Q. What is the underlying methodology used to select bonds for inclusion in the fund?
The Franklin Templeton Global Bond team employs a bottom-up, research-driven investment process that combines qualitative macroeconomic analysis with quantitative tools to identify the most attractive investment opportunities across duration, currencies, and sovereign credit opportunities. The team applies an active management, benchmark-unconstrained style, pursuing absolute returns over a one- to three-year time horizon.
A core element of the investment process is leveraging the broad capabilities and deep resources of the Franklin Templeton Fixed Income Group, a global investment platform with more than 40 years of experience managing multi- and single-sector fixed income assets. The Global Bond team also draws on the investment expertise of Local Asset Management teams in regional markets who have established a history of discovering value in their respective regions.
Q. South Korea is the largest country weighting in the fund. What rationale underpins such a position?
The Templeton Global Bond fund has been investing in South Korea for a number of years, from its time as an under researched emerging market to the established player we see today. During that time the major drivers of our decision to invest has been based on strong macro-economic data. As things stand today, South Korea has debt to GDP of 40%, which is significantly lower than G3 economies. The country has a 94% employment rate and they also have positive economic growth, with GDP growth this year target set at 3% from the forecast of 2.3% at the turn of the year. The South Korean government plans to have supplementary budget of as much as Korean Won 12trn (USD 12bn). It is also our view that the Korean Won is more than 30% undervalued against the US Dollar.
Q. What is your view on valuations within traditional bond markets, i.e. UK, US, Germany?
We hold the view that traditional G3 bond markets have been significantly overvalued for some time, these valuations have created a bubble in bond markets which has started to unwind during June of this year. As a result of the significantly high valuations in G3 markets investors have been receiving little, no or even a negative real return. We do not believe in investing in assets which we deem to offer “return-free risk”.
Q. What impact, if any, do you think the gradual cessation of monetary stimulus will have on bonds as an asset class?
As noted above, the continual pumping of money by central governments is both reckless and has failed to work, the result has been a bond bubble in G3 markets. We expect from here going forward that asset prices on bond markets will fall and interest rates will rise. We also predict inflation to rise significantly in developed markets and emerging markets, the latter in our opinion is better placed to fight the battle against inflation as they have a) economic growth b) a full suite of fiscal powers (unlike the G3) and c) they have coped with higher levels of inflation than the west for the past 20 years.
Q. What are your forecasts for overall bond performance over the forthcoming one to two years?
We typically invest with a longer time horizon that 1-2years. However, it is clear that bond markets are going to face significant challenges in the coming months and years ahead – many of those are outlined above. For this reason, we feel it is more important than ever to have a benchmark unconstrained approach to fixed income investing. Our approach allows for returns from credit, yield and currency, with no requirement to hold the debt of the most indebted nations, such as Japan. We also expect income in developed markets to be eroded by rising inflation and rates, so we continue to invest in very short-dated issuance from issuers with more attractive short term interest rates. Overall, expect rising interest rates, falling asset prices, and a rotation away from G3 currencies in favour of heavily undervalued Asian and South American currencies. Overall performance in bond markets can still be strong, if invested in the right areas.
This document does not constitute an offer to sell or any solicitation of any offer to buy securities or any other instrument described in this document. Franklin Templeton has expressed its own views and these may change. The data contained in this document has been sourced by Franklin Templeton and should be independently verified before further publication or use. Neither this nor any other statement (oral or otherwise) made at any time in connection herewith constitutes an offer to sell or exchange units in the fund or any other fund or product and is not soliciting an offer to buy or exchange and does not constitute an invitation to subscribe for, buy or exchange any units in the Fund or any other fund or product in any jurisdiction where the offer, sale or exchange is not permitted. Potential investors are advised to obtain and review independent professional advice and draw their own conclusions regarding the economic benefits and risks of investment in the fund as well as the legal, regulatory, tax and accounting aspects in relation to their particular circumstances.