LONDON/BOSTON Sept 10 (Reuters) - A setback in Ukraine for Franklin Templeton’s star fund manager Michael Hasenstab hasn’t dimmed his appetite for bold bets in markets shunned by others as he boosts exposure to some of this year’s worst-performing emerging markets.
For a decade, 41-year old Hasenstab has topped fund performance tables, outflanking rivals with outsize investments in unloved markets such as Hungary and Ireland, buying bonds cheap and cashing in as their governments dodged default.
But in Ukraine, where Templeton sank around $6.5 billion from 2011 — owning about 40 percent of outstanding bonds at one time — he wasn’t so lucky.
Last month, Templeton and three other funds agreed to write off 20 percent of the value of Ukrainian Eurobonds. Their worth in Hasenstab’s main $65 billion Global Bond Fund as of June 30, was $1.32 billion, more than halving from February 2014, though prices have rallied since the Aug. 27 debt agreement.
But that has not deterred Hasenstab from seeking out underdog assets. While foreign investors flee emerging markets, more than half the Global Bond Fund’s holdings are in developing countries, and scrutinising the fund’s investments shows it added to those positions this year.
Hasenstab, who oversees $170 billion from his office in San Mateo, California, was not available for interview but he wrote in a recent blog that he saw opportunities amid the turmoil, with investors indiscriminately punishing some markets.
“As we remain optimistic regarding the outlook for Mexico and Malaysia, it highlights how our strategies will often be contrarian,” Hasenstab wrote, adding such a strategy made short-term turmoil inevitable from time to time.
Mexico made up 9 percent of his fund by end-June, according to Franklin Templeton’s semi-annual report and fund fact sheets, versus 5.5 percent in February, while Malaysia comprised 6.9 percent, up from 1.4 percent.
Both countries have been at the sharp end of the selloff, with Mexican government debt nursing 12 percent losses this year in dollar terms on the GBI-EM bond index.
Malaysia has fared even worse, with 17 percent losses as the ringgit plumbs lows unseen since the 1997 crisis.
South Korea comprises 14 percent of the fund, up from 12.5 percent in February, while Brazil is steady at 4.6 percent.
All those would be considered brave bets, due to risks from tumbling commodities prices, a looming U.S. rate rise and slumping currencies. Brazil’s dollar-based bondholders have lost 25 percent this year, for example.
But Hasenstab said: “If we are not underperforming the market or our competitors for some given period, it implies we aren’t actually taking contrarian views and making those types of calls that go against prevailing market sentiment.”
Karin Anderson, an analyst at fund research firm Morningstar, argues that big punts on underperforming Mexico or Malaysia represent a return to normal for Hasenstab and that it was Templeton’s Ukraine foray that was out of character.
“For Franklin Templeton and Hasenstab’s team, they have a record of investing for multi-year products, of going in when things look ugly and then they get better,” she said. “In (Ukraine) they went in when things were good and they got bad.”
Ukraine undoubtedly dragged on returns, with the Global Bond fund’s performance in the year to June lagging more than half its peers, according to Morningstar. Year-to-date, it has underperformed 83 percent of peers, with 5.8 percent losses.
Templeton attributes the underperformance to the fund’s negative correlation with U.S. Treasuries, noting Ukraine made up less than 3 percent of holdings. But emerging market underperformance could fuel more short-term losses.
Over a decade however, the fund is ranked second in terms of performance by Morningstar, with a 7.34 percent average annual return. Another Hasenstab-led fund, Templeton Global Total Return, tops rankings.
“Hasenstab has expressed an interest in wanting to own more Brazilian real and Mexican peso and buying into that weakness when we have this downside may be contrarian,” Anderson said. “The fund is doing what it always has and we have high confidence in it.”
But investors are jittery — the household savers who dominate the fund’s investor base pulled $3.4 billion from it between January and end-July, after last year’s $3.2 billion outflows, according to data from Lipper.
Hasenstab’s ally has been his fund’s huge size, enabling him to stake a few billion dollars in markets where he saw long-term potential. But some say big may no longer be best.
Recent marketplace changes — namely shrinking bond trading volumes, especially in emerging markets — are increasingly a headache for such enormous funds, said a veteran emerging markets investor, who nevertheless admires Hasenstab as “one of the great success stories of global investment”.
“The less liquid nature of the market has boxed him in, in a manner he couldn’t have expected a few years back. Brazil, Korea and Mexico have some of the most liquid emerging bonds so if he wants to be in EM he has to play in those markets,” the person said.
On Ukraine, the jury is still out on how big a loss Templeton will swallow — the restructuring is relatively generous and already this year, the Eurobonds have risen 40 percent. So while Ukraine may not have been Hasenstab’s greatest call, he may well recover the lion’s share of his investment.
Additional reporting by Tariro Mzezewa in New York; Editing by Catherine Evans