Download Franklin Templeton Emerging Market Debt Opportunities

Franklin Templeton
Emerging Market Debt Opportunities
PRODUCT PROFILE
SECOND QUARTER 2012
STRATEGY OVERVIEW*
• Emerging market debt strategy that takes an absolute return approach, whereby we will only invest in countries or
securities we find attractive, irrespective of benchmark weights
• Diversified portfolio of hard and local currency emerging market issuers
• Return Target: 8–10% per annum over the course of a full market cycle
PERFORMANCE DATA** (AS OF 6/30/12)
Average Annual Total Returns (USD%)
Quarter
1 Year
3 Years
5 Years
10 Years
Franklin Templeton Emerging Market Debt Opportunities
Composite—Gross of Fees
0.2
3.0
16.3
9.1
14.9
Franklin Templeton Emerging Market Debt Opportunities
Composite—Net of Fees
0.0
2.2
15.3
8.1
13.8
JP Morgan EMBI Global Diversified Index
2.8
9.8
13.1
9.2
11.1
JP Morgan GBI-EM Broad Diversified Index
-1.3
-1.8
9.1
7.8
N/A
BofA Merrill Lynch Emerging Markets Credit Plus Index
0.4
7.0
14.2
8.0
9.5
30
20
10
0
-10
0.2
2.8
-1.3
0.4
3.0
Quarter
9.8
7.0
16.3 13.1
9.1
14.2
9.1
9.2
7.8
14.9 11.1
8.0
1 Year
Franklin Templeton Emerging Market
Debt Opportunities Composite—
Gross of Fees
3 Years
JP Morgan EMBI
Global Diversified Index
5 Years
JP Morgan GBI-EM
Broad Diversified Index
9.5
N/A
-1.8
10 Years
BofA Merrill Lynch Emerging
Markets Credit Plus Index
Calendar Year Returns (%)
100
50
60.9
6.8 7.1
2.6 7.4
16.3 12.2
29.8
0
-28.4 -12.0
13.1 6.2
16.6 9.8
14.3 10.3
17.3 11.6
35.4 22.2
2004
2003
28.1
13.7
-50
YTD 2012
2011
2010
2009
Franklin Templeton Emerging Market Debt
Opportunities Composite—Gross of Fees
2008
2007
2006
2005
JP Morgan EMBI Global Diversified Index
2002
MARKET REVIEW
• During April and May, sentiment among global investors deteriorated in the face of adverse economic data and
developments in the eurozone, generally leading to weak performance in assets perceived as risky, including emerging
market (EM) debt.
• However, EM debt markets in general rebounded in June, partly due to inflows into the asset class, as investors continued
to search for assets that appeared to offer high yields.
• As a result, EM debt markets’ overall weakness for the second quarter as a whole was reversed, allowing them to end
the quarter with gains, albeit gains that were not as strong as those the asset class generally saw in the previous quarter.
QUARTERLY PERFORMANCE ATTRIBUTION1
• The strategy’s positions in China, Hungary and Bosnia-Herzegovina contributed to performance in the second quarter.
The sovereign debt of Bosnia-Herzegovina strengthened following the government’s decision to allow the servicing of
the country’s foreign debt, which opened the way for fresh talks with the International Monetary Fund on a new aid
package.
• The weakness seen in many EM currencies detracted from the strategy’s returns during the second quarter, with the
largest negative impact coming from the Brazilian real and Uruguayan peso.
• The strategy’s positioning in Argentina also detracted from results for the second quarter, as the government’s
renationalization of the country’s leading energy company unnerved investors.
INVESTMENT OUTLOOK AND STRATEGY
• Uncertainty in global financial markets, driven by the ongoing eurozone crisis, makes it likely that EM debt could
continue to experience volatility in the coming months and quarters. However, we believe that over the longer term
the asset class has the potential to weather conditions arising from wider market nervousness, as it has done to a certain
degree so far.
