BNY Mellon Investment Manager Sees Growing Risk in Issuer-Weighted Indices
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."