Global bond funds by nature tend to come with a higher level of risk and volatility than domestic bond funds, although there are of course exceptions. But Franklin Templeton’s Global Bond Fund (TPINX) is one of the boldest funds in the world bond category of bond funds that are classified by Morningstar Inc. It takes a fundamentally different approach in its investment philosophy than most other similar types of bond funds, and it has consequently outperformed the majority of its peers in the past few years. Find out what makes this fund’s portfolio manager tick and why he has been so successful.

Portfolio Management Style

Portfolio manager Michael Hasenstab has taken a unique path in his selection of securities for this fund. He invests heavily in emerging market debt, which has caused the portfolio to move substantially in correlation with riskier assets. The fund moves more closely in tandem with stocks than almost any other bond fund. Hasenstab has also taken short positions against the yen and the euro, which reduces returns whenever those two currencies strengthen against the U.S. dollar. (For more, see: TPINX: Overview of Templeton Global Bond Fund.)

Nevertheless, his security selection and management style have produced stellar long-term results for this fund, and this along with a solid group of support analysts and low fees has earned the fund a gold rating by Morningstar. The fund owns almost nothing that is issued by the U.S., Japan or the Eurozone and concentrates instead on the debt in less developed markets. At this point, the bond holdings in the fund are about two-thirds invested in emerging debt and 80% of the currency holdings are also in this sector.

Hasenstab justifies his short holdings against the yen and euro because he currently believes that they are set to weaken as a result of quantitative easing. But he is wary of global inflationary pressure, which he feels could lead to permanent losses. For this reason, he reduced the duration of the fund’s holdings to a mere 0.2 years back in August from its previous duration of one year in 2014.

Hasenstab's  basic management process starts with identifying value in currencies, sovereign debt, interest rates in countries that have financial fundamentals that are either in good shape or are at least improving. He buys those that he feels are undervalued by the markets early on and then holds them for the long term to see how they perform. He invested substantially in Irish debt in the midst of the 2011 crisis in the Eurozone, and even bought some Hungarian debt, which was even less stable. (For more, see: Templeton Global Bond Performance Case Study.)

He also ook advantage of the sell off in Mexican and Brazilian debt in the third quarter of 2015 and added several percentage points worth of their debt to the portfolio as well. He also purchased a substantial stake in bonds from South Korea’s government in 2004. His selection criteria do not require a perfect fiscal record - he only looks for trends that are improving.

This approach to buying securities has of course resulted in some substantial sell offs in the short term, but long-term investors have reaped the benefits of Hasenstab’s management style. The fund has posted an average annual return of 6.1% since Hasenstab assumed command of the fund in December of 2006, which ranks it second out of 46 similar funds.

The Bottom Line

The Templeton Global Bond Fund is probably not appropriate for conservative investors who shun volatility. But the fund has provided solid returns over the past 10 years thanks to Hasenstab’s style of management, which has followed its own path when it comes to security selection. Investors who are willing to assume a higher level of risk with their fixed-income portfolios may be amply rewarded by this fund over time. (For more, see: TPINX: Templeton Global Bond Top 5 Holdings Analysis.)


Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.