As the guardian of $120 billion of assets, Franklin Templeton’s bond maestro, Michael Hasenstab, at the ripe old age of 37, has built himself a rock solid reputation as one of the finest bond managers in the world, but what makes him tick?
His skill as a manager is widely known but what is he really like? This is what I set to find out but admittedly ended up feeling slightly frustrated.
Hasenstab, you see, does self-effacing charm like nobody’s business but at times you almost will him to be a bit of a diva, more cut-throat, or for a man with such huge assets at his disposal, at least have a hint of arrogance about him. But with every attempt to grab him off-guard, to scratch beneath the surface, he outmanoeuvres you, coming back with a response so relentlessly on-message that you cannot help but admire him.
This it seems is man who politely refuses to mix business with any talk of pleasure, a comforting thing to hear as an investor but hardly music to a journalist’s ears.
The next Bill Gross?
The Templeton Global Bond fund he runs saw $16 billion of net inflows over the course of 2010 alone, a considerable achievement in itself, but this is just the half of it with Hasenstab as when his Global Total Return and Emerging Market Bond strategies are tallied up too, his power and indeed influence as a bond investor is second only to that of Bill Gross, founder of Pimco.
Having obtained his undergraduate degree in international relations and political economy at Carleton College in Minnesota, Hasenstab joined Franklin Templeton in 1995 first working as an emerging market sovereign credit analyst and aside from taking a leave of absence to complete a PhD in economics at the Australian National University, has been with the company ever since.
Speaking from the firm’s headquarters in San Mateo, California, just south of San Franciso, Hasenstab is philosophical on the trials and tribulations of managing assets on such a large scale.‘In terms of how one feels responsible, I think you feel that whether it’s a 100 million or a 100 billion that you’re managing, they are all equally important assets as they’re people’s retirements, they are people’s savings. So that equation doesn’t change.’
Crediting the 'point people'
He is, however, under no illusion that he has reached such lofty heights through his own merit alone and is quick to flag up the ‘point people’ who have become pivotal to the success of the funds as assets have swollen, saying: ‘Some of the scope of what we needed to build did change with growth, so a big effort was made to expand the team bringing in Sonal Desai as director of research and other portfolio managers to help with the capacity issue. The day-to-day is the integration of the research team, coordinated by Desai, it’s great when you have a good research network but you want to make sure all the information is filtering in, so she has been a great addition to the team.’
He added: ‘We have some other portfolio professionals who are helping to build our separate account business so Canyon Chan is a portfolio manager that helps makes sure we’re instituting our strategies across all of our separate accounts, while Laura Burakreis helps with emerging market debt.’
But for Hasenstab, the single most important weapon in the team’s armoury is its meticulous country research. ‘It really all comes down to the country research and the macro research, that’s what we really all spend our time on, travelling to these counties, the analysts go out, I go out, there’s no substitute for in-person meetings, being on the ground in these various locations and comparing what you learn on the ground versus what you’re seeing in central bank and International Monetary Fund reports and really challenging from both sides. That’s what really is the core of what we do,’ he says.
So what’s the upshot of all the globetrotting? What is his view of the world and how will he be positioning his funds accordingly?
‘My favoured regions are the ones we can make money in,’ Hasenstab says candidly. ‘What interests the whole team is; where is there an imbalance? Whether it’s in Brazil, Sweden, Indonesia, it really doesn’t matter. Identifying that macro imbalance and seeing how we can position an investment to take advantage of a readjustment there, that’s what we do best.’
US treasuries a no-go
So perhaps to narrow it down, an area where he’s certain he won’t be making money is US treasuries. ‘We have a 0% allocation. I think the combination of monetary and fiscal policy in the US, relative to the state of the economy, is too expansionary,’ he says. ‘There’s a lot of talk about the need for fiscal reforms but there’s no realistic proposal to do anything like, for instance, what the UK has done in terms of really tackling the structural problem. All the budget solutions at this point are really discretionary spending at the margins which will have very little impact on the real deficit.’
In contrast, he has been impressed by China’s ‘intelligent’ approach to economic liberalisation, and is encouraged by its decision to issue yuan bonds out of Hong Kong, a move he thinks will open markets further and enable him to scale up his investment in the region.
‘Markets continue to open, there was a brief spate of capital controls but none of them really reversed the decade-long progress to open markets and China probably is the big one over the next decade. Hong Kong is really the petri dish for the financial reforms China wants to make. China tries things out there, it builds the infrastructure. I think it’s a very intelligent way to go about financial reform and clearly China is sending signals that it wants the yuan to be an international, global currency. It’s just a matter of time,’ he says.
