For Franklin Templeton, All Roads Lead to Rio as Haven From Populists

  • Money manager invests 35% of biggest fund in Latin America
  • Hasenstab warns west against temptation of populist policy

Michael Hasenstab. Photographer: Brent Lewin/Bloomberg

Michael Hasenstab believes he has found a refuge from the anti-establishment politics creating waves across the developed world, and it’s not where you’d expect.

The Franklin Templeton money manager dedicated more than 35 percent of his $41 billion flagship Templeton Global Bond Fund to Latin America by the end of 2016 to seize on a shift away from the anti-trade policies now gaining favor in the U.S. and parts of Europe. That’s an increase of 11 percentage points in just one year, according to filings published this week.

The irony of investing in a continent that’s experienced a share of shameless demagoguery in recent years just as Donald Trump built his popularity in the U.S. and Britain voted to leave the European Union isn’t lost on Hasenstab.
The 43-year-old who holds a PhD in economics put out a research note this month warning governments in advanced countries from being "tempted by the sirens of populism" that inflicted economic damage in Argentina, Brazil and Venezuela.

The first two caught Hasenstab’s eye as they adopted measures to move away from protectionism. In the fourth quarter, he made his first investments in Argentina since the country ended a decade of isolation with the election of President Mauricio Macri in 2015, according to data compiled by Bloomberg.

He also bought more Brazilian bonds -- bringing holdings in the country to 15 percent of the fund -- as Dilma Rousseff’s impeachment paved the way for policies to lift the economy out of the throes of recession. The fund only invests more in Mexico.

Populist policies "promised the chimera of an easy, pain-free way out — but instead caused lasting declines in living standards and inflicted serious damage," said Hasenstab, who authored the report along with six colleagues also holding PhDs.

Biggest Concern

The strategy helped Hasenstab’s fund deliver 6.2 percent returns to clients in 2016, the most in four years, but it didn’t slow the exodus of clients. Investors have yanked $30 billion from the Templeton Global Bond Fund since 2014, making it one of the biggest victims of the rush into cheaper exchange-trade funds, which passively track indexes.

For a man whose claim to fame is taking risks in developing countries others avoid, the Washington state native’s concerns about the political trajectory in the west aren’t unusual. More than 30 percent of high-grade credit investors listed populism as their biggest concern for 2017 in a Bank of America Merrill Lynch Global Research poll late last year. This is especially so as elections loom in France, the Netherlands and Germany.

Read more: a QuickTake on the backlash against free trade

One of Hasenstab’s big contrarian calls of 2015, that Brazil would recover from what was then a crippling recession, paid off quickly. Since Rousseff’s May suspension, the country has moved toward more orthodox economic policy to boost growth and narrow the budget deficit. This in turn fueled a market rally that pushed local-currency bonds measured in a Bloomberg index up 67 percent in 2016. The country’s still on top this year.

The investment numbers revealed this week show Franklin Templeton also built a 4 percent position during 2016 in Colombia, a country that’s long rejected populism.

Across the Atlantic, the San Mateo, California-based money manager exited his entire position in Poland just as nationalists started carrying out campaign promises to splurge on social spending and encroach on state institutions. Ukraine, where Hasenstab got entangled in an $18 billion bond restructuring in 2015, remains one of his top holdings.

Hasenstab’s research suggested American and European leaders eschewing electorate-pleasing economic policies look at Argentina for lessons on how badly things can turn out. In the past century, wealth per capita plunged as trade barriers were erected to protect jobs and politicians borrowed more than they could repay to fund spending.

Case studies south of the border make it “especially ironic" that in the U.S., Trump is shunning free trade and curbing immigration, he said.

"While we are not suggesting that the U.S. or the various countries in Europe that are flirting with populism are at risk of traveling down some of the extreme paths we have described in this paper, these examples do offer a cautionary tale," Hasenstab said.

— With assistance by Christine Jenkins, Marton Eder, Charlie Devereux, and Matthew Bristow

    Before it's here, it's on the Bloomberg Terminal.