Revise Your Portfolio for a Safer Investing Climate

Republicans seem to have decided against using the debt ceiling as a political weapon. China has sidestepped a hard landing, and its economy is growing about 8% annually. The euro zone, while still in recession, seems to have avoided the crackup that many had predicted.

I'm not donning rose-colored glasses, but the world looks like a safer place (at least economically speaking) than it did even a year ago. Michael Hasenstab, manager of Templeton Global Bond A (symbol TPINX) and one of my most trusted authorities at assessing the global outlook, says we have moved "beyond Armageddon."

At the same time, Hasenstab warns investors: "What has worked over the last decade will not work going forward." By that, he means inflation and higher interest rates are now the big threat to bond investors. U.S. Treasury bonds in particular are no longer "the safe haven asset" they have been for most of the past 30 years.

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Even though Hasenstab runs a load fund that most do-it-yourself investors probably shouldn't pay to buy, he is worth listening to because of his track record ‐ both as a prognosticator and a fund manager. Last July, for instance, when the world looked much dicier, Hasenstab correctly predicted that things would turn out relatively well.

Hasenstab's fund, which invests in government bonds and currencies worldwide, returned an annualized 10.3% over the past ten years. Over the past 12 months, it gained 10.1%. My favorite way to access Hasenstab's talents, through Templeton Global Total Return A (TGTRX) ‐ a younger, near clone of Global Bond that invests in corporate bonds as well as sovereign debt ‐ has done even better. It returned an annualized 11.0% over the past three years and 13.7% over the past 12 months. All those returns put both Templeton funds in either the top 1% or 2% of global bond funds, according to Morningstar. (All returns are through January 28.)

In the U.S., the economy continues its slow climb from the deep 2007-09 recession. Hasenstab is encouraged that the U.S. seems to have been spared the worst of the "fiscal cliff" ‐ namely a default caused by failure to raise the federal debt ceiling. But he's concerned that Congress and President Obama have failed to take meaningful action toward bringing the nation's long-term debt under control.

Chinese economic policymakers, Hasenstab says, "continue to be quite prudent." Wages are rising, making the country more reliant on domestic demand than on exports.

The promise of massive intervention by the European Central Bank has pushed up bond prices (and pushed down bond yields, which move inversely from prices) in the debt-troubled euro-zone countries. Europe faces "a long hard slog" in reducing debt and building a closer union, Hasenstab says, but the critical phase is past.

The U.S., the euro zone (through its central bank) and Japan have each launched massive quantitative easing programs ‐ essentially all are printing tons of money. The strategy is untested, and ending it will be difficult and tricky. Meanwhile, all that money sloshing around the world risks creating asset bubbles, especially in emerging markets.

Inflation and rising interest rates are the likely outcome from these policies. The trick for bond investors is to pick countries that can nip inflation in the bud.

To earn good returns in the coming years, Hasenstab prefers well-run emerging nations to most developed countries. The economic fundamentals of most developing nations are still excellent, and most of these countries have little debt. Outside of emerging markets, Hasenstab likes Scandinavia.

Although Hasenstab still thinks the dollar will be stronger than the euro or the yen, he has increasingly favored emerging-markets currencies over dollar- denominated foreign bonds. He's made a big ‐ and so far successful ‐ bet on Ireland, and he's investing heavily in eastern Europe, as well as Asia and Latin America.

Unless you can invest in the Templeton fund without paying a sales charge, I wouldn't advise you to buy it. You have plenty of no-load options. Pimco Emerging Local Bond (PELBX), for example, invests almost exclusively in emerging-markets bonds and currencies. Loomis Sayles Bond (LSBRX) , a member of the Kiplinger 25, has fewer investments in emerging markets, but its managers approach the developed world similarly to Hasenstab.

Steven T. Goldberg is an investment adviser in the Washington, D.C. area.