Jeff Benjamin

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Big bets come back to haunt Franklin Templeton's global bond fund

Investors exit as the manager sticks to his guns

Oct 5, 2016 @ 8:10 am

By Jeff Benjamin

The $44 billion Templeton Global Bond Fund (TGBAX) is probably not what most financial advisers would expect from a strategy in such a bland and stoic category as world bond funds.

But, based on the pace of money flowing out of the fund over the past few years, advisers and investors are catching on that this is far from a plain vanilla global fixed-income portfolio.

This year through August, the fund has experienced more than $10.3 billion worth of net outflows, making it the fastest-bleeding mutual fund in Morningstar's database by about $2.5 billion.

Last year the fund saw more than $11 billion in net outflows, followed by nearly $1.7 billion in net outflows in 2014.

Franklin Templeton refused to comment for this story. But the fund, which has been managed by Michael Hasenstab since December 2001, is giving investors pretty much what has always been promised.

In essence, this fund is a risk-taking outlier in a category known for following the herd.

“It's a fund that's built for total return; it's not a fund you buy to be a ballast in the portfolio,” said Karin Anderson, bond fund analyst at Morningstar.

She said Mr. Hasenstab is known to make sizeable bets on currencies and emerging markets, making the fund “more highly correlated to equities than to the world bond category, which means it requires a strong stomach.”

This year through September, the fund is down 1.54%, which compares to an 8.2% gain for the world bond fund category, and a 5.8% gain for the Barclay's US Aggregate Bond Index.

Last year the fund matched the category with a 4% decline, while the benchmark Barclay's gained 55 basis points.

Brad Alford, chief investment officer at Alpha Capital Management, attributes the fund's stumbles largely to its size.

“I have seen this countless times in my 27-year career, where a fund refuses to close, so it swells to a size far too large to manage, it then has to take huge bets which always end badly,” he said. It's one of the few guaranteed outcomes in the investment industry.”

Whether the issues are a result of size or something else, there is little disputing the part about the huge bets.

Ms. Anderson said the fund holds large short positions in both the yen and the euro, as a hedge against a rallying U.S. dollar.

The portfolio has also made big bets on the emerging markets, specifically Mexico.

And, then there's the duration bet of nearly zero, while most world bond funds have a lot of developed market exposure and average durations in the six-year range.

The longer the bond portfolio duration the more that portfolio will decline when interest rates rise.

Top 25 funds by YTD outflows
Fund Morningstar Category Estimated Net Flow Total Net Assets
Fund Morningstar Category Estimated Net Flow Total Net Assets
Templeton Global Bond Fund World Bond -$10.33B $43.87B
PIMCO Total Return Fund Intermediate-Term Bond -$7.9B $85.8B
Ivy Asset Strategy Fund World Allocation -$7.83B $6.88B
Goldman Sachs Strategic Income Fund Nontraditional Bond -$5.73B $10.43B
American Funds Growth Fund of Amer Large Growth -5$.43B $145.61B
BlackRock Global Allocation Fund World Allocation -$5.18B $44.85B
JPMorgan Strategic Income Opps Fund Nontraditional Bond -$4.36B $12.31B
Franklin Income Fund Allocation--30% to 50% Equity -$4.12B 79.8
Fidelity® Contrafund® Fund Large Growth -$4.01B $108.51B
Dodge & Cox International Stock Fund Foreign Large Blend -$3.98B $55.46B
PIMCO Short Term Fund Ultrashort Bond -$3.63B $10.21B
Fidelity® Series All-Sector Equity Fund Large Growth -$3.33B $7.52B
Virtus Emerging Markets Opportunities Fd Diversified Emerging Mkts -$3.30B $7.41B
Vanguard Instl Total Stock Market Index Large Blend -$3.28B $38.99B
Harbor International Fund Foreign Large Blend -$3.26B $39.29B
American Funds Capital World Gr&Inc Fd World Stock -$3.22B $83.63B
Oakmark Fund Large Blend -$3.18B $14.98B
BlackRock Strategic Income Opps Port Nontraditional Bond -$3.18B $28.15B
Loomis Sayles Bond Fund Multisector Bond -$3.14B $15.18B
Franklin Mutual Global Discovery Fund World Stock -$3.11B $22.10B
T. Rowe Price Equity Income Fund Large Value -$2.95B $22.09B
Strategic Advisers® Core Fund Large Blend -$2.88B $22.86B
GMO US Equity Allocation Large Blend -$2.85B $2.21B
GMO Implementation Fund World Allocation -$2.84B $12.63B
Putnam Capital Spectrum Fund Large Blend -$2.72B $4.74B
Source: 2016 Morningstar, Inc.
Note: Eff Date: 2016-08-31

Thus, while Mr. Hasenstab been guarding against higher rates, his fund's performance has suffered compared to portfolios that have been less focused on a Fed rate hike.

“It almost looks like a nontraditional bond fund,” Ms. Anderson said. “It definitely marches to its own beat in the world bond category. In the meantime, world bond funds that have taken on longer durations have benefitted.”

In a September opinion piece in Investment News, Mr. Hasenstab explained his case for investing in the emerging markets and detailed how he identifies investment opportunities.

And during an interview in June, Mr. Hasenstab acknowledged some of the missteps, while also explaining his rational behind the investment decisions.

Ms. Anderson said she has long been trying to remind investors that this fund is not going to ride the benchmark or move in stride with the category.

That means the fund will have its moments, such as 2013 when it gained 2.4% while the category lost 2.6%, or 2012 when the fund gained 16.2% while the category gained 8.1%.

But that was then, according Todd Rosenbluth, director of mutual fund and ETF research at S&P Global Market Intelligence.

“It comes down to performance, because these kinds of bond funds are supposed to be capital preservation and income vehicles first, and when a fund is losing money and underperforming its peers, investors start looking around,” he said.

Based on the fund's whopping cash position of more than 20%, Mr. Hasenstab is clearly bracing for the outflows. But while that might mean he isn't forced into selling as investors jump ship, it also means he is sitting on a lot of low-yielding cash, which becomes another drag on performance.

“There is an extremely large amount of a cash for a fund that seeks to generate income,” Mr. Rosenbluth said. “If money is moving out they have to hold more cash, and mutual funds are shared portfolios, which means somebody selling impacts those who are not selling.”


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