Franklin's Hasenstab Stumbles With Mongolia as Bonds Plunge

  • Asian Bond Fund lagged 96% of peers, hurt by Mongolian notes
  • Mongolia 2022 bond was fund's biggest single-credit bet

Franklin Templeton’s Michael Hasenstab, who made an outsize bet on Mongolian bonds, is feeling the chill after tumbling commodity prices and rising political instability spurred a plunge in notes issued by the frigid Asian nation.

The $1.09 billion Asian Bond Fund, managed by a team including San Mateo, California-based Hasenstab, has declined 9.5 percent in the past year to lag behind 96 percent of its peers. Performance has been dragged down by junk-rated Mongolian notes maturing in 2022, which accounted for 7.24 percent of the fund’s net assets as of Dec. 31 and was the largest single-credit bet, according to data published on Franklin’s website. The 2022 notes slumped to record-low levels this month, as Mongolian officials plan meetings with global investors to discuss issuing more bonds.

Mongolia represents the latest challenge to Franklin’s contrarian bets on emerging markets, including commodity-rich nations that have been upended by a collapse in oil prices. Hasenstab, who leads Templeton Global Macro, is known for his investments on markets most bond investors shun, putting money in notes from nations including Ukraine, South Korea and Hungary. Franklin’s $54.7 billion Templeton Global Bond Fund, co-managed by Hasenstab, lost 4.3 percent in 2015, its worst year since 1999, even as he dodged disaster by negotiating a $7 billion Ukraine debt restructuring.

“The fund has a relatively high proportion of its assets in its 10 largest holdings,” said Kean Chan, a research analyst at iFast Financial Pte, a Singapore-based fund rating and advisory firm, referring to the Asia fund. “It’s not abnormal or bad per se, as it is a reflection of the managers’ conviction and approach in managing the strategy.”

Franklin Templeton’s Asian Bond Fund isn’t alone in making big wagers. The $76.4 billion Franklin Income Fund, led by Ed Perks, had 11.2 percent of its money in oil and gas companies at the end of 2015, according to data compiled by Bloomberg. A year earlier, the stake was 16.3 percent.

The Franklin Templeton Asian Bond Fund owned $98 million face value of the 2022 notes as of Dec. 31, according to data published on its website. That’s down from $122.5 million, or 9.6 percent of assets, at the end of September, according to data compiled by Bloomberg.

Mongolia’s $1 billion of 5.125 percent 2022 notes slid as much as 5.5 cents this month to a record-low 74.1 cents on the dollar, pushing the yield to 10.52 percent, according to Bloomberg-compiled prices. The notes traded at 75 cents in Hong Kong on Thursday. The Asian coking-coal producing nation, plodding through a five-year market slump, mandated lenders to arrange meetings with global investors this month with a view of raising new funds.

Fundamental Shift

The meetings came against a dire backdrop; coal exports slumped 24 percent last year to $555.9 million as prices fell while receipts from copper shipments dropped 11 percent to $2.28 billion, government data show. The slide in coking-coal prices isn’t a normal cyclical downturn but a fundamental shift that will place an unprecedented level of stress on the mining sector, Moody’s Investors Service said on Jan. 22.

While China’s slowdown has stoked volatility, political risk at home is also escalating as Prime Minister Saikhanbileg Chimed faces a leadership challenge in parliament, tied to the development of Oyu Tolgoi copper mine.

The Franklin Templeton bond fund handed investors a 1.5 percent loss this year through Jan. 25, following a 8.6 percent drop in 2015, as a slump in global markets deepened. The Mongolian tugrik hit a record low 2,007.5 per U.S. dollar on Jan. 22, according to Bloomberg-compiled data. The price of coking coal futures has slumped 22 percent in the past year.

Melissa Tan, a Templeton spokeswoman based in Singapore, said the Asian Bond Fund has no exposure to the tugrik. India, Indonesia, South Korea, the Philippines and China made up 70 percent of its asset allocation by geography, she said. Templeton declined to comment on whether the Asia fund would be willing to buy more Mongolian notes.

“Mongolia risk is amplifying the negative impact from the commodities decline in unfortunate timing,” said Dale Choi, the founder of research company Mongolian Metals & Mining in the capital city of Ulaanbaatar. “Further, Mongolia’s leverage increased significantly, which increased vulnerability.”

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