Michael Hasenstab, Portfolio Manager of Franklin Templeton Fixed-Income Group, and Dr. Mark Mobius, Executive Chairman of Templeton Emerging Markets Group, talk BENCHMARK through the research-intensive investment style employed by the firm to hunt out true value opportunities.
BENCHMARK (BM): Can you give us a brief synopsis of Franklin Templeton’s active management approach, combining both top-down and bottom up research to generate a total return?
Michael Hasenstab (MH): Our team has been built up over many years and is comprised of both country analysts and global macro analysts. It is founded on a fundamental, research-driven approach where we take a long-term investment horizon. This fundamental approach leads us to invest where the opportunities really are, not necessarily just where the most popular markets are. We have a combined approach looking at global macro dynamics, as well as country specifics. This blended analysis allows us to see countries in the perspective of global trends, such as commodity prices or global inflationary dynamics, without losing sight of the bottom-up ideas in individual countries.
BM: What role do local market analysts play and how do you find countries with attractive valuations and market inefficiencies?
MH: Our team of sixteen investment professionals is able to draw upon more than 130 fixed-income investment professionals in developed and emerging markets located around the world. The local market research team has on-the-ground knowledge of what is going on in these countries. Their work involves a lot of due diligence in these countries, and our team in San Mateo also travels to a lot of these markets to meet with policymakers, think tanks and academics.
It is a very research-intensive process, but that is how you identify good value, as opposed to just sitting behind a Bloomberg machine in one city and looking at the world through that lens.
BM: How do you determine your country allocation in Templeton Global Total Return Fund and how do you manage risk?
MH: Because the fund does not track a benchmark, establishing positions in countries that are potentially good investments is possible. There are several ways to manage risk, including building a very robust and disciplined research process to make sure we thoroughly understand all of our investments. We also work with our risk team to monitor our exposures relative to the risk boundaries of the overall portfolio. We are always thinking about the implications if our thesis is wrong and how we can hedge that tail risk. It is that forwardlooking scenario analysis that is probably the most important of our risk process.
BM: What is your current duration bias and your currency exposure?
MH: Currently, duration is short. Given the dynamics of the global economy, we view an oncoming upward shift in interest rates as largely a matter of timing. We are overweight in the currencies of many of the countries with stronger fundamentals. This includes large parts of Asia ex-Japan and, in general, countries that are enjoying relatively higher growth, low levels of indebtedness and flexible policy levers.
Dr. Michael Hasenstab, Ph.D., is a senior vice president of Franklin Templeton Fixed Income Group and co-director of the international bond department, overseeing the global fixed income portfolio management team. In addition, he is a member of the group’s Fixed Income Policy Committee and is a portfolio manager for a number of Franklin Templeton funds. Dr. Hasenstab initially joined Franklin Templeton Investments in July 1995. After a leave of absence to obtain his doctor of philosophy (Ph.D.) degree, he rejoined the company in April 2001. He specializes in global macroeconomic analysis with a focus on currency, interest rate and sovereign credit analysis of developed and emerging market countries.
Dr. Hasenstab has worked and traveled extensively abroad, with a special focus on Asia. Dr. Hasenstab holds a Ph.D. in economics from the Asia Pacific School of Economics and Management at Australian National University, a master’s degree in economics of development from the Australian National University and a B.A. in international relations/political economy from Carleton College in the United States.
BM: Can you tell us about the highly collaborative approach between analysts and regional colleagues used by the Asia-Pacific equity team for crosschecking information?
Mark Mobius(MM): We believe that on-the-ground presence is necessary to receive local, first-hand understanding of investment opportunities. With extensive, fundamental analysis supported by more than fifty investment research professionals located locally in eighteen different places, we always look for growth opportunities in companies with strong fundamentals and attractive valuation.
