Franklin Templeton Funds - largest single holder of Irish government bonds
Sep 3rd, 2012 by Conor McCabe
Story from the Financial Times today (sub required.
Quoted below:
A leading US figure in bond investment has emerged as Ireland’s single biggest private sector creditor by aggressively buying Irish government bonds.
The large bet on the country’s economic recovery has been placed by San Francisco-based Michael Hasenstab, who runs the Templeton Global Bond Fund.
Franklin Templeton funds, mostly managed by Mr Hasenstab, at the end of June held Irish government debt to the value of €6.1bn, according to FT calculations.
Most was owned by Mr Hasenstab’s Templeton Global Bond Fund.
Rival fund managers warned that the large Irish bond holdings could pose problems if Ireland’s economic recovery wilts, or if the eurozone crisis worsens. The Irish bond market is small and illiquid and exiting such a large position would be impossible without painful losses, they said.
“If they get it right they’ll be heroes but if they ever have to get rid of some of their position it will be very difficult,” a rival bond investor said.
The US asset manager is now the largest owner by some distance of Ireland’s six biggest debt securities after adding to its positions throughout the year, according to traders, including at the country’s July bond sale – the first since being bailed out by the eurozone.
The size of Irish bond purchases by Mr Hasenstab’s fund has raised eyebrows at some asset managers, who say the robust performance of Ireland’s bond market this year has been caused partly by its aggressive purchases.
“It’s a punchy bet,” said one senior rival bond investor. “It’s quite unusual to hold such a large position”. Templeton building up such a large position has been a major driver for Ireland’s performance this year.”
Mr Hasenstab told the FT that while the fund manager might have large positions in smaller markets, they remained small compared with the fund’s total assets, and it could always quickly hedge its exposure in the credit derivatives market.
He also reiterated his positive view on Ireland. “It will be challenging but Ireland continues to take the necessary steps on the road toward recovery,” he said.
In Ireland, Franklin Templeton’s purchases are seen as a welcome vote of confidence in the beleaguered economy.
“They see Irish debt as very good value and have taken a firm decision that the Irish economy is recovering, has turned the corner and they will be paid back,” Brian Hayes, Ireland’s deputy finance minister, told the FT.
“They will yield a substantial dividend from it,” he said.The international bond department of Franklin Templeton, of which Mr Hasenstab is a co-director, manages $158bn in assets, including the main $61bn Templeton Global Bond Fund.
The performance of the funds under his management has drawn comparisons with Bill Gross, the legendary founder of Pimco.
The Templeton Global Bond Fund has outperformed Pimco’s flagship Total Return Fund eight years in the past decade, only disappointing with negative returns last year and in 2005.
Mr Hasenstab’s main fund has rebounded from last year’s loss with a return of 8.7 per cent so far in 2012, driven largely by big bets on Ireland, South Korea and Hungary.
Have I got this straight? Michael Hasenstab is given money by investors; i.e. rich people. His company then goes out and buys bonds with that money. He has bought up a large amount of Irish bonds. Each year (depending on how long the bonds are for) the Irish government will pay a sum of interest to Hasentab’s company, and he will take a slice and pass the rest on to his rich clients. Then at the end of the bond term the Irish government will repay the initial sum, and he will take a slice and give the money back to the initial investors. In other words, he and his rich clients are gambling that the Irish state will be in a position to repay them; aside from that, they are getting something for nothing (and capitalists say that there is no such thing as a free lunch!). And our public services will be closed down and our citizens will be reduced to poverty so that people like Mr Hasentab and his clients must be repaid, because we are dependent on them for money, and they, like any loanshark, will metaphorically break the legs of our society if inconvenienced in any way. I know that’s a bit simplistic, but am I broadly right here?
Not only money from investors - these funds borrow as well. They gamble with borrowed money alongside invested money. This is what makes it a farce about losses.
Secondly, funds like Franklin Templeton make money not from investments but from price movement - he’s gambling that Irish bonds are underpriced and the difference in what he paid for them and what they are worth is what he is gambling on. (The higher the interest the cheaper they are.)
These guys invest in countries the way Paddy Power invests in horses.
The entire scam is profoundly depressing to watch.
Thanks for explaining that. Can you recommend a site (or a book) that explains (in layman’s terms, as you did there) how these people and institutions operate? I still find it a bit hard to understand. One thing I believe I do understand fully, though: this guy is basically gambling on the fact that Ireland will continue with its deprivation policies (supported by the EU and IMF) rather than burn people like him, and that individuals like him (a greedy sociopath who doesn’t give a toss if people suffer and die as long as he makes massive profits for himself and his clients) now hold our country in the palm of their hands. Reading about it this morning, a thought occurred: if this guy betting on Ireland is creating so much interest, what would happen if he decided that we weren’t such a good idea and cashed out? How would that affect our bond price etc.?
The account of the nature of banking and finance today that I have found most useful is this:
John Bellamy Foster & Fred Magdoff, The Great Financial Crisis: Causes and Consequences (New York: Monthly Review Press, 2010)
http://www.bookdepository.co.uk/Great-Financial-Crisis-John-Bellamy-Foster/9781583671849
Of the mainstream books out there, this is probably the best:
John Cassidy, How Markets Fail: The Logic of Economic Calamities (London: Penguin Books, 2009)
http://www.bookdepository.co.uk/How-Markets-Fail-John-Cassidy/9780141036519
Capitalism is a deeply unequal and exploitative system. The socialists weren’t lying.
Thanks again for that. I’m going to try and get those once I read Shaxson’s ‘Treasure Islands’, which I got a while back and haven’t yet had a chance to start yet.
‘Treasure Islands’ is great. Not much on Ireland but really covers the tax haven system of which Ireland is a hub.