterings in countries such as Spain and Italy.
Why most fund managers under-perform?
Here is the reason. Most fund managers base investment decisions on the composition of the index against which their funds, and often their paychecks, are measured. If managers don’t like a country’s outlook, they’ll usually “underweight” their holdings of its debt relative to the index-but they’ll usually still own some of it.
The problem, is that historically most indexes have been market-weighted, which means they are heavily tilted toward the countries with the most debt. In another word, the fund managers are lending money to the countries with the highest debt.
What is Dr. Hasenstab’s approach?
Dr. Hasenstab’s star fund Templeton Global Bond, a bond fund that invests in government debt, has achieved a 12% average annual return over the past decade. That is quite amazing for a bond fund.
If Dr. Hasenstab and his team don’t like a country’s fiscal and economic outlook, they won’t own its debt. Of late, Templeton Global Bond has held no debt from Japan or the U.K., and no U.S. Treasurys.
Instead, Dr. Hasenstab is more than willing to own big slugs of bonds from countries that have virtually no representation in the fund’s benchmark, the Citigroup World Government Bond Index, as long as they have strong fiscal policies and healthy economies. That’s a move that in most fund companies would have marketing executives complaining about “style drift.” For Dr. Hasenstab it has meant stakes in Brazil, Australia and South Korea.
As the economies of such countries bounce back more strongly than others, their central banks are tightening monetary policy, which isn’t good news for bondholders. But Mr. Hasenstab thinks he has positioned the portfolio to cushion any impact from higher short-term interest rates.
Time will tell on that front. But as a well-known technology company once said, sometimes it pays to “think different.”
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