Risk Based Investment Solutions (RBIS), a Rothschild Asset Management’s division, has launched a new generation of indices based on its risk-based approach applied to sovereign bonds.
The R Risk-Based Euro Sovereign Index, published by Markit, performs the role of calculation agent, Rothschild AM said.
Thanks to a proprietary model based on risk factors, the R Risk-Based methodology aims to reduce many of the challenges of traditional debt-weighted indices.
Bond indices are typically issuanceweighted: this concentrates risk in the most indebted countries without consideration for their ability to repay the debt. In addition, in these indices, duration is random and unrelated to the target duration of the investor.
To overcome these challenges, the R Risk-Based Euro Sovereign Index defines risk budgets a priori: first it assigns weightings according to GDP and not according to the level of the country debt. Secondly, it uses a risk budget according to maturity buckets and then to the outstanding issue size.
The ultimate objective is to deliver superior risk-adjusted returns, significantly reducing the volatility and the maximum drawdown compared with traditional debt-weighted portfolios, as well as lowering duration and convexity risk.
“With this innovative alternative to debt-weighted indices, our R Risk-Based Euro Sovereign Index will provide a significant advance in the world of bond indices improving investor outcomes. Putting risk as an input we are in a better situation to shape risk budgets,” said Abdelkader Bousabaa, head of Research at RBIS.