• Determining whether the recent softening in the global economy is a temporary factor will be important, especially for
commodity-oriented EM economies.
• We believe the longer-term outlook for EM debt remains relatively strong, although there are some signs that the market
may be becoming overextended. Therefore, exposure to certain holdings that we think now offer minimal upside
potential may be reduced as we deem appropriate.
*Targets represent the goal the strategy seeks against the JP Morgan EMBI Global Diversified Index and do not take into account management
fees or other expenses an investor would incur in the management of its account, which would reduce any returns. There is no assurance that
employment of the strategy will result in the intended targets being achieved.
**Periods of more than one year are annualized.
Franklin Templeton Emerging Market Debt Opportunities
Information is supplemental to the Historical Performance
PORTFOLIO CHARACTERISTICS OF A REPRESENTATIVE ACCOUNT1 (AS OF 6/30/12)
Representative Account
JP Morgan EMBI Global Diversified Index
JP Morgan GBI-EM Broad Diversified Index
Yield to Maturity
8.71%
5.26%
6.02%
Average Duration
3.74 years
7.24 years
4.76 years
Average Life
7.04 years
11.00 years
6.84 years
PORTFOLIO DIVERSIFICATION OF A REPRESENTATIVE ACCOUNT (AS OF 6/30/12)
Country Allocation (%)1,2
7
6
5
4
3
2
1
0
Risk Category:
One
Two
Three
Fund
Regional Allocation1,2
Currency Allocation1,2
Latin America
G7
Eastern Europe
Local
Middle East / Africa
Far East / Asia
Fund
Risk Category Allocation1,2
Portfolio Allocation1,2
One
Sovereign
Two
Quasi-Sovereign
Three
Corporates
Fund
Fund
Top Ten Holdings1,3
Security
Country
NOTA DO TESOURO NACIONAL, INDEX LINKED, 6.00%, 8/15/20
Brazil
% of Total
3.5
GOVERNMENT OF IRAQ, TRANCHE A3, SUMITOMO CORP. LOAN, FRN, .875%, 1/01/28
Iraq
3.4
GOVERNMENT OF BOSNIA & HERZEGOVINA, SENIOR BOND, B, FRN, 1.6875%, 12/11/21
Bosnia & Herzegovina
2.7
CENTRAL BANK OF NIGERIA, WTS., 11/15/20
Nigeria
2.6
GOVERNMENT OF LITHUANIA, SENIOR NOTE, REG S, 6.625%, 2/01/22
Lithuania
2.3
GOVERNMENT OF VENEZUELA, OIL VALUE RECOVERY WTS., 4/15/20
Venezuela
2.3
GOVERNMENT OF SOUTH AFRICA, 8.00%, 12/21/18
South Africa
2.2
GOVERNMENT OF URUGUAY, INDEX LINKED, 3.70%, 6/26/37
Uruguay
2.0
GEORGIAN RAILWAY LTD., SENIOR BOND, 9.875%, 7/22/15
Georgia
2.0
CEMEX ESPANA LUXEMBOURG, SENIOR NOTE, REG S, 8.875%, 5/12/17
Mexico
1.9
FRANKLIN TEMPLETON INSTITUTIONAL
Information is supplemental to the Historical Performance
SUPPLEMENTAL PERFORMANCE STATISTICS* (AS OF 6/30/12)
10 Years
5 Years
3 Years
Annualized Performance (USD%)
Risk and Return Characteristics**
Franklin Templeton Emerging Market Debt
Opportunities Composite—Gross of Fees
14.9
9.1
16.3
Franklin Templeton Emerging Market Debt Opportunities
Composite vs. Mercer Emerging Market Debt Universe
5-Year Period Ending March 31, 2012
JP Morgan EMBI Global Diversified Index
11.1
9.2
13.1
10.9
15.5
1.0
100
0.9
1
9.9
14.0
0.8
80
0.6
1
6.8
8.4
4.8
8.9
12.5
0.6
60
0.3
1
7.9
11.0
0.4
40
0.0
0
Tracking Error
vs. JP Morgan EMBI Global Diversified Index
Information Ratio4
vs. JP Morgan EMBI Global Diversified Index
0.6
0.0
0.7
Annualized Volatility
Franklin Templeton Emerging Market Debt
Opportunities Composite
JP Morgan EMBI Global Diversified Index
11.7
15.0
8.2
6.9
9.1
10.8
6.6
Return
9.5
Std.
