Thursday, February 09, 2012
NYT: A Contrarian Bets Ireland and Hungary Will Rebound
For months now, a big investor has been betting billions of dollars that two of Europe’s most wounded countries will bounce back from the beating they have taken during the region’s debt crisis.
But the bets, which center on Irish and Hungarian government bonds, aren’t the work of a hedge fund operating stealthily out of London or Geneva. Instead, the buyer is Franklin Templeton Investments, a mutual funds firm that caters to individual investors rather than to sophisticated institutional customers like pension funds.
The man behind the trades is Michael Hasenstab, who at the relatively young age of 38 has already drawn comparisons to some of the titans of the mutual fund industry, including Bill Gross of Pimco.
From his perch at Franklin Templeton’s headquarters in San Mateo, Calif., Mr. Hasenstab oversees a team of research analysts that controls more than $165 billion in assets, including the $57 billion Templeton Global Bond Fund. Last summer, when investors around the world dumped their holdings of Irish government debt, sending yields soaring, Hasenstab was buying. Today, his fund owns at least $2.5 billion in Irish government bonds. His Hungarian bet is even bigger, at more than $3 billion in that shakier country’s debt. The Irish bonds have been the far stronger performers, rallying more than 35 percent from the middle of last year.
Since 2008, investors have made a lot of money betting against Europe, but now some funds appear to think there might be a bigger payout from taking an optimistic stance on certain countries, like Ireland.
“Without question, the single best trade in the entire euro zone space is the one he’s done,” said Donal O’Mahony, the global strategist for Davy Securities in Dublin, said of Mr. Hasenstab’s purchase of Irish bonds.
But taking a very different approach from many of his peers — Mr. Hasenstab and the fund, for instance, have largely shunned the perceived havens of bonds of the United States and Germany — carries risks.
“The firm has given him a lot of freedom to execute a unique strategy, and it’s paid off,” said Miriam Sjoblom, an analyst with the research firm Morningstar, noting that the fund also has a stake in South Korean bonds and a bet that the yen will fall.
“But the risks that he’s taking here are pretty considerable, and there is the potential for the fund to suffer a bad spell.”
Mr. Hasenstab declined to comment for this article. Franklin Templeton representatives would not provide updated information about his holdings beyond publicly filed numbers for the end of last year. They said that the size and diversity of the fund insulated it from problems from a single country.
Mr. Hasenstab, who wrote his dissertation for his Ph.D. in the late 1990s on the development of China’s financial markets, has spent the bulk of his career at Franklin Templeton. Under his eye for the last decade, the Templeton Global Bond Fund has bested its peers time and again, racking up annualized gains of 11.7 percent, according to Chicago-based Morningstar. Those returns attracted investors who flooded into the fund, making it nearly four times as big as the next-largest, Unites States-registered global bond fund.
“We take a long-term perspective, it’s a research-driven perspective and we’re often contrarian, and that has been the case for decades and I think will remain the case for decades to come,“ Mr. Hasenstab said in a late October video posted on Franklin Templeton’s Web site.
Mr. Hasenstab is one of the firm’s top fee-generators because of the huge amounts of money he oversees. He paid $2.9 million in 2007 for a house on more than 19 acres in Sonoma Valley in California that was designed by the architect Robert G. Zinkhan.
Some say the secret to Mr. Hasenstab’s success is that he is not afraid to make big, concentrated bets in countries or currencies that are off the beaten trail or simply unloved. As of November, he had sunk over a quarter of the Templeton Global Bond Fund’s assets into South Korean and Polish government bonds, according to a filing made with the Securities and Exchange Commission.
Even as the fund’s Irish bonds gave it a boost, other foreign investments flagged in the second half of last year as the euro crisis rattled global markets. The fund landed near the bottom of its peer group in performance rankings, according to Morningstar’s data. After those returns, investors yanked out nearly $2.2 billion in the last two months of the year, according to an analysis by the brokerage firm Macquarie.
