A Franklin Resources emerging-markets bond fund run by star manager Michael Hasenstab was downgraded by Morningstar on concentration risk after the fund’s 9% decline since the market rout in Argentina.
Morningstar lowered its analyst rating of the $10.1 billion Templeton Emerging Markets Bond Fund (FEMGX) to neutral, its second-lowest, from bronze, according to a statement on Tuesday. A neutral rating indicates the conviction that a fund isn’t likely either to “deliver standout returns” or “seriously underperform,” according to Morningstar.
Morningstar analyst Patrick Ge said the emerging-market bond fund’s “benchmark-agnostic and contrarian investment approach” is more effective when applied to global bond offerings than to the narrower field of emerging markets.
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This results in “more-concentrated risk exposures, accentuating losses when mis-steps occur, as was the case with Argentina for the first three quarters of 2019,” Ge wrote.
The fund was one of the biggest losers in the aftermath of a shock Argentinian primary election result in August. Hasenstab wagered big on Argentina, saying last year that the South American nation seemed primed to lead a rebound among developing nations in 2019.
Argentine assets plunged amid investor concern that opposition candidate Alberto Fernandez would bring back the populist policies, including currency controls, that were common under the presidency of his running mate, Christina Fernandez de Kirchner. The sell-off led the government to reimpose capital controls and unilaterally push out debt maturities. Fernandez will face off against business-friendly incumbent Mauricio Macri in the final presidential vote on Oct. 27.
Hasenstab is well known for his contrarian investments that have put him at odds with the market. He held on to a short position against U.S. Treasurys in his flagship fund this year even as the bonds rallied. Some previous wagers on government bonds in countries going through financial turmoil, such as bailout-era Ireland and Hungary, have delivered strong returns.
The mutual funds and ETFs that ranked at the bottom of the sector still benefited from a “long-running bull market,” an expert says.
Templeton’s Global Macro strategies aim to “create portfolios that can provide diversification against highly correlated risks across asset classes,” according to a spokeswoman.
“We don’t believe the past 10 years of collapsing spreads, falling yields and rising equity markets will last forever,” underscoring the need to build a portfolio with “idiosyncratic allocations,” the spokeswoman said on Tuesday.
Bloomberg News
