Japanese funds that pair investments in high-yield debt and foreign exchange grew the most in 10 months in December after a rally in the Brazilian real, the most-used currency for the products.
The total net asset value of the so-called double-decker funds -- designed to first invest in high-yielding assets like junk bonds and then buy into currencies to further increase returns -- rose 7.9 percent to 9.63 trillion yen ($106.4 billion) last month from November, the steepest increase since February, according to data compiled by Thomson-Reuters unit Lipper. Created in 2009, the products now account for more than 15 percent of the world’s eighth-largest mutual-fund market.
The Brazilian real was among the 10 best-performing currencies against the yen last month, gaining 9.5 percent as the central bank intervened to stem the currency’s decline against the U.S. dollar. Products tied to the real accounted for 46 percent of double-decker fund assets last month, as Japanese individuals looked to beat the country’s low interest rates by looking overseas for higher-return investments.
The gain in the real helped boost demand for the funds, Shoko Shinoda, a Tokyo-based analyst at Lipper, said by phone. Net sales jumped 31 percent in December from the previous month, according to the research company’s data.
The increase last month reversed slowing growth in November when the real dropped to the lowest level against the greenback in more than three years after Brazil’s central bank indicated it would keep its benchmark rate at a record low for a period economists predict will be the longest in history.
Double-decker products use non-deliverable forward contracts for foreign exchange to leverage returns and pay monthly dividends, catering to Japanese individual investors who want a regular income, such as retirees.
The real has been preferred by Japanese funds to other emerging-market currencies because it’s more actively traded in the global foreign-exchange market, Shinoda said.
Nomura Asset Management Co.’s real-linked “U.S. High Yield Bond Fund,” is a double-decker fund investing in U.S. dollar-denominated industrial bonds. Its net asset value increased 6.8 percent in December, after falling 1.4 percent a month earlier, according to data compiled by Bloomberg.
Total returns on the fund were 21.8 percent in 2012, compared with a 5.4 percent loss the previous year, the data show.
The real’s drop over the past two years, amid a series of interest-rate cuts in Brazil, and subsequent fluctuations in returns on double-decker funds, have prompted Japan’s financial regulator to require more disclosure about the products’ risks, making sales more difficult, said Sadayuki Horie, a Tokyo-based researcher at Nomura Research Institute.