Kokusai Keeps Bet Against Yen After Biggest Loss Since 1999

By Wes Goodman

Jan. 13 (Bloomberg) -- Kokusai Global Sovereign Open Fund, Asia’s biggest bond fund, is sticking to the strategy that made last year its worst since 1999: betting against Japan’s currency.

“We underweighted the yen, which turned out to be the strongest currency,” said Masataka Horii, one of four investors for the $51 billion fund in Tokyo. Global Sovereign, which invests in bonds denominated in various currencies, doesn’t hedge its foreign-exchange positions.

Interest rates near zero percent in Japan and the U.S. will encourage investors to borrow in those nations and seek higher returns in Europe and Australia, Horii, 42, said. Bloomberg surveys of banks and securities firms project the yen and the dollar will fall this year as the world’s largest economies recover from a recession and risk aversion abates.

The opposite happened in 2008. The yen strengthened 10 percent or more against all of some 170 currencies tracked by Bloomberg, rallying 23 percent versus the greenback, as slowing economic growth led traders to reverse bets made with money borrowed in Japan. Global Sovereign handed investors a 14.6 percent loss, after accounting for reinvested interest.

The benchmark Kokusai uses to gauge performance, the Citigroup World Government Bond Index, fell 10 percent. In the past five years, the fund beat the measure three times and underperformed twice. The fund’s 1999 loss totaled 20 percent, according to data compiled by Bloomberg.

Boosting Yen

Global Sovereign boosted its yen investments to 18 percent of assets from 10 percent at the start of 2008. The figure is still about half of what the Citigroup index allocates to the Japanese currency, Horii said.

The fund cut its U.S. Treasury holdings to 27 percent of assets from 28 percent in December. Its biggest bet is euro- denominated bonds, which comprise about 38 percent of holdings.

The yen will weaken to 100 per dollar this year from 89.26 in recent trading, according to the median estimate of analysts surveyed by Bloomberg News. It will fall to 124 per euro from 119.30, a separate poll showed.

“Countries with high yields such as Australia and New Zealand may be attractive” to Japanese investors, said Kenichiro Ikezawa, who oversees about $3 billion as a fund manager at Daiwa SB Investments Ltd. in Tokyo. The company is part of Daiwa Securities Group Inc., Japan’s second-largest brokerage after Nomura Holdings Inc.

Last month, the Federal Reserve cut its target rate for overnight loans between banks to a range of zero to 0.25 percent from 1 percent and the Bank of Japan trimmed its benchmark to 0.1 percent in December from 0.3 percent.

The European Central Bank will lower its benchmark to 2 percent from 2.5 percent at a Jan. 15 policy meeting, according to most of the 59 economists surveyed by Bloomberg News before the decision. Australia’s central bank rate is 4.25 percent and New Zealand’s is 5 percent.

Volatility to Decline

A global credit crisis last year triggered recessions in the U.S., Europe and Japan, prompting investors to shun higher- yielding assets.

The Australian dollar tumbled 36 percent against the yen, while New Zealand’s currency plunged 39 percent. In the past month, they’ve advanced 2.8 percent and 3 percent, respectively.

“The market had huge volatility in 2008 and investors cut their positions,” said Horii.

Horii helped make Global Sovereign the world’s second- biggest managed bond fund after Newport Beach, California-based Pacific Investment Management Co.’s Total Return Fund, which has $132 billion in assets.

“Volatility is still high, but it will decline by year-end, he said. “Investors will build confidence again. They will sell dollars and Japanese yen and buy euros and Australian dollars.”

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.