This article was published in the April issue of Citywire Americas with quotes dating back to the end of February. Views and outlooks may have changed since publication.
The title ‘Bond King’ is thrown around by markets to champion both outperformers and those packing the biggest punch in asset terms.
Back in April 2011, Franklin Templeton’s Michael Hasenstab was gaining a reputation for savvy macro calls, consistent outperformance and was hotly tipped in these pages as the pretender to the then-PIMCO power player Bill Gross’s throne.
Gross has since made headlines in and out of markets, and Doubleline Capital founder Jeffrey Gundlach has also emerged as a new frontrunner, but Hasenstab has held the spotlight for his bets on beaten-up markets such as Ireland and Ukraine.
The San Mateo-based manager, who is CIO of the Templeton Global Macro group and oversees billions of dollars across a host of fixed income funds, was delivering strong returns with these large-scale contrarian calls.
However, the tables have turned sharply over the past year or so, particularly in the Templeton Global Bond fund, which is the $25 billion Ucits-compliant version of the world-renowned $50 billion US-domiciled fund.
The strategy, which Hasenstab co-runs with Sonal Desai, lost 10.2% in the 12 months to the end of February, versus a 2.7% rise by its Citywire-assigned benchmark, the JP Morgan Global GBI Unhedged.
The damage extends to the three-year numbers, where the index rose 0.3% and the fund lost 8.49%.
Speaking to Citywire while on one of his many global trips, Hasenstab is unfazed by the headwinds currently impeding performance that have triggered outflows from some of his most well-known strategies.
‘Certainly there have been challenges in the current market environment,’ he says. ‘Exceptionally weak emerging market currencies, strong US treasuries, and a strong euro and yen have hit short-term performance.’
Hasenstab attributes some of his fund’s problems to its heavy tilt towards emerging economies, with all 10 of the portfolio’s largest country allocations designated as developing world debt markets.
Given the volatility seen in this space over the past 12 months, it’s no surprise Hasenstab’s performance has been hit, with his weighty exposure to countries such as Brazil, Indonesia and Ukraine.
But the manager is keeping faith. ‘We believe there is a significant disconnect between current market pessimism and underlying global fundamentals,’ says Hasenstab, who has twice this year championed ‘once in a decade’ opportunities in the emerging world.
‘Markets have reacted as if conditions are worse than the 2008 global financial crisis, or the Asian financial crisis of 1997 and 1998, yet several emerging market countries are in far better shape with larger foreign reserves and more diversified, growing economies.
‘The risk aversion across emerging markets appears to have reached a maximum state of unwarranted pessimism, in our view, and we see a vast set of valuation opportunities amid the volatility.’
Keep it contrarian
This negative sentiment hasn’t forced Hasenstab to materially change the focus of the global bond fund. In fact, his only notable shift has been to remove all exposure to Ireland after stating the market had delivered significant returns since he first piled into its government debt five years ago.
‘In recent quarters we have been shifting out of the markets that we were previously contrarian on, that were once distressed but have now recovered and become consensus. Certainly, Ireland is the prime example; bond yields are down to just over 1% from more than 14% in 2011.
‘We’ve been moving out of those positions and into new opportunities. We are currently focused primarily on two sub-sets of potential: 1) countries with solid fundamentals that are being priced as if they are in a crisis, such as Mexico, Malaysia, Indonesia, and the Philippines; and 2) distressed special situations that are in crisis but that we see having a path for exiting that crisis over the medium term, such as Brazil.’
Speaking to Citywire in June last year, Hasenstab talked of bringing duration in the fund close to zero, but also building a cash ‘war chest’ to help navigate the uncertainty and exploit future opportunities in a rising rates environment.
He currently holds 9% in cash or cash equivalents and continues to advocate patience despite near-term volatility. ‘When investing globally many opportunities may take time to materialize, which requires weathering short-term volatility as the longer-term investing theses develop,’ he says.
But not all of Hasenstab’s investors have shared his willingness to absorb losses now for potential gains ahead. The Luxembourg version of the fund has shed roughly $7 billion over the past 12 months, according to Citywire data, having originally entered 2015 with $32.6 billion in assets.
‘It is always darkest before the dawn; unfortunately some investors do panic during that period and miss out on meaningful re-valuations once the sun rises.
‘In general, we’ve continued to recommend patience and an objective assessment of the underlying fundamentals, resisting the understandable impulse to overreact to near-term volatility, to exploit these once in a decade opportunities,’ he says.
Playing markets in transition
Hasenstab, however, believes general investor caution reflects wider uncertainty over global bonds, with low yields, unorthodox central bank policies and emerging market concerns continuing to undermine any optimism.
‘Conditions right now feel a lot like they did back in 2008 and 2009, when we were buying into emerging markets that were completely out of favor with the entire investor base.
‘Although there are similarities to what we saw then, there was even more uncertainty at the time, in terms of the global macro outlook. In those years we were buying into the volatility across the board, including places such as South Korea, Indonesia, Argentina, Lithuania, Latvia, Venezuela and Russia, among others.
‘Today, by contrast, the sub-set of opportunities that we find value in is a lot narrower. The magnitudes and market dislocations are similar today, but the actual investments are somewhat different; not all emerging markets are currently attractive.’
For Hasenstab the twin powers of China and the US will continue to bear on his global bond fund, perhaps more so than his peers who operate with a more developed world emphasis.
‘Markets are currently in a state of transition from a period of high commodity prices to low prices, from zero interest rates in the US to rising rates, and from China growing at double-digits to moderating and rebalancing its economy.
‘This has caused volatility, but we see an eventual improvement in market sentiment over China’s economy, stabilizing commodity prices and the global impact of US rate hikes.
‘It’s difficult to predict the exact timing of market stabilizations, but we believe we’re getting closer to an inflection point on both the underlying data and valuations. When we reach these stages, we believe investors will be able to see the underlying story more clearly and recognize that these markets were over-sold,’ he says.