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Michael Hasenstab
<p>To Michael&nbsp;<span data-scayt-lang="en_US" data-scayt-word="Hasenstab">Hasenstab</span>, the future looks clear: Treasuries will fall as inflation picks up, the dollar will rally, and a handful of emerging markets&mdash;including Mexico, Brazil, and Indonesia&mdash;represent once-in-a-generation opportunities.</p>

Bond Lessons at 29,000 Feet: Hasenstab Has No Time for Your Fear

(Bloomberg Markets) -- “If I don’t get to the top,” Michael Hasenstab was telling himself, “I have to rename our fund.” Franklin Templeton’s star bond-fund manager found himself somewhere around 24,000 feet on Mount Everest when he became intimately familiar with the effects of oxygen deprivation.

An avid mountaineer who’d spent the preceding five years bagging peaks to train for the world’s tallest, Hasenstab knew to expect pain on the Lhotse Face. It was 40 degrees below zero, the numbing wind ripped across the mountain, and misery accompanied every step on the blue-ice slope. Yet he was still hours away from Camp Three, where he’d begin breathing bottled oxygen, and he found his mind was fixating on a flag stashed inside his pack, one emblazoned with the logo of his three-year-old hedge fund, Global Summits. “If I don’t get to the top, I have to rename our fund.” He found the thought funny, and it motivated him to keep going. “I am not changing the name,” he told himself. “It’s printed on the flag.”

“I needed to put it on the top,” the curly-haired Ph.D. says three years later. Everest wasn’t the only peak he scaled in 2013. By then, Hasenstab was one of the world’s top investors, with his flagship Templeton Global Bond Fund ranking No. 4 in returns among 113 U.S.-based fixed-income funds tracked by Bloomberg for the previous 10 years. Assets under management across all his funds had swollen to $190 billion—equivalent to the annual economic output of Portugal—from less than $2 billion in 2001, when he started managing the Global Bond Fund.

Unlike mainstream global bond investors, Hasenstab had excelled at making huge one-way bets on the higher-yielding debt and currencies of developing nations. Once the contrarian saw a path to recovery, he’d make signature trades that sniffed out opportunities in situations with big upsides. “The goal is not to be a contrarian,” he says. “The goal is to be research-driven and be comfortable being a contrarian.” When the European debt crisis drove away investors in 2011, for instance, he loaded up on Irish bonds in an 8 billion euro wager that returned 70 percent. A similar bet on out-of-favor Hungarian bonds the same year also netted billions.

Since 2013, however, assets managed by Hasenstab’s team have declined by about $60 billion, or 32 percent, as clients have withdrawn funds. After riding the boom in emerging markets over the past decade, the fund manager is now confronting a radically new financial landscape—one in which growth is slower, potential returns are lower, volatility is higher, and pitfalls are plentiful. By far his biggest bruise came when a high-profile multibillion-dollar bet on Ukraine soured with Russia’s 2014 invasion of Crimea. After loading up on 40 percent of the country’s bonds, Hasenstab saw a major chunk of his investment wiped out as the conflict with pro-Russian rebels deepened an economic recession that drained the country’s reserves.

The Ukraine experience hasn’t stopped Hasenstab from going big, including a massive wager on rising interest rates after 30 years of declines. So far that gamble has been a flop: The U.S. economy struggles to gain traction, inflation remains below target, and Treasury yields remain near record lows. A $19 billion bet on the dollar against the yen is also losing money, in the face of a more-dovish-than-anticipated Federal Reserve and a less-dovish-than-expected Bank of Japan. Through Aug. 2 the $47 billion Templeton Global Bond Fund is down 1.1 percent this year. That’s after a loss of 4.3 percent in 2015—its worst year since 1999—when the emerging-market selloff caught Hasenstab off guard.

His ill-timed trades aren’t necessarily disastrous; they could eventually turn in his favor. Indeed, last year Hasenstab managed to salvage his Ukraine investment with a better-than-expected debt restructuring that ranked alongside Argentina and Greece among the largest ever. And his doubling-down in countries such as Brazil late last year was prescient and largely offset his losing trades. “He deserves praise on how well he did through this varying, treacherous environment,” says Dan Fuss, 82, vice chairman of Loomis Sayles, whose main bond fund beat 89 percent of its competitors over the past 15 years.

