Templeton Global Bond Fund

Transcription

1 Product Profile Product Details 1 Fund Assets $1,969,067, Fund Inception Date 07/15/1988 Number of Securities 136 Including Cash Base Currency CAD Morningstar Category Global Fixed Income Distribution Frequency Monthly Fund Codes 2 Series CAD USD Series A Front TML704 TML803 Series A DSC TML734 TML903 Series A Low Load TML674 TML684 Series F TML257 TML258 Series F ADM TML5020 TML5043 Series I TML254 TML256 Series O TML259 TML260 Series PF TML3727 TML3728 Series PF ADM TML5091 TML5114 Templeton Global Bond CAD USD Fund (Hedged) Series A Front TML3712 Series A DSC TML3714 Series A Low Load TML3713 Series F TML3715 Series F ADM TML5021 Series I TML3716 Series O TML3717 Series PF TML3808 Series PF ADM TML5092 Series I and V closed to new investors as of November 22, Fund Description The Fund seeks to achieve high current income with capital appreciation by investing primarily in fixed income securities and preferred shares issued around the world. The Fund may not invest more than 25% of the total value of the invested assets (excluding cash) in a particular industry. Performance Data 3 Average Annual Total Returns 4 (%) Since Inception 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs (07/15/1988) Series A Management Expense Ratio (as of 12/31/2017 incl. HST) 1.65% The indicated rates of return are the historical annual compounded total returns including changes in share or unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Please call Franklin Templeton Client Services at or visit for the most recent month-end performance. 20% 10% 0% -10% Series A Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs Since Inception Portfolio Manager Insight Calendar Year Returns (%) Series A Market Review During the second quarter, the US Federal Reserve (Fed) raised the federal funds target rate 25 basis points (bps) to a range of 1.75% to 2.00% at its 13 June meeting. Market expectations for additional rate hikes in 2018 remained strong, with fed funds futures at the end of June indicating another 25 bp hike at the 26 September meeting. The 10-year US Treasury (UST) note s yield reached 3.11% on 17 May, its highest level since 2011, before declining on growing risk aversion, notably driven by political concerns in Italy and US tariff threats. An escalating trade conflict that affects global growth remains a risk, in our view, though risks of a full-scale retaliatory trade war appear relatively contained. On the whole, we continue to have a positive outlook for US growth and All holdings are subject to change. Holdings of the same issuers have been combined. 2. ADM refers to the Investment Advisory Services Fee purchase option for series F,FT, PF, PF(Hedged), and PFT. Please see the simplified prospectus for further details. 3. The fund offers other series subject to different fees and expenses, which will affect their performance. 4. Periods shorter than one year are shown as cumulative total returns. 5. The information provided is not a complete analysis of every material fact regarding any country, market, industry, security or fund. Because market and economic conditions are subject to change, comments, opinions and analyses are rendered as of the date of this material and may change without notice. A portfolio manager s assessment of a particular security, investment or strategy is not intended as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy; it is intended only to provide insight into the fund s portfolio selection process. Holdings are subject to change.

