HEAD-TO-HEAD: Fidelity versus Templeton

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Investment approach

The two funds are both emerging market debt funds, but they are in different Morningstar categories, Ge told FSA.

The Fidelity Emerging Market Bond Fund is in the global emerging markets bond funds hard currency Morningstar category. The benchmark for that category is the JP Morgan Emerging Market Bond Index (EMBI) which is a hard currency bond index, Ge said.

The Templeton Emerging Markets Bond Fund is in the global emerging markets bond local currency Morningstar category.

Part of the reason for that is the Templeton fund invests quite a bit in local currency bonds, and typically has foreign exchange exposure, Ge explained.

“Another difference between the two funds is that the Fidelity fund is much more benchmark aware and it has alpha targets,” he said.

The Fidelity fund has an outperformance target of 160 basis points gross of fees annualized over a three-year rolling period with a tracking error budget of 150-250 basis points. Its primary investable universe consists of hard-currency sovereigns, although there is latitude to invest in corporate bonds local currency debt up to internal limits of 25% and 30%, respectively.

The Templeton fund is more benchmark agnostic and high conviction, Ge said.

The strategy’s high conviction, long-term-oriented process is underpinned by global rates and currency research. Managed in a benchmark-agnostic manner, the managers aim to identify value among sovereign credit, interest rates, and currencies in emerging markets countries with healthy or improving fundamentals that they think the market underappreciates.

The contrarian-minded group attempts to find those opportunities early on and then watch as their theses unfold over several years; notable successes have included patient plays with Indonesian and Ukrainian debt, said Ge.

The Templeton fund doesn’t invest in corporations. “They’re just focused on government bonds, sovereign bonds, and again, currencies. And those are the main alpha drivers there,” he said.

Another key difference between the two funds is that the Templeton fund has been avoiding some major markets. For example, countries that they think have poor fundamentals, such as Russia and Venezuela, according to Ge.

“So they haven’t invested in Russia since 2015, and that’s actually helped them quite significantly year to date considering what’s happening in Russia and Ukraine.”

Obviously, Russia and some of these other countries are in the benchmark. By not investing them, it’s an active call as compared with some other managers such as Fidelity which does have the Russian exposure, he concluded.

Fund characteristics

Top Holdings:

Source: Fund factsheets, 31 January 2022 and 31 December 2021*

Country allocation:

Source: Morningstar, 30 November 2021

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