Templeton's US$5.9b bet on Brazil bonds paying off in 2016

[LONDON] While most investors were beating a furious retreat from Brazil in the final three months of last year, Franklin Templeton's Michael Hasenstab was busy more than doubling his investments in the crisis-ridden nation's debt to US$5.9 billion.

So far this year, the wager is paying off. The real-denominated bonds have returned 4.7 per cent in dollar terms in 2016, versus an average loss of 0.13 per cent for local-currency debt in emerging markets.

The gains are in stark contrast to last year's rout, when Brazilian securities plummeted 33 per cent as the currency sank, a recession deepened and impeachment proceedings against President Dilma Rousseff began.

Mr Hasenstab's Brazil bet is flourishing four months after he said in a blog post that a selloff in emerging markets was creating "multi-decade opportunities."

He isn't the only fund manager at Franklin Templeton who shares that view.

Just last week, Mark Mobius, the chairman of the firm's emerging-markets group, said at an event in Sao Paulo he was increasing investments in Brazil in anticipation of a turnaround.

Many investors still remain skeptical, especially with Brazil poised for its deepest two-year recession in more than a century.

"It's too early to get back in the game there," said Sean Newman, a money manager at Invesco Advisers Inc, which oversees US$776 billion. Assets are "going to get cheaper."

He said the Brazilian real hasn't fully adjusted to a level that reflects Brazil's dire economic scenario. The real has lost 0.7 per cent in 2016, after having plunged 33 per cent last year.

Lisa Gallegos, a spokeswoman for Templeton, said the money manager wasn't available to comment on Brazil.

Mr Hasenstab boosted Brazilian bond ownership from US$2.4 billion at the end of September, making the country's notes his third-biggest holding, data compiled by Bloomberg show.

In the last three months of 2015, he entered into new positions in real-denominated bonds due Jan 2019 and 2025, both of which had slumped to record lows in September.

Data on any changes to the fund's holdings in 2016 isn't yet publicly available.

Mr Hasenstab is no stranger to contrarian trades. In his 21 years at Franklin Templeton, he's made big bets on assets when they were tumbling.

In July 2011, he famously snapped up Irish bonds as Europe's debt crisis worsened, making billions on the trade when the country received an international bailout eight months later.

But Mr Hasenstab's wagers don't always pay off. Just this year, his investment in Mongolian bonds has backfired as political instability roils the nation.

The volatility rocking global financial markets has also hurt Mr Hasenstab's Franklin Templeton Global Bond Fund.

Rocked by redemptions, the fund has lost 7 per cent in 2016, underperforming 95 per cent of its peers. Clients have pulled about US$12 billion from the fund over the past 12 months.

Still, the fund has bested more than 80 per cent of its peers in the past five years, returning an average 1.14 per cent a year over that span.

"Volatility will give you opportunities over a three to five-year period and if you have that long horizon and the research team to dig beyond the surface, that will unfold contrarian opportunities," Mr Hasenstab said in an interview with Bloomberg News in November.

BLOOMBERG