As Canadian pension plans look globally for fixed income, FTSE Russell has introduced a country classification framework to make the process of managing country inclusion of its flagship fixed income indexes more transparent.
Beyond the U.S., Canadian funds are interested globally, says Marina Mets, managing director of fixed income at FTSE Russell.
When going global, how to measure, and give rigour to which countries to invest in is a hot topic of discussion, she notes. “On the equity side of the fence, there’s quite a lot of study and following that’s done about how countries get assigned to particular sectors. So what’s considered developed versus emerging, etc. In fixed income, historically that hasn’t been. And as you see investors moving globally and investing in different areas of the market, the rigour with how you assign those countries, how you include or not include particular countries in global benchmarks that are tracked by lots of investors becomes very important.”
FTSE Russell’s fixed income country classification framework, introduced in January 2019, is revolutionary in the fixed income space, says Mets, noting it looks at how to classify market accessibility standards and how investment-grade country developed market benchmarks look at those accessibility standards to allow countries to come in or stay in.
The framework looks at different parts of the market’s evolution, including capital market reform, foreign exchange hedging policy, how easy it is to trade through the market, the kinds of liquidity parameters and of the types of support from a custodian perspective, she notes.
FTSE Russell has also published a watch list of countries on the cusp of reclassification of their market accessibility level because they’re either failing to meet criteria to stay at the current level or they are meeting the threshold for a higher level. “It is also a great tool for engaging with regulators [in markets tracked by our indexes]. It gives them an idea of what is being sought by the global investor base as to what requirements an investor would have of how they see investments in that particular country and what tools they would need to assure investment for their unit holders in those countries.”
On Monday, FTSE Russell announced the results of its first fixed income country classification review, assigning market accessibility levels to all fixed income markets tracked by the FTSE world government bond index, FTSE emerging markets government bond index and regional government indexes. It also published its full watch list.
“Minimum market accessibility levels replaced the barriers-to-entry criteria in the methodology for the flagship FTSE world government bond index and FTSE emerging markets government bond index and indexes that derive their membership from them, effective March 31, 2019,” noted a release from FTSE.
Of note from the announcement, Israel now meets the minimum market accessibility level, market size and credit quality for WGBI inclusion. If these criteria continue to be met in September 2019, FTSE noted it will make an announcement about index inclusion and timelines for implementation.