Deviation
0.2
Franklin Templeton Emerging Market
Debt Opportunities Composite
TOP-DOWN RISK CONTROLS (AS OF 6/30/12)
Risk Categories by Country
Category 1
(16%)
Eastern Europe
Bulgaria
Croatia
Czech Republic
Estonia
Latvia
Lithuania
Poland
Romania
Russia¹
Slovakia
Far East/Asia
Azerbaijan³
China
Malaysia
Thailand
Latin America
Chile
Mexico
Trinidad & Tobago
Middle East/Africa
Algeria
Botswana
Morocco
Oman
South Africa
Tunisia
Category 2
(8%)
Category 3
(4%)
Hungary
Macedonia
Serbia
Turkey²
Ukraine
Albania
Belarus
Bosnia & Herzegovina
Greece
Moldova
Montenegro
20
-0.3
0
Confidence
Information
of Value
Ratio
Added
JP Morgan EMBI
Global Diversified Index
Reward to
Risk
Investment Guidelines
Minimum Percentage
(% of Total Assets)
Maximum Percentage
(% of Total Assets)
Category One
–
16
Category Two
–
8
Category Three
–
4
Eastern Europe
10
40
Far East/Asia
10
40
Latin America
10
40
Middle East/Africa
10
40
G7 Currencies
20
80
Local Currencies
20
80
–
20
BB- or Higher
–
5
B+ or Lower
–
2.5
Individual Countries
Regions
Georgia3
India
Indonesia
Kazakhstan
Barbados
Brazil
Colombia
Costa Rica
El Salvador
Panama
Peru
Uruguay
Bangladesh
DPR Korea
Fiji
Nepal
Pakistan
PNG
Philippines
Sri Lanka
Vietnam
Argentina
Belize
DomRep
Ecuador
Grenada
Guatemala
Jamaica
Venezuela
Currency Denomination
Corporate
Egypt
Ghana
Iraq
Jordan
Mauritius
Namibia
Nigeria
Zambia
Angola
Gabon
Ivory Coast
Kenya
Lebanon
Malawi
RoCongo
Senegal
Seychelles
Uganda
Zimbabwe
1. Alternatively Far East/Asia.
2. Alternatively Middle East/Africa.
3. Alternatively Eastern Europe.
*Periods of more than one year are annualized.
**Source: Mercer Global Investment Manager Database. As of the quarter ended March 31, 2012. Peer universe data for the most recently completed quarter was not available at the time this material
was printed. The peer universe includes unaffiliated institutional asset managers that manage similar mandates. Universe percentile rankings were calculated using gross of fee performance.
Past performance does not guarantee future results and results may differ over future time periods.
Franklin Templeton Emerging Market Debt Opportunities
INVESTMENT PHILOSOPHY
Our philosophy is that a diversified portfolio consisting of issues denominated in hard and local currencies has the potential to generate attractive returns at
lower levels of absolute risk than the standard emerging market debt benchmarks, which tend to be concentrated in a few issuers. We believe that a bottom-up,
research-driven, qualitative investment process, combined with a risk-controlled approach, has the potential to achieve our objective of outperforming
standard benchmarks at low levels of absolute risk.
INVESTMENT PROCESS
Franklin Templeton’s Emerging Market Debt Opportunities investment process can be summarized in three integral steps—country allocation, currency
allocation and issue selection.
