Franklin Templeton is favouring the short end of the bond market as low rates lead many homeowners t...
Franklin Templeton is favouring the short end of the bond market as low rates lead many homeowners to pay off their mortgages early, resulting in decreasing bond yields.
Its US Government fund, run by Roger Bayston, invests exclusively in US Government National Mortgage Association (GNMA) issuance, mortgage-backed bonds fully guaranteed by the US government.
The fund has more than doubled in size over the past 12 months as investors continue to take flight to safer asset classes. The Luxembourg-listed Sicav's assets under management reached $2.5bn as of 31 October, up from just over $1bn 12 months ago.
Bayston said: 'Global asset allocators have been looking for lower volatility investments and we have not seen inflows decline even though equity markets have been coming back.'
GNMAs offer the same level of security as US Treasuries, he added, but typically with a 1%-1.5% yield pick-up.
The asset class has returned 7.36% over five years annualised, he noted, compared with 6.73% annualised growth from the Lehman Investment Grade corporate bond index, with half the volatility in terms of Sharpe ratio.
Bayston believes with many observers expecting higher interest rates next year, GNMAs will continue to outperform.
He said: 'The expected income stream lengthens when interest rates go up and GNMAs should outperform but the portfolio is insulated from any rise in mortgage credit risk.'
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