Over the past few years, the integration of the two fixed income teams from Templeton and Franklin, ...
Over the past few years, the integration of the two fixed income teams from Templeton and Franklin, who now sit together in San Mateo, has allowed a great deal of synergy, idea generation and implementation in Franklin Templeton's fixed income portfolios. In addition, the investment process, including risk management, has been enhanced by the development of macro-econometric and time-series models for forecasting interest rates, credit spreads, foreign exchange and emerging market asset class valuations.
Managed by Alex Calvo the fund offers a unique mixture of developed and emerging market government bonds aiming to add value for investors seeking capital appreciation through exposure to foreign exchange markets and emerging debt instruments on a risk-adjusted return basis with the added benefit of an income stream through exposure to government bond markets in developed countries.
The investment process starts with top-down macroeconomic fundamental research by analysing interest rates and currency dynamics firstly in the G3 then in the G10 and, finally, in emerging countries. Growth and inflation forecasts in the G3 economies will determine a yield curve view. Bottom-up real time data on capital utilisation rates and the housing markets in the G5 are overlaid with the macroeconomic research. On the principle that 50% of performance in fixed income investments is achieved through income and 50% of capital gains/losses is gained through interest rate and currency management, the manager will actively seek to add value through currency and yield curve positioning. The manager prefers to take more positions on the different part of the yield curve with a shift of 5%-15% rather than actively manage portfolio duration.
Currency management follows a three-tier approach, namely: i) Long-term fundamentals (savings and investment ratios, business cycle, etc), ii) Short-term fundamentals plus relative value (interest rate differentials, growth and productivity rates, capital/current account dynamics, etc) and iii) Shock scenario analysis (oil price impact, etc). While this approach is based on numerous econometric models, the manager is aware of their limitations and will only take aggressive positions when most of the tools he uses point in the same direction. The fund will invest in selective emerging debt credits, mainly government bonds and local currency, on a risk-adjusted return basis according to the economic prospects, the policy credibility and following financial conditions analysis.
Risk management is based on forward-looking models that aim to provide a consistent risk taking approach with performance attribution analysis. The fund will invest no more than 25% in any one source of risk and no more than 5% in any one holding. The manager is supported by a team of seven that form the global fixed income group and by several analysts focusing on different countries and currencies as well as two dedicated traders. He also receives input from equity analysts in terms of capital flows.
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