Should Shareholders Be Worried About Templeton’s Ukraine Bet?

Michael Hasenstab is no stranger to controversy.

Gregg Wolper 30.05.2014
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It almost sounds like a joke: Would you like to buy bonds from a country with dicey finances, a shaky government, and hostile troops massed on its border?

Michael Hasenstab would. Should his fund's shareholders be concerned?

Hasenstab is the manager of Templeton Global Bond, a $70 billion behemoth that has attracted notice in recent years for its asset growth, its excellent long-term record, and its manager's willingness to invest heavily in countries making headlines for worrisome reasons.

Currently the spotlight is on Ukraine. Hasenstab has owned this country's bonds for several years, but only recently has the stake drawn attention from media and investors. Though the vast majority of Templeton Global Bond's shareholders have stayed put, the retail share classes have seen meaningful net outflows in 2014. Only the shareholders or their advisors know why, but that's quite a turnaround from previous years when money poured in, and it's not hard to imagine investor concern over Ukraine playing a role.

In its Feb. 28, 2014, semiannual report, the fund listed a 4.6% stake in Ukraine bonds, all issued by the government or (in one case) a government-related agency. While neither Hasenstab nor Franklin Templeton has said much publicly about that, they apparently felt the glare of attention, for in April they released a video of Hasenstab walking the streets of Kiev touting the attractions of the country and his investment in it. He added a bit to the position when the prices of Ukraine's bonds declined (they've gyrated up and down this year), but the percentage of the portfolio devoted to that stake still lands in the mid-single digits.

A Cause for Concern?
It's beyond the scope (and ability) of this column to assess the merits of Ukraine's bonds. But in reality, such as assessment isn't necessary to make, either for shareholders or for outside observers evaluating the fund. The more pertinent questions are: Is this action in keeping with the manager's and the fund's strategy over time?  If so, has that approach paid off in the past? And more simply, as a shareholder, do you trust your manager to make such judgments?

There's little doubt that owning Ukraine bonds fits with Hasenstab's history. He has never paid much attention to benchmarks and typically has owned an uncommon portfolio dotted with controversial holdings. Most notably, he bought copious amounts of Ireland's government debt in 2011, when that country's finances were in dismal shape and global investors had sold its bonds in droves. That play has worked out tremendously well thus far. That year he took substantial positions in Hungary as well, whose finances are also criticized by many. Several years ago he took the view that a China slowdown would be moderate rather than rapid and destabilizing and positioned the portfolio decisively in that direction, including many of its trading partners. That was not a unique opinion at the time, but it was far from universal.

Has this unusual strategy worked? The record speaks for itself. Templeton Global Bond has beaten more than three fourths of its global-bond category rivals over the five-year period through April, 2014, and is in the second percentile over the 10-year period. Those records weren't built only on distant glory, either: The fund landed in the category's top quartile in both 2012 and 2013.

The global-bond category contains funds using many different strategies, so comparisons and rankings sometimes aren't as meaningful as they may seem, but with these rankings it would be tough to argue this fund has been anything but a success.

The last question, though, is also critical. If you hand your money to others to invest, it only makes sense that you trust their judgment--otherwise you wouldn't have invested with them in the first place. If so, that confidence has to extend to controversial or questionable holdings. Or at least it does if--as in this case--the manager is sticking to a time-tested process and that process has proven its worth.

Of course, that doesn't mean this Ukraine bet will inevitably pay off. Every situation is different, and even top managers make mistakes. But such managers should be granted the leeway to make their own decisions.

Much More to Consider
A look at Templeton Global Bond's entire portfolio illustrates why questioning its Ukraine play might be beside the point. For that position is just one of many that mark this portfolio as bold and unorthodox.

Most notably, Hasenstab has adopted a very cautious interest-rate stance. Expecting rates to rise, he's kept the fund to a short duration (meaning it isn't unduly exposed to losses if rates climb). That stance could backfire if rates continue to fall. Considering the makeup of the major global bond indexes flawed, he also massively underweights the U.S. and major eurozone countries in favor of emerging-markets positions, including many in Asia.

Additionally, Hasenstab holds strong opinions on currencies. For example, at the end of February, the fund was shorting the yen and euro to substantial degrees. (The semiannual report's roster of currency contracts runs to 14 pages.) In fact, as with many global bond funds, Hasenstab's currency decisions can affect performance as much as his choice of issuer. Interestingly, Ukraine doesn't figure here; the fund has no direct exposure to its currency. (Its Ukrainian bonds are U.S.-dollar-denominated save for one issue in euros.)

Templeton Global Bond is much bigger than it used to be, and it's getting far more attention from shareholders and media. Its past achievements don't guarantee future success. But the strategy remains largely the same, and the manager remains committed to it. In short, whether or not Hasenstab is right on Ukraine, he's been going against the grain for years. Concerns should arise if he stopped doing so. But those who bought into this fund's unconventional approach have no reason to jump ship now.

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Gregg Wolper  Gregg Wolper is an editorial director and senior mutual-fund analyst at Morningstar.

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