Courting ample currency and credit risk, Silver-rated Templeton Global Total Return shuns interest-rate risk, given skipper Michael Hasenstab's concerns about global inflation.
The following is our latest Fund Analyst Report for Templeton Global Total Return Fund TTRZX.
Templeton Global Total Return benefits from a skilled lead manager and analyst bench as well as a consistent approach, supporting a Morningstar Analyst Rating of Silver.
For years, lead manager Michael Hasenstab has mostly avoided low-yielding debt of the United States, eurozone, and Japan, which dominate most peer funds' portfolios. Instead, he has preferred emerging-markets bonds and currencies given what he views as those countries' better fiscal prospects. That includes longtime portfolio anchors South Korea (10%) and Indonesia (8%), as well as the more recent additions of Mexico (16%) and Brazil (15%). As Mexican and Brazilian debt sold off in 2015's third quarter, Hasenstab significantly built out those positions. Over time, he's shown ample willingness to buy what the rest of the market shuns. He loaded up on Irish bonds in the depths of the 2011 eurozone crisis, and he stuck with a low-single-digit stake in conflict-torn Ukraine in 2014 and into 2015 as the country restructured its debt.
The fund also stands out from the crowd because of significant and longtime bets against the yen (36% as of July 2017) and euro (39%) that are meant to serve as a hedge against rises in U.S. interest rates, which would hurt emerging-markets bonds. Though the fund courts ample currency and credit risk, it shuns interest-rate risk given Hasenstab's concerns about global inflation, which he believes could lead to permanent loss of capital. As a result, the fund's duration ran around one year in 2013 and 2014, already a very low level within the Morningstar Category, but it has run close to zero since late 2015.
The fund's cautious tack on interest rates and its currency hedges have held it back at various times in recent years, and its emerging-markets-heavy profile has caused it to move in sync with riskier assets and sport one of the highest correlations to equities in the group. Still, patient investors remain in good hands given the manager's knack for finding long-term winners. From the fund's 2008 inception through September 2017, its 8.2% annualized return was nearly double the category median.
Process Pillar: Positive | Karin Anderson 10/19/2017
Michael Hasenstab and his team aim to identify value among currencies, sovereign credit, and interest rates in countries with healthy or improving fundamentals that they think the market underappreciates. The portfolio is benchmark-agnostic and built on the team's meticulous fundamental research, with feedback from local market participants. The contrarian-minded group attempts to find those opportunities early on and then watch as its theses unfold over several years. The fund has held a double-digit stake in South Korea's government bonds since 2004, for example. Hasenstab doesn't require fiscal perfection, just improving trends. In the depths of 2011's eurozone crisis, he built a position in Ireland's government debt, arguing that Irish authorities had made strides toward fiscal sustainability that were not priced in. This fund takes more risk than its government-only sibling, Templeton Global BondTPINX, holding up to a third of assets in corporate bonds (it doesn't have any now because of valuation concerns).
The fund's significant and patient currency bets distinguish it, as well. Since late 2009, Hasenstab has maintained sizable shorts on the Japanese yen and the euro (up to 40% to 50% each) as a hedge against a strengthening U.S. dollar that would hurt emerging-markets local-currency bonds. Overall, the fund's patient approach and the manager's eye for value earn a Positive Process rating.