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GLADI Inflation-Linked Bond Index

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The PIMCO Global Advantage Inflation-Linked Bond Index (GLADI ILB) is an inflation-linked global government bond benchmark. Launched in March 2011, GLADI ILB is part of the PIMCO Global Advantage Index family that was first introduced in 2009 and is designed to better capture fixed income investment opportunities in a rapidly changing world. Intended to offer investors an improved benchmark for global inflation-linked bond “beta,” GLADI ILB provides a building block for portfolios with the potential for higher risk-adjusted returns.

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A More Thoughtful Approach to Global Inflation-Linked Bond Indexing

The global economy is in the midst of dramatic transformations that challenge the ability of traditional investment approaches to generate sustainable returns while also managing risks. Profound changes crucial to the global ILB market include the divergence in monetary policies and inflation regimes across regions, an explosion of public debt levels in industrialized countries, and a structural shift in consumption patterns in developing countries. Traditional global inflation-linked bond indexes – by virtue of their market capitalization weighting methodology – are beholden to ILB issuance patterns around the world and turn a blind eye to desirable factors for investing in global inflation-linked bonds. As concerns about sovereign creditworthiness become increasingly critical to asset allocation, and as growth patterns and inflation realities diverge across regions, there is greater urgency for an alternative to traditional indexing approaches.

Through its unique construction methodology, GLADI ILB recognizes the need for investors to better position their global inflation-linked bond portfolios within this evolving global environment. Several core features distinguish GLADI ILB from traditional global inflation-linked bond indexes, including:

  • An innovative GDP-weighting methodology that is designed to avoid the disadvantages of traditional indexes based solely on market capitalization weighting
  • A continuum in coverage from developed to emerging markets, capturing the fuller set of global investment-grade opportunities and avoiding a bias in weighting toward developed markets
  • A global beta that evolves with the world’s economic structure, providing broad exposure to a diversified basket of global currencies, especially currencies of creditor countries in the emerging world

Advantages of GDP Weighting

GLADI ILB weights constituent countries based on gross domestic product (GDP) as an alternative to the market capitalization weights used by most existing global inflation-linked bond indexes. GDP weighting offers a number of relative potential benefits:

1. Better alignment of investors’ bond exposures with countries’ capacity to pay.

Traditional ILB indexes use a market capitalization weighting approach, which aligns the investors’ country exposure with the arbitrary metric of national ILB issuance. By contrast, GLADI ILB’s GDP-weighted approach bases country allocation on national income (GDP), which should better reflect the capacity to repay debt.

2. More comprehensive inflation protection.

GLADI ILB’s GDP-weighted methodology gives investors exposure to countries based on their global economic significance. This includes exposure to leading developing economies, where inflation rates tend to be higher and more sensitive to key inflation drivers such as commodity prices. In addition, the GLADI ILB GDP-weighted approach incorporates a broader currency allocation concentrated in countries that are greater contributors to global growth. This may enhance overall inflation protection by capturing the opportunities that exist in the world’s most dynamic economies. By embedding a concept of where capital markets will be in the future – rather than where they have been in the past – GLADI ILB helps investors position their portfolios to reap potential first-mover benefits.

3. Favoring higher real yielding economies.

GLADI ILB’s GDP-weighted methodology emphasizes countries that contribute a larger share of global GDP, favoring higher growth countries over comparably sized lower growth countries. In addition, the inclusion of emerging market inflation-linked bonds may contribute to an elevated overall real yield, as these countries tend to exhibit higher growth rates with additional risk premium requirements. As emerging markets continue to develop, real yield convergence toward developed market levels represents the potential for further total return opportunities.

Methodology

The construction of GLADI ILB follows three steps as illustrated in Figure 1: (1) regional weights are assigned based upon the relative GDP share of the respective major regions in the global economy; (2) country weights are assigned to eligible markets that issue ILBs, have a minimum investment grade rating, provide sufficient liquidity and adhere to additional investability considerations; (3) security selection is guided by a set of rules designed to ensure that the index is investable and can be replicated in a portfolio of liquid securities, rather than illiquid instruments that are only theoretically investable.

