Asset managers voice concerns over corporate bond indices

GLOBAL – Asset managers have grown increasingly concerned about the instability of corporate bond indices at a time when investors are shifting from sovereign debt to corporate bonds, according to a EDHEC-Risk Institute study.

Of the nearly 70 asset and wealth managers surveyed, only 41% said they were 'satisfied' or 'very satisfied' with corporate bond indices.

EDHEC said: "As corporate bond indices should allow investors to achieve specific objectives, particularly in managing defined risk factors, it will be increasingly important for index providers to construct indices using methods that account for the stability of these risk factors.

"We observe, unfortunately, that the new forms of corporate bond indices do not take this dimension into account."

Against this backdrop, investors could use derivatives instruments as a solution to interest rate risk instability, creating an overlay strategy that neutralises the fluctuation of risk exposures in the underlying index, EDHEC said.

However, only 57% of respondents to its survey said they could use derivatives for such purposes, leaving almost half of them with no tools to manage bond index instability issues.

EDHEC pointed out that corporate bonds had long been considered a standard asset class and represented a significant amount of investment.

"As investors have growing concerns about the ability of European governments to solve the sovereign crisis and look for higher yields, corporate bonds are starting to be seen as a substitute for sovereign bonds when it comes to creating low-risk portfolios, and, consequently, many investors have increased their corporate bond exposure relative to sovereign bond exposure," the institute said.

EDHEC also referred to a survey conducted by ratings agency Fitch in the first quarter of 2012 among European fixed income investors.

The Fitch report showed that a large majority of fixed income investors reallocated their cash from sovereign bonds to corporate bonds in 2011, with a total outflow from euro sovereign bond funds of €33bn.