Thoughts on a Japanese Corporate Bond Fund? (Pimco).

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Topic Author
Kanto
Posts: 4
Joined: Wed Aug 12, 2020 12:53 am

Thoughts on a Japanese Corporate Bond Fund? (Pimco).

Post by Kanto »

I currently live in and invest in Japan (Non-American). I am mostly invested in low-cost-world market funds and indexed developed bonds. (Think VT 90% / BNDW 10%).

I was looking to add more fixed income exposure. What do you all think about the following fund?

Pimco – Japan Better Income Fund

Expense Ratio: .57%

1. Focus on Japanese corporate bonds
2. Bonds A or higher (Currently mostly AA)
3. Foreign currency assets are hedged.
4. Also uses derivatives, mainly Credit Default Swaps (CDs)


Holdings. 1. 1.838 billion Yen -> 18 million USD
71.2% senior corporate bonds (including CDS)
23.6% subordinate Debt.

T
op Ten Holdings

1.Mitsubishi UFJ Financial Group Senior Corporate Bonds 2.048 2030/07/17 USD AA- 7.8

2 Chugoku Electric Power Senior Corporate Bonds 3.488 2024/02/28 USD A A 6.8

3 Mizuho Financial Group Senior Corporate Bonds 2.869 2029/09/13 USD AA- 6.8

4 Mizuho Financial Group Subordinated Debt 4.600 2024/03/27 USD AA- 6.1

5 Mitsubishi UFJ Financial Group Senior Corporate Bonds 3.195 2029/07/18 USD AA- 6.0

6 Komatsu Finance Senior Corporate Bonds 2.437 2022/09/11 USD AA- 5.6

7 SMBC Aviation Capital Senior Corporate Bonds 3.550 2024/03/15 USD A A 4.7

8 Nissan Motor Senior Corporate Bonds 3.450 2023/03/15 USD A 4.6

9 Nippon Life Insurance Subordinated Debt 5.000 2022/10/18 USD AA + 4.3

10 Central Nippon Expressway Government Bonds 2.567 2021/11/02 USD AAA 4.1
rhe
Posts: 105
Joined: Sun Feb 26, 2017 2:10 am

Re: Thoughts on a Japanese Corporate Bond Fund? (Pimco).

Post by rhe »

I have given this a bit of thought, and have decided that despite living and working in japan we do not need yen exposure in our investments. This is because a lot of future expenses (education, travel, etc.) are either priced in foreign currency or will change in such a way that they de facto are, at least to some degree. For example, if the yen falls in value by half we might expect that yen denominated salaries at the American School will have to rise to maintain an internationally competitive salary.

Are you sure that you have future yen liabilities?
Topic Author
Kanto
Posts: 4
Joined: Wed Aug 12, 2020 12:53 am

Re: Thoughts on a Japanese Corporate Bond Fund? (Pimco).

Post by Kanto »

rhe wrote: Sun Oct 18, 2020 5:07 am I have given this a bit of thought, and have decided that despite living and working in japan we do not need yen exposure in our investments. This is because a lot of future expenses (education, travel, etc.) are either priced in foreign currency or will change in such a way that they de facto are, at least to some degree. For example, if the yen falls in value by half we might expect that yen denominated salaries at the American School will have to rise to maintain an internationally competitive salary.

Are you sure that you have future yen liabilities?
All our savings are in Yen. All of our investments are in Japan-domiciled mutual funds (non-hedged).
Valuethinker
Posts: 41159
Joined: Fri May 11, 2007 11:07 am

Re: Thoughts on a Japanese Corporate Bond Fund? (Pimco).

Post by Valuethinker »

Kanto wrote: Sun Oct 18, 2020 2:30 am I currently live in and invest in Japan (Non-American). I am mostly invested in low-cost-world market funds and indexed developed bonds. (Think VT 90% / BNDW 10%).

I was looking to add more fixed income exposure. What do you all think about the following fund?

Pimco – Japan Better Income Fund

Expense Ratio: .57%

1. Focus on Japanese corporate bonds
2. Bonds A or higher (Currently mostly AA)
3. Foreign currency assets are hedged.
4. Also uses derivatives, mainly Credit Default Swaps (CDs)


Holdings. 1. 1.838 billion Yen -> 18 million USD
71.2% senior corporate bonds (including CDS)
23.6% subordinate Debt.

