Irish turnaround is 'probably one of the investments of the decade'
INTERVIEW:It’s a crisp, blue Californian day at Franklin Templeton’s head office in San Mateo, on the US west coast. The asset management firm, located between the city of San Francisco and Silicon Valley, has become an unlikely protagonist in Ireland’s ongoing financial story.
Within 18 months, the company’s fixed income portfolio manager* has gone from being known to just a select group in financial circles to something of a household name – in Ireland anyway.
He doesn’t say so, but one gets the impression that Michael Hasenstab, who has built up an €8.5 billion holding in Irish bonds, is not entirely comfortable with the kind of cosy familiarity and everyman commentary this public profile brings. The 39- year-old fund manager is more used to explaining his investment strategy to the world of high finance.
With $165 billion of assets under his management, Hasenstab is one of the biggest – and most successful – fund managers in the world. His flagship Templeton Global Bond Fund has clocked up annualised returns of 10.66 per cent over the 10 years to the end of October last for investors.
But it is his recent investment in Ireland that has caught the attention of the investor community and the public on this side of the Atlantic.
Hasenstab first popped up on the Irish radar in July 2011 when his fund began buying Irish government bonds aggressively. It was a precarious moment – Ireland had just been downgraded to junk status, yields had soared to 14 per cent, and, as Hasenstab puts it, there was “massive panic” in the market.
Since then Franklin Templeton has increased its purchases in the secondary market and partaken in the NTMA’s bond auctions this year. It now owns an estimated €8.5 billion, or 10 per cent of the Irish bond market, a mix of primary and secondary, though most was accumulated in the secondary market in 2011 and early this year. So, the obvious question is, why Ireland?
“We had been looking at Ireland quite intensely for close to a year before we actually made our investment,” says Hasenstab. “Our initial read was that the market seemed to be lumping a handful of countries together as if they were all the same – Ireland, Greece, Portugal, Italy. Any time the market lumps a bunch of countries together, chances are it’s oversimplifying the situation.
“For us, the two outliers were Greece and Ireland. Our view on Greece was that it was fiscally insolvent.”
But Hasenstab and his team of analysts spied an opportunity in Ireland. “What really attracted us on the economic side, and still attracts us, was the very competitive economic fundamentals.
“Taking aside the chaos of the financial crisis, where clearly there was an over-investment, and a crash, this was evidently a country with an incredible wealth of long-term drivers of growth.”
Chief among these were competitiveness and “labour flexibility”, he says. “Ireland was far more flexible than any country in Europe in terms of its skilled, productive workforce and flexible labour market. A downward adjustment in real wages allowed exports to get competitive.”
Dealing with its problems upfront, including recapitalising its banks, also distinguished Ireland from most of the rest of Europe. “Take the banks for example. What Spain is doing today, Ireland did three years ago.”
Politically, Ireland’s “relative bi-partisan” support across the political parties, coupled with relative social cohesion, helped to instigate change, Hasenstab says. He acknowledges the social cost of these measures, including unemployment.
“[That] will take time to recover. There is no way to go through a financial market collapse of the magnitude of Ireland, the UK, the US without incurring an elevated level of unemployment. The question is to try and get through it as quickly as possible.”
Short-term pain will lead to recovery, is his message. “Look at Japan, where an inflexible labour market means you never get the innovation, you never get the recovery; you just stagnate for decades.”
Franklin Templeton’s investment in Ireland has so far proved prescient since its initial investment in July last year. Irish bond yields are now down to as low as 4 per cent. The sharp increase in the value of Franklin Templeton’s Irish bonds means the fund is sitting on billions of euro of paper gains.
The fund’s exposure to Ireland has caused some in the investment community to question whether Franklin Templeton’s holding is driving the Irish bond market.
“I would take those comments with a grain of salt,” says Hasenstab. “We bought a lot of Irish securities at very distressed prices [which] means someone was selling those bonds.
“I think there’s a fair amount of regret by people who sold those at distressed prices when they are now trading at par or above par. I think there is also some regret from people who missed what I would argue is probably one of the investments of the decade, the Irish turnaround.”
While he accepts that some investors were precluded from holding the bonds because of the ratings downgrade, he believes this only accounts for some of the dumping of assets onto the market at the time. “It was a mix. Some had to; some panicked.”