The Solactive FIIG Australian High Yield and Non-Rated Bond TR Index is a new index that allows investors to assess performance of the AUD high yield (HY) bond market.
About the index
The Solactive FIIG Australian High Yield and Non-Rated Bond TR Index (FIIG HY Index) is a rules-based, market value weighted index, which is unique in the Australian market for being the first of its kind. It is a benchmark that can be used to assess performance of AUD HY bond performance over a given period of time. The index was officially launched on 1 August 2019, with data starting as far back as 2012.
Being a value weighted index, underlying bonds in the index are weighted according to their respective market value in proportion to the aggregate market value of the index.
Below is a list of criteria used to determine index constituents.
Minimum outstanding amount: AUD20m
Country of domicile: Australia
Rating: Sub-investment grade or unrated by S&P/Moody’s
Exclusions: Convertible bonds, inflation-linked bonds, securitisation, private placement, or bonds issued by ADIs
Index performance to date
Since inception in December 2012, the FIIG HY Index has generated a cumulative return of 58.2% to 31 July 2019, or compound annual return of 7.20% over the same period. This means that an investor who would have maintained a portfolio of bonds mirroring the index would have made a 7.20% annualised return over the period. The table below summarises the index’s returns over a number of different time periods.
This performance is illustrated graphically below.
Similar to the ASX 200 or the Bloomberg AusBond Composite index, the FIIG HY Index is a benchmark index that can be used to track the performance of an asset class, in this case Australian HY bonds.
While the Australian iTraxx focuses on credit spreads of the underlying constituents, the FIIG HY Index is a total return index that measures the price movement of the underlying bonds and assumes that all distributions are reinvested into the index.
This is the reason why the index experienced a significant dip in late 2015. It was at this time that Qantas was upgraded to investment grade and subsequently removed from the FIIG HY Index. However, prior to this the three Qantas bonds had experienced a significant price appreciation and were a large proportion of the index. Hence, as these bonds were removed (at their elevated prices) the index experienced a dip. So contrary to the expectation that the index might have dipped due to a negative credit event, it was in fact a positive investment experience that caused the index to dip.
Currently, the FIIG HY Index contains 54 bonds issued by 41 issuers. AGL Energy, Crown Resorts, NextDC, Downer and Virgin are the top 5 issuers by outstanding volume and make up 48% of the index.
While exactly mirroring the index may be challenging for any individual investor given the supply and demand of all the constituents at any point in time, it is possible to replicate a significant part of it with portfolios of AUD250k (or more). The index demonstrates that significant diversification allows for the overall return of a portfolio to weather any temporary negative price movements or adverse credit events.
Please speak to your Relationship Manager or the Investment Strategy Group for further information and guidance on using the index.
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