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Templeton's Hasenstab Runs into Serious Problem With Big Bond Bet
"After loading up on more than $7 billion of the country’s bonds, Hasenstab has seen the value of the securities collapse as the conflict with pro-Russian rebels deepened an economic recession, depleted foreign reserves and prompted government calls for a debt restructuring. His investment, equal to almost half of all Ukraine’s foreign bonds, is now valued at just $4 billion, based on fund holdings from the end of the third and fourth quarters."
Michael Hasenstab is a savy bond manager, but he underestimate the risk of the Ukraine situation that has worsen since his Morningstar's interview. Ironially the same "bet" he had with Irish bonds played off handsomely in 2007-2008. Clearly this bet backfire badly.
"Investors last year pulled a record $14 billion from the U.S. and European versions of the Templeton Global Bond Fund and Templeton Global Total Return Fund, which have a combined $150 billion in assets ..."
Same old. Same old. Money pours in. Money pours out.
If these "in-and-out" investors are making a lot of money in the process, that's fine. I'm all for making a fast buck any way you can as long as you can keep reinvesting it for greater and greater returns. However, all the evidence I've read or viewed on this forum indicates just the opposite. That average fund investors who move in and out of their funds fail to achieve the returns those funds themselves achieve over time. So, in all this coming and going, something doesn't add up. Investors do worse than the funds they own. And, where did these investors get the idea that investing outside the U.S., especially in emerging markets, is NOT risky?
Not sure what my main point is here. But, hate to see mutual funds designed for "longer-term investors" (as almost every prospectus reads) subjected to rapid inflows and outflows. Hurts the funds and probably doesn't do much for 90% of those who are running in and out. In the end, all of us pay a bit more in the form of added operating costs the funds experience in aggregate. Old school I guess. Back in the 70s and 80s you needed to wait until next morning to learn the % of change & NAV of a fund, and maybe 3 months to learn how it was performing relative to so-called "peers". Time to reflect and take a deep breath. People were much more long-term focused. We expected our funds would experience both good and bad years. Nowdays, we sit at computer screens watching green and red numbers flashing.
Fund disappointed? How dare it? .... Shoot the ##**!!** ---
*Slightly edited, mainly to delete an incorrect reference to Russian securities (not pertinent)
Ukraine only about 6% of holdings. Over 95% of portfolio are investment grade. Might hurt a bit but far from a catastrophe. Hasenstab will come through just fine.
I think what concerns me is the idea that a mutual fund owns more than half of a country's foreign debt. There have been a number of examples in recent years or funds holding much of an emerging market country or company's debt. Seems like a recipe for problems, in particular liquidity. If Hasenstab (apparently) owns more than half of Ukraine's foreign debt, how difficult would it be to sell if need be?
Hasenstab is one of the best bond managers around, but again, I've read a number of stories in recent years of a fund or funds taking up much of a debt issue or debt from a certain entity.
Scott said: "I think what concerns me is the idea that a mutual fund owns more than half of a country's foreign debt..."
Hi Scott: That would be a very high percentage. However, as a percent of the fund's holdings, suspect it's still a relatively small amount, probably 10% or less of total investments. It's likely the fund's prospectus restricts how much can be invested in a single country and what % of any country's outstanding debt can be held. 50% of one issuer's outstanding debt would seem extraordinary high.
The numbers on fund performance didn't look terrible. One, anyway, was overall positive for the year - but lagged its "peers". How you put international bond funds or EM bond funds into a peer group eludes me. The world's a big place. These funds all take different approaches to international investing - choosing to favor some areas and avoid others. Some hedge against currency risk. Others choose not to. Makes a big difference in results. But, if looking for a pure play against the Dollar, the unhedged will give you more of that.
Here's the fact sheet for the Global Total Return Fund. I'm assuming it's the more aggressive of the two mentioned in the Bloomberg article: https://www.franklintempleton.com/forms-literature/download/407-FF Note that the Singaphore Dollar is the last currency listed as a substantial holding. It comprised 6.39% of fund's assets as of reporting. We can assume the Ukranean currency was something less than 6.39% of the fund's currency exposure. Correct?
