Bonds Without Borders: Global Funds Can Take Your Portfolio Anywhere

The concept of the global stock fund is well accepted. If U.S. bank stocks scare fund managers, maybe they can find banks with better risk-return profiles in Brazil or India. There's not much to buy in Detroit, but perhaps managers spot value in Toyota or BMW. Coca-Cola, McDonald's and Philip Morris International are world leaders. Fund managers can pick and choose stocks in a borderless investment world.

Global bond funds are a less-developed idea. But Michael Hasenstab, who manages the $13.3 billion Templeton Global Bond Fund, says Americans are increasingly seeking to invest in foreign bonds and currencies. Hasenstab, who has a doctorate in economics, is compiling a record that even Bill Gross of Pimco would envy.

Since Hasenstab began managing this fund in December 2001, it has returned 11.8 percent annualized through July 13. That's an average of four percentage points a year better than the Citigroup World Government Bond Index, a relevant benchmark. In the past year the fund made 12.4 percent. This suggests that the fund has a low correlation with the U.S. stock market -- and in fact, that's true. In 2008, Templeton Global Bond returned 6.3 percent.

This is a fairly complicated fund. Hasenstab, who works with 40 people around the world, invests to address three concerns: interest-rate risk, currency movements and the financial health of governments. For example, earlier this year he spied opportunity in Korean and Mexican government debt. He figured that interest rates in those nations were due to fall, so the bonds would gain value in local terms. But he didn't have confidence in Korea's won and Mexico's peso. If they fell against the dollar, the fund's U.S. shareholders wouldn't benefit from rising bond prices. So he bought the bonds (all of his foreign bonds are issued by governments or government agencies) but hedged the Korean and Mexican currencies.

At any time, Hasenstab is invested in 20 to 30 countries, including Iraq, Venezuela and Russia, and 15 to 25 currencies. For instance, some of his largest currency exposures are to the Malaysian ringgit, Chinese renminbi, Chilean peso, Brazilian real and Swedish krona. But he's betting against the euro and New Zealand dollar. In the United States, all of the fund's bond holdings are in municipals.

Hasenstab is bearish on the U.S. dollar in the medium and long term. He thinks the government is creating a good recipe for a depreciating currency as it prints and spends money and nationalizes financial institutions. Also, as U.S. consumers borrow less and repay debts, he expects the strongest economies and currencies to be large countries with fast-growing domestic markets, such as China, India, Indonesia and Brazil.