This is the climate when managers earn—or grow—their reputations as savvy and opportunistic investors, observes Paul Tracy of High-Yield International.
Bonds may lack the excitement and growth prospects of stocks, but when equities are weak and volatile, global bond markets shine.
The yield on a ten-year US Treasury bond stands at less than 2%. But there are bond markets around the world that offer far better yields than the US government that are not excessively risky or issued by fiscally troubled nations.
Closed-end Templeton Global Income Fund (GIM) has held up remarkably well this year, rallying in the face of a volatile and weak global market.
The fund invests only in bonds issued by governments. About 28% of the portfolio is invested in Asia, one-quarter in Europe and about 18% in Latin America.
In Asia, the fund’s largest allocations are in South Korea and Indonesia. Unlike most developed countries, Indonesia’s government debt-to-GDP ratio has been falling steadily in recent years, from over 70% of GDP in 2003 to about 25% this year—an impressive performance given recent global economic headwinds.
As for South Korea, government debt-to-GDP is set to hover at about 23% over the next few years, one of the lowest ratios of any developed country. Regardless of what happens to Italy and Greece, neither of these Asian economies should experience any difficulties meeting funding needs.
The fund’s exposure to Europe might look scary at first, but Templeton has no exposure to Portugal, Italy, Ireland, Greece, or Spain’s government debt markets.
The largest allocations are in Poland and Sweden, countries far removed from the Eurozone crisis. Sweden is one of the only 13 countries with an "AAA" bond rating and a stable outlook from Standard & Poor’s, Moody’s, and Fitch. Government debt-to-GDP is down about 10% over the past decade, and stands at a comfortable 40% of GDP.
Poland’s debt-to-GDP ratio is higher, and deficits are rising, but they remain modest in comparison to its EU peers. Moreover, the government is likely to continue its drive to privatize state-owned assets, using the proceeds to pay down debt.
The Templeton Global Income Fund is largely exposed to countries with relatively low credit risk or improving fiscal situations. The fund is also controlling risk in other ways, including holding a sizable 15% of fund assets in cash, and keeping the portfolio’s average duration at just three years.
Duration is a good measure of a fund’s interest-rate risk; the longer the duration, the more exposed the fund is to rising global interest rates.
With a sizable cash position and allocations to bonds issued by countries in solid financial positions, Templeton Global Income Fund is a solid low-risk buy and a welcome safe haven when stock market conditions deteriorate.
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