One of the greatest investment challenges for European fund management firms currently is how to allocate client funds in a 'two-speed' world.
In the fixed income business, this has only increased dissatisfaction with traditional market-cap bond indices, which encourage weightings towards the more indebted countries and companies.
As a result, certain fixed income investors are changing how they do things.
Pimco today announced the launch of a fund with an “improved” benchmark, and Lombard Odier has also developed its own set of indices. Both innovations take into account the ability of countries to repay their debts.
The Pimco GIS Global Advantage Real Return Fund, which seeks to deliver enhanced after-inflation returns, uses Pimco’s Global Advantage Inflation-Linked Bond Index. This is a GDP-weighted benchmark and should “better align investors’ inflation-linked bond exposures with issuers’ growing capacity to meet their debt obligations,” the company says.
Lombard Odier has launched the LO Emerging Local Currencies and Bonds Fund on the back of its index research. The index it uses is a different, fundamentally weighted index. Criteria are: purchasing power-weighted GDP; gross debt-to-GDP ratio (the lower the ratio the higher the weighting in the index); and fiscal budgets – a factor that gives a higher weighting to countries with healthier budgets.
Lombard Odier has developed a similar approach for corporate bonds, which weights the index according to the healthier companies.
The innovations could be seen as a sign that fund management firms are not prepared to let banks lead them as much as they have in the past. One observer says that many indices were and still are compiled by bond brokers, who are interested in developing a ready market for their bond issues.
©2011 funds europe