Pioneer Investments has launched a Global GDP-weighted Government Bond strategy as an approach to sovereign debt management – shifting from a market-cap weighted approach to a Gross Domestic Product (GDP)-weighted approach, with the aim of delivering more yield without increasing credit risk.
Today’s complex macro environment presents a number of challenges for Global Government bond investors. The current investment landscape of record low yields is demanding a new approach from investment managers to Government Bond investing which provides more yield, more diversification and greater alignment to long-term economic growth.
“The biggest issuers of government debt have also compressed bond yields through their monetary policy and quantitative easing,” said Tanguy Le Saout, Head of European Fixed Income. “’Investors are not being sufficiently compensated for increased sovereign indebtedness by the current level of sovereign bond yields”, he added.
"We believe the solution is to move from a market cap based approach to sovereign bond investing to a new innovative approach based on the GDP weights of the G20 nations, raising yield and creditworthiness", point out Le Saout.
The typical global government bond index uses a market capitalisation approach to index construction, meaning that a country’s weight in the index is dependent on the amount of debt that country has outstanding. However, that means that countries with very high amounts of debt outstanding receive a higher weighting in the index. With a GDP-weighted approach those countries exhibiting the largest GDP and fastest growth make up a proportionally bigger part of the index. We believe this new approach will prove appealing to institutional investors who are concerned about the indebtedness of sovereign entities worldwide.
‘’We believe that a Global Government Bond strategy investing in future growth instead of past debt is a viable solution for fixed income investors seeking higher yields and more diversification,’’ said Le Saout.
For those countries where investing in cash bonds is not an option (such as China, South Korea and India), Pioneer Investments’ unique innovative approach will aim to synthetically replicate the index exposures of these key countries, using derivatives. Our long-established derivative expertise and experience in investing in these markets will help us in this optimization process. The strategy will focus only on high quality investment-grade government bonds.