Under scrutiny, key Franklin fund posts rare outflow

Mon Oct 3, 2011 4:50pm EDT

* $393.6 million left Global Bond Fund last week -Lipper

* Emerging markets concerns prompt withdrawals -analyst

* Fund has been best-seller YTD -FRC

By Ross Kerber and Carolyn Cohn

Oct 3 (Reuters) - Spooked by concerns that Franklin Resources Inc's (BEN.N) flagship fund is overexposed to volatile emerging markets, investors last week pulled more money out of the best-selling fund than they put into it for the first time in almost a year.

Withdrawals of $393.6 million during the week ended Sept. 28 marked the first week of outflows from the U.S. registered portion of Franklin's Templeton Global Bond Fund (TPINX.O) since the week ended Dec 15, 2010, according to data from Lipper, a Thomson Reuters unit.

The withdrawals come amid new scrutiny for the fund, which under manager Michael Hasenstab has long beaten peers. But Hasenstab is suffering a rare off year.

Through Sept. 30 the fund was down 3.5 percent for 2011, trailing 97 percent of peers, according to data from Morningstar Inc. Lipper data show the biggest drop in performance came in September as currency markets turned volatile. Morningstar bond analyst Miriam Sjoblom said the fund's rapid growth may have left it vulnerable to jumpy investors who pulled out at the first sign of trouble.

Stifel Nicolaus & Co analyst Jeffrey Hopson said the withdrawals likely reflect investor concerns about the funds' exposure to emerging markets. But Hopson added "I wouldn't say the number alarms me" and that he expects the withdrawals to diminish as Hasenstab reassures investors in presentations.

PANIC ONLY "TEMPORARY"

For instance, Hasenstab has argued that the foreign currency positions that hurt his fund lately still make sense in the long run.

Among the biggest currency positions that Global Bond Fund holds, such as in the South Korean won and the Malaysian ringgit, "We view what has been happening ... as the result of temporary panic and contagion as opposed to fundamental problems," Hasenstab wrote in a note to investors on Sept. 22, posted on Franklin's website.

U.S. retail classes of Templeton Global Bond Fund had $58.3 billion in assets as of Sept. 28, said Lipper. All vehicles using the Global Bond strategy had around $150 billion as of June, a Franklin spokeswoman said. Franklin as a whole reported assets of $716.4 billion at Aug. 31, 2011.

MARKET LEADER

Templeton Global Bond Fund has been one of Franklin's most important products, as top leaders including Chief Executive Greg Johnson have reminded analysts on conference calls. For the year through August, Global Bond Fund was the industry's top seller, according to Financial Research Corp in Boston, with an inflow of $14 billion. The runner-up was Vanguard Group's Vanguard Total Stock Market (VTSAX.O) index fund, with an inflow of $11.2 billion.

The troubles at Templeton Global Bond Fund have implications for the company's shares, which have fallen lately. Shares in Franklin Resources fell 5 percent to $90.38 on Monday, in line with peers. The Franklin spokeswoman, Lisa Gallegos, said the company wouldn't comment on the potential impact of the outflows on the company's earnings.

EMERGING MARKETS

Global Bond Fund's exposure to emerging markets shows in a country breakdown from an Aug. 31 factsheet. It shows around 45 percent of the fund is invested in South Korea, Poland, Malaysia, Hungary and Mexico, along with a further 31 percent invested in "other" countries.

The top two bond holdings at the end of August were South Korean bonds, although Seoul's financial authorities said that Franklin Templeton sold around $171 million in South Korean bonds last week. [ID:nL3E7KS0LJ]

After the dollar, the fund is most heavily exposed to the Korean won KRW=. Other heavy currency exposures include the Polish zloty PLN= and Malaysian ringgit MYR=. Aside from the U.S. dollar, all have fallen to their lowest in more than a year in recent days.

Emerging market bonds, particularly denominated in local currencies, were a favorite of investors for much of this year, drawing in fund flows on expectations of higher yields compared with the developed world. But contagion from the euro zone debt crisis and worries about the U.S. and Chinese economies have led to a flight from risky assets and a reversal in those flows in recent weeks.

Emerging market bond funds saw a record outflow of more than $3 billion in the past week, according to the latest data from Boston-based fund tracker EPFR Global.

In addition to his statements about the "temporary panic" facing his biggest currency positions, Hasenstab said in the Sept. 22 statement that much recent volatility and selling pressure "has been driven by short-term, speculative and leveraged investors" who can face sharp reversals when sales don't match what he called "economic fundamentals."

As for the United States, he wrote, "we continue to believe that fears that the ongoing recovery may be coming to an end are overstated and that the recovery, lackluster though it may be, remains on track." (Reporting by Ross Kerber in Boston and Carolyn Cohn in London; Editing by Gary Hill)

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