Templeton Global Bond Fund‧Morningstar Fund Awards 2010 Special Editorial

Templeton Global Bond Fund

Morningstar Fund Award Winning History of Templeton Global Bond Fund

-        2010 Global Bond

-        2008 Dollar Bond

In the eyes of the general investors, the prospect of investing in bond market was gloomy in 2010. The slackened economic growth and unsolved European debt crisis were the main factors that drive the pessimism. But investors should bear in mind that one of the most important investment theories is to understand and diversify the risk properly. Investors can build a diversified bond portfolio with global bond funds. For the year 2010, Templeton Global Bond Fund is the winner of Morningstar Fund Award Global Bond Category.

Performance

Templeton Global Bond Fund gained 11.66% in 2010, a double of its peer group average, ranked in the top deciles. Its long term performance is also inspiring. The fund’s 3-, 5-, 10- and even 15-years were all sitting in the best quartile among its rivals.

Key to Success

Morningstar analysts think very highly of Michael Hasenstab, lead manager of the fund and Co-Director (International Bonds) of the Franklin Templeton Fixed Income Group. With his wealth of experiences, Hasenstab took the helm of this fund in 2002. On the other hand, Hasenstab also invests his own money in the US version of this fund. Both his tenure and the investment decision show his commitment to the fund. Hasenstab’s expertise in macroeconomic analysis is a cornerstone of the investment process. Besides, the large and well-resourced research team with local presence backing the manager is also the mainstay of the fund’s success.

Flexibility in portfolio construction allows Hasenstab to pursue the most attractive opportunities around the world. Hasenstab is willing to take large off-benchmark positions and therefore the fund is tilted to emerging markets when compared with its benchmark index and peers in Global Bond category. As at June-end 2011, the fund highest conviction holdings were emerging markets currencies, while it had no exposure to U.S. Treasuries or Japanese government bonds, and minimal exposure to Eurozone government bonds.

What contributed to the performance in 2010 are the interest rate opportunities, currencies and sovereign credit. “We favoured the currencies of rapidly recovering economies in both developed and emerging economies. Our select sovereign credit exposures performed well, and defensive duration positioning outside of a small group of emerging markets cushioned the portfolios from rising bond yields in the fourth quarter.” Hasenstab said.

Focuses

We appreciate the team’s medium to long-term focus and its strategic outlook for bond markets. That said, despite the long-term focus, the manager reacts very quickly if his views change. For instance, the team modified the portfolio’s duration swiftly during the outburst of European debt crisis. Hasenstab added US duration aggressively to nearly 6 years in 2009, but quickly cut the duration through early 2011 since he couldn’t find good value in government bonds given his expectation of interest rate rise around the globe.

The fund captures growth in three areas including interest rate, currencies and sovereign credit. How will Hasenstab construct the portfolio under the situation of rising bond yields and inflation threat? “Many people think that a rising interest rate environment means that all fixed income assets will suffer, which is not entirely true. While rising rates probably mean that buying 10-year U.S. government bonds may not be a particularly good investment, we see attractive opportunities in global fixed income even with higher interest rates, both in currencies and credit markets.” In response to the rising rate environment, the manager maintains defensive duration positioning outside of a select few economies where they feel the likely extent of monetary tightening is already priced in and long term yields should come down over time as a result of improved monetary and fiscal policy reducing risk premiums. Consequently, the manager has reduced the portfolio’s overall average duration exposure of less than two years, in contrast to the JP Morgan Global Government Bond Index’s 6.3 years. Hasenstab also claimed that they have found several short duration opportunities that offer relatively high yields in countries with high credit quality. 

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We may see the fund continued to be emerging markets tilted with Hasenstab’s positive long-term outlook for emerging markets. And investors should note that the fund is likely to be more volatile than its peers and benchmark given the manager’s willingness of taking large off-benchmark bets. Also, emerging markets bonds and currencies are more volatile by nature. Having said that, the fund’s impeccable performance has proven its qualities.