Fundamental indexing is coming to the fixed income world, thanks to a firm that popularized the concept on the equity side of the business and a bond benchmarking house. Research Affiliates LLC (RAFI) and Ryan ALM Inc. have joined forces to create the fundamental indexes, reports the Wall Street Journal's Fund Track column.

The new indexes evoke the methodology used by Pimco for its Global Advantage Strategy Bond Fund. That fund weights its national holdings by GDP, essentially weighting the fund by income rather than outstanding debt. The fund has gathered about $1.3 billion since its launch last year, according to the paper.

Fundamental indexing uses basic business measures such as sales or dividends rather than market capitalization metrics to weight indexes. Most traditional bond indexes, for example, are weighted by the each issuers debt outstanding.

However, RAFI's nine bond indexes will be using sales, profits, book value of assets and dividends to weight their holdings. They will cover corporate bonds, including both investment-grade and high-yield issues and group issues by maturities one to five years, five to ten years and more than ten years. Each index will contain only a few hundred issues compared to thousands in commonly used indexes.

The number of issues will be limited by RAFI's decision to use only the largest issue for each company.

RAFI founder and chairman Rob Arnott tells the paper that the weighting will allow investors to avoid concentrating their portfolio in companies that issue large amounts of debt.

"If you owe more money, why should your creditors want to own more of your debt?" he asks the paper. 

Edited by: Sean Hanna, Editor in Chief


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