Bond Superstar Says Skip The Dollar And Euro

By Aaron Levitt | February 03, 2012 AAA

As both the European Union and the United States wrestle with their burgeoning debt problems, the safety and security of treasuries and various sovereigns are now being questioned. High debt loads, slowing economic growth and underfunded entitlement programs are just a few of the reasons investors are worried. Given these issues, it might pay for retail investors to seek sound advice from proven managers. One prominent fund manager in the bond world recently gave his recommendations on what to avoid and what to buy in the new year. (For related reading, see Evaluating Bond Funds: Keeping It Simple.)

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Templeton's Other Half
Like Franklin Templeton's (NYSE:BEN) emerging market guru Mark Mobius, Michael Hasenstab has reached superstar manager status within the bond space. Aside from running the firm's flagship, near-$57 billion Templeton Global Bond Fund, Hasenstab is Franklin's international bond department's co-director and runs a variety other U.S. and internationally domiciled funds for the asset manager. Most recently, he won Morningstar's (Nasdaq:MORN) coveted bond manager of the year award in 2010. The manager's guidance has helped investors in his signature fund record a 10.96% annual return over the last 10 years.

Hasenstab's latest advice: stay away from the dollar and euro. Overall, the manager points to the loose monetary policies of the developed world as enough of a reason for investors to stay away from the two reserve currencies and their bonds. Recently, Hasenstab said the following: "The ECB has launched its version of quantitative easing which now augments the extraordinarily loose monetary policy of the U.S., Japan and U.K. We now see the most aggressive printing of money in modern times." In addition, the fund manager highlighted the current political gridlock in the United States as the reason that American fiscal reform was "unlikely" this year.

With these reasons in tow, the manager says that investors would be best suited in currencies outside the U.S. and euro area where inflationary pressures from the printing of money will not be imported. To that end, Hasenstab points to Asia as the place for investors to avoid these effects. The region's ability to lower interest rates coupled with strong macroeconomic fundamentals, and extremely low debt levels have resulted many of the continents currencies and bonds being undervalued. (For more information, read Monetarism: Printing Money To Curb Inflation.)

Avoiding the Problem Areas
With the problems facing the U.S. and Europe, investors may want to add some additional exposure to Asian currencies and debt in the new year. Aside from the Templeton Global Bond Fund, Hasenstab currently runs two closed-end funds, the Templeton Global Income Fund (NYSE:GIM) and Templeton Emerging Markets Income (NYSE:TEI). Both funds are chock full of non-euro and greenback related government bonds and feature hefty weightings towards Asian nations. In addition, both funds come without the 4.25% sales charges associated with Hasenstab's open-ended funds.

The fund manager expects appreciation in the renminbi over the next year. China's growing foreign reserves and gold assets are seen as major wins for its currency. With nearly $450 million in assets, the WisdomTree Dreyfus Chinese Yuan (ARCA:CYB) uses non-deliverable forward currency contracts to gain exposure to the renminbi. However, the new CurrencyShares Chinese Renminbi Trust (ARCA:FXCH) may make a better bet as the fund is backed by the underlying currency that is held in deposit accounts. Either way, as the yuan makes strides as the worldwide reserve currency, both funds should appreciate.

For those looking for a more broad approach to adding Asian debt to a portfolio, the WisdomTree Asia Local Debt ETF (ARCA:ALD) could be the easiest way to add a wide swath of bonds to a portfolio. Top holdings include bonds from nations like Malaysia, Indonesia and Singapore, and the fund currently yields around 1.62%. Meanwhile, the iPath GEMS Asia-8 ETN (ARCA:AYT) allows investors to bet on a basket of eight Asian currencies.

The Bottom Line

Given all the problems facing the developed world in relation to its debt, superstar bond manager Michael Hasenstab recommends that investors look towards Asia for gains in the new year. Low debt loads, improving fundamentals and lower inflationary pressures will help propel Asian bonds and currencies throughout the year. The previous funds, along with the PowerShares Chinese Yuan Dim Sum Bond (ARCA:DSUM) make interesting ways to play that surge. (To more information, check out Investing In China.)

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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