The $100 Billion Foreign Currency King

Michael Hasenstab keeps an eye on markets around the world from his perch at Franklin Templeton.

He may be one of the top managers in one of the hottest areas of investing, but Michael Hasenstab is refreshingly Clark Kent–ish. From Franklin Templeton's glass-and-granite headquarters in San Mateo, Calif., Hasenstab manages one of the largest bond and currency portfolios in the mutual-fund world, and for a guy who routinely takes billion-dollar bets, he seems surprisingly mild-mannered and academic. (In a recent interview, he spent much of his time with his head down speaking to his folded hands.) But his investing decisions do not lack conviction, nor does he. Asked if any of his bets are keeping him up at night, Hasenstab shrugs off the idea: "Mostly, it's jet lag."

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Though he's only 37, Hasenstab sits in a prominent place in the currency markets, at a pivotal time. Even as they've yanked their money out of stock funds, investors have been pouring it into currency investments, seeking ways to take part in a market once seen as too risky for the little guys. And the financial-services industry is eagerly offering the newbies more ways to play: There are now 43 publicly listed exchange-traded funds and mutual funds that focus on currency investing, according to a survey by fund company Merk Investments. Several brokerages now market online education campaigns promising investors that they, too, can be foreign-exchange traders. Together, these funds and do-it-yourselfers trade an estimated $158 billion in currency every day, up from $125 billion a day in 2009 and $40 billion in 2004.

A host of factors are enticing investors to dip their toes into the currency waters. Despite two consecutive good years of performance, many Americans are anxious about the near-term outlook for stocks, says Sang Lee, managing partner of Aite Group, a Boston research and advisory firm; others worry about the impact that inflation or a declining dollar might have on their portfolios. At the same time, average-joe types feel increasingly comfortable investing in foreign markets. That's good news for Hasenstab, who's as confident betting on the ringgit (Malaysia's currency) or the krone (Norway's) as on the good old American dollar. A decade ago, "the typical U.S. investor had a heavy home bias," he says. "The world has opened up."

THE CURRENCY KING

Michael Hasenstab is one of the biggest players in currency markets, with wagers on countries around the world. Recent top holdings in his funds:

Hasenstab's world includes an astounding $100 billion in bonds and currencies, spread across several funds. Franklin Templeton Hard Currency fund, established in 1989, was a pioneer among retail currency mutual funds; Hasenstab became the sole manager in 2001. Today it's one of the three biggest, and its 10-year annualized return of 6.6 percent is almost double the performance of the benchmark currency index. But the majority of Hasenstab's huge currency-related portfolio is held by other bond funds that he also manages, including the high-performing $46 billion Templeton Global Bond. To hear Hasenstab tell it, investing in foreign currencies requires a vast knowledge of bond markets around the world—not to mention an arsenal of complicated financial moves.

One thing that contributes to the complication, it turns out, is politics: Governments impose all kinds of restrictions on currency trading, forcing managers like Hasenstab to get creative. Foreigners who invest directly in the Philippine peso, for example, face a withholding tax. So to play in Manila, Hasenstab uses something called a forward contract, an arrangement to exchange a certain amount of currency at a certain point in time. Sometimes he shorts a currency, betting on the declining value of say, the yen against the dollar. And very often he buys short-term government bonds—investments whose value is tied closely to the ups and downs of the local legal tender.

It's not exactly a strategy for widows and orphans. Hasenstab often concentrates a large proportion of his portfolio in just a few countries, which makes his portfolio riskier, says Miriam Sjoblom, a Morningstar analyst. His global bond fund recently had a 15 percent commitment to South Korea. Axel Merk, a competing currency-fund manager, says that Hasenstab is more open than many of his peers to investing in minor currencies, like those of Eastern Europe. Hasenstab's globe-trotting might be rooted in his background. Though he says he grew up with a typical American childhood in Olympia, Wash., he started taking trips abroad with his parents when he was 6 months old. (His father, a Holland-born architecture professor, grew up in Indonesia and Australia; his Australian mother was a paralegal.)

As a career-long emerging-markets expert who earned a Ph.D. studying China's burgeoning financial markets, Hasenstab has the credentials to back up his picks—not to mention a team of 40 researchers to back him up. In a recent interview, he talked with about where the currency markets are headed and what novice investors might discover when they test those markets.

SmartMoney:Can an individual investor trade currencies?

Michael Hasenstab: I wouldn't do heart surgery by myself or fly an airplane by myself. Six of our staff have Ph.D.s. A lot of research goes into this analysis.

SM: What happens when all the people who do brain surgery and fly planes open currency-trading accounts?

MH: You'll see the same mistakes novices made with the tech bubble. Many of these investors are pursuing short-term gains. The only effective strategy is a long-term approach.

SM: Aren't currency movements the result of secret biweekly world-domination meetings?

MH: I don't think so. It's rare that a government can effectively move a currency. Even if they could get together in one room and agree, it would be hard to outweigh what the markets will do.

Photographs by Peter Samuels

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