By DYAN MACHAN
Michael Hasenstab keeps an eye on markets around the world from his perch at Franklin Templeton.
He may be one of the> top managers in one of the hottest areas of investing, but Michael Hasenstab is refreshingly Clark Kent ish. From Franklin Templeton's glass-and-granite headquarters in San Mateo, Calif., Hasenstab manages one of the largest bond and currency portfolios in the mutual-fund world, and for a guy who routinely takes billion-dollar bets, he seems surprisingly mild-mannered and academic. (In a recent interview, he spent much of his time with his head down speaking to his folded hands.) But his investing decisions do not lack conviction, nor does he. Asked if any of his bets are keeping him up at night, Hasenstab shrugs off the idea: "Mostly, it's jet lag."
Though he's only 37, Hasenstab sits in a prominent place in the currency markets, at a pivotal time. Even as they've yanked their money out of stock funds, investors have been pouring it into currency investments, seeking ways to take part in a market once seen as too risky for the little guys. And the financial-services industry is eagerly offering the newbies more ways to play: There are now 43 publicly listed exchange-traded funds and mutual funds that focus on currency investing, according to a survey by fund company Merk Investments. Several brokerages now market online education campaigns promising investors that they, too, can be foreign-exchange traders. Together, these funds and do-it-yourselfers trade an estimated $158 billion in currency every day, up from $125 billion a day in 2009 and $40 billion in 2004.
A host of factors are enticing investors to dip their toes into the currency waters. Despite two consecutive good years of performance, many Americans are anxious about the near-term outlook for stocks, says Sang Lee, managing partner of Aite Group, a Boston research and advisory firm; others worry about the impact that inflation or a declining dollar might have on their portfolios. At the same time, average-joe types feel increasingly comfortable investing in foreign markets. That's good news for Hasenstab, who's as confident betting on the ringgit (Malaysia's currency) or the krone (Norway's) as on the good old American dollar. A decade ago, "the typical U.S. investor had a heavy home bias," he says. "The world has opened up."
Hasenstab's world includes an astounding $100 billion in bonds and currencies, spread across several funds. Franklin Templeton Hard Currency fund, established in 1989, was a pioneer among retail currency mutual funds; Hasenstab became the sole manager in 2001. Today it's one of the three biggest, and its 10-year annualized return of 6.6 percent is almost double the performance of the benchmark currency index. But the majority of Hasenstab's huge currency-related portfolio is held by other bond funds that he also manages, including the high-performing $46 billion Templeton Global Bond. To hear Hasenstab tell it, investing in foreign currencies requires a vast knowledge of bond markets around the world not to mention an arsenal of complicated financial moves.
One thing that contributes to the complication, it turns out, is politics: Governments impose all kinds of restrictions on currency trading, forcing managers like Hasenstab to get creative. Foreigners who invest directly in the Philippine peso, for example, face a withholding tax. So to play in Manila, Hasenstab uses something called a forward contract, an arrangement to exchange a certain amount of currency at a certain point in time. Sometimes he shorts a currency, betting on the declining value of say, the yen against the dollar. And very often he buys short-term government bonds investments whose value is tied closely to the ups and downs of the local legal tender.
It's not exactly a strategy for widows and orphans. Hasenstab often concentrates a large proportion of his portfolio in just a few countries, which makes his portfolio riskier, says Miriam Sjoblom, a Morningstar analyst. His global bond fund recently had a 15 percent commitment to South Korea. Axel Merk, a competing currency-fund manager, says that Hasenstab is more open than many of his peers to investing in minor currencies, like those of Eastern Europe. Hasenstab's globe-trotting might be rooted in his background. Though he says he grew up with a typical American childhood in Olympia, Wash., he started taking trips abroad with his parents when he was 6 months old. (His father, a Holland-born architecture professor, grew up in Indonesia and Australia; his Australian mother was a paralegal.)
As a career-long emerging-markets expert who earned a Ph.D. studying China's burgeoning financial markets, Hasenstab has the credentials to back up his picks not to mention a team of 40 researchers to back him up. In a recent interview, he talked with about where the currency markets are headed and what novice investors might discover when they test those markets.
