2013 Investment Forum Materials / Not for Public Distributiondd.franklintempleton.com/common/pdf/2013/Breakout...2013 Investment Forum Materials / Not for Public Distribution Summary

2013 Investment Forum Materials / Not for Public Distribution

Global Macro Hedge Strategy

SONAL DESAI, Ph.D. Portfolio Manager, Director of Research International Bond Department

Franklin Templeton Fixed Income Group®

June 5, 2013


Topics

• Strategy Overview

• Investment Team Resources

• Philosophy, Process and Risk Management

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Summary

• Global Macro Hedge Strategy– Managed by Franklin Advisers, Inc., part of Franklin Templeton Investments, one of the world’s

leading investment organizations with over US$823 billion in AUM– Highly developed professional, technological and risk management infrastructure– Only suitable for longer-term investors

• Seeks to Generate Alpha from “Curve, Currencies and Credit” Investments in over 50 Countries

– Utilizes three “lenses” of economic research: country, global macro and on-the-ground– Evaluates every investment on individual risk/return and its contribution to overall volatility– Uses position concentration, security selection and portfolio leverage with the aim of producing

uncorrelated performance

• Seasoned Leadership Backed by Proven Fundamental Approach– Lead manager Michael Hasenstab, Ph.D., has over a 10-year track record and manages over

US$193 billion1

– 16 investment professionals on the International Bond team, with experience averaging over 12 years2

– Investment research by over 130 fixed income professionals in 10 global locations

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1.This includes a number of fund vehicles and separate accounts. 2.The 16 investment professionals on the International Bond team have other investment management responsibilities for other products. Investment professionals include portfolio managers, portfolio analysts and traders.As of March 31, 2013.



• Investment Objective– Seeks to generate strong absolute returns over the long term– Identifies macroeconomic imbalances in global interest rate, currency and credit markets– May invest in both long and short sovereign and corporate securities and derivatives, as well

as foreign exchange

• Unconstrained in Seeking Most Attractive Global Opportunities– Typically express 5–6 macro themes – May contain concentrated and illiquid positions– Frontier markets and niche investments, such as local bank deposits, may also be used– Leverage will be actively used

There is no assurance that the portfolio will achieve its investment objective. Past performance does not guarantee future results.

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Macro Strategy Designed to Generate Returns in Any Market Environment

• We Believe Alpha Opportunities Exist Throughout an Economic Cycle– Interest rates, currencies and credit spreads move in cycles, but not necessarily together– Accelerating economic growth implies stronger fundamentals

• Tends to be positive for risk currency/credit exposure, but not for duration exposure (higher interest rates)

– Slower economic growth implies weaker fundamentals• Tends to be positive for duration exposure (falling interest rates), but not for risk currency/credit exposure

* “Safe-Haven” currencies are those that the market tends to gravitate toward during periods of economic volatility.The above chart is for illustrative and discussion purposes only. Not representative of any current holdings.

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Lead Manager: Michael Hasenstab, Ph.D.• Since 2001, Lead Manager of Global Bond Plus and Global Multisector Plus Strategies

– Renowned macroeconomist with deep knowledge of global fixed income markets– Named the top global bond fund manager by Bloomberg Global Markets in 2009 and 2010*– Since 2001, AUM in his strategies have grown from US$2.1 billion to over US$193 billion1

• Leads Global Sovereign & Emerging Markets Debt Team– Team conducts on-going and rigorous analysis of developed and emerging countries– Disciplined application of interest rate, exchange rate and sovereign credit equilibrium models– Access to fixed income research platform with over 30 years of continuous operation

• Praise for Dr. Hasenstab’s Approach– “Produced returns better than bonds and equities, but hasn't experienced high volatility.”2

– “Hasenstab has a remarkable talent for spotting long-term trends in advance and then getting in on the ground floor.”3

– “No matter what happens in the Eurozone, or elsewhere for that matter, one thing that’s unlikely to change is Hasenstab’s steely resolve to stick with an investment process that’s focused on the long term, and which doesn’t react to headlines.”4