Figure 1: Three steps in constructing GLADI ILB

Step 1: Assign regional weights by gross domestic product

Major Regions Weighted by Share of Global GDP

  • United States
  • Eurozone
  • Japan
  • Other Industrialized Countries
  • Emerging Markets

Step 2: Assign country weights based on ILB insurance, credit and liquidity screens.

Country Weights Based on the Proportional Share of GDP in Major Regions

  • ILB Issuing Countries
  • Credit Screens
    • Investment grade credit rating of the country
  • Liquidity Screen
    • Inclusion of countries with linker markets that have reached $7 billion USD equivalent

Step 3: Complete security selection eligibility criteria

ILB Selection Designed for Replicability and Investability

  • Eligibility Criteria
    • Minimum issue size
    • Fixed rate bonds linked to the country’s or region’s consumer price index
    • Greater than one-year maturity

Step 1: Regional weights


The regional classification distinguishes the major economic regions listed in Figure 2, with the weight of each region in GLADI ILB determined by its respective share of global GDP. GDP shares are calculated as the simple average of each region’s share of global GDP for the previous five years, measured in nominal U.S. dollars at market exchange rates. The GDP data comes from the International Monetary Fund.

GDP weights are revised annually, with the new weights becoming effective on October 31 of each year. Figure 2 displays the current regional target weights for GLADI ILB, based on the annual review that became effective on 31 October 2015.

Step 2: Country eligibility and weights

Within multi-country regions such as eurozone, other industrialized countries and emerging markets, individual countries are further weighted by their share of GDP in each region. To help ensure high quality and investability of the index, countries need to meet a series of eligibility criteria to be included:


  • Size of inflation-linked bond market. Eligible countries must have an inflation-linked bond market that exceeds the local currency equivalent of $7 billion USD.
  • Credit quality. Eligible countries must be investment grade (BBB- or higher). The average rating from Moody’s, S&P and Fitch is considered when available. Countries downgraded to below investment grade are removed from the index upon monthly reconstitution.
  • Investability. The market needs to be investable, i.e., markets with significant capital controls and access restrictions or lack of liquidity are not eligible for the index.


The list of currently qualifying countries and their respective weights are illustrated in Figure 3.

Step 3. Security selection

Once a country is determined eligible for inclusion in GLADI ILB, security eligibility screens within each country are applied to maximize the replicability and investability of the index.

Eligibility Criteria

  • Instrument type. Only fixed-rate, non-callable central government debt qualifies. Index inclusion is limited to bonds with a bullet redemption structure whose principal and coupons are linked to the local country’s or region’s consumer price index.
  • Remaining maturity. All government bonds must have at least 12 months remaining until maturity.
  • Minimum par amount outstanding. Eligible instruments must have a current par amount outstanding greater than or equal to a minimum amount that differs by local currency.
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Index Attributes

The index methodology described above produces an index that is broadly diversified across regions, currencies and maturities. Key attributes of GLADI ILB and its sub-indexes are presented in the accompanying figures. Figures 4 through 6 show index data as of 31 October 2015.

Reweighting and Rebalancing

Target regional weights for GLADI ILB will be revised in an annual review, with the new weights becoming effective on 31 October of each year. On occasion, the target country weights may also be changed at the monthly update to reflect the most up-to-date set of eligible countries, following sovereign credit downgrades and upgrades.

On a daily basis, the actual country weights of GLADI ILB will deviate from their target weights, reflecting changes in the prices of the underlying instruments in the index, inflation accruals and fluctuations in the local currency value relative to the U.S. dollar.

On a quarterly basis (31 October, 31 January, 30 April, 31 July), GLADI ILB will be rebalanced to restore the actual country weights to their targeted levels. On a monthly basis, countries that no longer meet eligibility requirements will be removed and securities within each eligible country will be added and removed at month-end according to the GLADI ILB eligibility criteria.

Index Administration and Data

GLADI ILB will be administered and calculated independently from PIMCO by BofA Merrill Lynch, an unaffiliated leading global index provider. BofA Merrill Lynch will be responsible for the ongoing application of the index methodology, identification of index constituents and all other technical matters connected to the calculation and provision of index data.

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Annualized Returns

as of