Country Selection
We believe that country selection is the most important decision in structuring an emerging market debt portfolio. The first step in the investment process is
conducting bottom-up research on emerging countries. Our approach is largely qualitative and based on intensive fundamental research. Since the portfolio is
constructed through bottom-up fundamental research and not relative to a benchmark, there is no requirement to hold issues in any one country for the sake of
controlling tracking error. Countries are only held when they are considered suitable investments. An investment is made only if three key questions are
answered positively:
1) Does the yield adequately compensate for the fundamentals?
2) Is the country an improving credit?
3) Will the security generate a return in line with the performance target?
Currency Assessment
After individual countries have been selected, the next decision is whether to take exposure in the form of hard currency or local currency instruments. This
is a distinguishing characteristic of our investment process. Although both hard and local currency instruments are not available in all emerging market
countries, the inclusion of local currency instruments results in a significantly expanded investment universe, thus increasing the potential for uncovering
undervalued investment opportunities. The decision to invest hard or local currency-denominated issues is based on whether yield spreads are sufficient to
compensate for the perceived risk.
Security Selection
The final decision concerns selecting the most attractive security within each selected country and denominated in the chosen currency. The primary decisions
at this stage concern selecting the appropriate maturity and the appropriate coupon structure—fixed or floating. These decisions are based on three factors:
1) The extent of optimism on the country concerned
2) The shape of the sovereign spread curve
3) The outlook for yields in the underlying government market
INVESTMENT TEAM
Portfolio Management Team
William Ledward, Portfolio Manager
Claire Husson-Citanna, CFA, Portfolio Manager/Analyst
Nicholas Hardingham, CFA, Portfolio Manager/Analyst
Fatma Charlwood, Research Analyst
Philip Spires, Trader
Additional Resources
Fixed Income Policy Committee
Global Sovereign/EMD
Product Managers
Adam Grotzinger, CFA
Stuart Jonathan Lingard
Years with Firm
15
6
9
8
6
Years Experience
27
12
12
9
17
Years with Firm
8
1
Corporates—Investment Grade
Templeton Emerging Markets Equity
Years Experience
8
14
Corporates—High Yield
Local Asset Management
COMPLIANCE STATEMENT AND OTHER INFORMATION
Franklin claims compliance with the Global Investment Performance Standards (GIPS®).
Franklin (the “firm”) encompasses the equity, fixed income and balanced accounts managed by Franklin Advisers, Inc., and related Franklin affiliates, including, effective January 1, 2007, the equity
accounts managed by the institutional investment teams of Franklin Templeton Institutional, LLC under the former firm name of Fiduciary Global Advisors. The combined equity assets of Franklin
and Fiduciary Global Advisors form the Franklin Equity Group (formerly Franklin Global Advisers prior to June 30, 2010) unit of Franklin. Effective January 1, 2006, the fixed income assets managed
from that date forward by Franklin Templeton Institutional, LLC (“FTI”) or its related affiliates (managed previously by Fiduciary Trust Company International - Institutional Division or “FTCI’s
Institutional Division”) that went through the institutional portfolio review process were combined with the fixed income assets of Franklin to form the Franklin Templeton Fixed Income unit of
Franklin.
Franklin Templeton Emerging Market Debt Opportunities (USD) Composite consists of all portfolios managed on a fully discretionary basis with an investment objective that seeks to achieve an
above total return by investing in emerging market sovereign, quasi-sovereign and corporate debt instruments in both local and G7 currencies. In addition, the strategy may invest in below
investment grade bonds (rated below BBB-). The strategy is not constrained by benchmark weightings and may take tactical exposure to G7 as well as to emerging market currencies, but with the
objective of managing to the base currency needs of a U.S. dollar (USD) investor. The strategy regularly uses currency forwards, options, interest rate futures, credit-linked notes and, on a
somewhat less frequent basis, other derivatives such as swaps (including credit default swaps and total return swaps) for hedging purposes or for investment to control risk or assume tactical
exposure to various foreign currencies or asset classes consistent with the investment objective. Occasionally, the strategy may engage in writing puts and calls on securities. The base currency of
the composite is U.S. dollars.
