The worst thing fixed income investors can do in 2014 is freeze, as it will cause short-term shocks and even long-term pain, according to Franklin Templeton’s Michael Hasenstab.
In an investment update, Hasenstab, who is chief investment officer for global bonds at the US firm, cautioned against sitting on cash.
‘In the realm of behavioral finance, there’s a concept called “analysis paralysis” that many investors succumb to.'
'A daily deluge of data (often contradictory), news and investment advice can cause investors to sit frozen on the sidelines or leave the game completely,’ said Hasenstab.
‘Active, unconstrained managers were generally rewarded in 2013, and I think 2014 will be more of the same in fixed income. It is my conviction one of the biggest risks in 2014 is to do nothing and investors will need to be very active.’
Hasenstab said overcoming panic will be ‘critical’ in the coming year and also warned against overlooking the emerging markets.
‘There is a lot of consensus at the beginning of this year that emerging markets are over, that there is a lot of doom and gloom. We see a different reality.'
'We think that within some of the bearishness, there are some gems, and they are being thrown out in this sort of contagion/mass panic.’
In the coming year, Hasenstab said he will focus on specific country bets where there are obvious opportunities rather than being swept up in a broad aversion to developing world debt.
Rising rates reaction
Looking at the major macro challenges on the horizon, Hasenstab reiterated previous comments about rising interest rates and how it will be on the agenda of all bond investors in 2014 and beyond.
‘Rising interest rates could prove challenging for fixed income investors. I think that remains essential not only in the year ahead, but as we look out over the next five years or so.’
Hasenstab said, with this long-term view in mind, it is important for investors to not wait to see how the rising rates environment plays out but begin to tactically allocate ahead of time.
‘When you factor in the impact of inflation, that means that even to preserve one’s wealth, one has to take risk,’ said the San Mateo-based manager.
‘Just sitting on cash is a strategy that we think is very likely to lose money. Our job is to really identify which risks we think we’re getting compensated for, and which risks we think are not worth taking.’
The $43 billion Templeton Global Bond returned 14.1% over three years to the end of December 2013. Its benchmark, the JP Morgan Global GBI Unhedged TR, rose 3.73% over the same period.