Just 41% of respondents stated they were satisfied with indices, while up to 80% agree the instability of interest rate exposure is problematic. Around two thirds of respondents also felt that the instability of exposure to credit risk is unacceptable.
Exposure to both credit risk and interest rate risk can be managed using derivative instruments, but just 33% and 43% of investors have the ability to use derivatives to dilute the respective issues.
Index providers creating indices that are intended to be the foundation of an investment vehicle are likely to encounter difficulties, as almost half of respondents recognise that there is a direct trade-off between the index’s risk factor stability and its investability.
The EDHEC-Risk Institute said the various issues identified for corporate bond indices may be one of the reasons for the current relative unpopularity of passive investing in the corporate bond market.
It concluded it will be increasingly important for index providers to construct indices using methods that account for stability of these risk factors, but so far new indices do not seem to take this dimension into account.