2 the global economy for 2018, but we re continuing to watch for potential economic disruptions. Overall, we expect UST yields to continue rising as the Fed unwinds its balance sheet and tightens policy, while inflation pressures build on exceptional strength in the US labour market and resilient expansion of the US economy. At the European Central Bank s (ECB s) meeting on 14 June, ECB President Mario Draghi announced intentions to end the central bank s net asset purchase programme at the end of Quantitative easing (QE) is expected to continue at the current pace of 30 billion per month through September and then be reduced to 15 billion per month for October, November and December. However, Draghi also indicated that rates would likely remain unchanged until at least the summer of We ve expected rates to remain unchanged in 2018 and likely longer Draghi s comments effectively affirm that viewpoint. Additionally, the end of the ECB s net asset purchases does not mean the end of accommodative monetary policy. Balance sheet reinvestments would still continue after the purchase programme ends, while rate policy would also remain highly accommodative. Overall, we expect yields in the eurozone to remain exceptionally low in upcoming quarters. The 10-year German Bund finished the quarter 19 bps lower at 0.30%. The euro depreciated against the US dollar during the period we expect it to continue weakening on widening rate differentials between the rising yields in the US and the low to negative yields in the eurozone. The peak rate divergence between the US and the eurozone remains ahead, in our view. The euro also continues to be vulnerable to unresolved structural and political risks, in our view. In Japan, we expect Abenomics programmes to continue as planned in upcoming quarters. Bank of Japan (BOJ) Governor Haruhiko Kuroda has indicated interest in eventually normalising monetary policy and unwinding its stimulus programme, but planned schedules have not been publicly announced. The BOJ recently pulled back on its timeframe expectations for inflation to reach 2.0% in 2019, preferring instead to keep an open timeline. We expect BOJ monetary policy to continue targeting a 0.0% yield on the 10-year Japanese government bond to weaken the yen, stimulate growth and raise inflation. The 0.0% yield also helps constrain the costs of Japan s massive level of public debt. The Japanese yen depreciated against the US dollar during the quarter we expect it to continue weakening in upcoming quarters on widening rate differentials with the US. In emerging markets, yields rose across several local markets in Asia and Latin America. Emerging-market currencies also largely depreciated against a broadly stronger US dollar during the quarter, with notable depreciations in the Argentine peso, Brazilian real and Indian rupee. Recent weakness in the Argentine peso stems from a number of factors, including persistently high inflation caused in large part by removing utilities subsidies through scheduled utilities tariff increases. However, the central bank has responded appropriately to the exchange rate pressures, first using international reserves and then more decisively hiking its policy rate to 40% in May. The government also concurrently tightened fiscal targets, recommitted to its inflation targeting regime and reached out to the International Monetary Fund to secure funding to reduce the government s reliance on external borrowing. Overall, we remain positive on the longer-term investment potential in Argentina s local-currency markets. Additionally, we continue to see a number of local-currency emerging markets that we believe remain undervalued, particularly in India, Indonesia, Mexico and Colombia. We also see attractive risk-adjusted yields in Brazil. On the whole, we expect select currencies to appreciate over the medium term, particularly in countries with economic resilience and relatively higher, maintainable rate differentials. Performance Review In the second quarter of 2018, the fund s negative absolute performance was primarily due to currency positions, followed by interest-rate strategies. Sovereign credit exposures had a largely neutral effect on absolute results. Amongst currencies, positions in Latin America (the Brazilian real, Argentine peso and Mexican peso) and Asia ex Japan detracted from absolute performance, while the fund s position in the US dollar contributed. The fund maintained a defensive approach regarding interest rates in developed markets, while holding duration exposures in select emerging markets. Select duration exposures in Latin America (Argentina) and Asia ex Japan (Indonesia) detracted from absolute results. On a relative basis, the fund s underperformance of its benchmark index was primarily due to currency positions, followed by interest-rate strategies. Sovereign credit exposures had a largely neutral effect on relative results. Amongst currencies, overweighted positions in Latin America (the Brazilian real, Argentine peso and Mexican peso) and Asia ex Japan detracted from relative performance. The fund s underweighted position in the US dollar also detracted from relative results, while its lack of exposure to the euro and the Japanese yen contributed. Select overweighted duration exposures in Latin America (Argentina) and Asia ex Japan (Indonesia) detracted from relative performance. Outlook & Strategy We expect UST yields to continue rising and the US dollar to strengthen as the Fed continues to tighten policy while US inflation pressures pick up. Rising rates in the US should have varying effects on individual emerging markets. Countries with low rate environments, or large structural imbalances and economic soft spots, could be vulnerable to external rate shocks, but countries with current account surpluses or relatively higher yields should be in a stronger position to absorb rate shifts of 100 bps or higher, in our view. US protectionist policies in the form of steel and aluminium tariffs, as well as sector-specific tariffs against China, have the potential to impact growth and raise costs for consumers, adding to existing inflation pressures in the US. At this stage, the risks of a full-scale retaliatory trade war appear relatively contained, but an escalating trade conflict that damages global growth remains a risk. On the whole, we don t see trade coming to a standstill or the global economy toppling into a recession we continue to have a positive outlook for US growth and the global economy for Domestically, the US has seen some meaningful policy adjustments in the form of tax reform and deregulation that we expect to accelerate economic growth. Investment activity had been stifled by regulations enacted after the global financial crisis in 2008 removing those bottlenecks has incentivised new investment across a number of sectors. One of the trade-offs of US tax reform was the likelihood that it will increase the deficit, which raises the borrowing needs of the government. Concurrently, the Fed is no longer funding the deficit through its QE programme and is instead reducing its UST holdings. Rising deficits and diminished bond-buying from the Fed should pressure UST yields higher, in our view. We expect the current glide path of anticipated rate hikes this year to remain largely on course, with another rate hike likely coming in September. Outside of the developed markets, we continue to see a subset of countries with domestically strong economies that have demonstrated their resilience to global shocks, including potential increases in trade costs. We are focused on specific emerging markets that are less externally vulnerable and more domestically driven, and that have responsible, credible central banks that consistently respond with appropriate monetary policies. Certainly, 20 years ago it may have been difficult for many of these countries to weather a protectionist trade shock, a commodity price shock and an exchange rate shock all at the same time, but today several countries have greatly reduced those external vulnerabilities. We are seeing additional scope for strengthening in specific emerging markets in 2018 given how far valuations declined in prior years. franklintempleton.ca 2

