Putting the world into global bond funds

Market Commentary

28 June 2017

Global bond funds have seen a dramatic rise in assets over the past 10 years, reflecting the desire of investors to be exposed to a broader, more diverse set of assets away from their home markets. However, global bond funds still mainly give investors exposure to the largest developed markets, i.e. the G7 plus a few others. This is because most global bond funds benchmark against the Citi WGBI and the Bloomberg Barclays Global Aggregate indices, which assign only a 2-3% weight to Emerging Markets (EM). In other words, the indices are very poorly matched to the real world both in terms of GDP, where EM countries now comprise nearly 60%, and in terms of market cap, where EM fixed income is now close to 20% of the total global fixed income market. The good news for investors seeking a better index representation is that a new and more representative index is now available to global bond investors. The JP Morgan GBI-AGG Diversified index, launched last year, offers a far better reflection of the growing importance of EM on the world stage by assigning a 20% weight to EM, which brings it into line with EM’s true share of global fixed income markets. For the first time, investors will gain access to a truly global investment universe. We will show that the new index offers higher total returns for the same volatility compared to conventional global bond indices, higher current income and better diversification than pure G7 rates exposure.

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