Why is Kokusai bullish on the U.S. dollar?

The biggest bond fund in Asia said it is buying the U.S. dollar, and holds the greatest amount of the currency in 18 months, because the nation's economic instability may infect the rest of the world.

Kokusai Global Sovereign Open Fund's U.S. holdings are the highest since April 2007, Masataka Horii, one of four managers for the $51.9 billion in Tokyo, said in an interview. The fund increased its allocation to 27 percent of its assets as of the end of August, from a record low of 20 percent in March.

“The slowdown in growth will spread from the U.S.,” said Horii, 42, at Kokusai Asset Management in Tokyo. “Investors won't want to take risks. Money will go back to the dollar, especially from emerging markets.”

The dollar has fallen 3.7 percent the past two weeks against a basket comprised of six currencies of major trading partners on concern borrowing to fund a bailout of the banking sector will swell the nation's budget deficit.

Kokusai is favoring the dollar while Treasury Secretary Henry Paulson's $700 billion proposal to stabilize the banking system sends the currency lower.


Dollar Weakens
The dollar weakened the most against the euro on Sept. 22 since the European currency's 1999 debut, falling 2.1 percent. The combination of the plan proposed by Paulson, government spending and a slower economy may swell the U.S. budget deficit to $1.5 trillion, or 10 percent of GDP, said Michael Feroli, an economist at JPMorgan Chase in New York.

Investors in the Kokusai Global Sovereign Open Fund have lost 3.23 percent in September, versus a 1.75 percent decline in the Citigroup World Government Bond Index, the benchmark the company uses to gauge performance. The fund outperformed the benchmark last year, according to data compiled by Bloomberg.

Horii is also bullish because the Federal Reserve refrained from cutting interest rates this month even as markets crumbled, maintaining the extra yield that Japanese investors get for buying U.S. debt.

The target rate for overnight loans between banks is two percent in the U.S., compared with 0.5 percent in Japan. Ten-year Treasuries yield 2.30 percentage points more than Japanese securities of similar maturity, on line with the average for the past six months.

“The Fed won't cut the policy rate,” Horii said. “That will favor the U.S. dollar.”


Reducing Europe, Asia
Kokusai reduced its holdings of European and Asian debt to fund its U.S. purchases, Horii said. The company trimmed bonds in Europe to 39 percent of its portfolio from 44 percent, and in Japan to 9.5 percent from 13 percent since March.

Gross domestic product in the U.S. is likely to be 1.7 percent this year and 1.5 percent in 2009, according to the median estimate in a Bloomberg survey. For Japan, growth is forecast at one percent in 2008 and 1.15 percent next year. In the euro zone, the forecasts are 1.35 percent and one percent.

The U.S. rescue plan may help revive the world's biggest economy, leading investors to use funds borrowed in Japan in search of higher yields elsewhere, said Akira Takei, general manager for international bonds at Mizuho Asset Management in Tokyo.
“What we have seen since last week is an unwinding of the flight to quality,” said Takei, who helps oversee the equivalent of $36.9 billion at the unit of Japan's second-largest bank. “It means the yen will tend to be weaker.”

Mizuho bought dollars and sold Japan's currency at the end of last week, Takei said. The greenback may rise to 115 yen by year-end, according to Takei, who correctly forecast the rally in Treasuries last year.


Will the U.S. Treasury's proposal of a $700 billion bailout stop Kokusai from betting on the dollar?

Will Sumitomo Mitsui buy Lehman assets in Japan?

Lehman Brothers Holdings is in talks to sell some Japan assets to Sumitomo Mitsui Financial Group in a bid to save its 1,300-employee operation in the country, three people familiar with the matter said.

Lehman Brothers Japan is also trying to sell assets including its equity, investment banking and real-estate businesses to Mitsubishi UFJ Financial Group and Barclays, two of the people said, declining to be identified as the discussions aren't public.

Banks worldwide are picking over Lehman's assets while headhunters target its employees, after the 158-year-old company filed for bankruptcy on Sept. 15. Sumitomo Mitsui and Mitsubishi UFJ have avoided the worst of the credit losses and writedowns that sank Lehman and Bear Stearns Cos. and forced Merrill Lynch to sell itself to Bank of America.

“Japan banks haven't been hurt as much by the subprime crisis, and their opportunities to grow revenues at home are declining,” said Naoki Fujiwara, who oversees about $720 million as chief fund manager at Tokyo-based Shinkin Asset Management. “This is a good chance to gain investment banking know-how.”

Sumitomo Mitsui, which invested 500 million pounds ($901 million) in Barclays in July, is also seeking to buy businesses from New York-based Lehman elsewhere in Asia, the people said. South Korea's financial regulator said Sept. 16 it suspended Lehman's local units.


Lehman's Asset Sales
Lehman will hire PricewaterhouseCoopers LLP as financial adviser for the sale of the unit in Japan, Lehman Brothers Japan President Akio Katsuragi told a meeting of about 100 creditors in Tokyo, according to two people who attended. PricewaterhouseCoopers' Tokyo officials were not available for immediate comment.

Sumitomo Mitsui spokeswoman Chika Togawa denied the bank is in talks to buy Lehman's local assets. Mitsubishi UFJ spokesman Takashi Takeuchi, Lehman spokeswoman Keiko Sugai and Barclays spokesman Yu Sakakibara declined to comment.