– “We believe investors are in good hands.”5

1. As of March 31, 2013. The increase in AUM is not due to an increase in the value of the assets.2. Barron’s, global bond category, Templeton Global Bond Fund, for the 1-year period ended December 18, 2010.3. Morningstar, global bond category, Templeton Global Bond Fund, as of June 15, 2012.4. Morningstar, global bond category, Templeton Global Bond Fund, as of June 1, 2012.5. Morningstar, global bond category, Templeton Global Bond Fund, as of April 17, 2012.The quotes and awards shown herein are based on Michael Hasenstab’s management of certain U.S. and Luxembourg registered mutual funds, which employ a similar but not identical strategy as the Fund. There can be no assurance that the Fund will achieve the same results. The testimonials may not be representative of the experience of clients. Past performance does not guarantee future results.

Morningstar Awards 2011*

Winner Fixed Income Fund Manager of the Year

Investment Week 2011*

Winner Global Bond Manager of the Year

Switzerland, Germany, United Kingdom, France, Europe

Lipper 2011*

Best Fund Over 3-, 5- and 10-Year Periods as of 12/31/11

Lipper 2011*

Best-Selling Bond Funds Domiciled in Europe in 2011

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Leveraging Ideas Generated by Global Research Effort• The International Bond Team uses the

experience of 16 investment professionals:– Over 12 years’ average experience– Fourteen languages spoken

• Process builds upon existing portfolio management, research and risk infrastructure

• Able to draw upon over 150 fixed income investment professionals in developed and emerging markets located around the world

• Team may also exchanges ideas, insights and information with Franklin Templeton Investments global equity managers and analysts

Investment professionals include portfolio managers, portfolio analysts and traders.As of March 31, 2013.

38 Additional Globaland Local AssetManagementProfessionals

102 Additional FixedIncome Professionalsin 11 Locations

91 GlobalEquityProfessionals

Over 90 RiskManagementProfessionals

International Bond Team

16 Managers,Analysts and Traders

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International Bond TeamGlobal Macro Hedge Strategy Team (16) Title Years of Experience

Michael Hasenstab, Ph.D. Senior Vice President, Portfolio Manager, Co-Director International Bond Department 18

Canyon Chan, CFA Senior Vice President, Portfolio Manager 21

Sonal Desai, Ph.D. Director of Research, Portfolio Manager 19

Calvin Ho, Ph.D. Senior Global Macro and Research Analyst 8

Hyung-Cheol Shin, Ph.D. Senior Global Macro and Research Analyst 21

Kang Tan, Ph.D. Senior Global Macro and Research Analyst 13

Diego Valderrama, Ph.D. Senior Global Macro and Research Analyst 10

Vivek Ahuja Research Analyst/Portfolio Manager 17

Laura Burakreis Research Analyst/Portfolio Manager 26

Christine Zhu Quantitative Research Analyst 10

Attila Korpos, Ph.D. Research Analyst 8

Charlie Liu Research Associate 1

Jonathan Hum Research Associate 1

Michael Messmer Senior Trader 12

Matt Henry Trader 6

Andrew Mesic Trader 6

Product Management (3) Title Years of Experience

Elsa Goldberg Vice President, Senior Product Manager 16

Brian Henry Institutional Portfolio Manager 23

Susan Wong, CFA Product Manager 8

As of March 31, 2013.CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

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Investment Philosophy• View Global Financial Markets as an Integrated System

– Markets usually reflect fundamentals over 2–3 year horizon, but often deviate in the short term– Seek to take advantage of global inefficiencies and structural trends– Seek to identify “linkages” throughout global financial and economic systems in conjunction

with in-depth individual country research – Utilize a long-term value approach to “curve (interest rates), currencies and credit” analysis

• No Substitute for Fundamental Research– On-going evaluation of over 50 different countries and economies– Diversity of inputs in the investment process is critical– Extensive country analysis through multiple lenses

• Concentrated and Contrarian– Look for opportunities where others panic and be prepared to react quickly when others do

not– Willing to weather periodic and significant short-term volatility in search of long-term

opportunities– Hold only those investments in which we have high conviction, and add leverage, as

appropriate

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Designed to Achieve Diversification Across Wide Range of Fixed Income Instruments• Ability to choose from ideas generated by global fixed income management resources • Process builds upon existing strategies, research and risk management infrastructure


Global Multisector Plus

Global Bond Plus

Government/Sovereign Bonds

Currency/Foreign Exchange

Quasi-Sovereign and Govt. Agencies

Corporate Bonds and Spread Sectors

Bank Loans

Structured Debt

Frontier Govt. and Corp. Bonds

Credit Linked Notes

Local Bank Deposits

Specialty Issues

Leverage

For illustrative purposes only; not representative of any current holdings.

