Templeton's Hasenstab Shunning Russian Bonds Misses Out on Rally

  • Global Bond Fund sold last Russian holdings in April
  • Russian securities give best returns among peers in 2015

Franklin Templeton bond chief Michael Hasenstab is looking for “multi-decade” opportunities in emerging markets and Russia isn’t one of them.

The country doesn’t represent “good value,” the head of the largest overseas bond fund in the U.S. said in a video last week. Hasenstab removed the last Russian holdings from his $61 billion Global Bond Fund in April this year, missing out on the best returns among major developing nations in the past five months. 

While Templeton has excluded Russia from its portfolio, money managers at Aberdeen Asset Management Plc and Ashmore Group Plc say they still see value in the nation’s bonds. Political risks are reflected in bond prices and policy makers are taking steps to support the economy after a slump in oil prices curbed revenue and sanctions over the country’s role in the conflict in Ukraine blocked access to international capital, they said.

"There are plenty of opportunities in Russia and we’ve seen that this year where the sovereign debt has performed extremely well," Jan Dehn, Ashmore’s head of research in London, said on Oct. 8. "I don’t see why investors should exclude themselves almost in a religious way from Russia.” The bonds aren’t “expensive and they are a good-yielding instrument so I wouldn’t mind owning them," he said, declining to comment on the company’s investment strategy.

Russia’s sovereign dollar bonds have returned 17 percent this year as a fragile cease-fire held in eastern Ukraine following an agreement in February backed by governments in Moscow and Kiev. Hasenstab’s Global Bond Fund has lost 3.6 percent in the period, trailing 72 percent of its competitors, according to Morningstar Inc. The fund returned 7.3 percent annually over the past decade, beating 99 percent of its peers. 

“Not all emerging markets have good value -- we’re not investing in Turkey, or South Africa, or Russia," Hasenstab,  who oversees 20 funds with $143 billion in assets, said in the interview posted on YouTube a week ago following a selloff in emerging markets in the third quarter. "But there’s a handful that are being caught up in this turmoil that we think are the diamonds in the rough and multi-decade opportunities."

Hasenstab said he’s buying the Mexican peso, Malaysian ringgit and Indonesian rupiah. At the end of June, the fund had invested about 14 percent of its assets in South Korea, Mexico followed with 9 percent and Malaysia made up about 7 percent, according to the company’s website. Imogen Harvey, a Templeton spokeswoman in London, declined to comment further on Hasenstab’s view when contacted by Bloomberg on Friday.

"It’s not a surprise that big institutional investors are wary of putting money in Russia," William Jackson, an analyst at London-based Capital Economics Ltd., said on Oct. 7. "The ruble is likely to come under pressure because oil prices are likely to remain low and the central bank might need to provide foreign currency from its reserves to bail out sanctioned companies if they can no longer roll over their external debts."

Oil Glut

While Brent crude, Russia’s main export earner, has rebounded from a six-year low in August, it’s down 8 percent this year amid concern a global glut will persist. The price tumbled more than 45 percent in 2014. The ruble has weakened less than 1 percent against the dollar in 2015, the best performance after Hong Kong’s currency among 24 emerging markets tracked by Bloomberg. It was the worst performer last year, sliding 46 percent.

Russia’s dollar bond maturing in September 2023 is trading with a yield of 4.58 percent, the lowest in 15 months. That’s in line with the average yield on the sovereign’s debt and compares with 4.71 percent overall for developing nations, according to the Bloomberg USD Emerging Market Sovereign Bond Index.

"We see Russia as an attractive investment opportunity,” Viktor Szabo, a money manager who helps oversee $12 billion of developing-nation debt at Aberdeen Asset Management in London, said Oct. 8. “It has its own risks but a lot of those risks are priced in. We are long” Russian assets, he said.

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