Now fund managers in Europe and the United States are closely watching Mr. Hasenstab’s moves, trying to gauge if his big bets in Ireland and Hungary will pay off.
Traders in Dublin said they noticed a big buyer coming into the Irish government bond market late in the second quarter of last year and into the third. The buying, they said, was easy to spot as it typically occurred around the same time — lunchtime in Dublin — and because most investors were selling or staying away after the ratings agency Moody’s downgraded the country to junk status in mid-July.
The buyer in all likelihood was Franklin Templeton. According to reports filed with the Securities and Exchange Commission, the Templeton Global Bond Fund owned $685 million worth of Irish government debt at the end of August, up from zero at the end of May. By the end of November, the fund held $2.49 billion worth of Irish sovereign debt.
Those numbers most likely understate the size of the bet made by Mr. Hasenstab because they reflect only the disclosed holdings for the United States-registered Templeton Global Bond Fund. The data firm Thomson Reuters eMAXX estimates Franklin Templeton’s various United States and European funds held a combined $7.2 billion in Irish bonds at the end of last year, or about 6 percent of the country’s total outstanding bonds.
Mr. Hasenstab has been an evangelist for Ireland’s stoic response to the crisis. In October, The Wall Street Journal’s editorial pages published a commentary by Mr. Hasenstab, titled “Lessons of the Irish Comeback.” In it, he said wage cuts for Irish workers were painful but had helped the country regain competitiveness. In the article, he did not disclose whether his funds held any Irish bonds. Mr. Hasenstab did mention that Franklin Templeton funds had bought Irish sovereign debt in a September commentary on the company’s Web site, a spokeswoman said.
So far, the Irish trade appears to have done well. The price of Irish government bonds has risen 37 percent since the end of June, according to a Bloomberg index.
“They’ve had a huge gain on the trade; they’ve done really well,“ said Ronan Reid, the chief executive of Dolman Securities in Ireland.
The question hanging over Mr. Hasenstab’s Irish bet is whether he will hold the bonds after 2013. Right now, the Irish government can pay off bonds that come due with the help of rescue loans from the European Union and the International Monetary Fund. But after 2013, Ireland may need to go back to borrowing from private investors to repay debts that come due — and the appetite may not be there, which could send Irish bond prices plunging. All of the Templeton Global Bond Fund’s Irish government bonds mature after 2013, according to the November holdings filing.
Some traders question whether the run-up in Irish government bond prices resulted in part from Mr. Hasenstab’s own buying. Others wonder what might happen if he tried to sell those bonds quickly. When a fund’s position becomes big in a market that is dominated by foreign investors, mass selling can drive prices sharply lower.
That may be more of a concern with Mr. Hasenstab’s stake in Hungarian government bonds.
At the end of November, the fund’s $3.03 billion of Hungarian government debt was more than double than what it held at the end of May, according to regulatory filings.
But, again, those filings reflect only a portion of Mr. Hasenstab’s bets. Thomson Reuters eMAXX estimates Franklin Templeton’s funds owned some $8.8 billion of Hungarian government bonds at the end of last year.
Weighed down by a high debt load and racked by political and economic turmoil, Hungary is seeking aid from the European Union and the International Monetary Fund. However, relations with both entities became strained last year after Hungary pursued measures that could, among other things, threaten the independence of the country’s central bank.
Hungarian bonds have struggled amid the country’s disagreements with the European Union. The price of those bonds has fallen 8 percent since the end of June, according to their Bloomberg index. The index has risen 8.7 percent so far this year.
Just over 60 percent of Hungarian government bonds are held by foreigners, according to statistics from the country’s central bank. That’s high, and means foreign sellers heading for the exit would struggle to find enough domestic buyers.
“Hungary doesn’t have a large pool of local savings, so if you want to sell, your ability to exit is limited,” said Koon Chow, emerging-markets strategist at Barclays Capital in London.
In a statement, Franklin Templeton said, “The fund’s well-diversified and large-asset base further insulates against the need to sell positions before their targets have been achieved.”
Posted by Bud Fox at 12:00 PM