T
op Ten Holdings

1.Mitsubishi UFJ Financial Group Senior Corporate Bonds 2.048 2030/07/17 USD AA- 7.8

2 Chugoku Electric Power Senior Corporate Bonds 3.488 2024/02/28 USD A A 6.8

3 Mizuho Financial Group Senior Corporate Bonds 2.869 2029/09/13 USD AA- 6.8

4 Mizuho Financial Group Subordinated Debt 4.600 2024/03/27 USD AA- 6.1

5 Mitsubishi UFJ Financial Group Senior Corporate Bonds 3.195 2029/07/18 USD AA- 6.0

6 Komatsu Finance Senior Corporate Bonds 2.437 2022/09/11 USD AA- 5.6

7 SMBC Aviation Capital Senior Corporate Bonds 3.550 2024/03/15 USD A A 4.7

8 Nissan Motor Senior Corporate Bonds 3.450 2023/03/15 USD A 4.6

9 Nippon Life Insurance Subordinated Debt 5.000 2022/10/18 USD AA + 4.3

10 Central Nippon Expressway Government Bonds 2.567 2021/11/02 USD AAA 4.1
The fund looks fine. High credit quality.

I imagine the yield to maturity of Japanese investment grade corporate bonds is nearly zero? Not much you can do there as I do not advise going downwards on credit quality. Too much equity risk.

As per other poster you want to think carefully re your actual Yen expenses exposure.

Foreign travel for instance (at least pre Covid-19 ;-)).

Japan as an economy has an unusually high exposure to exports for such a large gdp. And it imports 100% of its raw materials and much of its food. So a strong yen hurts the Japanese economy but helps you as a consumer.

Important therefore to hedge a weak yen via international holdings.

You almost certainly have more Yen risk than a US retiree w Social Security does dollar risk. Especially as SS is CPI indexed.
Valuethinker
Posts: 41159
Joined: Fri May 11, 2007 11:07 am

Re: Thoughts on a Japanese Corporate Bond Fund? (Pimco).

Post by Valuethinker »

Kanto wrote: Sun Oct 18, 2020 2:30 am I currently live in and invest in Japan (Non-American). I am mostly invested in low-cost-world market funds and indexed developed bonds. (Think VT 90% / BNDW 10%).

I was looking to add more fixed income exposure. What do you all think about the following fund?

Pimco – Japan Better Income Fund

Expense Ratio: .57%

1. Focus on Japanese corporate bonds
2. Bonds A or higher (Currently mostly AA)
3. Foreign currency assets are hedged.
4. Also uses derivatives, mainly Credit Default Swaps (CDs)


Holdings. 1. 1.838 billion Yen -> 18 million USD
71.2% senior corporate bonds (including CDS)
23.6% subordinate Debt.

T
op Ten Holdings

1.Mitsubishi UFJ Financial Group Senior Corporate Bonds 2.048 2030/07/17 USD AA- 7.8

2 Chugoku Electric Power Senior Corporate Bonds 3.488 2024/02/28 USD A A 6.8

3 Mizuho Financial Group Senior Corporate Bonds 2.869 2029/09/13 USD AA- 6.8

4 Mizuho Financial Group Subordinated Debt 4.600 2024/03/27 USD AA- 6.1

5 Mitsubishi UFJ Financial Group Senior Corporate Bonds 3.195 2029/07/18 USD AA- 6.0

6 Komatsu Finance Senior Corporate Bonds 2.437 2022/09/11 USD AA- 5.6

7 SMBC Aviation Capital Senior Corporate Bonds 3.550 2024/03/15 USD A A 4.7

8 Nissan Motor Senior Corporate Bonds 3.450 2023/03/15 USD A 4.6

9 Nippon Life Insurance Subordinated Debt 5.000 2022/10/18 USD AA + 4.3

10 Central Nippon Expressway Government Bonds 2.567 2021/11/02 USD AAA 4.1
One thing I do notice is how small fund size is.

Pimco won't be making a lot of money on it unless they can use it as a "feeder" fund into a larger fund. Vanguard does this in the UK.

