Overview

In The Hunt For Return? Overweight Safety!

INTRODUCTION

Public debt is issued in order to finance government budget deficits via government bonds and bills. Its sheer size and function make public debt play an essential role in the global economy: as of the end of 2018, government debt outstanding reached USD 66 trillion, or about 80% of global gross domestic product (GDP).
 

In this white paper, we analyze the historical performance and characteristics of a basket of sovereign bonds weighted according to the inverse of their issuing country’s level of indebtedness. Results show that our Solactive GDP-to-public debt sovereign bond strategy was able to outperforme a marketvalue-weighted one both risk- and return-wise.


Additionally, it consistently exhibited both a better credit rating and a lower
duration than the benchmark.

KEY FINDINGS

  • The GDP-to-Debt strategy exhibited a higher degree of both country and currency diversification than the benchmark.
  • The historical credit rating and duration of the GDP-to-Debt strategy were better and lower, respectively, throughout the entirety of the studied period.
  • The Sharpe Ratio of the GDP-to-Debt strategy was 0.38 (0.93 vs. 0.55) higher than that of its benchmark. This outperformance came from both higher annualized returns (4.97% vs. 3.93%), and a lower  annualized volatility (5.35% vs. 7.09%).
  • The outperformance of the GDP-to-Debt strategy relative to its benchmark appears not to be linked to foreign exchange fluctuations.

To find out more about our GDP-to-Debt Index strategy, please click here or on the graphic below to download our white paper.