By Mark Jewell
AP Personal Finance Writer
BOSTON (AP) -- Invest in bonds now? Are you crazy?
That seems to be the sentiment of investors who spent the past two months pulling $22 billion out of bond mutual funds.
It's an about-face after the stock market meltdown sent investors rushing into the relative safety of bonds a couple of years ago.
But now, as the economic recovery regains momentum, fear is growing that interest rates will rise and inflation may soon follow. That would cut into how much investors can earn from bonds, which don't seem as safe as they did a few months ago.
The growing anxiety has hurt bond prices, and explains why most types of bond funds suffered losses last quarter. Hardest hit were general U.S. Treasury funds, which lost an average 5 percent, according to Lipper Inc.
More losses may be coming, but Michael Hasenstab isn't worried. The lead manager of the Templeton Global Bond Fund sees plenty of opportunities, provided bond investors are willing to venture into areas they've traditionally avoided. That means investing overseas, rather than just at home.
Hasenstab is increasingly buying bonds issued by foreign governments, especially those with fast-growing economies and modest debt loads. His current stake in U.S. Treasurys is zero, and he's avoiding most European and Japanese bonds.
It's a strategy that's worked lately. This month, Morningstar named the 37-year-old its Fixed-Income Manager of the Year.
Templeton Global Bond (TPINX) returned 12.7 percent in 2010, double the average return for its world bond category. Over the past 10 years, the fund's average annualized return of 11.6 percent is also twice that of its peers. The fund attracted $16 billion in new cash last year -- second highest of any mutual fund in 2010 -- to grow to $47 billion.
Here are excerpts from a recent interview:
Q: Why have you been buying more bonds overseas in recent years, rather than in the U.S?
A: A lot of investors have a home-country bias.
But you get stronger return opportunities when you internationalize a portfolio. If you buy bonds in South Korea or Australia, for example, you can get a higher yield than in the U.S., without having to take more interest rate risk by holding bonds that mature over longer time periods. You can buy a 1-year bond in Korea that yields 3.5 percent. To get that yield in the U.S., you'd have to get a 10-year bond.
Generally, our fund has had low exposure to U.S. Treasurys because we've found better opportunities elsewhere.
Q: You acknowledge that interest rates are likely to rise globally, not just in the U.S. What kind of risks does that present for a fund with a strong international component?
A: Rising interest rates are not necessarily bad for investors, if you're positioned correctly. When Australia's central bank raises rates, we can earn more when we buy securities carrying higher interest rates. It can be a great environment for global investing. There are a lot of ways to manage around interest rate risk.
Q: What strategies did you pursue last year, and what are you doing this year?
A: A big part of 2010 was setting the fund up for 2011. In the second and third quarters, our performance lagged a bit when there was an 11th-inning rally for U.S. Treasurys that we didn't participate in. But we really started to catch up in the fourth quarter when rates started rising.
We're pretty well set up for a higher interest rate environment and for avoiding the debt problems in Europe. A key part of investing is deciding what not to own.
We're finding better opportunities in Asia, with Japan being an exception. Their governments are not highly indebted, and we like the economic growth story there. Also the currencies of Asia, excluding Japan, are undervalued versus the euro, the yen and the dollar. We think those three currencies will be the worst performers this year, largely because their governments are printing too much money and have fiscal problems.
Q: What countries are among your favorites now?
A: There are still lots of good opportunities in the developed world, where I like Norway and Australia. In emerging markets, I like Indonesia. So that's what we built up in 2010 to take advantage of what we see happening this year.
Q: There's a lot being written about how well emerging markets are performing. What's a key risk you're watching?
A: Inflation, particularly for food and resources like oil and minerals. In a lot of these countries, a good portion of a person's income goes to buy food. Most of these countries import a lot of those resources, and pay in U.S. dollars.
If a foreign government is very concerned about rising food prices, it can take steps to strengthen its currency, and buy some time to reduce the impact of inflation. It also cools the economy. Some of these economies are running very hot, so they need to raise interest rates, pull back fiscal spending, and have stronger currencies. All these steps can go a long way to make growth sustainable and prevent boom-bust cycles.
Q: Fears about the heavy debt loads in European countries like Greece and Portugal have lowered their bond prices, creating potentially attractive yields. Do you see a buying opportunity anytime soon?
A: No. I still haven't seen a tangible, comprehensive plan by the European Union to tackle debt problems. There are a lot of conflicting interests, and lots of different prescriptions for how to address the problems.
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Questions? E-mail investorinsight@ap.org.
Published: Fri, Feb 4, 2011