3 In the major developed economies, we anticipate continued monetary accommodation and low rates in Japan and the eurozone while rates rise in the US those increasing rate differentials should depreciate the yen and euro against the US dollar, in our view. Eurozone growth has moderated from its 2017 levels while inflation remains below the ECB s target, allowing the ECB to remain accommodative for longer. We continue to have a negative view on the euro not only because of ongoing monetary accommodation, but also because of unresolved structural issues and ongoing populist risks. Overall, we continue to maintain low portfolio duration while aiming at a negative correlation with UST returns. We also continue to hold select localcurrency duration exposures in countries that we believe have healthy fundamentals and significantly higher yields than those available in developed markets. Looking ahead, we anticipate rising inflation pressures in the US to drive UST yields higher. We also expect depreciations of the euro and Japanese yen against the US dollar and currency appreciation across a select subset of emerging markets. Portfolio Characteristics 6 Portfolio JP Morgan Global Government Bond Index Average Duration Yrs 7.97 Yrs Average Weighted Maturity 3.04 Yrs 1.29 Yrs Portfolio Diversification Geographic Allocation 7 Percent of Total AMERICAS NON-US AMERICAS Mexico Brazil Colombia Argentina Peru USA ASIA South Korea India Indonesia Philippines MIDDLE-EAST/AFRICA EUROPE SUPRANATIONAL ST CASH & CASH EQUIVALENTS OTHER % 0% 10% 20% 30% 40% 50% Currency Allocation 8 Percent of Total AMERICAS NON-US DOLLAR Mexican Peso Brazilian Real Colombian Peso Argentine Peso Peruvian Nuevo Sol US DOLLAR ASIA Indian Rupee Indonesian Rupiah Philippine Peso South Korean Won MIDEAST/AFRICA % 20% 40% 60% 80% 100% 6. The portfolio characteristics listed are based on the fund s underlying holdings, and do not necessarily reflect the fund s characteristics. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 7,8. Figures reflect certain derivatives held in the portfolio (or their underlying reference assets) and may not total 100% or may be negative due to rounding, use of derivatives, unsettled trades or other factors. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. franklintempleton.ca 3

4 Credit Quality Ratings 9 Percent of Total AAA AA A A BBB BBB- BB BB- B B Cash & Cash Equivalents % 5% 10% 15% 20% 25% 30% 35% Investment Grade Non-Investment Grade Cash & Cash Equivalents Supplemental Performance Statistics 3 Yrs 5 Yrs 10 Yrs Since Inception Standard Deviation (%) Tracking Error (%) Information Ratio Beta Sharpe Ratio The indicated rates of return are the historical annual compounded total returns including changes in share or unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Please call Franklin Templeton Client Services at or visit for the most recent month-end performance. Investment Philosophy We believe that applying a fundamental, research-driven approach focused on identifying potential sources of total return (current income and capital appreciation) worldwide and seeking to capitalize on global interest rates and currency trends provides the best potential for solid risk-adjusted returns. The strategy is run independently of its benchmark, allowing the manager to hold only the positions it believes have the best potential to maximize riskadjusted returns. This is a high alpha seeking strategy that invests globally and may include allocations to both developed and emerging markets. Investment Process Investment Strategy Long-Term, Opportunistic Value Approach Long-term, fundamentally driven investment focus Total return approach that is not benchmark driven Identify economic imbalances that may lead to value opportunities in: Yield curve Currencies Sovereign credit Active positioning across these three areas 9. Ratings shown are assigned by one or more Nationally Recognized Statistical Rating Organizations ( NRSRO ), such as Standard & Poor s, Moody s and Fitch. The ratings are an indication of an issuer s creditworthiness and typically range from AAA or Aaa (highest) to D (lowest). When ratings from all three agencies are available, the middle rating is used; when two are available, the lowest rating is used; and when only one is available, that rating is used. Foreign government bonds without a specific rating are assigned the country rating provided by an NRSRO, if available. If listed, the NR category consists of rateable securities that have not been rated by an NRSRO. The N/A category consists of nonrateable securities (e.g., equities). Cash includes equivalents, which may be rated. Derivatives are excluded from this breakdown. Information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 10. Beta, Information Ratio and Tracking Error information are measured against the JP Morgan Global Government Bond Index. 11. Information Ratio is a way to evaluate a manager s ability to outperform a benchmark in relation to the risk that manager is assuming, with risk defined as deviation from the benchmark. This measure is calculated by dividing the portfolio s excess return (portfolio return less the benchmark return) by the tracking error (derived by taking the standard deviation of the monthly differences between the portfolio return and the benchmark return over time). franklintempleton.ca 4

