Daiwa SB Investments Ltd.’s Australian bond fund is poised to overtake Kokusai Global Sovereign Open as Asia’s biggest mutual fund this year, bolstered by demand for the nation’s short-term yields that are higher than those of riskier long-term bonds.
The Daiwa SB Short-Term Australian Dollar Bond Open Fund increased assets almost 10 times from 2009 through 2011 to 1.18 trillion yen ($14.8 billion) as of Dec. 31. Global Sovereign Open shrank from 4.7 trillion yen to 1.85 trillion yen in the same period. Daiwa’s Australia fund handed investors an annual average gain of 16 percent the past three years. Kokusai, which invests in currencies and bonds in the world’s biggest markets, delivered returns of less than 1 percent.
Daiwa SB’s Tokyo-based fund buys Australian dollars and invests them in short-term debt that earns interest based on what Reserve Bank Governor Glenn Stevens does with the target for overnight lending. Even after the bank cut the rate twice last year to 4.25 percent, it’s still higher than the yields on any of the nation’s bonds except for 15-year debt, the longest maturity. The benchmark rate compares with almost zero percent in Japan and the U.S.
“My fund is simple,” said Yoshisada Ishide, 43, who manages the investment for Daiwa SB in Tokyo, part of Japan’s second-biggest brokerage after Nomura Holdings Inc. “The yield is getting lower, but it’s still attractive compared to other major nations. The Reserve Bank won’t cut rates aggressively. It’s still attractive to Japanese investors. Currently we are getting good inflows.”
Australian employers added 46,300 jobs in January, the most in 14 months, according to a government report Feb. 16. The gain led traders to reduce bets on the size of central bank interest-rate cuts over the year ahead by the most among the Group of 10 developed nation currencies.
The RBA will lower its target rate by 45 basis points within a year, interest-rate swaps show, versus 100 basis points forecast on Jan. 31, according to Credit Suisse Group AG indexes.
Australia is attractive to investors because it’s one of only 12 countries that still hold AAA grades from all three major ratings companies. Economic growth in China is helping drive demand for Australia’s goods. China consumes 28 percent of its merchandise exports including coal and iron ore.
Daiwa SB is drawing interest as it grows, said Hideo Shimomura, who competes against it as chief fund investor at Mitsubishi UFJ Asset Management Co., a unit of Japan’s biggest publicly traded bank.
Seen as Safe
“A fund of 1 trillion yen has status,” Shimomura said. “It’s a type of brand. Australia funds are the only type of bond funds that are drawing money. They’re quite popular. People think that Australia is a safe haven, and they offer a lot of return, not only from the yield but also from the currency.”
Kokusai’s Global Sovereign Open is also betting on Australia, with 10.8 percent of its assets there versus 1 percent in the Citigroup World Government Bond Index, the benchmark it uses to gauge performance, as of Feb. 16, according to the company’s website.
Global Sovereign’s annualized gain of 0.4 percent over the past three years lags behind 52 percent of its peers, according to data compiled by Bloomberg.
Interest Rate Held
The Daiwa SB Australia fund surged 7.3 percent in the past month and Kokusai Global increased 4 percent after the RBA’s Stevens on Feb. 7 unexpectedly refrained from cutting rates, sending the local currency to a six-month high against the U.S. dollar.
A rally in the Australian currency to a record $1.1081 in July is coming to an end, according to Bloomberg surveys of economists, making it tougher for Daiwa SB to maintain its pace of growth. The currency will buy $1.04 by year-end, the survey shows, versus $1.0724 as of 7:15 a.m. in London.
“The Daiwa SB fund’s total return has made it popular, beating Kokusai Global Sovereign Open,” measured by performance, Ryo Watanabe, a Tokyo-based analyst at fund research company Morningstar Japan K.K., wrote in an e-mail. “Daiwa SB’s Australia’s assets may grow, but it’s doubtful they can keep up the current pace because the Australian dollar may fall.”
Ishide said there’s a possibility that inflows will slow in 2012 as the RBA trims rates, even if the cuts are less than investors expected at the start of the year.
Size hasn’t been a problem so far, he said.
“I don’t have any trouble investing in Australia,” Ishide said. “The fixed-income market is growing rapidly. We can find inventory any time.”
Australia’s debt market is equivalent to $247 billion, outranked only by Japan, China, India and South Korea among nations in Asia and the Pacific.