Franklin Templeton sold Russian bonds during the first quarter while adding to its almost $8 billion in Ukrainian debt as conflict between the countries escalated.
The asset manager, whose $190 billion global bond group is managed by Michael Hasenstab, cut holdings of dollar debt from Russia’s government and state-owned companies with a face value of about $29 million during the period, part of a reduction of more than $200 million in Russian securities over six months to $1.2 billion, the company’s latest filings show. Franklin Templeton increased Ukrainian dollar and euro bond holdings by $62 million in the first quarter to $7.6 billion.
As the rising threat of war spurs bond losses on both sides of the border, Hasenstab, known for making contrarian bets on nations including Ireland and Hungary, is favoring Ukraine over Russia after visiting Kiev last month and touting the country’s long-term economic potential. Ukrainian dollar bonds lost an average 8 percent this year as Russian notes dropped 4.4 percent, JPMorgan Chase & Co. indexes show.
“People are underestimating the likelihood that this conflict could extend beyond Crimea,” Peter Lannigan, a managing director at broker-dealer CRT Capital Group LLC, said in a telephone interview from Stamford, Connecticut. “Investors aren’t being compensated enough for the threat.”
Franklin Templeton is the world’s largest mutual fund investor in offshore debt from Ukraine and among the largest in Russia, according to data compiled by Bloomberg.
Franklin Templeton spokeswoman Stacey Johnston Coleman declined to comment.
The U.S. and Europe are accusing Russia of fanning unrest in Ukraine’s east, a region that is slipping out of the government’s grasp amid heightened separatist unrest, and are threatening more sanctions if President Vladimir Putin doesn’t ease tensions.
“If the conflict doesn’t stop here and now, it is likely to expand,” Eric Fine, a New York-based money manager at Van Eck Global, said in an e-mailed response to questions. “Ukraine itself has few natural borders, and there are other ethnic Russian communities in other countries that could invoke similar tensions.”
Losses on Ukrainian debt have limited returns on Hasenstab’s $71 billion Templeton Global Bond Fund (TPINX) to just 0.85 percent this year, trailing 94 percent of peers, according to data compiled by Morningstar Inc.
Investors pulled an estimated $570 million from the fund and $4.8 billion from its European counterpart in the first quarter, part of $8.8 billion in withdrawals from Franklin Templeton’s global and non-U.S. bond funds in the period.
The U.S.-based fund has returned 8.98 percent annually over the past decade, ranking it in the top one percentile among peers. Hasenstab was named the Top Global Bond Fund Manager in 2010 by Bloomberg Markets magazine.
The crisis in Ukraine came “and what encouraged us was the response of crisis management,” Hasenstab said in an April 5 video posted on Franklin Templeton’s website. “The current government has done an exceptional job of tackling not just the short-term issues but really setting the stage for Ukraine to flourish over the next five to 10 years, putting in place very difficult, but very important, structural reforms.”
U.S. and European officials are expressing skepticism over Russia’s commitment to an accord that sought to defuse the situation following the expansion of sanctions against people and companies linked to Putin’s inner circle. Putin has warned further penalties may trigger a response against foreign companies in Russia’s energy industry and other sectors.
As the crisis strains Ukraine’s shrinking economy, the International Monetary Fund approved this week $17 billion in aid. The government will get an immediate $3.2 billion disbursement to help pay its debts.
Gross domestic product fell 1.1 percent from a year earlier in the first quarter as industrial production and the hryvnia slumped following deadly protests and Russia’s annexation of Crimea.
Yields on Russian government and state company dollar debt have surged 1.05 percentage point this year to an average 5.7 percent, JPMorgan index data show. Russia’s credit rating was lowered last month one level to BBB-, the lowest investment-grade ranking, by Standard & Poor’s.
Russia is already in a recession, the IMF said April 30 after cutting the country’s economic-growth forecast for the second time in a month.
Bank of America Corp., the second-largest U.S. lender, cut its net exposure to Russia by 22 percent in the first quarter to $5.2 billion while Citigroup Inc., the third-biggest U.S. bank, said it reduced assets tied to Russia by 9 percent to $9.4 billion as of March 31, according to filings.
Other firms including GoldenTree Asset Management LP are seeing value in securities including Russia corporate debt. Managing Partner Steve Tananbaum said in an April 28 interview with Bloomberg Television that the $18 billion fund manager has been targeting debt of companies including OAO Gazprom.
“By the numbers, Russian sovereign risk is low, but obviously geopolitical risk is hitting the assets, and the question is what degree of impact on Russia’s economy will emanate from sanctions from the U.S. and future sanctions from the west,” Lannigan said. “Their economy is already sputtering.”