MSCI rolls out ‘glidepath’ indexes for corporate bonds to help portfolios become sustainable
Glidepath provides a framework to enable cash flows from current holdings to be reinvested into issuers aligned with specific objectives, such as higher ESG ratings
MSCI is best known for equity indexes, but it recently rolled out two index approaches to address pain points for asset owners and fund managers of bond portfolios.
The MSCI Glidepath Corporate Bond Indexes aim to help managers gradually transition bond portfolios towards sustainability targets.
A second set of products, the MSCI Alternative Weighting Strategy Indexes, aims to enable managers of bond portfolios to add value to traditional market capitalisation-weighted bond indexes by systematically applying alternative weightings.
Jarrad Linzie, MSCI’s global head of fixed-income index research, said: “The benchmark indexes that exist today are legacy products. We’re not looking to replace any of the incumbents because managers don’t (switch) benchmarks. They would only switch benchmarks if there is an issue or change in the overall strategy.”
MSCI has 180 fixed-income indexes comprising market capitalisation-weighted indexes covering government bonds and developed-market corporate bonds, among others. More than half of the indexes are focused on climate and sustainability strategies.
Linzie said investors are seeking ways to transition their portfolios into assets that are more sustainable. This may mean investing more in green bonds or issuers with science-based targets or green revenues.
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“But if you do the transition from day one, it becomes very costly because you have to sell and buy bonds and repurpose the entire portfolio.”
Glidepath essentially helps this process by providing a framework, to enable cash flows from current holdings to be reinvested into issuers aligned with specific objectives, such as higher ESG ratings or lower emissions. Cash flows are generated by coupon payments or redemptions.
Traditionally, cash flows from holdings are reinvested into a bond index’s underlying constituents on a pro-rated basis. “If you care about emissions and your ethos is to decarbonise, then you wouldn’t reinvest the cash flows into the entire index. You’d reinvest to a small proportion of the index,” said Linzie.
“We’ve created a methodology that segments the entire basket into deciles, and cash flows go into the top six deciles. What we’ve seen is that over the last five years, this would have achieved an average decarbonisation rate of roughly 14 per cent,” he added.
The top six deciles comprise an index’s constituents with the highest composite scores in terms of emissions and ESG scores. The bottom deciles are securities with the lowest scores. Reinvesting cash into the top six deciles would effectively underweight securities in the lowest deciles.
“Our strategy isn’t about replacing the incumbents in a market capitalisation-weighted index. It’s more about offering solutions for clients on the sustainability front,” said Linzie.
He added that sustainable bonds currently account for around 5 to 10 per cent of fixed-income portfolios, and expects this share to grow to 70 per cent over the next decade.
“I have been speaking with some very large asset owners who have been using the same benchmarks for 30 years. It’s not possible for them to switch benchmarks in six months. There are around 20 asset owners I’m speaking to that are already going through the process of effectively linking assets to Glidepath.”
The Alternative Weighting Strategy indexes set out to address the criticism that market capitalisation-weighted bond indexes are sub-optimal, because they reflect the most indebted issuers. In the new strategy, a portfolio’s bond holdings are grouped into maturity buckets, and then weighted according to their yield-to-duration ratio, while also capping their overall bond and issuer weights.
Based on MSCI tests, the strategy results in higher risk-adjusted performance. For US investment-grade debt, for instance, the outperformance in terms of total return may be as much as one percentage point.
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