Here's an article from May, 2014: "Templeton Fund Snaps Up a Third of Ukraine Sovereign Eurobonds"http://www.emergingmarkets.org/Article/3342021/Templeton-fund-snaps-up-a-third-of-Ukraine-sovereign-Eurobonds.html. This article puts this fund's total assets at around 71 billion dollars and the total investment in these bonds of just over 3 billion. That puts the total investment at around 4.25% of fund assets. Reasonable I think. Obviously, it was a speculative play that didn't work out.
Ukraine only about 6% of holdings. Over 95% of portfolio are investment grade. Might hurt a bit but far from a catastrophe. Hasenstab will come through just fine.
I just looked at the portfolio on Morningstar and it looks like only a little more than 81% is in investment grade bonds. I looked at TPINX, Templeton Global Bond A. The Global Total Return Fund is only a little more than 65% investment grade. Please correct me if I've got this wrong. I view investment grade as BBB and above.
Prospectus: Templeton Total Return Global Bond Fund https://www.franklintempleton.com/forms-literature/download/407-PSUM *No restriction on below investment grade bonds. - From Wikipedia: "A bond is considered investment grade or IG if its credit rating is BBB- or higher by Standard & Poor's or Baa3 or higher by Moody's. Generally they are bonds that are judged by the rating agency as likely enough to meet payment obligations that banks are allowed to invest in them." - Can't get Total Return fund's "Principal Investment Strategies" to copy. However, suggest folks take a look. Enough to sober up any potential investor (or lead one to take another drink). Terms like "non-diversified," "concentrated", (may purchase) "bonds ... in any category including bonds rated in default", and "(use of) derivatives" would make me think twice before clicking "Buy." ... Sad most investors don't read this stuff.
i hope it is understood that mr. hasenstab owns half of the ukrainian debt across all his vehicles, including his two closed end funds: gim and tei. also, for those getting hooked on the investment grade stuff, don't forget that many sub-prime and alt-a mortgages were investment grade; russia was investment grade until a week ago; etc, etc. if (or, rather, when) the ukraine restructures (i.e. defaults), the debt of other eastern european countries might be repriced. hasenstab owns polish and hungarian debt in his funds i believe. the population of these countries borrowed in CHF and EUR and saw these currencies appreciate (especially CHF) against their own. if these governments choose to bail out their citizens from their reserves, their sovereign debt could be downgraded.
one should hope that the current price (about 55c on a dollar) reflects the impeding credit event.
Ukraine only about 6% of holdings. Over 95% of portfolio are investment grade. Might hurt a bit but far from a catastrophe. Hasenstab will come through just fine.
I just looked at the portfolio on Morningstar and it looks like only a little more than 81% is in investment grade bonds. I looked at TPINX, Templeton Global Bond A. The Global Total Return Fund is only a little more than 65% investment grade. Please correct me if I've got this wrong. I view investment grade as BBB and above.
Thanks for your input. I don't think anyone here is "hooked on the investment grade stuff." Someone raised a reasonable question about that aspect of Mr. H's funds and I along with others attempted to address it.
Agree with you that these ratings are but one part of the overall picture and can be misleading. Dick Strong was notorious for shopping around for a rating agency to rate his credit holdings favorably, even when the major firms like S&P felt otherwise. Nearly sank their money market fund in the late 90s.
And to be clear, I'm pretty sure S&P's description of BBB includes the stipulation that these bonds, while investment grade, have "some speculative qualities" - or words to that effect. Also, many houses, like T. Rowe Price, perform their own in-house research into otherwise "unrated" securities. (I, for one, would trust Price's judgement above that of the rating agencies.)
Yes, as I think you are suggesting, geo-political considerations and exchange rates (currency movements) are of paramount importance in selecting foreign bonds regardless of an agency's rating.
A final point: While bond rating is imperfect, I do think the limitations in the prospectus concerning bond ratings (or absence of such limitations) are designed to inform potential investors about the relative risks of the funds from management's perspective. From that standpoint, it is understood that Templeton's Total Return Global Bond fund does carry significantly greater risk for investors than does their Global Bond fund.
Ukraine only about 6% of holdings. Over 95% of portfolio are investment grade. Might hurt a bit but far from a catastrophe. Hasenstab will come through just fine.
I just looked at the portfolio on Morningstar and it looks like only a little more than 81% is in investment grade bonds. I looked at TPINX, Templeton Global Bond A. The Global Total Return Fund is only a little more than 65% investment grade. Please correct me if I've got this wrong. I view investment grade as BBB and above.