London-based Barclays agreed this week to buy Lehman's North American investment-banking unit for $1.75 billion. Private-equity firms Bain Capital LLC and Hellman & Friedman LLC are negotiating as a team to acquire Lehman's investment-management unit, according to people familiar with the discussions.

Tokyo-based Sumitomo Mitsui, which has a 40 percent stake in Daiwa Securities SMBC, is the only one of Japan's three biggest banks that lacks majority control over an investment-banking unit. The lender has reported about $910 million in losses on subprime-related investments since the start of April 2007, compared with more than $13 billion in such charges at Lehman and $52 billion at Merrill.


Japan's Biggest Bankruptcy
Sumitomo Mitsui paced gains by Japanese banks in Tokyo trading after U.S. stocks rallied the most in six years as the government considered a plan to shore up the financial system.

The lender rose 13 percent to close at 659,000 yen on the Tokyo Stock Exchange, the second-biggest gain among 84 stocks in an index tracking Japanese banks, which jumped 11 percent.

Lehman's main units in Japan filed for bankruptcy this week in the nation's biggest corporate collapse, listing about 4.7 trillion yen ($44 billion) of liabilities.

The company ranked 14th last year in underwriting Japanese stock sales and hasn't worked on any such transactions this year, according to data compiled by Bloomberg. Lehman was the ninth-biggest adviser on mergers and acquisitions in the country, advising on 13 deals, Bloomberg data shows.


Recruiters Knock
Lehman Brothers Japan President Katsuragi said this week the company wants to find a buyer and that Japanese firms are among the potential acquirers.

Discussions might fail unless Lehman is able to stem departures among its employees, the people familiar with the talks said. Recruitment firms are calling Lehman workers in Japan, trying to lure entire teams or departments, the people said.

The company's lawyers are seeking to file a revitalization plan, which will include a potential acquirer, to the Tokyo District Court by Sept. 26.

Lehman reported 12.4 billion yen of profit in Japan for the year ended March 31, up from 1.4 billion yen a year earlier. Revenue rose to 122 billion yen from 35.6 billion yen.

Brokerage commissions totaled 28.2 billion yen and trading profit was 4.3 billion yen, while Lehman earned 53.7 billion yen from fee businesses, including its merger advisory operations.


Should Sumitomo Mitsui decide not to buy out Lehman in Japan, which firm will most likely acquire it?

Why have fund managers grown

more bearish on Asian equities?

Fund managers investing in Asia outside of Japan became more bearish on equities in the third quarter, with more increasing their holdings of cash and bonds, according to a HSBC Holdings survey.

The survey by HSBC of 12 investment management companies that oversee a combined $4.2 trillion in assets showed 44 percent of fund managers polled were “underweight” equities in the third quarter, compared with ten percent in the preceding three months.

The proportion of fund managers with an “overweight” allocation to bonds rose to 44 percent in the third quarter, up from 20 percent in the April to June period, the survey said.

“Investors continue to take conservative positions, moving away from volatile equity markets and finding a safe haven in bonds and cash,” said Bonnie Tse, HSBC's head of wealth management for personal financial services in the Asia Pacific.

The MSCI Asia Pacific excluding Japan Index, which tracks 642 stocks, has declined 31 percent this year, as concerns over slowing global growth and more than $500 billion in writedowns and credit losses at financial institutions hurt profits.

Investors pulled a net $50 billion from equity funds in the second quarter and put a net $15 billion into balanced funds and $11 billion into money-market funds, the HSBC survey showed.


Will investors continue to rely on cash and bonds? How would this trend affect the Asian equity market?

Will Mitsui's renewed focus on property and utilities

deliver better than its hedge funds business?

Mitsui & Co., Japan's second-largest trading company, will close its New York hedge fund business as it shifts to investments including property and utilities.

Mitsui, with businesses ranging from import-export to financial services, decided to shut Mitsui & Co. Alternative Investment Corporation because it failed to meet the company's targets amid the turmoil of the global credit squeeze, Masaji Matsuoka, who is in charge of formulating funds at the firm's asset management division, said in an interview in Tokyo.

The unit was established in 2005 to mainly target institutional investors in Japan who sought to diversify their investments through hedge funds, Matsuoka said.

Tokyo-based Mitsui aims to focus on investing where it has more expertise, Matsuoka said. In June, it announced plans to raise as much as $1.2 billion for a fund to invest in infrastructure assets such as power generators, electricity and gas transmission companies, and railways.

“We're in the midst of shifting our focus to investments that match the business model of a trading company,” Matsuoka said. “We don't have any plans in the near future to pursue hedge fund investments.”

The company has raised about 20 billion yen ($188 million) for the Emerging Market Infrastructure Fund, Matsuoka said. Mitsui may also create funds to invest in agricultural businesses, emission credits and metal, he said.

Mitsui invested in London-based Climate Change Capital Group in May along with Alliance Trust, Universities Superannuation Scheme and SNS Reaal Groep NV. Climate Change Capital is a manager of funds investing in greenhouse gas credits.

Any future expansion in hedge fund investments will be made by Mitsui's Tokyo-based Japan Alternative Investment, said Matsuoka.

Global hedge funds fell 2.35 percent in July, according to Chicago-based Hedge Fund Research, raising the prospect they will suffer their first annual loss since 2002. Hedge funds have dropped an average of 3.5 percent this year, according to Hedge Fund Research. The July decline marks the fourth time in the past year that hedge funds have lost two percent or more in a month.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.


Aside from property and utilities, what could be other investment venues that are less vulnerable to the credit squeeze?