With ears to the ground in more than 30 countries, Franklin Templeton's fund managers are ready to buck plenty of fixed income investing trends in 2012. Most notably, they plan to embrace active management of their funds, as well as global volatility.
And ignore anything with an index.
Its managers plan to drill deep into fundamentals of local companies anywhere they are found. And find them in countries ignored by other funds and investors. On the company's radar: Poland, Hungary, Korea, Malaysia and Indonesia.
Like a champion judo practitioner, it also intends to nimbly grab opportunities that crop up from "headline volatility" to get bargains. That's when some headline over some emotional event, such as the outlook for sovereign debt in Europe, knocks down values of securities, unfairly, in its wake.
"We are finding significant opportunity outside the U.S. bond market," said Franklin's chief investment officer Christopher Molumphy. "We see a number of regions and countries where the fundamentals are vastly superior."
Of course, even the best judo practitioners risk being flipped by their opponents. As of Dec. 31, Templeton's Global Bond Fund lost 6.50 percent of its value over the year, due in part to price deflation as panicky investors left many international markets. However, some clients are willing to stay the course, such as Mark Martiak, senior wealth strategist at Premier Financial Advisors.
Martiak, who manages over $400 million in assets, says the money he plugged into the global bond fund in April has lost roughly 5 percent of its value, but he feels the fund is positioning itself well for surges in a number of regions.
"I do think that the pendulum will swing back in favor of fixed income" securities, he told Money Management Executive. "Like the team at Franklin Templeton, I believe that the flight to perceived safe-haven assets during 2011 opened attractive opportunities in currencies and fixed income markets around the world that are underpinned by the relative strength of select economies."
In addition to the global bond product, which focuses primarily on non-U.S. government debt, Franklin operates four other international fixed income funds. These include funds that focus on hard currency; total return; investment bonds of all types, and a combination of equities and debt.
The global bond fund, with nearly $57 billion in assets, is the largest of its type in the Morningstar World Bond Category.
All of these funds focus on gaining high-alpha, or active return, by playing with what Franklin calls the "three Cs," interest rate curves and duration, imbalances in currency markets, and solid sovereign credit.
In addition to Molumphy, Franklin's international debt group is led by Michael Hasenstab. Their research team is led by Sonal Desai, who is also a portfolio manager.
Franklin touts its global research function as a key advantage over other managers. Of course, the firm drills down on macro-economic figures and market data for countries and regions like everyone else.
However, Franklin depends upon local managers and traders to give it on-the-spot observations missed by funds whose managers just read screens from their offices in New York or elsewhere in the United States.
For example, on Franklin webpages touting their global investment products, one manager notes the explosive growth of Thai consumers shopping at supermarkets compared to 30 years ago. Another observes the growing wanderlust of the Russian middle class for travel.
They also like to be what they call "benchmark agnostic," ignoring as much as possible indices which Molumphy describes as "commodity" benchmarks and which are primarily dominated by government debt from the United States, Japan and the most developed countries in Europe.
"We'll look at countries or regions that have positive fundamentals regardless of their credit rating or inclusion within a global index," says Molumphy.
So what are they hearing from their people on the scene?
For one thing, there is a lot of value to be found in emerging market debt, which they say should bounce back this year, and leveraged bank loans.
A lot of countries in non-Japan Asia, peripheral Europe and Latin America have more solid debt situations compared to their counterparts in the developed world. They don't expect a crash in Europe, but rather a slow and agonized rebuilding, with long-term recessions in countries such as Spain and Italy.
They also see some opportunities in the U.S. debt market, but just not with federal debt. Molumphy said the corporate sector is "fundamentally reasonably sound," and likes the municipal sector.
"We remain positive on municipal bonds," he said. "Unlike the federal government, our local, city and state entities have done a reasonable job getting their financial houses in order."
Meanwhile, the Franklin team is bracing itself for more short-term headline risk in Europe and other regions, but refuses to let a little volatility shake them out of these markets. "Our typical investment horizon is three-to-five years," Molumphy says. "Instead of 12 months."
In a recent report, global fixed income head Hasenstab wrote "we view periods of heightened market volatility as opportunities for us to put cash to work in some of our favorite positions at improved valuations."
This long-term opportunistic approach seems to be working. Using Morningstar data, Franklin Templeton calculates that the Templeton Global Bond Fund outperformed 99 percent of its peers over the 10-year period and that 98 percent of its U.S. retail fixed income products rank in the first or second quartile of their Lipper peer groups.
Wojtek Zarzycki, chief investment officer at Optimal Investing, says Franklin's experience weathering bulls and bears is very powerful branding asset.
The firm, he says, is viewed as "stable, safe and geared towards investments for the long-term."
Franklin declined to comment on what precise strategies its fund managers plan to follow this year or whether they would launch any new funds.
But Martiak at Premier Financial expects they will likely look at currency opportunities in countries with relatively strong growth and tightening monetary policies as well as sovereign debt in countries focused on improving their economic policies.
