Kokusai bond fund may cut Italy weighting more

TOKYO: Japan's Kokusai Asset Management wants to further reduce its holdings of Italian bonds in its $27 billion bond fund, the world's third largest, due to deepening concern over the euro zone debt crisis, the chief manager of the fund said.

Kokusai Asset has trimmed down its exposure to euro-denominated bonds overall as the debt crisis in Europe turned worse than it expected, forcing the asset manager to begin cutting exposure in Europe from around mid-June.

The asset company has rapidly lengthened duration of the flagship bond fund as the global economic outlook deteriorates because of the debt crisis and a slowdown in the United States, the chief fund manager said.

"We were originally thinking of increasing the weighting of euro-denominated bonds. The perception of the economy is not necessarily bad, but there are too many uncertainties about the debt problem," Masataka Horii, who oversees Kokusai Asset's Global Sovereign Open fund, told Reuters in an interview on Friday.

"We became concerned about how the region's debt crisis will affect financial institutions in Europe," Horii said.

Kokusai Asset's Global Sovereign fund may further reduce allocations in euro bonds from current levels, while it plans to shift more into Australian and yen bonds.

The fund's weighting in euro-denominated bonds fell to 32.3 percent as of Sept. 21, after peaking around 37 percent in June. The weighting was at 31.8 percent in April when Reuters previously conducted an interview with Kokusai.

Kokusai Asset was originally looking to raise the weighting towards 43 percent -- its highest ever, reached in late 2009.

The asset management company may extend its sales of Italian bonds after halving its weighting over the last three months, Horii said.

The weighting of Italian bonds was down sharply at 7.1 percent as of Sept. 21, from nearly 14 percent in June. Still, Kokusai was overweight in Italian debt against the benchmark of 6.6 percent in Citigroup's World Government Bond Index (WGBI).

"At the time (in April), we didn't think the debt problem would spill over into Italy," Horii said.

Horii said it may lower the weighting of Italian bonds to around the benchmark level, or even below that level.

The fund does not have any exposure to Greek bonds after selling them off in December 2009.

Global Sovereign's weighting in US Treasuries and US agency bonds fell to 13.7 percent, versus 22.9 percent in April and below the benchmark of 26.5 percent.

HEAVY OUTFLOWS

The fund has rapidly lengthened duration to 6.5 years by Sept. 21 from about 5.5 years in April as pessimism towards the global economic outlook increased, Horii said.

Kokusai does not, however, expect to extend duration further in the coming months as wariness over the economic outlook is expected to ease in the long term, he said.

Global Sovereign, also known as "Glosov" among Japanese investors, is an actively managed mutual fund that invests in global government and agency bonds with high credit ratings.

Glosov, the biggest mutual fund in Japan, had 2.09 trillion yen ($27.2 billion) in assets under management as of Thursday, making it the world's third-largest bond fund after PIMCO's Total Return Fund and Vanguard's Total Bond Market II Index Fund, Lipper data showed.

Still, the fund has struggled to attract investments from retail investors over the last three years, hurt by poor performance and availability of a slew of attractive products such as high-yield bond funds and emerging markets funds.

The asset size peaked at around 5.7 trillion yen in 2008, but the fund faced outflows after the Lehman crisis that year. Glosov generated a negative return of 2.4 percent over the past six months to Sept. 21, also underperforming the benchmark WGBI, which was plus 1.9 percent.

The fund has also lagged the benchmark since its inception in December 1997 with a return of 25 percent, against WGBI's gain of 41.6 percent.

Copyright Reuters, 2011