By Sujata Rao
LONDON Dec 12 The bet paid off in Ireland and
it paid off in Hungary but star bond investor Michael
Hasenstab's faith in distressed countries honouring their
sovereign debts faces an even bigger test in Ukraine.
For the moment at least the fate of a $5 billion-plus punt
on Ukraine government debt by the Franklin Templeton manager
does not look promising. Political tensions are roiling Ukraine;
less than $20 billion stand between it and a huge
But then Hasenstab, who oversees a team managing around $190
billion at Franklin Templeton, has made a name for himself with
similarly contrarian investments.
Many were in unloved markets that eventually paid off big
time. That has propelled Hasenstab's flagship $70 billion Global
Bond Fund to the top of world bond fund league tables at
investment research house Morningstar on a 10-year basis.
Snapping up Irish debt when it traded around 50 cents in the
dollar in early 2012, Hasenstab saw it become the best performer
in Europe last year. Returns have topped 70 percent since then
as Dublin honoured its debts by opting to stick with bailout
terms and budget cuts instead of default.
Templeton funds also bought aggressively into Hungary,
another volatile credit, building up their holdings to more than
10 percent of the market. Here too they have been rewarded with
40 percent-plus returns over the past two years.
But in Ukraine, where Templeton's funds are sitting on as
much as a 30-40 percent share of a market that government
figures say is worth $16 billion, many reckon Hasenstab has met
True, Ukraine still comprises less than 4 percent of the
flagship Global Bond Fund's assets, while Ireland even today
accounts for almost 10 percent.
But the former Soviet republic's debt has been more or less
in freefall, with derivatives implying a greater than 50 percent
default risk over the next five years.
"They specialise in making a huge bet on one outcome - it
worked in Hungary but it doesn't look like it is working in
Ukraine," said one European fund manager, who like most
investors interviewed for this story asked not to be named while
discussing a rival.
Hasenstab declined to comment. A spokeswoman for Franklin
Templeton said in emailed comments that the group had "the size
to take what may seem like large stakes in a single country, and
hold those positions for as long as needed, given how small
these positions are relative to the larger diversified
Unlike Hungary and Ireland, which made real efforts to slash
spending and budget deficits, Ukraine has shown no interest in
knuckling down to reform, the European fund manager said.
Nor is its history reassuring; the government's refusal to
support state energy firm Naftogaz already propelled what was a
quasi-sovereign credit into default as recently as 2009.
"Ukraine is very different from Ireland and Hungary, it's
not really an obvious turnaround story," the fund manager said.
"It's a big reputational risk for them. I wouldn't like to be in
Franklin Templeton's shoes at the moment."
Clearly, yield was a motivation. The sovereign 2020 dollar
bond of which Franklin Templeton owns over $500 million, was
launched at par with a 7.75 percent coupon.
As recently as March this year the bond had surged well
above issue price to trade at 108 points. Since then it has
fallen to just 85 cents in the dollar.
But as in Hungary, Hasenstab stepped up buying after the
turmoil erupted, adding over $1 billion to his Ukrainian
position in August and September, security filings show. Since
then though, bond prices have fallen even further, making
Ukraine the worst performer on the benchmark.
In recent days some other investors have also crept in to
buy, reckoning prices have fallen far enough and betting Kiev
will eventually get aid from Russia or the European Union and
meet its debt obligations in full.
That could potentially set up a huge bounce in bonds that
are currently trading at 80-90 cents in the dollar.
"Hasenstab did well in Ireland. He also did frustratingly
well in Hungary...He just stayed there and kept buying to
maintain his position in the market," another fund manager with
a large international asset management firm said.
Ukraine could be "third time lucky", he added, but it was a
Hasenstab, 39, has run his flagship fund since 2001,
averaging annual 8.5 percent returns in the past decade.
Underpinning the gains is his strategy of concentrating bets on
what Franklin Templeton terms "out of favour assets".
That approach is par for the course at the hedge funds
inhabiting London's Mayfair district. But it's less common at a
highly regulated retail fund of the kind Hasenstab runs, which
is open to household savers and mom-and-pop investors.
"Hasenstab follows a patient, contrarian and fundamental
approach to investing...with a focus on countries with improving
credit fundamentals that he believes are not yet priced into
their bonds," says Sarah Bush, mutual fund analyst at
Morningstar, the fund research firm.
The strategy is not unique: Bruce Berkowitz at Fairholme
Capital is an extreme example. He holds a handful of stocks,
with just three names AIG, Bank of America and Sears, making up
80 percent of his portfolio
But Morningstar says that since the 2008 crisis, those kinds
of big off-benchmark bets tend to be occasional trades, rather
than full-on strategy.
Hasenstab's fund has gone through some weak periods but is a
top performer over the longer-term, Morningstar's Bush noted.
"That points to the need for patience and a relatively long
time horizon when holding the fund," she added.
UKRAINE: "HE CAN TAKE IT"
So how big is the risk in Ukraine?
The country may eventually get outside help. But there is
also a chance that any future International Monetary Fund
programmes will involve "bail ins" of bond investors, forcing
them to bear some of the rescue costs, some analysts reckon.
Franklin Templeton points out that its portfolios is
diversified enough to fend off stress in one market -
Hasenstab's world bond fund has debt from more than 20
Ukraine moreover is not in his top 10: by end-September 3.9
percent of its assets were in Ukraine while Poland and Ireland
accounted for over 9 percent each.
The stake is still clearly too big to allow Hasenstab to
easily exit the Ukrainian market. But he may not need to.
"Hasenstab is stuck there, but because of the size of the
fund he can afford to sit there," the second fund manager said.
"It's a position that is part of a $70 billion bond
portfolio. You've got the 2023 (Ukrainian dollar) bond trading
at 85-90 cents on the dollar so if it goes to zero that would
hurt, but he can probably take it."