Pacific Investment Management Co. LLC recently unveiled its first global bond index.
Pacific Investment Management Co. LLC recently unveiled its first global bond index.
The Pimco Global Advantage Bond Index tracks the performance of fixed-income securities throughout the world. Unlike securities in most indexes, which are weighted by market capitalization, securities in this index are weighted according to the gross domestic product of the regions from which they originate.
The index, which had been in development at Pimco for two years, was launched last month.
"Market-cap-weighted indexes are more backward-looking in that they look at volumes of debt issued in the past," said Ramin Toloui, an executive vice president at Newport Beach, Calif.-based Pimco and one of the architects of the index. "They may not be the best index to capture the future trajectory of capital markets."
Weeks after taking the wraps off the index, Pimco launched the Pimco Global Advantage Strategy Fund, a mutual fund that tracks the index.
Pimco's index competes against the Barclays Global Aggregate Index, formerly known as the Lehman Brothers Global Aggregate Index. For years, that index — which is weighted by market cap — has been considered something of an industry standard for the global bond market.
Predictably, Barclays Capital, the investment-banking division of London-based Barclays PLC, disagrees with Mr. Toloui's claim that weightings based on market capitalization are "backward-looking."
"It takes a snapshot of the market as it is today," said Waqas Samad, head of Barclays Capital's index products group.
While its methodology is new, the Pimco Global Advantage Bond Index may not offer advisers an advantage.
"I wouldn't assume it's going to be a better mousetrap because it's GDP-weighted," said Scott Kays, president of Kays Financial Advisory Corp. of Atlanta, which has $120 million in assets under management. "A large market cap weighting could mean that there is more depth in the bond market, and there is more liquidity and lower spreads."
Others question whether Pimco faces a conflict of interest in overseeing an index and a mutual fund based on that index. The concern is whether the company can objectively measure an index when the performance of one of its mutual funds hinges on the index's performance.
"When a firm is the founder of an index and the manager of a product [connected to that index], it has been met with criticism in the marketplace," said Eric Jacobson, senior fund analyst at Chicago-based Morningstar Inc.
"I have utmost confidence in Pimco's ability to assess the future of fixed income," said Geoff Bobroff, East Greenwich, R.I.-based mutual fund consultant.
"But arguably, because of the size of their own investment portfolio, they could tilt the index because of their own activity," he said. "The index may be something that works to their benefit."
Pimco defended its objectivity by pointing out that the calculation and administration of the index will be done independently from the portfolio management by Markit Group Ltd., a London-based financial-information company and index provider.
Either way, the launch of a bond index based on GDP weightings is a first.
"Nothing like this has caught on before," Mr. Jacobson said. "Conceptually, it's a really terrific idea."
Chuck Gibson, president of Financial Perspectives of Newark, Calif., which has $50 million in assets under management, agrees.
"To me, that index would be very interesting because it includes both government and corporate bonds," he said. "And because it is coming from someone like Pimco, with their great historical record and research, I would gravitate to that."
No matter what, it is unlikely that Pimco's new index will overtake that of Barclays anytime soon.
"There are hundreds of billions of dollars tied to legacy indexes," said Jeff Tjornehoj, senior research analyst at Denver-based Lipper Inc.
"They are legacy because they typically accomplish what they set out to do," he said. "Unseating that is a challenge."
E-mail Sue Asci at sasci@investmentnews.com.