Total returns are presented in U.S. dollars both gross and net of investment advisory fees, are inclusive of commissions and transaction costs, and assume reinvestment of any dividends, interest
income, capital gains, or other earnings. If mutual funds are included in a composite, gross of fee returns are based on the primary share class (typically Class A) and are calculated by adding 1⁄12 of
the funds’ annual expense ratio, which includes management fees and all other fund expenses, to the 12 monthly returns for each fiscal year. Net of fee returns for separate accounts are net of
actual management fees or, for accounts on a legacy portfolio accounting system, net of management fees based on the standard fee schedule. Returns for periods of less than one year are not
annualized. The performance presented for Franklin is in compliance with GIPS® from January 1, 2000 to the present. Past performance does not guarantee future results and results may
differ over future time periods.
Because three countries dominate most emerging markets indices, the firm does not base its asset allocation upon any emerging market index. Rather, the firm’s asset allocation is constrained by
three sets of investment guidelines consisting of currency denomination, regions, and country selection. Although the firm’s strategy in emerging market debt is not managed to a benchmark, we are
including three indices for comparative purposes, to represent the investment environment existing during the time periods shown. The primary benchmark is the JP Morgan EMBI Global Diversified
Index which consists of U.S. dollar denominated securities. The JP Morgan EMBI Global Diversified Index is a market value weighted fixed income index comprised of U.S. dollar denominated debt
instruments issued by emerging market sovereign and quasi-sovereign entities. The secondary benchmark, JP Morgan GBI-EM Broad Diversified Index, includes securities denominated in local
currencies. The JP Morgan GBI-EM Broad Diversified USD-Unhedged Index is a U.S. dollar denominated market value weighted fixed income index comprised of local currency government bonds
of emerging market countries. The third benchmark, BofA Merrill Lynch Emerging Markets Credit Plus Index, consists of securities denominated in U.S. dollar and euro. The BofA Merrill Lynch
Emerging Markets Credit Plus (100% Hedged Into USD) Index is a market value weighted fixed income index hedged to the U.S. dollar and comprised of emerging market corporate credit with an
average credit quality of high-BB.
Additional information regarding the firm’s policies and procedures for calculating and reporting performance results is available upon request. To receive a complete list and description of Franklin
composites (including any single account mutual fund composite) and/or a presentation that adheres to the GIPS® standards for any composite, contact your Franklin Templeton Institutional
representative at 1.800.321.8563.
Effective with the third quarter of 2008, composite returns in base currency are translated to other currencies using London FX rates instead of New York rates for all time periods presented, which
may result in revisions to multi-currency returns compared to what was previously reported for prior periods.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
Explanatory Notes
1. Portfolio information is based on a representative account taken from the Franklin Templeton Emerging Market Debt Opportunities Fixed Income Composite. The information is historical, may
not reflect current or future characteristics and may vary among individual separate accounts depending on a variety of factors such as portfolio size, specific investment guidelines and
inception dates of the individual accounts.
2. Percentage may not equal 100% due to rounding. Portfolio diversification information is based on a representative account, is historical, and may not reflect current or future portfolio
characteristics.
3. Holdings of the same issuer have been combined. Top ten holdings information is based on a representative account, is historical, and may not reflect current or future portfolio characteristics.
All holdings are subject to change.
4. Information ratio is a way to evaluate a manager’s ability to outperform a benchmark in relation to the risk that manager is assuming, with risk defined as deviation from the benchmark. This
measure is calculated by dividing the portfolio’s excess return (portfolio return less the benchmark return) by the tracking error (derived by taking the standard deviation of the monthly
differences between the portfolio return and the benchmark return over time).
This piece is intended for institutional investment management consultants or investors interested in institutional products and services available through Franklin Templeton
Institutional and its affiliates. Various account minimums or other eligibility qualifications apply depending on the investment strategy or vehicle.
© 2012 Franklin Templeton` Investments. All rights reserved
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