HEAD-TO-HEAD: Capital Group versus Franklin Templeton

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Investment process

Both the Capital Group and the Templeton funds belong to Morningstar’s global flexible bond categories. Ge explained that the funds within the category usually deviate from global bond indices as well as other global bond products. For example, the funds in the category have the flexibility to invest across all sub-asset classes and make currency bets by investing in hard or local currencies.

However, there are several differences between the investment approach of the two products.

Starting with the objective, Ge explained that the Capital Group fund aims to provide income to investors. Historically, the fund has provided a 7% yield annually to investors, although Ge expects that the number will go down as bond yields have gone down in recent years. Meanwhile, the Templeton fund does not have an income mandate, but instead aims to maximise total return over the long-term.

Given that the Capital Group fund aims to provide stable income for investors, it invests in higher-yielding bonds, according to Ge. The product has two main sleeves, which are emerging market debt and US high yield. The emerging market debt sleeve is managed by Los Angeles-based Robert Neithart, while New York-based David Daigle looks over the high yield bond sleeve.

The product is benchmarked against a custom index of 50% Bloomberg Barclays US HY 2% Cap, 20% JPM EMBI Global, 20% JPM GBI-EM Global Diversified and 10% JPM CEMBI Broad Diversified, reflecting the strategy’s flexibility to invest in various sub-asset classes.

“You can see that within emerging markets, it can invest in both government and corporate bonds and that can further be split to hard and local currency,” Ge said.

Capital Group Global High Income Opportunities asset allocation

Source: Fund factsheet. As of 29 February 2020.

Turning to the Templeton fund, Ge said that the product predominantly invests in sovereign bonds and is benchmarked against the JP Morgan Global Government Bond Index.

He noted that the fund was not classified as a flexible bond fund, but the firm decided that it was flexible given that its portfolio largely deviates from the benchmark and its peers.

Ge explained that its lead fund manager, Michael Hasenstab, often has contrarian views.

“Over the recent years, for example, the fund is known for its short duration plays [to offset any increases in inflation or interest rates]. Now it has a negative duration, which is quite different from what we have seen in other global bond funds,” Ge said.

The fund also takes huge currency bets. For example, around 46% of the portfolio is in Japanese yen, he added.

Templeton Global Bond Fund asset allocation

Source: Fund factsheet. 29 February 2020.

Given the differences in the funds’ investment processes, the drivers of returns are also different, according to Ge.

For the Capital Group fund, around 55% of returns are driven by credit selection, while country selection accounts for 25%. Meanwhile, currency is not much of a driver for the fund’s returns.

Turning to the Templeton fund, Ge said that the fund managers look at duration and interest rates. Unlike the Capital Group fund, currencies play a huge role in driving returns.

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