The PIMCO Global Advantage™ Bond Index (GLADI™) is a new investment-grade fixed income benchmark. Launched in January 2009, GLADI is designed to better capture investment opportunities that are becoming increasingly important in a rapidly changing fixed income universe. Intended to offer investors an improved measure of fixed income market “beta,” GLADI provides a building block for portfolios with the potential for higher risk-adjusted returns.

A New Approach to Bond Indexing
The global economy is in the midst of dramatic transformations in growth drivers, wealth dynamics, and institutional arrangements. These changes are affecting the ability of traditional investment approaches to generate sustainable returns while also managing risks.

Through its broader coverage and unique construction methodology, GLADI explicitly recognizes the need for investors to position their fixed income portfolios within this changing global environment. Several core features distinguish GLADI from traditional fixed income indices, including:

• An innovative GDP-weighting methodology that avoids the disadvantages of traditional indices 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 disproportionate weighting of developed markets.
• Inclusion of inflation-linked bonds in addition to nominal bonds, providing a partial built-in hedge against potential inflationary pressures.
• Integration of the range of modern fixed income instruments such as interest rate swaps, as well as liquidity requirements, for the purpose of providing a more accurate, investable performance benchmark consistent with the instruments used by mainstream bond managers.

Advantages of GDP Weighting
GLADI weights index components based on gross domestic product (GDP) as an alternative to the market capitalization weights used by most existing fixed income indices. GDP weighting offers a number of relative benefits:

1. Forward-Looking. Fundamental transformations in global capital markets are reshaping the financial landscape for retail and institutional investors. Market capitalization-weighted indices fail to capture these changes because they are inherently backward-looking, reflecting past patterns of debt issuance. Since rapid economic growth tends to precede the liberalization and deepening of capital markets, GLADI’s GDP weighting is designed to capture 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 helps investors position their portfolios to reap potential first-mover benefits.
      
2. Counter-Cyclical Rebalancing. A well-known disadvantage of market capitalization-weighted indices is that they assign progressively greater weight to securities as they go up in price, exactly the opposite of the investment maxim to “buy low, sell high.” GLADI not only avoids this pitfall of market capitalization weighting, but also has the potential to benefit from counter-cyclical rebalancing, since bond prices tend to move inversely to GDP growth over the business cycle (rising in price as economic growth slows, and falling as economic growth accelerates), as illustrated in Figure 1.
   
   Figure 1:  Counter-Cyclical Rebalancing Feature of GDP Weighting
    
    
3. Avoiding Excessive Borrowers. Market capitalization-weighted indices have traditionally assigned greater weight to large-scale issuers, even though the credit quality of those issuers may be eventually compromised by their debt load. GLADI’s GDP-weighted approach avoids over-allocating to excessive borrowers.