Investors dissatisfied with corporate bond indices – EDHEC-Risk report

A survey by researchers at the EDHEC-Risk Institute has indicated that a significant majority of those polled feel that available corporate bond indices do not meet investor needs.

Only 41% of respondents said they are satisfied or very satisfied with corporate bond indices, with many citing the instability of risk factor exposures as a concern. Between 64% and 80% of respondents agreed or strongly agreed that the instability of interest rate risk exposure is problematic.

The poll showed 45% of respondents agree or strongly agree that bond issuers and investors have conflicting interests when it comes to the duration of corporate bonds.

Using derivative instruments may appear to be a solution to interest rate risk instability, as in principle an overlay strategy can neutralise the fluctuation of risk exposures in the underlying index, but only 57% of respondents said they could use derivatives for such purposes, leaving almost half of them with no tools to manage the instability problem.

The instability of exposure to credit risk is also identified as problematic by about two-thirds of respondents. In that case, only one-third of respondents said that they would be able to use derivatives products to manage instability.

Nearly half those polled recognise there is a direct trade-off between an index’s risk factor stability and its investability, which will probably present obstacles to providers who wish to create indices as the foundation of an investment vehicle.

The various issues identified for corporate bond indices may be one of the reasons for the current relative unpopularity of passive investing in the corporate bond market, the survey report said.

Corporate bond indices should allow investors to achieve specific objectives, particularly in managing defined risk factors, so it will be increasingly important for 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,” the Institute’s report said.

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