Institutional investors increasingly are thinking outside the U.S. Barclays Capital Aggregate box for their fixed-income allocations, but market veterans say the shift to less constrained, more global mandates has a long way to go.
Bond guru William H. Gross, the co-chief investment officer of Pacific Investment Management Co. LLC, in his February investment outlook urged investors to pick up the pace. Arguing that the prevailing U.S. low interest rate policy amounts to “robbing savers” — from the man on the street to pension funds — he suggested investors might want to “exorcise” U.S. Treasury bonds from their portfolios in favor of better risk-reward tradeoffs in credit or emerging markets debt.
The precarious fiscal state of the U.S. government is prompting that review of bond allocations.
Roughly 80% of the BarCap Aggregate is tied to the U.S. government, and a continued rise in U.S. debt will leave investors who employ that market-cap weighted index ever more exposed to a single, increasingly strained sovereign risk, noted Erik Knutzen, CIO of Cambridge, Mass.-based investment consulting firm NEPC LLC.
Mr. Knutzen said his team is urging clients to “disaggregate the Agg” — to look at the underlying betas to which they're exposed, while freeing themselves from the constraints of that widely used benchmark.
(updated with correction)
A number of bond veterans are reaching similar conclusions.
There's growing sentiment that institutional investors should “bag the Agg,” because elements of a BarCap Aggregate-indexed core-bond portfolio “may not be what investors want or need,” said Matthew Toms, a senior vice president and head of U.S. public fixed-income investments for ING Investment Management, Atlanta.
Mr. Toms said that kind of soul-searching is prompting growing interest in “more creatively designed benchmarks,” more global in nature, to complement the BarCap Agg.
Newport Beach, Calif.-based PIMCO offered one alternative in the summer of 2009 - its Global Advantage Bond index, which weights allocations by gross domestic product rather than by the market capitalization of outstanding debt.
In 2010, meanwhile, Research Affiliates LLC, also based in Newport Beach, introduced fundamentally weighted investment-grade and high-yield bond indexes. In the coming months it will come out with global sovereign and emerging markets fundamental indexes, weighted by GDP, population, land mass and energy use as proxies of factors of production, said Robert D. Arnott, the company's chairman and CEO.