In Asia, central banks in China, India, Indonesia, Korea and Australia have already announced interest rate cuts.
An additional complicating factor is the strengthening US dollar, which can impact dollar-denominated products in other countries.
In this environment, how do the well-known global bond strategies from Pacific Investment Management Company and Franklin Templeton Investments fare against each other?
The Ireland-domiciled PIMCO fund was launched in 2010 and had $7.9bn in assets under management on 31 January. The Luxembourg-based Templeton fund has been in operation since 1991 and manages $36.1bn in AUM.
Both funds have the similar objective of providing investors with regular income through investments in global fixed income securities.
But the way these funds achieve their objective differs primarily due to the geographic focus of their investments. The PIMCO vehicle has significant allocations to developed markets whereas the Templeton fund is focused on emerging market allocations.
Ryan Sim, head of investments, global wealth management at OCBC Bank, provides a comparative analysis.
Investment strategy review
Both funds have large holdings in government issues, but their geographic exposure is very different.
“The PIMCO funds maximises the total return potential by mainly focusing on issuers from developed countries and has marginal exposure to other asset classes such as securitised and inflation-linked bonds,” Sim noted.
On the other hand, the Templeton fund focuses its investments on opportunities in emerging markets and at the same time takes advantage of foreign currency fluctuations in order to generate returns.
“That clearly differentiates the geographic and strategic focus of both funds.”
Based on the respective fund factsheets as of 31 January, Templeton has an allocation a significant allocation in emerging markets, with the top three allocations in South Korea (13.4%), Mexico (11.2%) and Poland (9.5%).
Meanwhile, the PIMCO fund’s top country allocations are in the US (33.8%), Japan (18.6%) and Italy (14%).
Worthwhile to note is that the modified duration of the PIMCO fund is 5.66 years, much higher than the Templeton fund’s 1.49 years, making the former more susceptible to interest rate changes.
“This may be a sign of the differing views that both houses have toward monetary policy.”
According to Morningstar data, the three-year volatility of the PIMCO fund was at 4.58% on 31 January compared to 6.81% for the Templeton product, Sim said.
South Korea 13.37%
“Over the last four calendar years, the Templeton fund has been able to provide stronger performance compared to the PIMCO vehicle, probably due to its more aggressive positioning in the emerging markets and currency space coupled with the risk-on appetite of the last few years.”
Both funds were negatively impacted during the “taper tantrum” period between May and June 2013.
“But the Templeton vehicle managed to eke out a positive performance for the year relative to a negative one from the PIMCO fund,” Sim said.
According to FE Analytics, the PIMCO fund posted a negative 3.9% return in 2013 compared to a 1.2% gain recorded by the Templeton vehicle.
In 2012, the PIMCO fund registered a 8.7% return compared to 16.3% generated by the Templeton product.
In 2014, the PIMCO fund recorded a 1% return compared to a 1.1% return from the Templeton product.
However, during 2011, the PIMCO fund gave a 6.8% return compared to the negative 3.1% return of the Templeton vehicle.
The PIMCO fund is run by a team of four portfolio managers: Scott Mather, Andrew Balls, Lorenzo Pagani and Sachin Gupta.
Mather has been managing the fund since its inception, while the other three have been co-managing the fund since September 2014.
PIMCO has been in the news since early 2014 when Mohamed El-Erian, former chief executive and co-chief investment officer, quit the firm. The departure of founder Bill Gross followed in September.
Coming to the current management team, Mather is CIO of US core strategies. He has been working at PIMCO since 1998.
Balls joined PIMCO in 2006 and is the firm’s CIO for global fixed income.
Gupta is an executive vice president and global portfolio manager and head of the global desk. He joined the firm in 2003.
Pagani is the head of the European government bond and European rates desk. He has been with PIMCO since 2004.
Coming to the Templeton fund, Michael Hasenstab is the lead portfolio manager and has been managing the product since June 2002. He is the chief investment officer-global bonds of Franklin Advisers and co-director of the international bond department. He oversees the global fixed income portfolio management team.
Hasenstab also manages the Templeton Global Total Return Fund. He initially joined Franklin Templeton Investments in July 1995. After a leave of absence to obtain his doctor of philosophy degree, he rejoined the company in April 2001.
Hasenstab is joined by Sonal Desai who has been the deputy manager of the fund since November 2011. Desai is portfolio manager and director of research for the Franklin Templeton fixed income group's international bond department.
She has more than 16 years of experience in the financial sector and joined Franklin Templeton in 2009.
Both funds charge an initial investment fee of 5.00%. However, the PIMCO fund charges a higher annual investment management fee of 1.39% compared to the Templeton fund’s 0.75% annual management fee.
Taking into account each fund’s strategy, portfolio mix and volatility, Sim was of the view that the Templeton fund would be a suitable choice for investors with a more aggressive risk profile who wish to have exposure to global sovereign bonds, and at the same time place some bets on currency fluctuations.
“It is apparent that the Templeton fund will most likely maintain its EM and currency strategy, taking strategic positions in the market as it is a tried and proven move for them.”.”
The PIMCO fund seems to be a more traditional global fixed income fund and would better fit those with a low-to-moderate risk appetite, Sim said.