Some prominent institutional bond investors are shifting their focus away from traditional benchmark indices that weight countries’ debt issues by market capitalization, toward GDP-weighted indices. PIMCO (Pacific Investment Management Company, LLC, the world’s largest fixed-income investment firm) and the Government Pension Fund of Norway (one of the world’s largest Sovereign Wealth Funds), have both recently made moves in this direction.
There is a danger that some investors will lose sight of the purpose of a benchmark index. The benchmark exists to represent the views of the median investor dollar. For many investors, going with the benchmark is a good guideline – especially those who recognize themselves to be relatively unsophisticated and also those who think they are sophisticated but really aren’t. This is the implication of the Efficient Markets Hypothesis (EMH), for example.read more