On the other hand, Mr. Kiesel said the index could be more difficult to outperform if institutional clients do not adjust the investment guidelines imposed on their external bond managers. Some institutional investors do not allow their bond managers to invest in securities that have been given a below-investment-grade rating by any ratings agency.
Traditionally, Lehman would select bonds for its Aggregate Bond index based on their ratings from Standard & Poor's New York, and Moody's Investor Services, New York. Lehman would choose the higher of the two ratings to determine whether a bond would make it into its index.
Starting July 1, however, Lehman will look at ratings from Fitch, S&P and Moody's, and go with the middle rating.
The company made the announcement amid reports that General Motors Corp.'s credit rating, currently BBB by S&P, would be downgraded to junk status after it announced weaker-then-expected fourth quarter earnings. The downgrade potentially could have hurt core bond managers as well as the value of the index itself, since GM bonds comprise about 2% of the corporate bonds portion of the Lehman Aggregate.
Some money management executives have privately speculated that a potential GM downgrade precipitated Lehman's move to incorporate Fitch's ratings. Under the new system, GM would still be allowed in the index even if S&P downgraded its bonds. "The timing of Lehman's move seems awfully coincidental," said one bond manager who did not wish to be identified.
Steve Berkley, Lehman's director of index services, declined to comment; Lehman spokeswoman Tasha Pelio said the firm had been considering this move for some time.
While Lehman's move does nothing to affect the fundamental characteristics of bond issuers, core fixed-income managers benchmarked to the Lehman Aggregate are saying it could afford them the opportunity to invest in attractive credits they otherwise would not be able to buy.
Some of the bonds managers are watching that will be included in the index come July 1: Delphi Corp..; Enterprise Products Partners LP; Texas Utilities Corp.; Union Carbide Corp.; Dana Corp.; and Electronic Data Systems.
In all, the 59 credits that would be added to the index represent about $33 billion in capital.
"We already owned a lot of those bonds in our corporate portfolios," said Mr. Kiesel. "Now that Lehman will be using Fitch ratings, some of those bonds are doing quite well. Enterprise Products is one of them."
Mr. Kiesel also noted that while the inclusion of Fitch ratings into the Lehman Aggregate universe could drive up the prices of some bonds because of heavier trading activity, most bond managers — including PIMCO — will still emphasize fundamental research.
"In general (Lehman's move) will provide more technical (trading) support for those bonds. As far as the direction of spreads (to Treasuries) go, what it boils down to is fundamentals, including profit growth, economic growth, margins, what companies are doing with (the proceeds of) new bond issues."
Said John Simms, director of bond investments at ICM Asset Management, Spokane, Wash, which manages about $2.5 billion for institutional clients: "There was a fair amount of nervousness in owning Ford and GM, but this move puts a little bit of a floor beneath them in terms of whether they will be relegated to junk status."
David Lippman, managing director at Metropolitan West Asset Management, Los Angeles, said the inclusion of the 59 "fallen-angel" bonds would not have a significant impact on the index. "We think that relative to the market, those bonds all trade tight anyway," he said.