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Dexia launches new model for investing in sovereign debt

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Dexia Asset Management has launched a new model for investing in sovereign debt, in order to overcome the drawbacks of traditional international bond benchmarks.

The proprietary approach, which has been applied to the newly re-launched Dexia Bonds Global Sovereign Quality fund, incorporates both financial and elements of SRI analysis to define a broader, high quality investment universe.

Koen Van de Maele (pictured), global head of fixed income at Dexia AM, says: “International government bond benchmarks are fundamentally flawed for a number of reasons: they are comprised of the most indebted nations because of their market capitalisation, the maturity of the investment tends to be determined by the issuer and they are typically over exposed to just a few currencies. Therefore benchmarks are not always the optimal solution for investors. We believe that the world has changed and a more intelligent approach to government bond investing is required, involving sustainable and responsible bond management.” 

While the traditional benchmark universes typically have a limited scope, Dexia AM starts with a 216-country universe (based on World Bank data) and applies three filters: long-term fiscal quality, interest rate and currency,to determine its approach to build an optimal high quality government bond portfolio.

Dexia AM’s new model involves in-depth financial and sustainable analysis on a country’s ability and willingness to repay its debts and its vulnerability to external shocks.

Nicolas Forest, manager of the Dexia Bonds Global Sovereign Quality Fund, says: “We believe that a nation’s willingness to repay its debt starts with long-term analysis of governance. Good governance depends on political and democratic stability, legal certainty, institutional transparency and an almost total absence of corruption. This analysis is then supplemented by the sustainability of its debt and its ability to avoid external and internal shocks. The evaluation of this is not only vital to the country-selection process, but also in determining optimal portfolio allocations.”

Dexia AM takes classical variables, such as the government’s debt levels, deficits, current account balance and unemployment data and combines them with demographic trends and the importance of the financial sector in the country’s economy, in order to assess the ability of a country to serve its debt on a longer-term horizon. Only countries that are deemed better than average on their willingness and ability to repay their debt are then taken into the portfolio.

Forest says: “Our approach produces a more extensive, less European-centric portfolio, including countries otherwise missing from the traditional benchmarks such as South Korea, Chile, Singapore, Norway and Luxembourg. Government bonds will remain an essential part of investor’s allocations in the future and we believe that a well-constructed government bond portfolio allocation is essential.”

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