Top mutual fund diversifies to boost bond returns

TOKYO: Kokusai Asset Management, Japan’s biggest mutual fund manager, may reduce exposure to the US and Japan in its $ 19 billion bond fund to diversify investments and boost returns following years of net outflows and underperformance.
The firm’s flagship Global Sovereign Open Fund sees little room to cut its exposure further to the troubled euro zone having slashed its holdings in recent years, Masataka Horii, the fund’s chief manager said in an interview with Reuters.
“Speaking broadly, we’ve been reducing our exposure to the euro zone and the United States and shifted into countries such as Australia, but we want to diversify even further,” said Masataka Horii, the chief fund manager of the fund.
Horii said the fund was adding Poland, Mexico and Nordic countries to its portfolio. Earlier this year, the fund added New Zealand and it has been increasing its exposure to Canadian and Australian bonds.
The Global Sovereign Open Fund’s total assets have shrunk to a quarter of their peak of about 5.7 trillion yen in 2008 when the collapse of Lehman Brothers triggered the global financial crisis. H or ii said outflows have been slowing down this year.
The fund has struggled to match its benchmark returns. The fund has grown just over 30.2 percent in value since its inception in 1997, underperforming a rise in the benchmark Citigroup World Bond Index (WGBI) of 48.1 percent.
Like other Japanese institutional investors including the Japanese Government Pension Investment Fund, the Global Sovereign Open Fund is finding that its traditional investment destinations of Europe, the United States and Japan are either too risky, or offer persistently low yields.
US 10-year Treasury bonds yielded just 1.6 percent on Tuesday compared with 4.3 percent 10 years ago. Equivalent bonds in Japan provide 0.75 percent, versus 1.3 percent a decade ago, and in Germany 1.5 percent, compared with 4.6 percent 10 years ago.
By comparison, Australia 10-year government bonds yield over 3 percent currently, Poland more than 4.3 percent, and Mexico 5.3 percent, Thomson Reuters data shows.
“Obviously we’ve had debates within our company whether it was valid to treat Mexico and Poland as developed countries, but it was not easy to draw a line between industrialized and developing countries,” Horii said.
“But I feel it’s valid to include developing countries in our portfolio as their economies are coming close to industrialized countries.”
The fund is an actively managed bond fund that invests in global government and agency bonds of developed countries with credit ratings of single A and above.
Kokusai is eager to diversify beyond Australia, which accounted for nearly 20 percent of the portfolio, due to growing doubts over the potential growth of the economy, Horii said.
The fund could add more Mexican bonds, now about 1.6 percent of its portfolio, and Polish bonds, which totaled 1.9 percent, Horii said. It could also raise the weightings of Swedish and Norwegian bonds, he said.
The fund has reduced its exposure to the euro area during the bloc’s protracted debt crisis to 10 percent as of Oct. 11 from a peak of 43 percent in late 2009.
Horii said the fund’s exposures to Japan and the United States were still high at close to 30 percent and 11 percent respectively, and had more room to be reduced, even though in the case of the United States he was relatively upbeat about the economy’s prospects.
He suggested Washington would avoid the so-called “fiscal cliff” of tax increases and government spending cuts due to take affect early in 2013 unless Congress acts. Too much was at stake if Congress fails to act, he said.

“I expect Congress will reach a solution. Everybody knows that a failure to reach a solution would be dire, so the government have to act,” Horii said.
In the meantime, Horii expects the US housing market to rebound and lift the economy.
“You mention all the negative points (fiscal cliff, uncertainty over the US. presidential election, euro crisis and Chinese uncertainty), but on the positive side, we need to focus on many improvements seen in the US housing sector,” he said.
Reflecting signs of a pick up in the housing market, two of America’s biggest banks, Wells Fargo & Co. and J.P. Morgan Chase & Co, posted record quarterly profits last week following a sharp rise in mortgage lending.
“The housing market has turned the corner,” said JPMorgan CEO Jamie Dimon.
Although the Global Sovereign Open Fund has underperformed its benchmark, it has massively outperformed the index level of the Nikkei stock average, which is down more than 50 percent since 1997.
Compared with Japanese competitors, the fund was the 47th best performer out of 128 over the last five years and 37th out of 56 funds over the past decade, according to fund tracking firm Lipper, a Reuters company.