This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Pimco Has New Way of Looking at World

NEW YORK ( TheStreet) -- If you buy Vanguard Total Bond Market Index (VBMFX), you have a big stake in Treasuries and tiny holdings in debt from such blue-chip corporate issuers as International Business Machines (IBM - Get Report) and Wal-Mart Stores (WMT - Get Report).

The Vanguard portfolio, which tracks the Barclays Capital Aggregate Bond (LAG) index, seems lopsided because it is weighted according to market capitalization. Under that system, Uncle Sam and other issuers that are heavily indebted account for a big weight in the index, while borrowers with little debt outstanding count for a small percentage of total assets.

In effect, bond investors loan the most money to people who may have trouble repaying. That is not the best way to invest, says Ramin Toloui, executive vice president of Pimco, which runs the world's biggest bond mutual fund. "You wind up with a distortion when large issuers of debt have higher weights in the index," Toloui says.

To take a different approach, Pimco has devised a global bond benchmark that weights countries according to their gross domestic product. The idea is to put more money into bonds from borrowers that have the greatest national income, not the most debt.

Because Japan accounts for about 9% of global GDP, that is the country's weighting in the Pimco Global Advantage Government Bond Index. In contrast, Japan -- which has huge debts -- accounts for 30% of the Citigroup World Government Bond Index, a traditional benchmark weighted by market capitalization. Emerging markets account for 30% of the Pimco index, compared with a figure of 1% for the Citigroup benchmark.

Pimco says that over the past 20 years, a GDP-weighted index would have outdone a traditional benchmark by about a third of a percentage point annually. But the advantage could be greater in the future as emerging markets account for a growing share of world GDP.

To appreciate why bonds of fast-growing emerging markets could outdo issues from the developed world, compare markets in Japan and Brazil. At a time Japan's economy seems trapped in sluggish growth, the country's bonds yield a meager 1.5%. In contrast, bonds in growing Brazil yield 12%. The yield must be higher to compensate investors for the risk of inflation. In addition, the currency of the fast-growing economy is likely to appreciate against the sluggish yen, which would boost returns for foreign bond holders.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
IBM $160.67 0.00%
LAG $58.99 0.00%
WMT $77.88 0.00%
AAPL $124.75 0.00%
FB $80.78 0.00%

Markets

DOW 17,826.30 -279.47 -1.54%
S&P 500 2,081.18 -23.81 -1.13%
NASDAQ 4,931.8150 -75.9760 -1.52%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs