RESEARCH

Bond Pricing Agency Malaysia Research Series

Comparison Between Bond Indices in Malaysia for Benchmarking Purposes

June 2011

Noor Syaheera Shairfulkhairi Industrial Training Student, Universiti Sains Islam Malaysia John Chong Financial Engineer john@bpam.com.my Noor Bazlina Sharifmuddin Financial Engineer bazlina@bpam.com.my

TABLE OF CONTENTS
1 2 INTRODUCTION .............................................................................................................................................. 1 BOND INDICES IN MALAYSIA .......................................................................................................................... 1 2.1 2.2 2.3 2.4 2.5 3
QUANT SHOP MALAYSIAN BOND INDEXES (QUANT SHOP) ....................................................................................... 2

HSBC ASIAN LOCAL BOND INDEX (ALBI) .......................................................................................................... 2 MARKIT IBOXX ABF INDEX (IBOXX) .................................................................................................................. 2 BPA MALAYSIA BOND INDEX SERIES (FIIX) ........................................................................................................ 2 BLOOMBERG AIBIM BURSA MALAYSIA SOVEREIGN SHARIAH INDEX (BMSSI) ............................................................ 2

COMPARISONS FOR GROUND RULES IN INDEX CONSTRUCTION .................................................................... 3 3.1 3.2 3.3 3.4 CHARACTERISTICS ........................................................................................................................................ 3 PRICE CONTRIBUTION .................................................................................................................................... 4 SEGMENTING RULES ..................................................................................................................................... 4 AVAILABILITY OF INDEX STATISTICS .................................................................................................................... 5

4 5

CONCLUSION .................................................................................................................................................. 5 REFERENCES ................................................................................................................................................... 6

Comparison Between Bond Indices in Malaysia for Benchmarking Purposes

Introduction

A bond index consists of a bond portfolio covering segments of the market which contains broad but homogenous characteristics following a target objective. It serves as a composite value representing the movement of the market at large. One is only required to see the index level for the day and compare its increase/decrease against level from previous day to see the direction in which it has taken. Over a longer time horizon, bond index observes the bull or bear trend of the overall market. Other usages of a bond index include: benchmark of performance measurement basic data for risk management and asset allocation decision to act as an underlying asset for potential derivatives instruments, and to demonstrate added value to intended sponsors for fund managers This paper will focus on using index as a performance measurement. For the purposes of benchmarking performance, choosing the right index will better gauge and properly assess returns against asset portfolios. Often, the suitability and relevancy of a bond index in use are decided by the index specification. Henceforth, the performance of a medium term bond fund is better evaluated against a medium term bond index; as opposed to being evaluated against a general all bond index. Benchmarking performance alongside a correct index ensures justification of why the fund over or underperforms. A solid methodology and a set of rules for bond index construction and specification will certainly provide a clear picture and improve monitoring for bond portfolio managers. Construction rules for existing bond indices in Malaysia will be explored in this paper. Results from this study can be used by portfolio managers to identify the right index for specific portfolios under their management.

Bond Indices in Malaysia

Bond market in Malaysia has seen healthy growth since the first issuance of Shell MDS in 1990. Significant issuance amount in the primary market and consistent trading volume in the secondary market have also been observed since the past two decades. This has spurred the emergence of bond indices as a gauge to observe the overall movement of the bond market. The following are a few of the prominent bond indices in Malaysia listed in chronological order: i. quant shop Malaysian Bond Indexes by quant shop ii. HSBC Asian Local Bond Index (ALBI) by HSBC iii. Markit iBoxx ABF Index by Markit iv. BPA Malaysia Bond Index Series (FiiX) by BPA Malaysia v. Bloomberg AIBIM Bursa Malaysia Sovereign Shariah Index (BMSSI) by Bloomberg