I use TGBAX
ron, my comment was with respect to yours which said "Over 95% of portfolio are investment grade"
That doesn't coincide with the info I looked up in M*. Don't know where you are getting the info that over 95% of the portfolio is investment grade. Looks to me like about 81% and 65% for the two funds, per above. Perhaps you were referring to something different
Ukraine only about 6% of holdings. Over 95% of portfolio are investment grade. Might hurt a bit but far from a catastrophe. Hasenstab will come through just fine.
I just looked at the portfolio on Morningstar and it looks like only a little more than 81% is in investment grade bonds. I looked at TPINX, Templeton Global Bond A. The Global Total Return Fund is only a little more than 65% investment grade. Please correct me if I've got this wrong. I view investment grade as BBB and above.
I use TGBAX
ron, my comment was with respect to yours which said "Over 95% of portfolio are investment grade"
That doesn't coincide with the info I looked up in M*. Don't know where you are getting the info that over 95% of the portfolio is investment grade. Looks to me like about 81% and 65% for the two funds, per above. Perhaps you were referring to something different
Hot money is of no concern for me. It drives managers crazy, however, because they must hold more cash than they otherwise would want. Hasenstab is a top manager. He did not take dumb pills. There have been instances like this in the past, where a small percentage of his fund has issues. Most other bond managers would love to have his smarts and his track record. Investors and advisors who jump in and out of funds because of what is or is not hot at the moment almost never come out ahead. They are chasing the hot fad of the day. Wonder how much of it went to an S&P 500 Index fund? After all, that was the hot item last year.
With his CEFs, GIM and TEI, if hot money flows out, you can buy them at a discount.
I've been flirting with TEI for a while, but his Brazil overweight bothers me more than Ukraine. Brazil may be nearing a bottom now, but to have been so heavily into Brazil last year, when its problems (at least if you live there, like I do) were so obvious, really strikes me as a mistake that should have been avoided.
@Maurice, yes, that's exactly what I meant, if the hot money flows out, it doesn't impact the manager, but you (the investor) can buy them on the cheap.
Comments
Same old. Same old. Money pours in. Money pours out.
If these "in-and-out" investors are making a lot of money in the process, that's fine. I'm all for making a fast buck any way you can as long as you can keep reinvesting it for greater and greater returns. However, all the evidence I've read or viewed on this forum indicates just the opposite. That average fund investors who move in and out of their funds fail to achieve the returns those funds themselves achieve over time. So, in all this coming and going, something doesn't add up. Investors do worse than the funds they own. And, where did these investors get the idea that investing outside the U.S., especially in emerging markets, is NOT risky?
Not sure what my main point is here. But, hate to see mutual funds designed for "longer-term investors" (as almost every prospectus reads) subjected to rapid inflows and outflows. Hurts the funds and probably doesn't do much for 90% of those who are running in and out. In the end, all of us pay a bit more in the form of added operating costs the funds experience in aggregate. Old school I guess. Back in the 70s and 80s you needed to wait until next morning to learn the % of change & NAV of a fund, and maybe 3 months to learn how it was performing relative to so-called "peers". Time to reflect and take a deep breath. People were much more long-term focused. We expected our funds would experience both good and bad years. Nowdays, we sit at computer screens watching green and red numbers flashing.
Fund disappointed? How dare it? .... Shoot the ##**!!**
---
*Slightly edited, mainly to delete an incorrect reference to Russian securities (not pertinent)
Hasenstab is one of the best bond managers around, but again, I've read a number of stories in recent years of a fund or funds taking up much of a debt issue or debt from a certain entity.
Hi Scott: That would be a very high percentage. However, as a percent of the fund's holdings, suspect it's still a relatively small amount, probably 10% or less of total investments. It's likely the fund's prospectus restricts how much can be invested in a single country and what % of any country's outstanding debt can be held. 50% of one issuer's outstanding debt would seem extraordinary high.
The numbers on fund performance didn't look terrible. One, anyway, was overall positive for the year - but lagged its "peers". How you put international bond funds or EM bond funds into a peer group eludes me. The world's a big place. These funds all take different approaches to international investing - choosing to favor some areas and avoid others. Some hedge against currency risk. Others choose not to. Makes a big difference in results. But, if looking for a pure play against the Dollar, the unhedged will give you more of that.
