Credit Suisse plans variation on passive government bond product

Credit Suisse Asset Management plans to launch a passive government bond product whose exposures to sovereign debt are calibrated by measures of the countries’ fiscal strength, not the aggregate amount of the debt they have taken on.

CSAM has identified growing client demand for the concept and plans to offer a bespoke solution to large sophisticated institutional clients, especially pension funds.

The product is likely to be launched first as a Swiss-based fund dedicated to institutional clients, then potentially as a Luxembourg Ucits compliant fund. It hopes to offer the solution in other forms for other client segments in the future.

The funds will track the Barclays Capital Fiscal Strength Indices.

The weighting methodology should help avoid the problem investors have in passive products whose reference benchmark has weightings determined by a country’s public debt load, says CSAM’s managing director, alternative investments, David Boal.

Such an approach arguably exposes the investor to the most ‘at risk’ nations, he says.

“If you weight your holding by the amount of debt outstanding, you are buying into the weaker credits.”

The methodology behind the product CSAM is proposing would weight constituents, for example, by debt to GDP, budget deficit to GDP and current account balance to GDP.

A classic example of the difference between pure debt-weighted, and debt-to-GDP-weighted, indices would be Italy. As at end-2011 it would represent around 21% of an index of eurozone countries weighted by their public debt outstanding. However, its weighting based on debt to GDP would be around 13% .

CSAM already has other variations on the pure index theme among the $78bn of client money it ran, as at 31 January, in ETFs and index solutions.

Other strategies run from its Zurich office use ‘fundamental equity indexation’ – following a benchmark created on the basis of companies ranked on the basis of fundamental valuation metrics, rather than their market capitalisation.

“This gives you exposure to stocks in an index, with weights based on measures of their valuation,” explains Boal.

“It should be a safer way to buy (passive equity exposure) and historically provides a better long-run return than from a market cap index, because it gives you exposure to the value stock premium, and small cap premium.”

CSAM also has enhanced index commodity products, investing in commodities according to an index, but then using intelligent analysis of the curve reflecting forward prices for those commodities, and positioning fund exposure actively along that curve.


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