We live in a world of low yields and have for a while. Investors are finding it increasingly difficult to generate income, so invariably they have to choose between higher volatility or higher risk in their portfolios. I thought I would take a look at the approaches of some well-known guru investors to see what lessons we can learn. Second on my list is global bond investor Michael Hasenstab, who manages the Templeton Global Bond Fund.
Michael Hasenstab
Equity investors tend to receive most of the accolades in the financial press and with private investors. After all, the equity arena is where fortunes are made and lost within a decade or so. Bonds can be a comparative grind and the difference between a 6% annualized return and a 7% annualized return is not too exciting until the end result is observed over several decades.
With this income series, I am doing my part to change this dynamic. Hasenstab is a bond investor with a PhD in Economics who has received nearly every award and accolade possible in the investment world. In 2006, he was named Business Week's Best Global Manager. In 2008, 2010 and 2011, Investment News named him their Global Bond Manager of the Year and called him one of the most influential fund managers in 2010. Meanwhile, Bloomberg Markets selected him as Top Global Bond Fund Manager in 2010 and Top U.S. and Global Bond Fund Manager in 2009. Additional titles were bestowed by Morningstar, naming him Fixed Income Manager of the Year in Canada in 2013 and in the U.S. in 2010. That is an impressive list.
I have reviewed his portfolio, which can be found here. Several things stand out to me. Bill Gross, who we reviewed previously, held 11% cash. Hasenstab ups him by having 30% in cash. That must mean he is thinking bond bubble.
Image: Screenshot from the Templeton website.
If we look at the portfolio statistics, we immediately understand the view he is taking. The average duration is -0.3 years. This means if interest rates move up 1%, the portfolio will, on average, gain 0.3%. The benchmark may well have a duration of 7% or 8% to put that minus -0.3% in perspective. He is expecting interest rates to increase and bond prices to go down. The 30% cash makes a lot of sense because he will go shopping after bonds crash.
South American countries - notably Mexico and Argentina - make up a large part of the portfolio. He almost completely fades Europe ,where interest rates on bonds can be negative as Mario Draghi continues to run a very loose monetary policy.
Portfolio themes
Here are what I determine to be his portfolio themes:
- Reduce duration risk to maximum extent.
- Avoid modelling your portfolio on an index.
- Accept low income.
- Take advantage of rarely occurring emerging market debt such as Mexico, Indonesia and Argentina.
Hasenstab is on trend: it seems all the great investors are building medium or low-yielding income portfolios. It is impossible to know for certain why this is the case, but perhaps it is a reflection of low returns all around.
Mexican bonds are Hasenstab's top holdings and have been for a while. Have a look at Market Vectors LatAm Aggregate Bond ETF (BONO, Financial)—it contains a fair ratio of Mexican bonds. Since there is no exchange-traded fund (ETF) focused on Mexican debt, consider the Templeton Global Income Fund, which has a reasonable expense ratio.
Disclosure: No positions.
