PIMCO Global Advantage Government Bond Index January 2011
Contents 1 Index Overview... 3 2 Country Classification and Eligibility Rules... 5 2.1 Regional Classification... 5 2.2 Instrument Categories... 5 2.3 Selection Criteria for Countries Within Developed Markets... 5 2.3.1 Size of Bond Market... 5 2.3.2 Credit Rating... 5 2.3.3 Number of Bonds in Issue... 5 2.4 Selection Criteria for Countries within Emerging Markets... 6 2.4.1 Investability... 6 2.4.2 Size of Bond Market... 6 2.4.3 Credit Rating... 6 2.4.4 Number of Bonds in Issue... 6 2.4.5 Domestic Currency... 6 2.5 Currently Qualifying Countries... 6 2.5.1 Developed Markets... 7 2.5.2 Emerging Markets... 7 3 Weighting Mechanism... 7 3.1 Inter-country Weightings... 7 3.2 Intra-country Weightings... 9 3.3 Rounding and Resetting... 9 4 Historical Weights... 10 5 Bond Selection... 12 5.1 Maturity Profile and Market Classification... 12 5.1.1 Maturity Profile... 12 5.1.2 Market Classification... 12 5.2 Bond Selection for Emerging Markets... 12 5.3 Bond Selection for Developed Markets... 12 6 PIMCO Global Advantage Government Customized Indices... 14 6.1 Maturity Indices... 14 6.2 Indices with a Number of Individual Countries Excluded... 14 7 Calculations... 15 8 Price Fixing Times... 15 2
1 Index Overview The document contains the description, structure and rules for the PIMCO Global Advantage Government Bond Index ( PIMCO GLADI Government ). The GLADI Government represents the global bond market for nominal government debt encompassing both developed and emerging market. The index adheres to the principals of the PIMCO Global Advantage indices where appropriate. The document is structured as follows. Chapter 2 contains an overview of the index and the definitions for the different regions and instrument categories along with the list of countries qualifying under the amended rules. Chapter 3 describes the weighting mechanisms that apply across and within individual markets, respectively. Chapter 4 details the historical overview containing historical weights since 2003. The calculation methodologies for the returns, indices and analytics, as well as currency translations are described in chapter 5. Chapter 6 deals with publication and timing issues. The index history starts on 31 December 2003. In line with the existing PIMCO Global Advantage indices, all indices have a level of 100 on 31 October 2008. The index weights are rebalanced quarterly and the bond selection is performed monthly on the last calendar day of the month resp., quarter. The membership selection for the month immediately following the is determined using information available at the close on the third business day before month end ( membership selection date ). The index structure is presented in table 1 below: 3
Table 1: Index structure PIMCO Global Advantage Global Government Bond Index Developed Markets PIMCO Global Advantage Developed Markets Government Bond Index PIMCO Global Advantage US Government Bond Index PIMCO Global Advantage Eurozone Government Bond Index Austria Belgium Finland France Germany Greece * Ireland Italy Netherlands Portugal Spain PIMCO Global Advantage Japan Government Bond Index PIMCO Global Advantage Other Industrialized Government Bond Index Australia Canada Denmark New Zealand Norway Sweden Switzerland United Kingdom Emerging Markets PIMCO Global Advantage Emerging Markets Government Bond Index Brazil Chile Czech Republic Egypt Hong Kong Hungary Israel Malaysia Mexico Peru Poland Russia Singapore Slovakia South Africa South Korea Taiwan Thailand * Currently not included due to rating downgrade to sub-invetsment grade in June 2010 Discontinued from January 2009 4