Bond Pricing Agency Malaysia Research Series June 2011

Comparison Between Bond Indices in Malaysia for Benchmarking Purposes

2.1

quant shop Malaysian Bond Indexes (quant shop) quant shop Malaysian Bond Indices is a family of indices produced by quant shop Pty Ltd from Australia. It was first formulated in February 1998 with Rating Agency Malaysia Berhad (now known as RAM Holdings Berhad) as a monthly index which was later enhanced to provide users with higher frequency and coverage. From 1 June 2009 onwards, it is exclusively generated by quant shop. The index family covers MGS, GII, Cagamas, Khazanah and Corporate sub-indices for numerous maturity buckets. The origin of the prices for the constituents is from Bank Negara Malaysia (BNM) for the sovereign bonds, and prices based on yield curves are also obtained from BNM for non-sovereign bonds.

2.2

HSBC Asian Local Bond Index (ALBI) The ALBI tracks the local currency denominated liquid bonds in Asia ex-Japan. Currently, it covers China, Hong Kong SAR, India, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand. The index returns for each country-based sub-index are calculated in the respective local currencies and then aggregated for the overall ALBI index, measured in US dollar.

2.3

Markit iBoxx ABF Index (iBoxx) Markit iBoxx ABF Index is a family of indices developed by International Index Company (IIC) and EMEAP (The Executives Meeting of East Asia and Pacific Central Banks). The indices cover sovereign and quasi-sovereign bond issues in eight Asian currencies including China, Hong Kong, Malaysia, Indonesia, Korea, Philippines, Singapore, and Thailand. The index family consists of separate sub-indices for government and quasi government issues for each domestic market and maturity sub-indices for the 1-3, 3-5, 5-7, 7-10 and 10+ years maturity buckets; aggregated in an overall index denominated in US Dollars. The price contributors are various banks and financial agencies from each country.

2.4

BPA Malaysia Bond Index Series (FiiX) FiiX is a family of indices by BPA Malaysia based on guidance provided by the European Federation of Financial Analyst Societies (EFFAS) Standardized Rules and it conforms to international standards. BPA Malaysia is a bond pricing agency in Malaysia for bond valuation registered under the guidelines of the Securities Commission (SC). The index issued locally and denominated in Ringgit Malaysia (RM). The FiiX index family covers Overall, Conventional and Islamic sub-indices further broken down into Government, Quasi Government, BNM, Financial, Corporate Guaranteed, Corporate and ABS subindices for maturity buckets of 0.25-1, 1-3, 3-7 and 7+ years. The origin of the prices is from BPA Malaysias marked-to-market prices.

2.5

Bloomberg AIBIM Bursa Malaysia Sovereign Shariah Index (BMSSI) BMSSI is a Ringgit sukuk index produced by collaboration between Bloomberg and Association of Islamic Banking Institutions Malaysia (AIBIM). It covers the most traded Ringgit denominated Islamic sovereign bonds from Malaysia with prices sourced from Bloomberg.

Bond Pricing Agency Malaysia Research Series June 2011

Comparison Between Bond Indices in Malaysia for Benchmarking Purposes

Comparisons for Ground Rules in Index Construction

When measuring fund performance against an index, one must remember to use an index that has similar characteristics to the fund. Structure, relevant universe and time frames are some of the consideration to be taken into account. The following shows comparison between the different indices in Malaysia for benchmarking consideration. To begin with, quant shop, iBoxx and FiiX are index families with numerous segmentations while ALBI and BMSSI are single indexes. 3.1 Characteristics

Index Name

quant shop Malaysian Bond Index

HSBC Asian Local Bond Index

iBoxx ABF Index

FiiX Bond Index

Bloomberg-AIBIMBursa Malaysia Sovereign Shariah Index 2010 Malaysia

Base Index Country

1994 Malaysia

2000 China, Hong Kong SAR, India, Indonesia, South Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand Issued internationally Denominated in USD Government and quasi government bonds only Liquid bonds

2004 China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand

2007 Malaysia

Index Issuance Characteristic

Issued locally Denominated in RM

Issued internationally Denominated in USD Government and quasi government bonds only Rule based

