October 25, 2017 / 6:58 AM / a year ago

UPDATE 1-Dai-Ichi Life likely to reduce FX hedging on foreign bonds in H2

* Likely to reduce currency-hedged foreign bond investment

* May increase unhedged foreign bonds

* Plans to increase foreign stocks, alternative assets (Adds comments, detail)

By Hideyuki Sano

TOKYO, Oct 25 (Reuters) - Japan’s Dai-ichi Life Insurance is likely to reduce currency hedging on its foreign bond investment in the six months to March as the cost of hedging on dollar bonds is rising, a senior official said on Wednesday.

The institutional investor also plans to increase alternative assets and properties as it seeks to diversify its portfolio, Kazuyuki Shigemoto, general manager of investment planning, told reporters.

For many Japanese investors, foreign bond investment with currency hedging has been the most popular alternative to negative-yielding domestic bonds in recent years.

But rising dollar hedging costs, which are linked to dollar interest rates, are increasingly eroding the return on such a strategy.

The three-month hedging cost has risen to around 2.0 percent. When the 10-year U.S. Treasuries yield is less than 2.5 percent, that would leave Japanese investors’ real return of less than 0.5 percent.

The hedge cost has risen from around 1.5 percent about six months ago and about 0.75 percent two years ago.

Dai-ichi dealt with the rising costs partly by diversifying its foreign bond portfolio to other currencies, such as the euro and the Swedish crown, Shigemoto said.

The firm also increased foreign bonds without currency hedging in the previous six months and is likely to do so again in the current half year based on current market conditions, he said.

Dai-ichi Life, the core firm of Dai-ichi Life Holdings , Japan’s second largest private life insurer, also plans to increase foreign stocks, alternative assets such as private equity funds and properties.

During the half year that ended in September, the insurer invested in foreign real estate through funds for the first time in 26 years, Shigemoto said.

The move reflected the firm’s drive to diversify its assets further and also to cap its investment in credit products such as corporate bonds.

“Credit spreads have been tightening for a long time so rather than taking risks in company credit, we would like to increase the assets that have different risk profile from stocks and bonds,” Shigemoto said.

While Dai-ichi Life expects global economic growth to continue for now, it is mindful of the risk that the positive economic and credit cycle that began after the global financial crisis in 2008-09, could come to an end, Shigemoto said, noting the global economy seems to have peaked out after monetary tightening in the United States. (Reporting by Hideyuki Sano; Editing by Minami Funakoshi and Gopakumar Warrier)

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