First, the team identifies potential bargains among companies within the region, it then conducts deep and comprehensive quantitative and qualitative analysis to assess the company’s long-term value. Quantitative analysis includes five-year historical audited financial statements and five-year forecasts based on projected future normalized earnings, cash flow or asset value potential. The team also visits companies, carrying out approximately 1,500 to 2,000 company visits per year.
It then collaborates to determine the best combination of stocks to create a diversified portfolio with appreciation potential.
BM: How are price targets set and what are the showstoppers when meeting company management?
MM: We seek companies that are trading at a discount compared with our five year valuation projections. The company analyst sets the target price based on research and our investment philosophy. We also adhere to a strict sell discipline based on valuation thresholds. One of the showstoppers with management is unhealthy corporate governance. One of the first things we look for is a strong culture and ethical conduct; we will not invest if we perceive there to be any impropriety or hints of corruption.
BM: What has been the average tenure of analysts and how are they recruited, trained and promoted?
MM: As of 31 December 2012, Templeton Emerging Markets Group had fifty three dedicated portfolio managers and analysts with an average of 12 years in the industry and eight years with the firm. We tend to recruit new analysts with experience in fields such as accounting, finance, brokerage and fund management. These new employees will receive on-the-job training for about a month and will start analyzing companies assigned to them. Once they pass their six-month probation, they will be selected as members of our fund allocation teams, depending on their performance. All lead fund allocators are backed by at least two team members, so we do not experience any problem when lead fund managers take annual leave, get sick or decide to retire.
BM: How are managers compensated and are their incentives tied to shareholders’ interests?
MM: All portfolio managers and analysts are compensated with a base salary and a bonus. Portions of the bonuses are reinvested in the funds that Templeton Emerging Markets Group manages to ensure their interests are aligned with that of shareholders.
BM: Templeton Asian Growth Fund trailed behind the benchmark and its peers last year, can you share with us the detractors?
MM: Select energy companies detracted from the performance of the Templeton Asian Growth fund this year due to significant commodity price volatility. Automobile was another laggard sector in the fund. However, these companies are also amongst those that have contributed double-digit returns to the fund in the past five years. On the positive side, Southeast Asian financials, Thai banking stocks in particular, as well as consumer stocks, were strong contributors to the Templeton Asian Growth fund performance.
BM: What do you focus on in terms of market cap level for your Templeton Asian Smaller Companies?
MM: For the small cap fund, we look at companies that have a market capitalization of less than US$2 billion. There is no fixed requirement for ROI or trading discounts for a company to be included into the fund, rather we evaluate a wide range of qualitative and quantitative objectives.
We take a long-term view of our investments and look to invest for at least five years. Our investment mandate does not force us to sell stocks that grow into mid or large cap companies. Rather, we adhere to a strict sell discipline based on valuation thresholds. All holdings are regularly reviewed.
BM: With the fund’s unconstrained approach and small-cap bias, what are your risk control policies?
MM: Risk is analyzed by the dedicated Performance Analysis and Investment Risk Group (PAIR), which regularly examines portfolios relative to their composite and benchmark, using sector range reports, as well as detailed risk analytics. The PAIR team goes through the risk reports with the investment team on a weekly and quarterly basis, highlighting any stocks with a higher than normal contribution to active risk or with higher risk attribution to the portfolio. BM
Dr. Mark Mobius, Ph.D., Executive Chairman of Templeton Emerging Markets Group, currently directs analysts based in Franklin Templeton’s 18 emerging markets offices and manages the emerging markets portfolios. Dr. Mobius has spent more than 40 years working in emerging markets all over the world. He joined Franklin Templeton in 1987 as president of the Templeton Emerging Markets Fund, Inc. In 1999, he was appointed joint chairman of the Global Corporate Governance Forum Investor Responsibility Taskforce of the World Bank and Organization for Economic Cooperation and Development. Dr. Mobius earned bachelor’s and master’s degrees from Boston University, and a Doctor of Philosophy (Ph.D) in economics and political science from the Massachusetts Institute of Technology.