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Templeton’s Hasenstab Avoids Europe Debt Trap in Top Bond Fund

For Michael Hasenstab, manager of the top-rated and best-selling Templeton Global Bond Fund, Greece is the latest example of why investors should avoid countries that rely too heavily on borrowed money.

Hasenstab, who oversees more than $58 billion between the domestic and non-U.S. versions of the fund, shunned debt-laden countries including the U.S., Japan and much of Europe even before the Greek debt crisis undermined confidence in the euro. He favors the bonds and currencies of faster-growing Asian and Latin American nations with smaller budget deficits.

“Sitting here in the U.S., we are focused on massive debts,” he told investors at a presentation in New York this month. “In other places the opportunities are more compelling.”

The strategy is working, with the $34 billion Templeton Global Bond Fund outperforming all world bond rivals during the past decade. His bearish view on countries running big deficits is shared by managers including David Rolley, co-head of global fixed income at Boston-based Loomis Sayles & Co., and Tony Norris and Peter Wilson, managers of the $1.3 billion Evergreen International Bond Fund in London.

“You want to be lending money to people who can pay you back,” Rolley, who helps oversee $26 billion, said in a telephone interview.

The 36-year-old Hasenstab, who started at San Mateo, California-based Franklin Resources Inc. fresh from college in 1995, is attracting investors increasingly interested in venturing beyond the U.S. His fund had net deposits of $7.1 billion in the U.S. this year through April, second only to the $15 billion that went into Bill Gross’s $225 billion Pimco Total Return, data from Chicago-based Morningstar Inc. show.

Secular Shift

The $24 billion version of the fund sold outside the U.S. brought in $5.2 billion in the first quarter, making it the top seller in the rest of the world, according to Strategic Insight, a New York-based research firm. Global bond funds had net deposits of $55 billion in the first three months of the year, a quarterly record, according to EPFR Global, a Cambridge, Massachusetts-based research firm.

Hasenstab said non-U.S. bonds, like international stocks 10 years ago, are being added to more American investment portfolios.

“The question now is not if you have money in international, but how much?” he said in a telephone interview.

Douglas Sipkin, an analyst at Ticonderoga Securities in New York, said the European debt crisis may slow the flood of money moving into the group. Longer term, “the secular shift towards international fixed income is in its early stages,” he wrote in a May 11 note to clients.

Top Fund Returns

The euro has fallen 3.4 percent against the Bloomberg Correlation-Weighted Currency index since the start of May, when concerns that Greece will be unable to finance its sovereign debt spread to countries such as Portugal and Spain. The European Union and International Monetary Fund on May 10 added to a 110 billion-euro ($134 billion) bailout for Greece with a 750 million-euro package of loans and guarantees to other countries facing instability.

Templeton Global Bond returned 12 percent annually in the 10 years ended April 30, compared with an average 6.6 percent for the world bond category, Morningstar data show. World bonds have at least 40 percent of their assets invested outside the U.S., according to Morningstar’s definition of the group.

Hasenstab’s fund gained 6.1 percent this year through May 17, better than 97 percent of peers, according to data compiled by Bloomberg.

Templeton Global Bond, which Hasenstab has managed since 2001, held no government bonds from the U.S., Japan or the U.K. as of Feb. 28, according to an April regulatory filing. Its largest holdings were in South Korea, Australia and Poland.

Debt Avoidance

Hasenstab, who oversees about $75 billion for Franklin Resources, has avoided the U.S. and Japanese government bond markets for several years and cut holdings in Europe more recently, he said in an e-mail. He is also betting the euro will decline against the dollar.

A native of Buffalo, New York, he holds a doctorate and a master’s degree in economics from Australian National University in Canberra, Australia. He has a bachelor’s degree from Carleton College in Northfield, Minnesota.

Hasenstab looks for markets where government bond yields are attractive, credit quality is improving or where there is an opportunity to make money on currency movements.

In Indonesia, whose bonds represent 6.2 percent of the fund, 10-year government bonds yield 8.86 percent compared with 3.35 percent for a 10-year U.S. Treasury bond, Bloomberg data show. Moody’s boosted its rating on Indonesia in September to Ba2, the highest grade in 11 years and two steps below investment level.

Bond, Currency Bets

The Indonesian economy grew at 5.7 percent in the first three months 2010, the fastest pace in more than a year, as consumer spending rose and exports and investment recovered.

On the bond side, Hasenstab likes countries such as Indonesia and Brazil, which have manageable debt and the prospect of stable or declining long-term interest rates, he said.

On the currency side, he looks for countries where he expects interest rates to rise, such as Norway, Australia, China and India. “Despite global problems, these economies are robust,” he said.

China’s consumer prices rose 2.8 percent in April from a year earlier, and property prices jumped 12.8 percent, the government’s statistics bureau said May 11. Higher inflation increases pressure on the government to raise borrowing costs for the first time since 2007 and allow the yuan to appreciate.

Jim Rogers, chairman of Singapore-based Rogers Holdings, said in a May 10 Bloomberg Television interview that China’s decision to boost the value of the yuan was a question of “when” not “if.”

Australian Fan

Australia, which represented 9.8 percent of Hasenstab’s portfolio, was one of the few economies, along with China and India, to skirt last year’s global recession. The Australian dollar, which was worth 63 U.S. cents in March 2009, currently trades for 86 cents, Bloomberg data show.

Hasenstab’s uncommon strategy of making bets on both bonds and currencies distinguishes him from most rivals, said Kevin McDevitt, an analyst with Morningstar.

“He is willing to do things others would not be comfortable doing” said McDevitt in a telephone interview.

Loomis’s Rolley said government budget deficits and the potential for falling currencies made the major bond markets risky places to invest.

When you look at the big markets, “you are going from one frying pan to another frying pan,” he said.

‘Easy Decision’

The debt problems of the major economies were highlighted in an October 2009 report by the International Monetary Fund. The IMF found that among the developed economies in the G-20, a group that includes the United States, Japan and Great Britain, the ratio of public debt to gross domestic product was expected to be 107 percent in 2010.

For the emerging countries in the group, such as Indonesia, China and India, the comparable estimate was 40 percent.

“It is an easy decision to underweight those older economy bond markets,” Evergreen’s Norris and Wilson wrote in a March report. The pair called the United States, Great Britain, Japan and Europe “old” economies.

Yields in those economies will move up as the need to issue more bonds forces governments to pay higher rates to attract investors, Norris said in a telephone interview. Rising rates drive the price of bonds lower.

“Why buy them?” Norris said. Where is the value?’’

More Euro Declines

In the April regulatory filing, Hasenstab cited the U.S. budget deficit and Japan’s weak economic growth as reasons for avoiding those bond markets. He was staying away from most of Europe, he wrote, because of concerns about growth and “the fiscal creditworthiness of Greece.”

Hasenstab, who owned no Greek bonds, said the European Union’s financial support package didn’t change his view of either Greece or Europe.

In an e-mail sent after the European nations acted last week, he said Greece’s problems could return because the country needs an “almost unprecedented fiscal reform to get back to a sustainable debt path.”

Templeton Global Bond fell 4 percent in the week before the European plan was announced as bonds tumbled around the world. In times of panic, investors don’t make distinctions and sell everything, Hasenstab said.

“Once things settle out you will see that differentiation return,” he said.

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