Irish turnaround is 'probably one of the investments of the decade'
The fact that Franklin Templeton partook in this year’s NTMA bond auctions also dispels this idea that the holding is in some way a driver of the market, he says. “You don’t drive secondary prices if you take part in primary issuance.”
Neither is his position on Ireland predicated on a deal on Irish bank debt, he says. The decision at the June summit to de-couple sovereign from banking debt, contributed to a fall in Irish bond yields this year.
“Our investment is not dependent on that, but I think Ireland absolutely deserves it. Ireland is benefiting from the fact that they took the tough medicine upfront but the terms that they got from official support probably could be revisited . . . I think there is growing awareness that Ireland really is the model for growth and austerity and any credit they can get from that is well deserved.”
He also dismisses fears about the possible impact of any sudden offloading of the holding. “We’re not looking at short-term trade, we’re looking for a country that we can make an investment in for years. That applies to our investment strategy across the board.
“Our typical investment is three to five years. We’re really looking to invest in a country where we think over the course of the next one to 10 years, it will be in a lot better position in the future than it is today.”
Does this mean he plans to hold the bonds until maturity? “We certainly keep them a long time. Whether it’s all the way to maturity varies.
“It’s really a function of how things play out, but certainly when we went into Ireland, like in any country, we’re taking a view that five years from now, the Irish economy is going to be in a much better place.”
Hasenstab also points out that the funds’ holding of Irish government bonds is relatively moderate. “While Ireland is an important investment in the portfolio, relative to the total assets I manage, it’s moderate . . . The size of the fund gives us the staying power to ride through any short-term changes.
“We don’t worry about month-to- month or quarter-to-quarter volatility. Our investment performance as judged by our shareholders is based on long-term investment performance, so that may mean that maybe Ireland underperforms for a month, or a quarter, but what we really care about is whether it is on the right long-term track.”
Taking a contrarian view has been a hallmark of Hasenstab’s investment strategy. His two most significant managed funds – Templeton Global Bond Fund, and Templeton Global Total Return Fund, which are open to international, including Irish, investors – have accumulated a diverse portfolio of perceived riskier bond assets which have delivered double-digit growth.
Ireland keeps company with countries such as Poland, Hungary, Mexico and Korea in the funds. Essentially, the policy is to buy in when others are selling.
For Hasenstab, the fund’s strategy on Ireland is simply replicating other successful positions in the fund. He cites the example of Korea, the fund’s largest holding, which underwent a period of over-leveraging but has now seen its debt-to-GDP ratio fall, and its manufacturing industry move up the value chain.
Indonesia, which underwent a liquidity crunch at the end of 2008 and early 2009 is another example, which has delivered gains for the fund.
Choosing to invest in perceived riskier assets is no mean feat in light of the colossal sums of money at stake – Hasenstab manages $165 billion on behalf of investors.
But the firm’s investment philosophy is underpinned by a much more fundamental belief that the investment landscape is changing. Risk taking is becoming an inevitable – even essential – part of all investment strategies, he says. To preserve value, in other words, you have to take risks.
“In the past, you could put money overnight on deposit at the bank, or buy a 10-year US Treasury or German bund which was considered your risk-free asset. The reality today, given where those short-dated yields are and given where inflation is, is that is no longer risk-free . . . Putting money overnight on deposit is actually a guaranteed way to lose money, inflation will eat away at that.
“Long-term treasury yields in the US or Germany are at very, very expensive levels and, on a real basis, negative, so that’s not a safe haven. So even just to preserve one’s financial assets, one has to take a degree of risk . . . So what our task is is to look for where we’re getting adequately compensated to take risk.
“You’re going to have to take risk but the key is to make sure you’re getting compensated for that risk, so what we’re doing is trying to scour the world for areas where we think, five years from now, those investments will have equal and better value than they do today, where we’re earning a decent real yield, generating some income in that process.”
Central to this strategy is a strong emphasis on research. Some 50 senior executives report into Hasenstab from Franklin Templeton’s offices in San Mateo, London and Singapore as well as the Bric countries, reinforced by research personnel based in local markets.