Merrill Lynch extends global reach

Investment banks regard proprietary indices as one of their key weapons in the battle to win over investors, and while both Chase and HSBC already have functioning Asian-based indices, neither is said to have Merrill Lynch's global reach, transparency or customization abilities.

Says Phil Galdi, managing director of Merrill Lynch's portfolio strategy and index group: "Many index compilers have either specialized in one market or if they do operate across different markets, they tend to keep each one separate.

"To date, only Lehman Bros, Salomon Smith Barney and to a lesser extend JP Morgan have begun building global platforms, but none have got as far as we have in terms of full coverage."

Globally, Merrill Lynch operates over 3000 debt indices, of which Asia now contributes 55. The headline Asian Dollar Index has a total capitalization of $56 billion and comprises 131 bonds from issuers across 10 countries.

Tracking the total return performance of US dollar denominated public debt issued in the eurobond and US markets, the index covers rated investment grade and high yield Asian sovereign, quasi-government and corporate issues (excluding Japan).

Both the headline index and all related sub-indices are rules-based rather than liquidity-based, with qualifying bonds to be a minimum of $150 million in size and with more than one year remaining term to maturity.

With the exception of floating rate Brady bonds, all constituents also have to have a fixed rate coupon. In addition, Merrill Lynch has taken the unusual step of allowing structured subordinated issues into the index, recognizing the sector's importance as an emerging asset class in Asia.

Recent deals from Korea's Hanvit and Cho Hung Bank will therefore be included, but since most investors regard the typically 10 non-call five structures as five-year bullet maturities, they will only be included up until the call option.

Overall, Korea has the largest representation in the index with about 35% weighting, followed by Hong Kong and the Philippines, both on about 17%. Heavy issuance by Asian sovereigns since 1997's financial crisis also means that the market is now almost evenly split between governments and corporates, but more surprisingly has a two-to-one skew towards investment grade issuers in both sectors. The investment grade government sector is, for example, entirely BBB rated, while 40% of the investment grade corporates have a single A rating.

Building on strengths

Merrill Lynch's bankers believe the key strengths lie in their transparency and customization abilities. In the case of the former, users have access to daily constituent listings, pricing and analytical data. Where the latter is concerned, users can make comparisons across any global or regional sector.

Charting investment grade versus high yield corporate spreads over a three-year period from 1997 to 2000 shows, for instance, that having a hit high of 800bp in September 1998, the differential between the two stabilized in the 550bp to 600bp range around April last year.

Bankers also conclude that the indices will be beneficial to the corporate sector.

Says Merrill Lynch's Asian head of fixed income research Chris Francis: "They are particularly relevant to the corporate sector because so many fund managers benchmark against this sort of index. If a bond goes into the Merrill Lynch BBB or single A index, a fund manager will have to buy the bond even if he or she decides they only want to take a neutral position."