HEAD-TO-HEAD: Franklin Templeton versus JP Morgan

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Investment process

Both the Franklin Templeton (FT) and JP Morgan funds have a flexible strategy when investing in Asian fixed income, which means they can take positions in various sub-asset classes such as investment grade, high yield and government bonds, according to Ng.

The managers both use a total return approach and also take into consideration macro factors, company fundamentals and technicals, such as supply and demand of the bonds.

However, the funds are differentiated by currency risk, country allocations and duration.

Currency risk

On the currency front, both are flexible in taking currency risk, according to Ng. The FTI fund, for example, invests in both US dollar- and hard currency-denominated Asian bonds, even though its benchmark index, the JPM GBI-EM Broad Diversified Asia Index, is a local currency bond index.

Meanwhile, the JP Morgan fund, which has no benchmark index, can invest up to a maximum of 50% of its assets in local currency bonds, Ng said, noting that at least 50% of its assets should be in US dollar-denominated securities.

But of the two funds, the FTI product is more active in taking currency bets. For example, nearly 60% of the fund’s assets are in local currencies, which compares to just 30% last year when the US dollar was becoming stronger relative to other currencies.

The FTI fund can also short currencies, Ng added, noting that the fund is currently shorting the Australian dollar.

“Most Asian fixed income managers will probably be more passive in terms of making currency bets. But for the Templeton fund, the managers are quite active on that front,” Ng said.

On the other hand, the JP Morgan fund has remained constant in keeping its US-dollar exposure at around 80% of the fund’s assets, according to Ng, noting that the product aims to keep volatility low.

As of the end of July, US-dollar denominated bonds accounted for 83.5% of the portfolio.

Country differences

Both products have different country allocations as well, according to Ng. For example, the FTI product has no exposure to China, which compares to 25% for its benchmark, while the JP Morgan fund has at least 40% of its assets in the mainland.

Country allocation

Source: Fund factsheets

“The FTI fund tends to focus on a country that they have strong conviction in,” Ng said.

“Managers of the JP Morgan fund may have taken into account the market share of China in the Asian fixed income universe.”

Previously, Ho Shaw Yann, co-portfolio manager of the JP Morgan fund, explained to FSA why the fund is tilted to China.

“For China corporate bonds, which constitutes a material portion to our China exposure, most of them are rated single-A with more attractive valuations when compared to similarly-rated corporates in the region.

“Earnings also remain healthy and companies are able to maintain their leverage and at the same time expand their businesses,” she said.

Duration

Another huge difference between the FTI and JP Morgan funds are their durations, according to Ng.

The FTI fund has a tendency to keep its overall duration close to zero, Ng said, noting that the current duration of the product is -3.96.

“This is not usual in the universe of Asia fixed income funds.”

The JP Morgan fund, on the other hand, keeps its duration to 1.5-5 years. Currently it is at around 3, which is in line with other Asia fixed income products, Ng said.

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