That may pose a risk of future closure. W an equity fund that can trigger a capital gain although less risk w a bond fund.
Topic Author
Kanto
Posts: 4
Joined: Wed Aug 12, 2020 12:53 am

Re: Thoughts on a Japanese Corporate Bond Fund? (Pimco).

Post by Kanto »

The fund looks fine. High credit quality.

I imagine the yield to maturity of Japanese investment grade corporate bonds is nearly zero? Not much you can do there as I do not advise going downwards on credit quality. Too much equity risk.

As per other poster you want to think carefully re your actual Yen expenses exposure.

Foreign travel for instance (at least pre Covid-19 ;-)).

Japan as an economy has an unusually high exposure to exports for such a large gdp. And it imports 100% of its raw materials and much of its food. So a strong yen hurts the Japanese economy but helps you as a consumer.

Important therefore to hedge a weak yen via international holdings.

You almost certainly have more Yen risk than a US retiree w Social Security does dollar risk. Especially as SS is CPI indexed.

I have done what I can to mitigate my risk by investing in international equity mutual funds. It is not worth it here to hold foreign domiciled funds due to dividend taxation issues. Holding foreign currency accounts is not worth it either. When we do travel it is usually to Canada.

Any other recommendations?



One thing I do notice is how small fund size is.

Pimco won't be making a lot of money on it unless they can use it as a "feeder" fund into a larger fund. Vanguard does this in the UK.

That may pose a risk of future closure. W an equity fund that can trigger a capital gain although less risk w a bond fund.
I am 90% sure it is a feeder/loss leader. It is there only low-cost fund available to Japanese investors, launched in combination with a big securities firm.

I can also buy VCSH, VCIT, VCLT through my exchange.
alex_686
Posts: 6848
Joined: Mon Feb 09, 2015 2:39 pm

Re: Thoughts on a Japanese Corporate Bond Fund? (Pimco).

Post by alex_686 »

Kanto wrote: Sun Oct 18, 2020 2:30 am 2. Bonds A or higher (Currently mostly AA)
3. Foreign currency assets are hedged.
4. Also uses derivatives, mainly Credit Default Swaps (CDs)
...
Sorry it is all in Japanese
[/quote]

In the USA, Pimco’s heavy use of derivatives heavily modify the duration on quality of the top holdings that it makes the top 10 list worthless. I would read closely what they are currently using. It could very well be complex. I am in favor of how Pimco uses their derivatives in their US funds but it is not simple.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Valuethinker
Posts: 41159
Joined: Fri May 11, 2007 11:07 am

Re: Thoughts on a Japanese Corporate Bond Fund? (Pimco).

Post by Valuethinker »

Kanto wrote: Sun Oct 18, 2020 7:46 am
The fund looks fine. High credit quality.

I imagine the yield to maturity of Japanese investment grade corporate bonds is nearly zero? Not much you can do there as I do not advise going downwards on credit quality. Too much equity risk.

As per other poster you want to think carefully re your actual Yen expenses exposure.

Foreign travel for instance (at least pre Covid-19 ;-)).

Japan as an economy has an unusually high exposure to exports for such a large gdp. And it imports 100% of its raw materials and much of its food. So a strong yen hurts the Japanese economy but helps you as a consumer.

Important therefore to hedge a weak yen via international holdings.

You almost certainly have more Yen risk than a US retiree w Social Security does dollar risk. Especially as SS is CPI indexed.

I have done what I can to mitigate my risk by investing in international equity mutual funds. It is not worth it here to hold foreign domiciled funds due to dividend taxation issues. Holding foreign currency accounts is not worth it either. When we do travel it is usually to Canada.

Any other recommendations?
That's about it. Your choices are presumably some form of guaranteed bank deposit (deposit insurance limits) OR this fund? Your returns should be similar albeit this fund will be more volatile. Also 0.57% expense ratio in a world where Japanese corporate bonds pay near 0% (better than Japanese govt bonds, which are negative yield) means your returns will be pretty modest.


On
I can also buy VCSH, VCIT, VCLT through my exchange.
I don't carry tickers around in my head - so I can't make any comment on those funds.
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