Yet the rare miscalculations for Franklin Templeton’s 30-year-old fund are beginning to taint a previously impeccable record. Over the past three years, it barely made money and lagged 91 percent of its peers, according to Morningstar. Hasenstab’s go-big, go-early, and go-against-the-herd approach faces a crucial test: Can it still work when powerful, unconventional central-bank policies have changed the way markets function?

“I am comfortable being out of consensus,” the spectacled Hasenstab, 43, tells Bloomberg Markets from his corner office at Franklin Templeton in San Mateo, Calif. It’s June  24, the first trading day after the U.K. voted to exit the European Union. He says the  losses, the outflows, and even Brexit haven’t shaken his conviction in his fundamental outlook on the global economy and the bets he’s staked his reputation on. To Hasenstab, the future looks clear: Treasuries will fall as inflation picks up, the dollar will rally, and a handful of emerging markets—including Mexico, Brazil, and Indonesia—represent once-in-a-generation opportunities. “We are in that period needing patience and vigilance,” he says. “The philosophy hasn’t changed.”

If Bill Gross, the former Pimco bond king now at Janus Capital, and Jeffrey Gundlach, the DoubleLine Capital founder, are the public faces of modern bond investing, with egos as big as their assets, the baby-faced Hasenstab is every bit the opposite. Sitting behind a desk stacked with research papers, he comes across more like a bookish professor—especially when he drops terms such as “the Lewis Turning Point” in a quiet voice befitting a library.

“I’m comfortable going through periods of pain, sweat, and tears, knowing there’s a reward at the end”

Yet Hasenstab lives for adventure. He spent part of his senior year of high school in China, traveling alone across the country. He once swam from Alcatraz to the San Francisco shore, and he’s run several marathons in Death Valley. For their honeymoon, he and his wife climbed Mount Kilimanjaro.

It’s this combination of studious academic and ambitious risk-taker that’s done so well for the firm built by the late Sir John Templeton. A pioneer of global investing who had a knack for finding undervalued companies, Templeton borrowed money as World War II broke out to buy every stock listed on the major U.S. exchanges selling for $1 or less, an investment that minted him a fortune. Hasenstab and his team of 20 have carried the founder’s vision into bond investing. They comb the world for mispriced assets, often disregarding benchmarks and ignoring the opinions of ratings companies.

Hasenstab himself spends at least three months a year crisscrossing continents, meeting prime ministers, economists, even local business owners. “A lot of the research that I do on the ground is the opposite of glamorous,” he says. “You’re talking about going around the back alleys of Jakarta sweating through your suits in 100-degree weather to meet people.”

Speaking with academics during his travels excites him most, he says. In the early 2000s, for instance, a lunch with a Chinese professor helped him realize that the country’s one-child policy would lead to a labor shortage and force the government to shift its growth model to consumption from exports. That very transformation—mostly just a provocative idea at the time—has unfolded in recent years and reshaped the global economy.

For years, Hasenstab’s funds have been the largest investors in countries such as Ghana, Sri Lanka, and Uruguay, as well as in larger markets such as South Korea and Indonesia. At the end of June, Mexico, Brazil, Indonesia, Ukraine, and Malaysia accounted for about half of his Global Bond Fund’s total holdings, compared with a weighting of about 1 percent in the Citigroup World Government Bond Index.

In a bold move for Hasenstab, he’s accumulated short positions in the yen and the euro that now account for about 20 percent of the Templeton Global Bond Fund’s value at risk. The duration of its U.S. interest rate swaps, a measure of sensitivity to changing interest rates, amounted to minus 2.6 years, lowering the average duration of the fund to 0.2 years, a massive contrast to the benchmark’s 7.7 years. That means for each 1 percentage-point increase in bond yields, the valuation of his holdings will rise 2.6 percent.

Many bond investors, including Gross and Gundlach, see the three-decade bull market in Treasuries coming to an end. With 10-year yields at about 1.5 percent, they say there’s little room for price appreciation. The U.S. economy, while far from booming, continues to expand at a moderate pace. The unemployment rate is at a nine-year low, bolstering the case that inflation will creep up and prompt the Federal Reserve to raise rates.

