BNY Mellon Investment Manager Sees Growing Risk in Issuer-Weighted Indices
NEW YORK and LONDON, May 21, 2012 Standish Mellon Asset Management Company LLC, the fixed income specialist for BNY Mellon Investment Management, has launched a bond strategy designed to improve exposure to what it believes to be the world's healthiest economies. The strategy links its benchmark to the gross domestic product of the issuers and invests in sovereign bonds and corporate credit in developed economies and emerging markets.
Standish weighed the advantages of a GDP-based strategy and published its conclusions in a white paper, Reconstructing Bond Investing to Align with New Global Debt Realities. Standish concluded that benchmarking against GDP-weighted indices presents greater opportunities than benchmarking against the issuer-weighted indices commonly in use.
Issuer-weighted sovereign bond indexes can expose investors to a high concentration risk in the most heavily indebted countries, according to the report.
"The high debt levels in many developed economies and the growing surpluses in emerging economies have turned the investing universe upside down," said Michael Faloon, managing director of quantitative analysis and quality management for Standish, and the report's author. "GDP-weighted bond indices, such as the new Barclays World GDP Index, provide investors with a holistic approach to investing across the entire fixed income capital structure."
"The global financial crisis and the sluggish recovery have thrown into relief a new set of global financial and economic realities for bond investors that had been gathering momentum for the last 30 years," said David Leduc, chief investment officer for Standish. "We believe traditional notions of so-called risk-free sovereign debt in developed countries and alleged riskier sovereign debt in emerging markets have been exposed as myths."
The report noted that the growing surpluses in emerging economies helped to finance the mountain of debt in developed economies. Utilizing GDP weighting in an investment strategy allows for a greater proportion of high-growth economies than current indexes weighted by debt issuance and better reflects global growth realities, according to Standish.
"We believe the broader universe of this new index presents greater potential for active managers to generate excess return," said Leduc. "The index can be customized to suit individual objectives, provide greater diversification and has the potential to generate higher risk-adjusted returns than the standard benchmark for global bond investing."
The Barclays World GDP Weighted Index is a trademark of Barclays and is used solely herein for comparative purposes. The foregoing index is not affiliated with Standish Mellon Asset Management Company LLC. Barclays does not endorse, sponsor, sell or promote the investment strategies or products mentioned in this paper, and does not make any representation regarding advisability of investing in the products and strategies described herein.
The Barclays World GDP Weighted Index has the same underlying bonds and inclusion rules as its market value weighted counterpart which is a blend of flagship Global Aggregate, Global EM and EM Local Currency Government indices. This multicurrency global benchmark offers expanded spread sector security coverage, including bonds from the treasury, government-related, corporate, and securitized sectors. The index contains more than 14,200 securities with a market value greater than $42trn, including 32 different local currency debt markets and 94 different countries of risk as of April 30, 2012.
The GDP Weighted Index weighs index-eligible country blocs by the size of their economies, rather than the total amount of outstanding debt and borrowing. Only GDP of countries with meaningful representation (>0.25% by market value or local currency eligibility) in the overall index will contribute to a country bloc's fixed GDP weight. After GDP weights are applied at a country bloc level, all index-eligible securities within each bloc are market value weighted in order to best reflect the investment choice set available to investors in that bloc.
Specific details on GDP weighted index rules and construction methods can be found in Barclays Capital GDP Weighted Bond Indices, November 2009
Standish Mellon Asset Management Company LLC, with approximately $92 billion of assets under management, provides investment management services across a broad spectrum of fixed income asset classes. These include corporate credit (investment-grade and high-yield), emerging markets debt (dollar-denominated and local currency), core / core plus and opportunistic (U.S. and global) strategies. Standish also offers full service capabilities in insurance and liability driven investing. The firm also includes assets managed by Standish personnel acting as dual officers of The Dreyfus Corporation and The Bank of New York Mellon.
BNY Mellon Investment Management is one of the world's leading investment management organizations and one of the top U.S. wealth managers, with $1.3 trillion in assets under management. It encompasses BNY Mellon's affiliated investment management firms, wealth management services and global distribution companies. More information can be found at www.bnymellon.com.
BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 36 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, offering superior investment management and investment services through a worldwide client-focused team. It has $26.6 trillion in assets under custody and administration and $1.3 trillion in assets under management, services $11.9 trillion in outstanding debt and processes global payments averaging $1.4 trillion per day. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available on www.bnymellon.com or follow us on Twitter @BNYMellon.
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