Here's the fact sheet for the Global Total Return Fund. I'm assuming it's the more aggressive of the two mentioned in the Bloomberg article: https://www.franklintempleton.com/forms-literature/download/407-FF Note that the Singaphore Dollar is the last currency listed as a substantial holding. It comprised 6.39% of fund's assets as of reporting. We can assume the Ukranean currency was something less than 6.39% of the fund's currency exposure. Correct?
Here's an article from May, 2014: "Templeton Fund Snaps Up a Third of Ukraine Sovereign Eurobonds"http://www.emergingmarkets.org/Article/3342021/Templeton-fund-snaps-up-a-third-of-Ukraine-sovereign-Eurobonds.html. This article puts this fund's total assets at around 71 billion dollars and the total investment in these bonds of just over 3 billion. That puts the total investment at around 4.25% of fund assets. Reasonable I think. Obviously, it was a speculative play that didn't work out.
Prospectus: Templeton Global Bond Fund https://www.franklintempleton.com/forms-literature/download/406-PSUM
*"The fund may invest up to 25% of its assets in bonds that are rated below investment grade."
Prospectus: Templeton Total Return Global Bond Fund https://www.franklintempleton.com/forms-literature/download/407-PSUM *No restriction on below investment grade bonds.
-
From Wikipedia:
"A bond is considered investment grade or IG if its credit rating is BBB- or higher by Standard & Poor's or Baa3 or higher by Moody's. Generally they are bonds that are judged by the rating agency as likely enough to meet payment obligations that banks are allowed to invest in them."
-
Can't get Total Return fund's "Principal Investment Strategies" to copy. However, suggest folks take a look. Enough to sober up any potential investor (or lead one to take another drink). Terms like "non-diversified," "concentrated", (may purchase) "bonds ... in any category including bonds rated in default", and "(use of) derivatives" would make me think twice before clicking "Buy." ... Sad most investors don't read this stuff.
one should hope that the current price (about 55c on a dollar) reflects the impeding credit event.
just some thoughts on the topic.
Thanks for your input. I don't think anyone here is "hooked on the investment grade stuff."
Someone raised a reasonable question about that aspect of Mr. H's funds and I along with others attempted to address it.
Agree with you that these ratings are but one part of the overall picture and can be misleading. Dick Strong was notorious for shopping around for a rating agency to rate his credit holdings favorably, even when the major firms like S&P felt otherwise. Nearly sank their money market fund in the late 90s.
And to be clear, I'm pretty sure S&P's description of BBB includes the stipulation that these bonds, while investment grade, have "some speculative qualities" - or words to that effect. Also, many houses, like T. Rowe Price, perform their own in-house research into otherwise "unrated" securities. (I, for one, would trust Price's judgement above that of the rating agencies.)
Yes, as I think you are suggesting, geo-political considerations and exchange rates (currency movements) are of paramount importance in selecting foreign bonds regardless of an agency's rating.
A final point: While bond rating is imperfect, I do think the limitations in the prospectus concerning bond ratings (or absence of such limitations) are designed to inform potential investors about the relative risks of the funds from management's perspective. From that standpoint, it is understood that Templeton's Total Return Global Bond fund does carry significantly greater risk for investors than does their Global Bond fund.
That doesn't coincide with the info I looked up in M*. Don't know where you are getting the info that over 95% of the portfolio is investment grade. Looks to me like about 81% and 65% for the two funds, per above. Perhaps you were referring to something different
FEMGX
TBOAX
MXGBX
TAEMX
In addition to the already mentioned
Gim
Tei
TPINX
TGTRX
AAA 11.59 —
AA 16.96 —
A 36.82 —
BBB 15.37
http://globaleconomicanalysis.blogspot.com/2015/02/black-market-in-ukrainian-currency.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+MishsGlobalEconomicTrendAnalysis+(Mish's+Global+Economic+Trend+Analysis)
I've been flirting with TEI for a while, but his Brazil overweight bothers me more than Ukraine. Brazil may be nearing a bottom now, but to have been so heavily into Brazil last year, when its problems (at least if you live there, like I do) were so obvious, really strikes me as a mistake that should have been avoided.