2 Country Classification and Eligibility Rules 2.1 Regional Classification The classification follows the rules of the PIMCO GLADI indices. The global universe is classified into economic regions. The regional classification distinguishes the following major economic areas: US means the United States of America. Eurozone includes those member countries of the European Union that have adopted the Euro as domestic currency. Japan means Japan. Other Industrialised Countries are Australia, Canada, Denmark, New Zealand, Norway, Sweden, Switzerland and the UK. Iceland is also part of the Other Industrialised Countries, but is not included in any index as it contributes less than 0.5% to the total GDP of this category. Emerging markets are defined in this document as those markets that are not included in any of the other regions. US, Eurozone, Japan and Other Industrialised Countries comprise the developed market. 2.2 Instrument Categories Only bonds issued by central governments in their domestic currency qualify for the index. 2.3 Selection Criteria for Countries Within Developed Markets For a developed country to qualify for the index a set of the criteria has to be met. These include: Size of bond market Credit rating Number of bonds in issue 2.3.1 Size of Bond Market In order to ensure that only markets that are relevant to investors are included in the index, the minimum market size required of a bond market at first inclusion is set to USD 5 bn local currency equivalent. The size of a bond market is defined as the aggregate size of all eligible local currency-denominated government debt with a maturity of one year or longer. 2.3.2 Credit Rating Countries must have a domestic sovereign debt rating by at least one of the following rating agencies: Standard & Poor s, Moody s or Fitch. If a country is rated by two or more agencies, then the average rating is used. The rating of the country needs to be investment grade (BBB- or higher). 2.3.3 Number of Bonds in Issue A minimum number of 3 bonds are required for a country to become eligible. 5
2.4 Selection Criteria for Countries within Emerging Markets For an emerging to qualify for the index a set of the criteria has to be met. These include: Investability Size of bond market Credit rating Number of bonds in issue Domestic currency Countries whose internal or external borrowing is subject to EU or US sanctions are not eligible for the index, even if they fulfil all other criteria. Currently Cuba, Iran, Myanmar, North Korea, Syria and Sudan are considered to be on the sanction list. The list of eligible markets is reviewed annually on 31 July. New countries that become eligible during the July review are included on 31 October that year. 2.4.1 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. 2.4.2 Size of Bond Market The total size of the local currency bond markets must be at least USD 10 billion. The size of a bond market is defined as the aggregate size of all local currency-denominated debt with a maturity of one year or longer. 2.4.3 Credit Rating Countries must have a domestic sovereign debt rating by at least one of the following rating agencies: Standard & Poor s, Moody s or Fitch. If a country is rated by two or more agencies, then the average rating is used. The rating of the country needs to be investment grade (BBB- or higher). 2.4.4 Number of Bonds in Issue A minimum number of 5 bonds are required for a country to become eligible. 2.4.5 Domestic Currency The local currency must not be AUD, CAD, CHF, DKK, EUR, GBP, ISK, JPY, NOK, NZD, SEK or USD. 2.5 Currently Qualifying Countries Below is the list of the currently qualifying countries based on the criteria specified in the sections above as of July 2010: 6
2.5.1 Developed Markets Australia Austria Belgium Canada Denmark Finland France Germany Ireland Italy Japan Netherlands New Zealand Norway Portugal Spain Sweden Switzerland United Kingdom United States 2.5.2 Emerging Markets Brazil Chile Czech Republic Egypt Hong Kong Hungary Israel Malaysia Mexico Peru Poland Russia Singapore South Africa South Korea Taiwan Thailand 3 Weighting Mechanism The weighting mechanism follows the procedure defined in the PIMCO GLADI indices. 3.1 Inter-country Weightings In general, all weights are GDP-based, the exception being the emerging market debt indices. Emerging markets where FX forwards are mainly traded in the form of NDFs are limited to 10% of the emerging markets index each. The GDP data to weight the regions is updated once a year in October. The new weights are published on the 15th of September, or the next business day. The new weights become effective on 31 October each year. All GDP weights are constructed as the equally-weighted average of the last five years global share of the GDP. 7
