7fin.org
  • Corporate Finance
  • Personal Finance
  • Random
  • Future Posts
  • About

Archives

  • May 2022
  • April 2022
  • March 2022
  • January 2022
  • November 2021
  • March 2018
  • February 2018
  • January 2018

Categories

  • Corporate Finance
  • Personal Finance
  • Random
0
7fin.org

e.l.i.5 corporate finance

7fin.org
  • Corporate Finance
  • Personal Finance
  • Random
  • Future Posts
  • About
  • Corporate Finance

Nuances of the Barclays Fixed Income Indices

  • February 11, 2018
  • Luis A

Most corporate investors use benchmarks to express their desired asset allocation, to guide their asset managers’ portfolio construction process and, on an ex-post basis, to measure their performance.

Well known indices such as the S&P 500 or the Barclays U.S. Aggregate are generally used as benchmarks. In BS (balance sheet) fixed income investing, the most popular indices are provided by Barclays Capital and by Merrill Lynch. Many of you may be using the Barclays 1-5yr. Govt./Credit or the Barclays 1-3yr. Government indices, so I thought it would be nice to present some aspects of the Barclays methodology.

(Side comment: it took me 5 or 6 years to stop saying “Lehman methodology”, as it was called from inception in the early 1970s to the bankruptcy of Lehman Brothers in 2008).

Monthly reset

  • Securities are evaluated on a monthly basis to determine index eligibility. If a security meets all the criteria at the beginning of the month, it will stay in the index for return calculations until month-end.

Treatment of Cash

  • Cash earned from interest and principal payments remains in the index until month-end with a 0% return.
  • Real world comment: In the real world, this cash would be reinvested or swept into a money market fund and, in both cases, presumably earn a rate greater than 0%. This feature should benefit the portfolio manager (although I don’t know to what extent).

Pricing

  • Main source: Barclays traders.
  • Timing: 3pm New York, 4:15pm London (for European markets), different times for Asia.
  • Frequency: daily.
  • Side of the market: bid side, except for new corporates entering the index on the offer side (makes sense, one would have to pay the offer side to include a bond in the portfolio), and EUR & GBP Treasury bonds, which use mid (don’t ask why).
  • Real world comment: the index is agnostic to transaction costs; in the real world, a portfolio manager would have to pay the offer side each time she wanted to add a bond to the portfolio and, since the index uses bid, she would be penalized.

Credit quality

  • Considers the following agencies: Moody’s, S&P, and Fitch.
  • Middle rating rule: discards highest and lowest ratings.
  • If only two agencies rate a bond, then the most conservative rating is chosen.
  • If only one agency rates a bond, then that one rating is used.
  • If none of the agencies rates a bond, then the issuer level rating may be used.
  • Real world comment: be cognizant of these rules when determining investment guidelines, try to be aligned with the index or be prepared to have the portfolio manager blame his negative alpha on a guideline-index mismatch. For example, a hypothetical BS portfolio manager could tell you: “your guideline for minimum credit quality uses the most conservative rating while the index uses the middle rating, therefore several index-eligible bonds are not eligible for your portfolio and, alas, those were the exact bonds that rallied… it’s the reverse of George Constanza’s it’s not you, it’s me!”

Two Index Universes: Returns and Statistics

  • Each Barclays index consists of two pools of securities, or “universes”: the Returns Universe and the Statistics Universe.
  • The Returns Universe is used to calculate return data, while the Statistics Universe is used to provide characteristics such as market value, sector weightings, maturity, yield, duration, etc.
  • The Returns Universe contains the set of securities that meet the index eligibility criteria at the beginning of the month and does not change until the next reset date (i.e., month-end). This means that if a security is no longer eligible (e.g., due to a credit rating downgrade), it will remain in the index until month-end and, therefore, a portfolio manager will have some time to decide whether to sell the security or keep it and introduce some tracking error.
  • The Statistics Universe is dynamic, it changes every day based on eligibility, so if a bond is no longer eligible, it will fall off this pool immediately.

Next up: Merrill Indices

I will provide similar details for the Merrill Lynch indices in a future entry.

If you think that any of the bullet points above is outdated or plain wrong, please send me a note or comment below. Thanks!

Related Topics
  • portfolio management
You May Also Like
View Post
  • 5 min
  • Corporate Finance

The fractal nature of asset-liability matching

  • May 1, 2022
View Post
  • 4 min
  • Corporate Finance
  • Personal Finance

Time-weighted vs. money-weighted return

  • April 9, 2022
View Post
  • 3 min
  • Corporate Finance

What’s the expected return on buybacks (a theoretical view)

  • March 23, 2022
View Post
  • 4 min
  • Corporate Finance

How to think about swaps

  • March 14, 2022
View Post
  • 1 min
  • Random

This website

  • January 30, 2022
View Post
  • 4 min
  • Corporate Finance

How to think about minimum cash balance

  • November 16, 2021
View Post
  • 2 min
  • Corporate Finance

How is VWAP calculated?

  • March 16, 2018
View Post
  • 1 min
  • Corporate Finance

Yield vs. Return, what’s the difference?

  • February 16, 2018
2 comments
  1. Jason says:
    October 23, 2018 at 12:00 pm

    Side comment to your side comment:
    Now that Bloomberg has acquired these indices, we have to get used to another name change. They are now called the Bloomberg Barclays Indices.

    https://www.bloomberg.com/company/announcements/bloomberg-acquisition-barclays-brais/
    https://www.bloomberg.com/professional/product/indices/bloomberg-barclays-indices/

    1. Luis A says:
      November 17, 2018 at 6:28 pm

      Haha, this time I won’t need 5 or 6 years to adjust. Bloomberg and its unique (terrible?) user interface is taking over the world of finance!

Comments are closed.

subscribe now

my infrequent, never spammy newsletter

7fin.org
  • Corporate Finance
  • Personal Finance
  • Random
  • Future Posts
  • About
e.l.i.5 corporate finance

Input your search keywords and press Enter.