Templeton’s $38 Billion Fund Takes Battering From Latam Slump

This month’s slump in currencies from Mexico to Argentina is weighing on the performance of Franklin Templeton’s flagship bond fund just as it was starting to reap the rewards from a multi-year bet against U.S. Treasuries.

The $38.2 billion Templeton Global Bond Fund, run by Michael Hasenstab, is down more than 1.7 percent int the past month amid a slump in local debt of Brazil, Mexico and Argentina, three of its biggest holdings. The loss has helped erode a gain for the year that put the fund at the top of its peer group at the end of April, according to data compiled by Morningstar Inc.

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The shift highlights the potential risks and rewards of Hasenstab’s strategy of staking vast sums on conviction trades. Latin American currencies have been among the hardest hit in an emerging-market currency rout this month, set off by the surge in the dollar and mounting concern about rising global borrowing costs.

Argentina’s peso has slumped the most in the world this year and the country’s authorities have had to seek help from the International Monetary Fund following a mistimed reduction in the inflation target. The government stanched the depreciation on Tuesday, rolling over about $30 billion of short-term notes known as Lebacs and selling almost $3 billion in fixed-rate local bonds. Templeton holds more than 40 percent of one of the existing bonds that Argentina reopened on Tuesday.

Hasenstab defended his holdings in Latin America in an interview with Bloomberg TV earlier this month, saying that Argentina and Brazil are examples of countries that have rejected populism and unsustainable macro policies, giving them “great potential” in the medium term.

A spokeswoman for Franklin Templeton couldn’t be reached before normal business hours.

— With assistance by Charles Stein