How to Tap Foreign Bonds and Currencies

The concept of the global stock fund is well accepted. If U.S. bank stocks scare a fund manager, maybe he or she can find banks with better risk-return profiles in Brazil or India. There's not much to buy in Detroit, but perhaps the investor spots value in Toyota or BMW. Likewise, Coca-Cola, McDonald's and Philip Morris International are world leaders in their lines of business. Fund managers can pick and choose in a borderless investment world.

Global bond funds are a less-developed idea. But Michael Hasenstab, who manages the $13.3-billion Templeton Global Bond Fund (symbol TPINX), says Americans are increasingly seeking to add foreign bonds and currencies. He's a good man to enlist on your side in this quest. Hasenstab, who holds a doctorate in economics, is compiling a record that even the great Bill Gross of Pimco would envy.

Since Hasenstab began managing this fund in December 2001, it has returned 11.8% annualized through July 13. That's an average of four percentage points a year better than the Citigroup World Government Bond Index, a relevant benchmark. During the past year the fund made 12.4%. This suggests that the fund has a low correlation with the U.S. stock market -- and in fact, that's true. In 2008, Templeton Global Bond returned 6.3%. It also doesn't track the U.S. bond market closely, making it a nice diversifier for a portfolio.

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This is a fairly complicated fund, full of moving parts. Hasenstab, who works with an investment team of 40 around the world, invests to address three concerns: interest-rate risk, currency movements and the financial health of governments. For example, earlier this year he spied great opportunity in Korean and Mexican government debt. He figured that interest rates in those nations were due to fall, so the bonds would gain value in local terms. But he didn't have confidence in Korea's won and Mexico's peso. If they fell against the dollar, the fund's U.S. shareholders wouldn't benefit from rising bond prices. So he bought the bonds (all of his foreign bonds are issued by governments or government agencies) but hedged the Korean and Mexican currencies.

At any time, Hasenstab is invested in 20 to 30 countries, including garden spots such as Iraq, Venezuela and Russia, and 15 to 25 currencies. For instance, some of his largest currency exposures now are to the Malaysian ringgit, Chinese renminbi, Chilean peso, Brazilian real and Swedish krona. But he's shorting (which means he's betting against) the euro and New Zealand dollar. In the U.S., all of the fund's bond holdings are in municipals. Overall, he thinks half of his fund's return comes from currency movements and half from getting it right in terms of bond duration (a measure of interest-rate sensitivity) and credit soundness.

Hasenstab is bearish on the U.S. dollar in the medium and long term. He thinks the government is creating a good recipe for a depreciating currency as it furiously prints and spends money and nationalizes financial institutions. Also, as U.S. consumers borrow less and repay debts, he expects the strongest economies and currencies to be large countries with fast-growing domestic markets, such as China, India, Indonesia and Brazil.

The Class A shares of Templeton Global Bond, which is sold through brokers, levy a 4.25% front-end sales charge. Perhaps you can access it without the load through a financial adviser or other means. If not, there's a fine alternative: Templeton Global Income (GIM), a closed-end fund that is a near-replica of Global Bond and is also run by Hasenstab and team. At its July 14 close of $8.63 a share, roughly the same as its net asset value. Global Income yields 5.8%, has an equally fine record as the open-end fund, and bears an expense ratio of 0.74%, compared with Global Bond's 0.92%.

Andrew Tanzer is an editorial consultant and investment writer. After working as a journalist for 25 years at magazines that included Forbes and Kiplinger’s Personal Finance, he served as a senior research analyst and investment writer at a leading New York-based financial advisor. Andrew currently writes for several large hedge and mutual funds, private wealth advisors, and a major bank. He earned a BA in East Asian Studies from Wesleyan University, an MS in Journalism from the Columbia Graduate School of Journalism, and holds both CFA and CFP® designations.