Utilize Utilize Less Do Not Utilize

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Investment Process

The above chart is for illustrative and discussion purposes only and is not indicative of the Fund’s investment holdings at any given time.

DevelopedMarkets

EmergingMarkets

FrontierMarkets

GEOGRAPHIC UNIVERSE

GLOBALMACRO HEDGE

STRATEGY

Best Execution

Risk Analysis

THREE “LENSES” OF GLOBAL RESEARCH

SOURCES OF POTENTIAL ALPHA

CONSTRUCTION & IMPLEMENTATION

LongCurve

ShortCurve

LongCurrency

ShortCurrency

LongCredit

ShortCredit

Investments include, but are not limited to: government, supranational, municipal and corporate debt; bank loans;private placements; structured debt; mortgages; forward foreign exchange; swaps; futures; and options

Portfolio Management• Top 5–6 themes

• 23–35 individual positions

• Leverage

Trading• Trade structuring

• Market flows• Local execution

Risk Modeling• VaR

• Correlations

• Scenario-planning

• Stress-testing

Country Analysis• Macroeconomic

fundamentals

• Monetary & fiscal policy

• Capacity for change

Macro Models• Currency models

• Interest rate models

• Ad hoc thematic research

• Identify imbalances

Local Perspectives• Brazil

• China, India, Korea, Malaysia

• Dubai

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Sample Portfolio Construction

• Typically Express 5–6 Global Macro Themes– Evaluate ideas from a “clean slate” all-cash portfolio– Look for uncorrelated ideas– Focus in areas where we believe opportunities exist to “harvest low-hanging fruit”– Potential investments compared based on expected risk/return

• Six “Levers” for Each Market—Curve, Currencies and Credit, Either Long or Short– Execute ideas via combination of cash, bonds, derivatives and leverage– Position size based on valuations, cross-correlations and expected risk/return– Recognize that shorting can be more complicated in some frontier and emerging markets – No stop-loss provisions—counterintuitive to the way we think

.

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Robust Global Growth• Long EM FX• Minimal long duration• Almost zero sovereign credit

Global Re-Coupling to the U.S. Slowdown• Long duration ex U.S.• Short EUR• Long JPY, CHF to hedge

BRL, IDR

European Sovereign Crisis• Long E. Eur. credits• Avoid PIIGS

Bottoming of Interest Rate Cycle• Scaled out of long duration exposures

Low U.S. Interest Rates• Short JPY

to hedge U.S. rates

Credit Crunch Widens• Long EM

credits and FX• Reduced

JPY, CHF EM Liquidity Crisis• Anchored

EM deals• Added EM

credits and FX

August 2007U.S. Sub-Prime

Spreads Globally

September 2008Lehman (plus Fannie, Freddie, ML, WaMu)

December 2008Fed cuts rates from

1% to 0–0.25%

December 2009European sovereign

crisis begins

0

200

400

600

800

1,000

7/06 10/06 1/07 4/07 7/07 10/07 1/08 4/08 7/08 10/08 1/09 4/09 7/09 10/09 1/10 4/10 7/10 10/10

JPM

EM

BIG

Sove

reign

Spr

ead (

meas

ured

in ba

ssis

point

s)¹

How We Navigated the Hundred-Year StormInvestment Strategies Utilized in the Franklin Templeton Global Bond Plus Composite Representative Account (2006–2010)

Source: Bloomberg, 2010.The above chart is for illustrative and discussion purposes only. Information is historical, is for a different strategy and may not reflect current or future portfolio characteristics of a Global Macro Hedge Strategy.1. The JPMorgan Emerging Bond Index Global (EMBIG) Sovereign Spread is the difference in yields between the EMBIG and the U.S. Treasury yield curve. JPMorgan calculates this spread by aggregating the cash flows of all the bonds in the index and determining the number of basis points which need to be added to the U.S. Treasury yield curve so that the discounted net present value of the aggregate cash flows will equal the aggregate current market value of the bonds (Z-spread).