In Japan the chorus grows ever louder for more monetary and fiscal stimulus, moves that may reverse the yen’s 19 percent appreciation this year against the dollar. With inflation falling and the economy on the brink of contraction, a steady appreciation in the yen is the last thing the country needs.

Yet there’s always a risk that the payoff never comes. Betting against Treasuries has been the wrong wager since the recession ended in 2009. Some investors are already calling it the next “widowmaker,” a term used in Japan to describe the perpetually losing trade of shorting government debt.

Buckling under aging populations and falling productivity, growth in almost every major economy outside the U.S. is faltering. The outlook is even dimmer post-Brexit, increasing the demand for safe-haven government debt. And with more than $10  trillion of bonds in Europe and Japan offering yields below zero, the case to buy Treasuries is increasingly appealing.

“Sometimes you have to stick to your guns, to what is going to be good long-term value, and let them go out of favor temporarily,” says Gilbert Armour, a San Diego-based financial adviser at SagePoint Financial who’s invested in the Templeton Global Bond Fund for more than a decade. Armour says Hasenstab is “certainly not afraid to do that” and calls him “a brilliant guy.”

Hasenstab’s strategies have also begun to court controversy. Critics say few global bond investors ever amass positions as large as Templeton’s in certain markets. And once the firm decides to exit a position, it exposes the countries to unnecessary volatility. Critics also maintain that Hasenstab’s investments can give governments, sometimes authoritarian ones, an easy pass to carry out policies that erode democratic values.

Viktor Szabo, a money manager at Aberdeen Asset Management, says he finds Hasenstab’s strategy most troubling in Hungary. After coming to power in 2010, Prime Minister Viktor Orbán has embarked on one of the most extensive centralizations of power since the end of communism. He’s installed party loyalists to key oversight posts, including the Constitutional Court, while seizing control of private pensions worth $11 billion. “By buying up the bonds, [Hasenstab and Templeton] allow the government to go on with all these crazy, unorthodox policies,” Szabo says. “That could all happen without [Hasenstab], but it would be much more difficult should the market provide decent enough feedback that the policies are not right.”

Hasenstab brushes aside these concerns. His investments help countries build schools and bridges and fund social programs, he says, while making a profit for his investors. “If the country does well, our investors do well,” he says. “We absolutely have every incentive for a country to succeed.”

If the big, contrarian trades worked out well for him in Ireland and Hungary, his investment in Ukraine underscores the risk. To make himself whole, Hasenstab had to enter an unfamiliar role as the lead negotiator of a sovereign-debt restructuring deal that took center stage during a global power struggle.

The breakthrough finally came in August 2015. With Hasenstab facing the very real prospect of a default without any restructuring agreement in place, Ukrainian Finance Minister Natalie Jaresko flew 6,000 miles to meet him for breakfast at the Hyatt Regency in downtown San Francisco. Their ensuing deal exceeded the markets’ expectations, sending benchmark bonds up as much as 16 cents on the dollar the day after it was announced. In the space of days, Hasenstab had recouped his losses, while Ukraine got the debt relief and access to multilateral aid it needed.

“It was a deal in which both sides gave things up and both sides got something,” says Charles Blitzer, a former International Monetary Fund official with experience advising on sovereign-debt restructurings.

Hasenstab ranks the restructuring as his single biggest professional achievement. “We were not just managing a simple restructuring exercise,” he says. “We were managing our role in this geopolitical situation. It was beyond just getting the economics right.”

In all his triumphs, including Ukraine, Hasenstab says he succeeded by having the patience to weather turbulence other fixed-income money managers couldn’t stomach. His strategy remains the same. And while he admits he mistimed his wagers on Treasuries and the yen, he remains undeterred.

“I’m comfortable going through periods of pain, sweat, and tears, knowing there’s a reward at the end,” he says, referring to both investing and climbing. “It’s not a quick reward.”

Neither was planting his Global Summits flag atop Everest. It was a bluebird day when he summited, and as the sun rose, he could see the mountain’s shadow all the way to the horizon. “The achievement of getting onto the top is rewarding,” Hasenstab says. “To me, though, it’s the process of climbing that I enjoy more.”

To contact the authors of this story: Ye Xie in New York at [email protected] Boris Korby in New York at [email protected] To contact the editor responsible for this story: Joel Weber at [email protected]

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