Issued locally Denominated in RM

Issued internationally Denominated in RM Government sukuk only Liquid bonds

Bond Universe

All Bond Rule based

All Bond Rule based

quant shop, FiiX, and BMSSI are bond indices solely based on Malaysian bonds while iBoxx and ALBI are aggregated indices based on the Asian market. Only quant shop and FiiX cover all bonds whereas ALBI, iBoxx and BMSSI only cover Government and Quasi Government bonds. Funds with corporate bonds will be better acquainted with quant shop and FiiX indices as they generate indices for the corporate segments as well.

Bond Pricing Agency Malaysia Research Series June 2011

Comparison Between Bond Indices in Malaysia for Benchmarking Purposes

3.2

Price contribution
quant shop Malaysian Bond Index HSBC Asian Local Bond Index Country's HSBC treasury office Internal pricing Bloomberg-AIBIMBursa Malaysia Sovereign Shariah Index Bloomberg Trades

iBoxx ABF Index

FiiX Bond Index

Price Provider Prices

Bank Negara Malaysia Trades for Government, curve pricing for non-Government bond Daily Monthly

Individual countrybased banks Internal pricing

BPA Malaysia MTM pricing

Calculation Rebalancing

Daily Monthly

Daily Monthly

Daily Daily

Daily Monthly

Price source reflects the index accuracy. The origin of the prices verifies the depth and breadth of the market that is reflected in the index. A widely acceptable pricing, i.e trades or MTM, is better suited for building an index and best for benchmarking purposes. On the other hand, the frequency of the calculation and rebalancing measures how effective the index is in representing the market. Regular rebalancing and calculation shows the index is updated with the latest happenings in the market. 3.3 Segmenting rules
quant shop Malaysian Bond Index Sector breakdown MGS GII Cagamas Khazanah Corporate Bloomberg-AIBIMBursa Malaysia Sovereign Shariah Index n/a

HSBC Asian Local Bond Index Country index

iBoxx ABF Index

FiiX Bond Index

Sovereign Quasi Sovereign

Government Quasi Gov BNM Financial Corporate Guaranteed Corporate ABS i. Short term 0.25 to 1 yr 1 to 3 yr ii. Mid term 3 to 7 yr iii. Long term >7 yr

Maturity breakdown

i. Short term 1 to 3 yr ii. Mid term 1 to 5 yr 1 to 7 yr iii. Long term 5 to 10 yr 1 to 10 yr >7 yr >10 yr

n/a

i. Short term 1 to 3 yr ii. Mid term 3 to 5 yr 5 to 7 yr iii. Long term 7 to 10 yr >10 yr

n/a

Segment breakdowns determine the sub-indices in each family of indices. quant shop, iBoxx and FiiX offer diverse sub-indices while BMSSI and ALBI only offer single indices. Segmented sub-indices offer better depth and it gives fund managers wider selection to find a specific index which matches the fund specifications.

Bond Pricing Agency Malaysia Research Series June 2011

Comparison Between Bond Indices in Malaysia for Benchmarking Purposes

3.4

Availability of index statistics

quant shop Malaysian Bond Index Bloomberg-AIBIMBursa Malaysia Sovereign Shariah Index Total Return Price Return

HSBC Asian Local Bond Index Total Return

iBoxx ABF Index

FiiX Bond Index

Index Return Type

Total Return

Total Return Price return Gross price and income indices Hedged total return Unhedged total return Market value Annual modified duration Annual yield

Total Return Price return

Risk Stats

Market value Average yield Average duration Average convexity

Country weight Index duration Average life Average coupon Total market cap

No of bonds Market value Average duration Average convexity Market weight Average clean price Average coupon Average maturity Average YTM

n/a

Taking index as a passive portfolio, risk statistics can provide a yardstick measurement for comparisons with funds. Statistics ensure that the managers are comparing apple to apple when using the index.

