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Hasenstab Built a Bond Franchise on Risky Bets. Now, He's Piling Up Cash.


One of Wall Street’s most intrepid bond investors has turned defensive.

Michael Hasenstab

built an almost $200 billion government-bond franchise for Franklin Templeton Investments by making large, profitable bets in risky countries. But that strategy backfired badly for the star fund manager in 2019 when a bet on the Argentine peso soured, saddling investors with losses.

Now Mr. Hasenstab is pulling out of most emerging markets and building a big cash pile to prepare for the market selloff he says is coming.

“It’s our biggest shift in 10 years,” Mr. Hasenstab said. “We understand we are giving up returns but we are not chasing late-cycle investments that we believe to be illiquid and expensive.”

Mr. Hasenstab piled up impressive returns through 2016 while catapulting the flagship Templeton Global Bond Fund into the largest government-debt fund in the world. His unusual approach: concentrating investments in a handful of countries that he surmised would offer the highest returns without defaulting. He became a major lender for countries such as Uruguay, Ghana and Ukraine, and government officials routinely visited him seeking his investments.

Now, about 44% of the Templeton Global Bond Fund he manages is invested in cash and short-term U.S. and Japanese government bonds, up from around 36% at the start of the year. Mr. Hasenstab boosted the fund’s investment in Japanese yen to about 40% this year—after avoiding the currency for a decade—because he believes it is a haven that will perform well in periods of global turmoil.

The about-face comes after several years of disappointing performance, most recently in August when an investment in Argentine peso-denominated bonds collapsed after the country said it would default and the currency lost about 30% against the dollar. Because of the Argentine trade and a bad bet against Treasurys, the global bond fund is down 0.85% this year compared with a 6.3% gain by its benchmark index. Its assets have shrunk to $30 billion from a peak of $72 billion in 2013, according to data from Morningstar.

What worries Mr. Hasenstab now is global instability, he said. Nationalism is increasing friction between countries at the same time that populism and economic inequality are destabilizing domestic politics, raising social tensions to levels “we haven’t seen since the Vietnam War era,” Mr. Hasenstab said. Central banks in developed markets have kept interest rates low for an unprecedented period, pushing investors to buy riskier securities, he said.

In addition to the yen, the fund manager is investing in Scandinavian currencies and is betting that U.S. short-term bonds will rise in price, while long-term bonds will sell off. The fund also kept some emerging-market investments in countries like Brazil and Mexico.

The global bond fund is bunkering down now to avoid losses in a downturn and so it will have cash on hand to snap up distressed assets, said Mr. Hasenstab. “When the change starts to happen, it’s already too late to be shifting positions.”

The same strategy played out well for Mr. Hasenstab in the financial crisis of 2008, he said, when his fund returned 6.28%, according to Morningstar, while the S&P 500 stock index lost 37%. Until the next selloff, however, he is likely to keep underperforming more aggressive funds, he said, and he is now marketing the fund to investors as a hedge against risk rather than a driver of yield.

“Over the last 10 years we saw a lot of opportunities to buy, particularly in emerging markets where we were getting paid for the risk,” he said. “Now we’re taking a different view.”

Write to Matt Wirz at matthieu.wirz@wsj.com

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