3Q ‘06 4Q ‘06 1Q ‘07 2Q ‘07 3Q ‘07 4Q ‘07 1Q ‘08 2Q ‘08 3Q ‘08 4Q ‘08 1Q ‘09 2Q ‘09 3Q ‘09 4Q ‘09 1Q ‘10 2Q ‘10 3Q ‘10 4Q ‘10

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Risk Management Is the Foundation of Our Investment Philosophy• Responsibility Begins and Ends with Our Portfolio Managers

– Leverage time-tested strategies and experienced managers and teams– Integrated within our fundamental, research-driven process

• Performance Analysis and Investment Risk (PAIR) Team– Over 90 professionals based in 14 locations; 25 dedicated to fixed income– Performs scenario analyses, risk modeling, stress-testing, position scaling,

risk budgeting and performance attribution– Designed to ensure risks are “recognized, rational and rewarded”

Recognized Rational Rewarded

Strive to ensure risks are recognized and understood at the security, portfolio and operational level

Risk decisions are an intended and rational part of each portfolio’s strategy

Seek to ensure that every risk has an opportunity for a commensurate long-term reward

As of March 31, 2013.16


Risk Management Process Is Independent, Detailed and Disciplined• On-going Monitoring of Exposures, Correlations and Counterparties

– Performance Analysis and Investment Risk (PAIR) team members sit on trading desk, but conduct independent analysis

– Trades subject to pre- and post-trade compliance– Key risk statistics published overnight to internal website– Regular manager and peer review of risks on daily, weekly, monthly and quarterly basis

Dedicated Risk Management Specialists

• Performance Analysis and Investment Risk work consultatively to help integrate risk analytics into the portfolio evaluation process

• Independent analysis is designed to allow for a consistent philosophy andan unbiased perspective for the organization

In-Depth Reviewand Oversight

• Senior level oversight committees manage risk related to: counterparty risk, complex securities, global product launches and pricing and liquidity

• Support specialists in Portfolio Compliance, Legal and Trading support the portfolio teams in monitoring risks in each area

Solid, CommittedOrganization

• Unifying mission and organizational values guide decision-making withinthe organization

• A leading global asset management firm helps support the portfolio teams in adhering to core philosophies through market cycles

FUNDAMENTALS OF RISK MANAGEMENT

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Integration of Risk Management into Portfolio Construction

1 Portfolio Construction• Build portfolios according

to proven style and client constraints• Seek to ensure proper diversification

2 Performance Evaluation• Designed to identify

drivers and detractorsof performance

• Assess which risks areeffectively rewarded

• Backtest risk modelto validate ex-ante risk

4 Risk Monitoring• Measure risk exposures

and help identify new risks• Monitor risks across several

dimensions daily and bringattention to material changes

• Contribute to appropriate Risk Committee

3 Risk Analysis• Analyze exposure

changes under variousconditions

• Designed to ensuremanagers do not departfrom investment policy

• Propose trades to helpmitigate unwanted riskexposures

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Example: Isolating Risk Exposures

• If we like a local interest-rate opportunity but find the currency unattractive, we can hedge out the currency risk, or cross-hedge to a currency we do find attractive

• Example: Long maturity local Mexico bonds (denominated in Mexican pesos) cross-hedged to Indian rupees

The above chart is for illustrative and discussion purposes only and is not indicative of the Fund’s investment holdings at any given time.

Step 1 = Purchase peso-denominated Mexican bond

Step 2 = Cross-hedge peso risk into Indian rupee risk

Result = “Rupee-denominated” long-dated Mexican debt

Cross-HedgeMexican Interest Rate Risk

Indian Rupee Risk=

Single Security Hedge-Out Mexican Peso and Hedge-In Indian Rupee Result

+Indian RupeeMexican Peso

Mexican Interest Rate Risk

Mexican Peso Risk-

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Example: Combining Research, Risk Management and Portfolio Construction

The above chart is for illustrative and discussion purposes only and is not indicative of the Fund’s investment holdings at any given time. The above example is not intended to be the views of the portfolio managers, nor should be taken as investment advice.

