Fund firm SSgA plans new passive bond offering

* Index uses financial ratios to weight bond issuers

* Post-crunch, investors demanding greater customisation

By Claire Milhench

LONDON, May 11 (BestGrowthStock) – State Street Global Advisors
(SSgA) (STT.N: ) is developing a new passive bond strategy to meet
demand for more innovative credit products, and to attract
investors who are wary of the equities market.

The new product uses a fundamentally scored credit index,
which employs a variety of quality criteria to determine what
credits should have the biggest weighting.

This is in contrast to a traditional market-weighted bond
index, which weights its constituents by the amount of debt
outstanding, meaning investors have a larger exposure to the
most heavily indebted companies.

“It has been approved by the investment committee. We are
just trying to work out how to bring this to clients,” said Mike
Arone, vice president at SSgA.

Kevin Anderson, senior managing director in SSgA’s fixed
income solutions division, said the quality criteria included
determining whether the company was using debt wisely, could pay
it back, and whether turnover in the debt was compensated for by
the return.

The better companies were then weighted more highly.

Since the credit crunch, investors have sought customised
bond indices — asking for subordinated financials to be cut
from an investment grade bond index. More recently, they have
sought for Greece, Portugal, Ireland and Spain to be excluded
from a eurozone bond index.

Johan Jooste, fixed income and currency portfolio strategist
at Merrill Lynch Wealth Management, said investors were becoming
more comfortable with non-mainstream fixed income, such as high
yield and emerging markets.

He also said there was some resistance to larger allocations
to equities.

“There hasn’t been a rebalancing back to the pre-credit
crunch appetite — despite the rebound in equities it hasn’t
tempted people to bail back in,” he told Reuters.

Investors are instead moving into a greater variety of bond
products — in the U.S. even munibonds and mortgage-backeds have
seen flows. This has pushed asset managers to come up with more
innovative credit offerings.

SSgA is aiming to offer a global investment grade index for
sterling, euro and dollar-denominated debt with exposure across
a range of sectors.

Stock Market Analysis

(Editing by Andrew Macdonald)

Fund firm SSgA plans new passive bond offering