5 Precisely isolate desired exposures Risk budget composition will shift based on relative attractiveness during global economic and credit cycles Investment Process 12,13 Multiple Research Lenses Can Lead to High-Conviction Opportunities Global Research Lenses Three Potential Sources of Alpha Portfolio Construction and Implementation Country Visits Local Asset Management Perspectives E S G Macroeconomic analysis Macro-models analysis Growth Drivers Monetary Policy Fiscal Policy Inflation Dynamic Debt Sustainability Balance of Payment Political Situation Yield Curve Credit Ideas Currency Ideas Identification of High- Conviction Opportunities Risk Modeling VaR Analysis Correlation Analysis Scenario/Stress Testing Team Management Potential Return vs. Expected Risk Global Allocations Trading Trade Structuring Market Flows Local Execution/ Settlement Liquidity Analysis PORTFOLIO Review Review/ Performance Attribution 12. The above chart is for illustrative and discussion purposes only. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. 13. The Local Asset Management Group is comprised of investment professionals located in affiliates of and joint venture partners with Franklin Templeton Investments. Investment Team Portfolio Manager Years with Firm Years Experience Michael Hasenstab, Ph. D., Executive VP & Chief Investment Officer Sonal Desai, Ph. D., Senior VP, Portfolio Manager, Director of Research 8 24 Additional Resources Global Sovereign/EMD Local Asset Management Glossary Average Duration: A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Average Weighted Maturity: An estimate of the number of terms to maturity, taking the possibility of early payments into account, for the underlying holdings. Maturity is expressed as a number of years. Beta: A measure of the magnitude of a portfolio s past share-price fluctuations in relation to the ups and downs of the overall market (or appropriate market index). The market (or index) is assigned a beta of 1.00, so a portfolio with a beta of 1.20 would have seen its share price rise or fall by 12% when the overall market rose or fell by 10%. Information Ratio: In investing terminology, the ratio of expected return to risk. Usually, this statistical technique is used to measure a manager s performance against a benchmark. This measure explicitly relates the degree by which an investment has beaten the benchmark to the consistency by which the investment has beaten the benchmark. Sharpe Ratio: To calculate a Sharpe ratio, an asset s excess returns (its return in excess of the return generated by risk-free assets such as Treasury bills) are divided by the asset s standard deviation. Standard Deviation: A measure of the degree to which returns vary from the average of its previous returns. The larger the standard deviation, the greater the likelihood (and risk) that performance will fluctuate from the average return. Tracking Error: Measure of the deviation of the return of a product compared to the return of a benchmark over a fixed period of time. Expressed as a percentage. The more passively the investment is managed, the smaller the tracking error. franklintempleton.ca 5

6 Important Legal Information CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. Important data provider notices and terms available at: Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus or fund facts document before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Franklin Templeton Investments Canada is a business name used by Franklin Templeton Investments Corp. Franklin Templeton Investments Canada 200 King Street West, Suite 1500 Toronto, ON M5H 3T4 Tel: Fax: franklintempleton.ca 2018 Franklin Templeton Investments. All rights reserved. 704 PPE 06/18