INTERVIEW-Japan's Kokusai Asset hasn't sold U.S. debt as default not likely
* Asia's top mutual fund does not expect U.S. debt default
* Outlook for U.S. economy, developed countries strong
* May allocate funds to Italy, Spain if ratings rise
(Adds comments, details)
TOKYO, Oct 10 (Reuters) - Japan's Kokusai Asset Management, the manager of Asia's biggest mutual fund, has not sold U.S. Treasuries from its flagship $14 billion bond fund as the United States is not expected to default on its sovereign debt, the fund's chief manager said.
Masataka Horii, the chief fund manager of Kokusai's Global Sovereign Open fund, said financial turmoil was not likely to occur even in the event of a technical default by the country.
"Our main scenario is that we'll not see a default in the United States. We have not positioned our portfolio, preparing to factor-in a possible default," Horii told Reuters in an interview.
Still, Kokusai will closely monitor the market situation and act appropriately if the U.S. dollar falls sharply in the unlikely event of a default, Horii said.
The U.S. government has been partially shut down since Oct. 1 as Democrats and Republicans failed to agree on a budget and spending measures. The world's largest economy is also facing a looming deadline of Oct. 17 to raise the debt ceiling to stave off a possible debt default.
The fund has raised exposure to U.S. Treasuries and U.S. agency bonds to 30 percent as of Oct. 3 from 22.4 percent in late March due to the bullish outlook in the U.S. economy.
"We think that the economies of the core developed countries -- the United States, the euro zone, England and Japan -- are healthy and leading to push up the entire global economy. That is the key reason why we have raised exposure to these places," Horii said.
The fund increased allocations in the countries due to fading concerns over sovereign risks in developed countries, while it lowered exposure to countries such as Canada, Australia and New Zealand, the chief fund manager said.
The Global Sovereign fund raised the allocations to euro-denominated debt to 24.4 percent as of Oct. 3 from 17.7 percent six months ago.
The fund's portfolio in euro-denominated bonds rose mainly due to increases in Belgian and French bonds.
The actively managed bond fund, which invests in sovereign and agency debt with credit ratings of higher than a single A category, has reigned as the top mutual fund in Japan for more than 11 years. The fund is also one of the largest bond funds in the world.
The fund has struggled to beat a benchmark over the six-month period mainly due to the exclusion of bonds of Italy and Spain in its portfolio as the countries did not carry a rating of more than single A, the level required for the fund.
Credit ratings of both countries were in the triple B category.
As of Oct. 3, the fund's performance was flat over the six-month period, sharply underperforming the benchmark Citigroup World Government Bond Index (WGBI) which produced a positive return of 4.3 percent.
The fund has also underperformed since its inception in 1997, producing a positive return of 55.0 percent compared with the benchmark WGBI's 76.8 percent.
"The fact that Italy and Spain were not included in the portfolio were the key reasons that hurt our overall performance," said Horii, adding that the fund was considering including these countries in the portfolio again once their ratings rise to the single A category.
Both bonds of Italy and Spain have been excluded from the portfolio since November 2011.
The fund has broadened its allocations to Mexico, Poland and Singapore over the past year, while it has also allocated money into European Financial Stability Facility bonds in its portfolio for the first time in two years in January.
But the fund was not considering further expanding investment destinations as it was planning to generate returns by investing in developed nations, Horii said.
($1 = 97.1950 Japanese yen)
(Additional reporting by Hideyuki Sano and Takaya Yamaguchi; Editing by Jacqueline Wong)