PORTFOLIOShort JPY positionC

ount

ry R

esea

rch

Mac

ro

Res

earc

h

JapanWeak economic fundamentals

Short JPY

Interest rate differential analysis

Strong correlation between USD/JPY and U.S.-Japan interest rates

U.S.Interest rates will eventually rise after QE

Short U.S. rates

RESEARCH

Incorporated correlation analysis into risk models

Target % of short JPY to hedge U.S. rates risk

U.S. rates risk, JPY correlation

PAIR (risk team)

Target % short JPY

Portfolio does not hold anyU.S. TreasuriesPortfolio does hold EM $ sovereign bonds

Implicit U.S. rates risk

Portfolio Management

IMPLEMENTATION

JPY correlation

Short U.S. rates

Short JPY

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Our Current Macro Outlook• Questions in the Eurozone Have Shifted from Existential to Practical

– How will the fiscal compact evolve into a deeper fiscal union?– Will ambitious structural reforms continue now that the European Central Bank’s de facto

quantitative easing has eased pressure?

• Global Linkages Help Predict How Dynamics in One Region Are Transmitted to Another– Trade channel: A European downturn would not lead to as sharp of a drop in demand as 2008

because Europe does not trade as much with the world as the U.S.– Capital markets channel:

• Risk of deleveraging shock is mitigated by the binary choice European banks face—raise capital elsewhere or pull out of their most lucrative markets entirely

• The ECB’s long-term repurchase operation adds to aggressive monetary policy from the U.S. and Japan, and capital cannot be entirely contained by borders

• Capital Flows Are Determined by Relative Pricing, not Absolute– A European downturn would lower absolute levels of growth, but the gap of growth speeds will

persist between the G-3 and lower-leveraged developed and emerging markets

• Long-Term Risks of Historically Unorthodox Monetary Policy– There has to be a cost of the most expansionary monetary policy in modern times: asset price

distortions, price pressures

As of March 31, 2013. Portfolio manager opinions are as of the date of this publication, are subject to change without notice and should not be considered as investment advice.21


Important Information

22© 2013 Franklin Templeton Investments. All rights reserved.

The information provided during this conference is not a complete analysis of every material fact regarding any market, industrysector, security, or portfolio. Statements of fact cited by the presenters have been obtained from sources considered reliable but no representation is made as to their completeness or accuracy. Because market and economic conditions are subject to rapid change, opinions provided are valid only as of the date of the material and are subject to change without notice. The manager’s opinions are intended solely to provide insight into how the manager analyzes securities and are not intended as a recommendation or individual investment advice for any particular security, strategy, or investment product. Indexes are for illustrative purposes only. One cannot invest directly in an index. For more information on Franklin Templeton products or services, please contact your local Franklin Templeton representative at (800) 321-8563.

This presentation is provided by Franklin Templeton Institutional for informational purposes only. This information is considered proprietary and shall be treated as confidential. It shall not be distributed or otherwise communicated to third parties. While every effort has been made to ensure the accuracy of the information contained within these materials, we do not guarantee such accuracy.

Additional Information for Macro Strategy Designed to Generate Returns in Any Market Environment Slide: All investments involve risks, including possible loss of principal. Currency rates may fluctuate significantly over short periods of time, and can reduce returns. Derivatives, including currency management strategies, involve costs and can create economic leverage in the portfolio which may result in significant volatility and cause the Fund to participate in losses (as well as enable gains) on an amount that exceeds the Fund’s initial investment. The Fund may not achieve the anticipated benefits, and may realize losses when a counterparty fails to perform as promised. Foreign securities involve special risks, including currencyfluctuations and economic and political uncertainties. Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity. Investments in lower-rated bonds include higher risk of default and loss of principal. Changes in interest rates will affect the value of the Fund’s portfolio and its share price and yield. Bond prices generally move in the opposite direction of interest rates. As the prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value.

Documents

2013 Investment Forum Materials / Not for Public Distributiondd.franklintempleton.com/common/pdf/2013/Breakout...2013 Investment Forum Materials / Not for Public Distribution Summary