Conclusion

Each bond fund differs from one another based on its objectives and strategies. It is important to choose the right index to match the funds goals to best compare performance and risk profiles. Myriad of indices available need further scrutiny before they are adopted to serve a users purpose. The reliability of indices to capture the snapshot of a market over a span of period has always been overlooked without sufficient prior knowledge on indices characteristics, constituents, price sources and relevant statistics. Only with informed knowledge on indices formations can a user maximize the added values to gauge the general market while being aware of the limitations surrounding the methodology. Another critical dimension to consider is the suitability of available indices. User picks the relevant benchmark to suit their intended goals. Under portfolio evaluation, funds targeted to capture short versus long-term investments, geographical versus asset type diversifications, sector or industry growth and so on should ideally be based on the appropriate indices for benchmarking purpose. Such relative measure will provide a more meaningful comparison and accurate return performance evaluation. Knowing the indices details and their suitability is the onus of the user. Where accuracy and relevancy of methodology adopted are concerned, the user should be aware of how realistic is the general representation depicted by indices. The degree of an index coverage and its degree of replication will ultimately determine the utility of an index from the users point of view.

Bond Pricing Agency Malaysia Research Series June 2011

Comparison Between Bond Indices in Malaysia for Benchmarking Purposes

References
[1] Noor Bazlina Sharifmuddin, Razni Razak, (2009), Construction Rules and Calculation Methodology For BPAM Ringgit Bond Index, Bond Pricing Agency Malaysia Research Series, Bond Pricing Agency Malaysia Sdn Bhd (BPA Malaysia). (2004), Asian Local Bond Index (ALBI), http://www.hsbcnet.com/treasury/attachments/markets/pdf/albi_factsheet.pdf [accessed 14 Apr 2011] (2009), quant shop Malaysian Bond Indexes, http://www.quantshop.com/mbonds/Mal_Bond_Index_Manual_090601.pdf [accessed 14 Apr 2011 ] (2008), Markit iBoxx ABF Index Guide, http://indices.markit.com/download/products/guides/ABF/Markit_iBoxx_ABF_Guide.pdf [accessed 15 Apr 2011] RAM Quant Shop Bond Index Daily History, http://www.quantshop.com/malaysian%20bond%20v1.htm, [accessed 19 Apr 2011] HSBC Asian LCY Bond Returns Index, http://asianbondsonline.adb.org/malaysia/data/bondmarket.php?code=Asian_Local_bond_RI, [accessed 19 Apr 2008] iBoxx ABF Index Family, http://asianbondsonline.adb.org/malaysia/data/bondmarket.php?code=IBoxx_ABF_Index [accessed 19 Apr 2008]

[2]

[3]

[4]

[5]

[6]

[7]

[8]

Noor Bazlina Sharifmuddin, Razni Razak, Tan, P., (2009), The Benefits of Bond Pricing Agency, Bond Pricing Agency Malaysia Research Series, Bond Pricing Agency Malaysia Sdn Bhd (BPA Malaysia).

Bond Pricing Agency Malaysia Research Series June 2011

Comparison Between Bond Indices in Malaysia for Benchmarking Purposes

Disclaimer Information on this document is intended solely for the purpose of providing general information on the Ringgit Bond market and is not intended for trading purposes. None of the information constitutes a solicitation, offer, opinion, or recommendation by Bond Pricing Agency Malaysia Sdn Bhd to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services regarding the profitability or suitability of any security or investment. Investors are advised to consult their professional investment advisors before making any investment decision. Materials provided on this document are provided on an "as is" basis, and while care has been taken to ensure the accuracy and reliability of the information provided in this document, Bond Pricing Agency Malaysia Sdn Bhd (BPAM) provides no warranties or representations of any kind, either express or implied, including, but not limited to, warranties of title or implied warranties of fitness for a particular purpose, accuracy, correctness, non-infringement, timeliness, completeness, or that the information is always up-to-date.
Bond Pricing Agency Malaysia Research Series June 2011