According to a press release, the key differentiating feature of the new indexes is a gross domestic product (GDP)-weighting methodology that contrasts with the debt-weighted, market capitalization methodology of traditional indexes. GLADI Government covers the full set of investment-grade global government bond markets. European Advantage covers investment-grade government bonds issued by European countries, where problems in Greece and other peripheral economies underscore the need to reassess existing benchmarks.
Instead of giving the highest weights to the countries with the most debt, which is a characteristic of market capitalization-weighted indexes, GLADI Government and European Advantage Government indexes give the highest weights to countries with the highest income based on gross domestic product (GDP).
PIMCO said the advantages of this approach include:
- Higher Allocation to Low-Debt Countries: GDP weighting favors countries with higher income and therefore better capacity to service their debt, in contrast with market capitalization-weighted indexes that can overweight highly indebted countries with the largest stocks of outstanding liabilities.
- Forward-Looking: GDP weighting helps structurally position portfolios in countries with stronger growth dynamics, including emerging markets, which are likely to attract increasing global capital flows in the coming years and have traditionally been underrepresented in market capitalization-weighted indexes.
- Counter-Cyclical Rebalancing: GDP weighting avoids the problem of market capitalization weighting that increases the weight of securities as they go up in price. In fact, it has the potential to benefit from counter-cyclical rebalancing, as bond prices tend to move inversely to GDP growth over the business cycle.
Markit LLC, an unaffiliated leading financial information services company and global index provider, will administer and calculate these newest members of the family of Global Advantage indexes first launched in January 2009, according to the press release.
More information on the index, including detailed information on construction methodology, can be found at http://www.pimcoindex.com/.