Morningstar Advisor - October/November 2011 - (Page 38)

Spotlight How Well Do You Know Templeton Global Bond? By Miriam Sjoblom In their global search for yield, investors are pouring assets into a one-of-a-kind fund they might not understand. Yields on all types of high-quality U.S. bonds have hovered near all-time lows for the past couple of years. U.S. Treasuries continue to defy expectations, their yields sinking still lower this summer on concerns about the health of the U.S. economy, political wrangling over the debt ceiling, and no end in sight to the eurozone’s sovereign debt crisis. In an effort to get away from these low yields and the threat of rising interest rates in the United States, some investors have turned to world-bond funds. One in particular has emerged as investors’ go-to choice for global-bond exposure. Since flows into world-bond funds turned positive in May 2009, Templeton Global Bond TPINX has taken in $43.1 billion in new money, according to Morningstar estimates, which represents nearly 60% of total flows into the worldbond category during this stretch. The $62.6 billion Templeton Global Bond now accounts for 40% of the total assets in the group. The fund’s popularity clearly owes much to its outstanding record. In the past five years, it gained 11.7% per year on average, beating every other fund in the category and outlegging the Citigroup World Government Bond Index by an average of 380 basis points a year without producing additional volatility. Analytics such as the Sharpe ratio give the edge to a handful of U.S.-dollar-hedged world-bond funds that don’t take any currency risk, but this fund has otherwise produced an excellent risk/reward profile. Meanwhile, investors craving diversification have also enjoyed a very modest correlation to the Barclays U.S. Aggregate Bond Index in the past five years that’s lower than all but one other fund in the category. Many investors who’ve piled into this fund, however, may be surprised to learn just how offbeat it is. Even as it has nearly quadrupled in size during the past two years, its portfolio has shown no sign of shedding its idiosyncratic qualities. By betting on China’s economy and shedding interest-rate risk, the fund could be taking its boldest stance yet. Not Just Another Pretty Face From the start, manager Michael Hasenstab’s investment style has fallen into the last camp. Unlike managers who construct their portfolios relative to traditional issuanceweighted benchmarks, Hasenstab argues that those indexes don’t make good investment sense. By design, they’re heavily skewed toward the world’s most indebted countries. The JPMorgan GBI Broad Index’s largest country weightings, for example, are Japan (30%), the United States (29%), and the eurozone (27%). Given that many of those countries’ gross debt/GDP ratios now approach 100% or greater, it’s understandable why he’s looking elsewhere. The ongoing sovereign debt crisis in Europe and this summer’s debt ceiling negotiation debacle in the United States have only brought these long-festering problems front and center. Other fund managers have caught on to this story in recent years, but when it comes to ignoring benchmarks, Hasenstab was ahead of his time. He has avoided U.S. and Japanese government bonds for years; the fund’s exposure to eurozone debt has fluctuated around just a few percentage points and hasn’t included any of the bloc’s less fiscally responsible actors, including big benchmark constituents Spain and Italy. Instead, Hasenstab has favored the debt and currencies of countries with strong or improving fundamentals—such as low levels of indebtedness, The world-bond category contains a hodgepodge of strategies that can result in a wide dispersion of returns in any given year. Some funds stick to investment-grade government debt; some hold a sizable amount in corporates and other credit sectors; some hedge all of their currency exposure back to the dollar; some sync up their currency exposure to global bond benchmarks; some include the United States in the mix while others exclude it; and a few forge their own path, while paying little heed to traditional guideposts. 38 Morningstar Advisor October/November 2011

Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2011

Morningstar Advisor - October/November 2011
Contents
Contributors
Letter From the Editor
The Emotional Burden
Where Are You Going for Yield?
Ahead of the Curve
How to Use a ‘Collar’
Why Dividends
Is Bond Investing All Uphill From Here?
Four Picks for the Present
Investment Briefs
The Risks of Stretching for Yield
For Banks, Uncertainty Reigns
The Virtues of Dividends
How Well Do You Know Templeton Global Bond?
The Case for Dividends in Emerging Markets
Finding Refuge in Value
Swift, Smooth, and Silent
Crack Open Closed- End Funds to Avoid the Relevance Paradox
Getting Beyond Labels in the ‘To vs. Through’ Debate
Handling the Headwinds
Bonds, Short-Term Bonds
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
A Prisoner of Pricing

Morningstar Advisor - October/November 2011