A Swiss pension fund is poised to make a one billion Swiss franc (€816 million) investment into Lombard Odier Investment Management's bond strategy that invests against fundamentally weighted indices.
Stephane Monier, fixed income CIO at Lombard, declined to name the fund but confirmed that the institution “wants” to make the allocation to the indices that Monier and his team created as an alternative to market-cap weighted indices.
Critics, like Monier, describe market-cap weighted bond indices as “flawed” because they can lead investors to have greater exposure to governments and companies with the biggest debts. In the JP Morgan Global Diversified Index, for example, countries are weighted by the market capitalisation of their bonds, so those countries that have issued more bonds – and have greater debt – are a bigger proportion of the index.
Lombard Odier’s approach uses different measures to create sovereign indices, including a country’s fiscal budget: the healthier the budget, the higher the weighting. This is meant to give a greater weighting towards healthier economies.
Recently, the eurozone sovereign bond fundamentally weighted index outperformed the market-cap equivalent by more than 4% year to date.
Monier joined Lombard Odier IM in July 2009 and said his proposal to create the indices was accepted straightaway.
He also says the business, which has raised $2 billion (€1.42 billion) in total so far in its fundamentally weighted index bond strategies, is in talks with two providers to carry out the index calculations.
However, the success of fundamentally weighted indices so far looks limited. The Edhec-Risk Institute said recently that cap-weighted and debt-weighted indices – despite their shortcomings - remain the reference for European institutional investors and asset managers.
Edhec surveyed 104 investment professionals about equity and bond indices.
Felix Goltz, head of applied research at Edhec, said alternative indices were more likely to be used as a “cost efficient alternative for using up the tracking error budgets that are conventionally entrusted to active managers”.
©2011 funds europe