(Bloomberg) -- Franklin Templeton star bond investor Michael Hasenstab is loading up on safe-haven currencies and winding down massive holdings in emerging markets after two of his biggest investments flopped in August.
The fund manager doubled exposure to the yen to 40% in the $30 billion Templeton Global Bond Fund in the third quarter, according to a recent filing. He’s also added long positions in the Norwegian krone and Swedish krona and is increasing liquidity by boosting cash across his funds, he said in an October note.
Total net assets in the global bond fund dropped by $3 billion in the three months through September as a massive holding in Argentina was pummeled by the country’s default. The fund was also holding a huge short position in U.S. Treasuries as yields sank to a three-year low.
“A number of global risk factors have increased, raising the need to hedge some of our foreign exchange risk exposures and counterbalance our U.S. rate hedge,” said Hasenstab, who oversees more than $100 billion. “The potential for a geopolitical event appears higher than it has been in decades, given ongoing tensions among major world powers.”
Templeton’s Global Bond Fund has underperformed more than 80% of peers this year, losing 1.3% compared with a return of about 7% from Treasuries. The fund has returned 2.3% in the past three years, Bloomberg data show.
The fund is holding on to its Treasury short, but shifting the focus to those with longer maturities, according to the report. Hasenstab argues that markets continue to overvalue long bonds given rising deficit spending and rising debt.
Average duration in the Global Bond Fund, a measure of sensitivity to shifts in rates, increased to minus 1.39 years as of the end of September, the filings show. At the end of June it was a record low of minus 2.82 years.
While Hasenstab continues to see value in emerging markets, he says he is now “sizing and hedging” positions for individual risks. A 14% holding in Brazilian bonds, for example, is being offset by a net-negative position in the Australian dollar, according to the report.
“Investment strategies that may have worked well over the last decade are not as likely to be effective in the next one,” Hasenstab said. “Investors need to prepare for today’s challenges by building portfolios that can provide true diversification against highly correlated risks present across many asset classes.”