Michael Hasenstab is all about the big trade. It's a tack that has made him one of the world's most successful, and famous, bond fund managers during his 17-year stint at Franklin Templeton. But if his contrarian bets on Irish and Hungarian debt highlight the rewards to such a strategy, his gamble on Ukraine underscores the risks.
After loading up on more than $7 billion of the country’s bonds, Hasenstab has seen the value of the securities collapse as the conflict with pro-Russian rebels deepened an economic recession, depleted foreign reserves and prompted government calls for a debt restructuring. His investment, equal to almost half of all Ukraine’s foreign bonds, is now valued at just $4 billion, based on fund holdings from the end of the third and fourth quarters. As the losses mount, returns on Hasenstab’s two biggest funds - standouts in the industry that have outperformed 99 percent of peers over the past decade - have slipped, helping fuel client redemptions. Investors last year pulled a record $14 billion from the US and European versions of the Templeton Global Bond Fund and Templeton Global Total Return Fund, which have a combined $150 billion in assets, according to estimates compiled by Bloomberg.
“His success speaks for itself, but he does take bets,” said Alex Petrovic, a financial planner in Kansas City, Missouri, who invests in Franklin Templeton funds for clients. “And so far this Ukraine bet hasn’t played out.”
Creditor Talks
Hasenstab and Stacey Coleman, a Franklin Templeton spokeswoman in San Mateo, California, declined to comment on the firm’s Ukraine strategy.
“Franklin Templeton’s Global Bond group often takes a contrarian approach to investing,” Coleman said in an e-mailed response to questions.
“It has the research capabilities, size and long-term perspective to buy and hold investments that are out of favour.”
The Ukraine trade started to unravel in the second half of last year as the government’s finances deteriorated. The maths at this point isn’t encouraging: Ukraine has to make $14 billion of foreign bond payments over the next three years, an amount that’s almost double the $7.5 billion of international reserves it has left, according to data compiled by Bloomberg. And the economy is in tatters. Government officials are predicting a 4.3 per cent contraction this year following a 7.5 percent drop last year.
The military conflict with separatists, which has claimed more than 5,000 lives since it began in April, has snarled business in much of the east of the country.
Looming restructuring
Prices on Ukraine's benchmark bonds have fallen to 55 cents on the dollar, from as high as 105 cents last year, indicating that investors are expecting a debt restructuring that will saddle them with losses. Finance Minister Natalie Jaresko emerged from a meeting last week with International Monetary Fund officials in Davos, Switzerland, saying she plans to negotiate more favourable borrowing terms with bondholders. That same day, Christine Lagarde, the IMF managing director, said the lender was also willing to support an extended fund facility that would replace a $17 billion loan provided to Ukraine in the aftermath of the toppling of President Viktor Yanukovych last year.
Shortly after Yanukovych -- an ally of Russian President Vladimir Putin -- left office in February following months of protests, Hasenstab traveled to Kiev to survey the scene on the ground. While there, he filmed a video for Franklin Templeton spelling out why he remained bullish on the country.
‘Short-term fiscal issues’
“It’s a country that despite some of the short-term fiscal issues has very little indebtedness,” Hasenstab, 41, said in the April 5 thpiece. “So from a bondholder investor standpoint, it made a lot of sense. Then the crisis came, and what encouraged us was the response of crisis management.”
Two months later, Hasenstab was quoted in a Morningstar interview as saying that Franklin Templeton had made “a good amount of money” as Ukrainian bonds rallied. The selloff would start a few weeks later.
Hasenstab, who was named the top global bond fund manager in 2010 by Bloomberg Markets magazine, helped cement his reputation as a bargain-hunting investor when he snapped up Irish bonds amid the European debt crisis. The bet paid off handsomely as the bailout took hold. Irish bonds have returned 68 per cent since the end of 2011.
Big bets
He’s also made big investments in debt from South Korea, Hungary and Poland, Bloomberg data show.
Hungary’s dollar bonds have returned an average 54 per cent over the past three years, helping Hasenstab’s Global Bond Fund return an average 10.1 per cent annually over the past decade. The fund’s return, though, slipped to 1.99 per cent last year, a figure that put Hasenstab behind 53 per cent of his peers. The Ukrainian bonds were responsible for more of that slump in returns than those from any other country, according to data compiled by Bloomberg.
“The fund’s management team is nothing short of brilliant,” Gilbert Armour, a financial adviser in San Diego who owns the fund for clients, said.
“I wouldn’t let a short-term dip in performance deter one from sticking with a long-term winner.”
Piecemeal approach
Hasenstab now finds himself in the position of having to decide how much, if anything, he’s willing to give up in restructuring negotiations. The government has hired Lazard to advise it in talks with bondholders, Reuters reported Wednesday, citing people familiar with the situation.
Restructuring talks will likely have the support of the IMF, according to Lutz Roehmeyer, a fund manager who oversees $1.1 billion in emerging-market debt at Landesbank Berlin Investment. If IMF officials are showing a willingness to extend the terms of their financing to Ukraine, they will be looking for bondholders to make concessions too, he said. “Nobody wants to fund Ukraine alone,” Roehmeyer, whose holdings include Ukrainian debt, said.
“Not the US, not the EU and not the IMF. It’s a piecemeal approach, and of course creditors will have to contribute. If the IMF prolongs its loans, it will demand the same from bondholders.”
Bloomberg