SmartMoney : Can an individual investor trade currencies?
Michael Hasenstab: I wouldn't do heart surgery by myself or fly an airplane by myself. Six of our staff have Ph.D.s. A lot of research goes into this analysis.
SM: What happens when all the people who do brain surgery and fly planes open currency-trading accounts?
MH: You'll see the same mistakes novices made with the tech bubble. Many of these investors are pursuing short-term gains. The only effective strategy is a long-term approach.
SM: Aren't currency movements the result of secret biweekly world-domination meetings?
MH: I don't think so. It's rare that a government can effectively move a currency. Even if they could get together in one room and agree, it would be hard to outweigh what the markets will do.
Photographs by Peter Samuels
SM: What do you make of the tidal wave of interest in your field?
MH: Investors have gained confidence in the equity side [in foreign markets], and the same thing is happening on the bond and currency side. Ten years ago, the opportunities were limited. There were unstable economies or lots of restrictions. That's still the case for retail investors, but for institutions it's opened up.
SM: What about investors learning foreign-exchange trading from brokerages that offer 30-day free practice accounts?
MH: It's not something you can learn in 30 days. Even if you have a great idea, many currencies, like the Malaysian ringgit, are impossible to buy.
SM: Why not just trade the major currencies, such as the dollar against the yen?
MH: Investors often don't get diversification right. You wouldn't want 100 percent in one stock idea. It's also important to look at relationships between currency and bonds. We don't think about currency in isolation.
SM: What are the geopolitical views guiding your portfolio now?
MH: [There's] an interesting combination of slow economies in the euro zone, Japan and the U.S., and healthy growth environments in the emerging markets. One of our themes is looking for emerging currencies like Korea, Malaysia, Indonesia and Brazil to appreciate against the euro and the U.S. dollar. Currencies of countries like Australia, Norway, Sweden and Poland may also appreciate because they don't have the indebtedness of some others.
SM: What's a favorite trade right now?
MH: Australia. It has little debt and high short-term interest rates at 4.75 percent versus the U.S. at zero percent. Its economy is tied in to growth in China, and I'd expect the currency to grow. To get near the same [return] in the U.S., you would have to buy a 30-year Treasury.
SM: What has worked out well for you?
MH:Buying the Malaysian ringgit and the country's short-term bonds. Long- and short-term bonds and currency in Indonesia. Malaysia had double-digit returns in the past 12 months.
SM: What's your plan to profit as U.S. rates rise?
MH: More short-term bonds our average duration is under three years. But another solution is to go global. You can earn higher yields without taking interest-rate risk, [that bond prices will fall as rates rise].
SM: With huge inflows of capital, what are the chances of a macroeconomic shock emanating from these emerging economies?
MH: Most of the emerging countries have built up their foreign-currency reserves. They learned a lesson from the 1990s Asian currency crisis and the dangers of not having enough reserves. Korea has $292 billion in reserves.
SM: Several emerging economies are holding down the value of their currencies. If they do too much, they will stall growth. If they do too little, they will invite inflation.
MH: It's a tough policy call. So far, there have been some preemptive interest-rate hikes. Malaysia has proposed budget cuts and has allowed its currency to appreciate 10 percent. China has tightened its own growth. If these countries do allow the currency to rise, we are encouraged.
SM: If they don't?
MH: The risk is to have overheating a bubble with destabilizing, real inflation. If the country imports a lot of food, higher prices can lead to political instability.
SM: The U.S. has been pressuring China to let its currency rise. Will we see it this year?
MH: Pressure from the U.S. is less relevant. But it's in China's best interest to fight inflation. If China opens the yuan [to foreign investors], it will open the door to becoming a global reserve currency, to having a more balanced export and domestic economy. It would mean a wealth transfer to a lot of people in China. They could import more.
SM: Fed Chairman Ben Bernanke has said the U.S.'s "quantitative easing" policy is not the same as printing money.
MH: I'm not sure how I'd describe it then. It will raise inflationary pressure in the longer term if liquidity is not withdrawn when the economy recovers.
SM: Aren't you awfully young to be doing this?
MH: I get older by the day.