Chinese outward investment
But it is not all about the money flowing into China, as for Hasenstab, the money flowing out of the country is just as significant. ‘All of a sudden, China has gone from being a recipient to being a source of foreign direct investment and for some of these small economies it can have a meaningful impact, even for large economies like Australia. So that story about Chinese outward investment, I think, is a very important story for the next five to 10 years,’ he says.
It is not just China that Hasenstab is positive on either, as one of his strong convictions for the year ahead is the performance of non-Japan Asian currencies versus the euro, yen and dollar. ‘It has to do with the good fundamentals in Asia, the lack of leverage, strong growth, the need for exchange-rate appreciation due to inflationary pressures combined with the easy money in the G3 [US, European Union and Japan], a combination of those factors, I believe, will lead to a continued appreciation of [non-Japan Asian] currencies,’ he predicts.
2011 - a year for policy making
Inflation is high on Hasenstab’s agenda, a theme he believes is ‘absolutely critical’, as it changes the political calculus and it is this that underscores his belief that interest rates globally are going higher in 2011.‘Whether in some countries it’s because of fiscal problems or in others because of inflation, or just because you have a normalisation of growth – all of those point to higher interest rates.’
In positioning his funds appropriately for rising rates, Hasenstab reveals that he and the team are now looking for opportunities to hedge interest rate risk, saying: ‘That’s why we’ve got very short durations in our strategies and why we’re looking for currencies that have a negative correlation to moves in interest rates.’
Broadly, he says 2011 is going to be about policy making, people staying ahead of the curve, getting behind the curve and in Europe’s case in particular, the need for fiscal consolidation. ‘The policy decisions will probably be the key variables, whereas last year was a lot more about predicting business cycles,’ which explains why his last big conviction for the year ahead is Europe’s periphery versus the core.
‘In terms of Europe, I think it is going to continue to be a very muddied picture. The need for fiscal coordination [and] all of the political problems that go along with actually imposing...that, could work out, but it also might not work out and we don’t like the binary bet,’ he says.
He continues: ‘When we’ve taken a broader look at Europe, where we do have a high conviction is in Germany. Germany’s export engine is doing very well, German growth is one of the strongest in Europe and its economy has maintained competitiveness better than most other countries in Europe, so we’re looking for ways to play that.’
Such plays include Sweden, which is a large exporter to Germany, as well as Poland and Hungary, countries that are ‘very tied to the German export engine so we like that linkage’. ‘One of the reasons we like Scandinavia and central Europe is because of their low levels of debt. Hungary is a bit of an exception, but it has at least made the steps to correct it.
Too big to fail
Throughout the entire interview, Hasenstab has maintained a calm, unhurried delivery but for a brief period, on the topic of Greece’s role in the sovereign debt crisis and the idea of being ‘too big to fail’ he becomes animated, unable to disguise his disbelief that markets and politicians would make the same mistake twice.
Letting go for a moment he says: ‘It was interesting, a lot of the logic for owning Lehman Brothers was too-big to- fail and then a year later I heard the same arguments about Greece – too-big-to-fail – and that to me was like, OK, you can make a mistake once but you shouldn’t make it twice.
‘There were many other reasons that kept us out of Greece but the one that stuck in my mind was the too big- to-fail and we just lived through a period where too-big-to-fail didn’t hold, so I think there were some valuable lessons to be taken out of that crisis.’
What then has been his own biggest mistake? ‘I would say looking back there were things that were unexpected and I wish we had done differently. Even though we were very cognisant of how the financial crisis was unfolding I did not foresee that Lehman would default. I think there were some surprises in there and obviously in hindsight if one knew Lehman was going to default there would be very different trades that one would have put on.’
Yet in the same breath, as only Hasenstab can, he finds a silver lining in the crisis: ‘As tough as it was as a period, I think it was a very good stress test for our portfolios and portfolio risk procedures.’
In fact, the crisis in many ways has worked to his favour, as previously, many investors were anxious of his funds’ high tracking error, deeming them to be risky. But as they came through the crisis relatively unscathed, opinions quickly altered. ‘I think many institutional and retail investors became a lot more comfortable and realised that tracking error is not a very good indicator of risk and started to increasingly embrace our strategy because it held up so well in that hundred-year flood. It was a difficult period to go through but it was a necessary stress to show that the approach is robust.’
Hasenstab, as ever, always sees an opportunity to play a crisis situation to his advantage.
This article originally appeared in the March 2011 issue of Citywire Global magazine.