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The Battle of the Bond Benchmarks

TOKYO – Some prominent institutional bond investors are shifting their focus from traditional benchmark indices, which weight countries’ debt issues by market capitalization, toward GDP-weighted indices. PIMCO, one of the world’s largest fixed-income investment firms, and the Government Pension Fund of Norway, one of the largest sovereign wealth funds, have both recently made moves in this direction. But there is a risk that some investors could lose sight of the purposes of a benchmark index.

The benchmark exists to represent the views of the median investor. For many investors – both those who recognize their relative lack of sophistication and those who don’t – going with the benchmark is a good guideline. This is an implication of the efficient markets hypothesis (EMH), for example.