The latest regional and country weights as of July 2010 are defined in the table below: Table 2: Regional and country weights, July 2010 Level Weights Region Country Region Country Aggregate US 26.00% Eurozone 22.40% Austria 3.20% 0.7168% Belgium 3.90% 0.8736% Finland 2.10% 0.4704% France 21.90% 4.9056% Germany 28.30% 6.3392% Ireland 2.20% 0.4928% Italy 18.10% 4.0544% Netherlands 6.60% 1.4784% Portugal 1.80% 0.4032% Spain 11.90% 2.6656% Japan 9.10% OIC 12.20% Australia 13.20% 1.6104% Canada 20.70% 2.5254% Denmark 4.70% 0.5734% New Zealand 1.90% 0.2318% Norway 5.70% 0.6954% Sweden 6.70% 0.8174% Switzerland 6.70% 0.8174% United Kingdom 40.40% 4.9288% EM 30.30% Brazil 10.00% 3.0300% Chile 2.80% 0.8484% Czech Republic 3.10% 0.9393% Egypt 2.30% 0.6969% Hong Kong 3.90% 1.1817% Hungary 2.50% 0.7575% Israel 3.10% 0.9393% Malaysia 3.40% 1.0302% Mexico 19.20% 5.8176% Peru 2.00% 0.6060% Poland 7.70% 2.3331% Russia 10.00% 3.0300% Singapore 2.90% 0.8787% South Africa 5.20% 1.5756% South Korea 10.00% 3.0300% Taiwan 7.50% 2.2725% Thailand 4.40% 1.3332% Every quarter following the 31 January quarterly cycle - the weights are reset to reflect the agreed weights. In between quarters, the weights may slightly fluctuate based on the performance of the different instruments and FX movements. 8
3.2 Intra-country Weightings All intra-country weightings are market cap based. 3.3 Rounding and Resetting The weights of a region, instrument category within a region or country within an instrument category are expressed in % and rounded to one decimal place each. If the rounded weights do not add up to 1, the largest unrestricted segment(s) are adjusted by 10 basis points each until the sum of all weights is 1. If the categories are equally weighted, the first category is adjusted by 10 basis points, if necessary). Combined weights are not adjusted. The mechanism ensures that all weights sum up to 100%. An example of the weights calculation is shown in table 2 above. 9
4 Historical Weights Historical regional and country weights are presented in the 2 tables below covering the period of 31 December 2003 to 2008. Table 3: Historical regional weights Regions 2003 2004 2005 2006 2007 2008 United States 30.8% 30.8% 30.4% 29.6% 28.6% 27.4% Eurozone 21.2% 21.2% 21.5% 22.1% 22.4% 22.6% Japan 13.0% 13.0% 12.3% 11.4% 10.6% 9.8% Other Industrialized Countries 11.2% 11.2% 11.5% 11.8% 12.1% 12.3% Emerging markets 23.8% 23.8% 24.3% 25.1% 26.3% 27.9% 10
Table 4: Historical country weights Countries 2003 2004 2005 2006 2007 2008 2009 Australia 1.28% 1.28% 1.35% 1.43% 1.50% 1.57% 1.61% Austria 0.66% 0.66% 0.67% 0.69% 0.69% 0.70% 0.69% Belgium 0.78% 0.78% 0.80% 0.82% 0.83% 0.84% 0.85% Brazil 0.00% 0.00% 0.00% 0.00% 2.63% 2.79% 3.03% Canada 2.26% 2.26% 2.32% 2.37% 2.47% 2.52% 2.53% Chile 0.76% 0.76% 0.68% 0.68% 0.68% 0.78% 0.85% Czech Republic 0.74% 0.74% 0.70% 0.75% 0.74% 0.84% 0.94% Denmark 0.54% 0.54% 0.55% 0.57% 0.57% 0.58% 0.57% Egypt 0.00% 0.00% 0.00% 0.70% 0.60% 0.64% 0.70% Finland 0.42% 0.42% 0.43% 0.44% 0.45% 0.45% 0.45% France 4.54% 4.54% 4.60% 4.73% 4.79% 4.84% 4.79% Germany 6.42% 6.42% 6.32% 6.36% 6.36% 6.33% 6.20% Greece 0.45% 0.45% 0.47% 0.51% 0.54% 0.57% 0.56% Hong Kong 1.74% 1.74% 1.46% 1.36% 1.16% 1.17% 1.18% Hungary 0.64% 0.64% 0.63% 0.68% 0.66% 0.73% 0.76% Ireland 0.36% 0.36% 0.39% 0.42% 0.43% 0.45% 0.47% Israel 1.21% 1.21% 1.04% 0.98% 0.84% 0.86% 0.94% Italy 3.77% 3.77% 3.85% 3.96% 3.99% 4.00% 3.94% Japan 13.00% 13.00% 12.30% 11.40% 10.60% 9.80% 9.10% Malaysia 1.00% 1.00% 0.92% 0.93% 0.87% 0.92% 1.03% Mexico 6.35% 6.35% 5.64% 5.45% 4.84% 4.97% 5.82% Netherlands 1.34% 1.34% 1.38% 1.41% 1.43% 1.45% 1.43% New Zealand 0.18% 0.18% 0.20% 0.21% 0.22% 0.23% 0.23% Norway 0.56% 0.56% 0.59% 0.61% 0.64% 0.68% 0.70% Peru 0.00% 0.00% 0.53% 0.53% 0.50% 0.53% 0.61% Poland 2.00% 2.00% 1.82% 1.88% 1.79% 1.98% 2.33% Portugal 0.38% 0.38% 0.41% 0.42% 0.43% 0.43% 0.40% Russia 0.00% 0.00% 2.43% 2.51% 2.63% 2.79% 3.03% Singapore 0.95% 0.95% 0.83% 0.80% 0.74% 0.81% 0.88% Slovakia 0.24% 0.24% 0.24% 0.28% 0.29% 0.33% 0.00% South Africa 1.40% 1.40% 1.31% 1.38% 1.34% 1.51% 1.58% South Korea 2.71% 2.71% 2.43% 2.51% 2.63% 2.79% 3.03% Spain 2.08% 2.08% 2.19% 2.34% 2.46% 2.55% 2.60% Sweden 0.78% 0.78% 0.79% 0.80% 0.82% 0.84% 0.82% Switzerland 0.84% 0.84% 0.85% 0.85% 0.85% 0.82% 0.82% Taiwan 2.71% 2.71% 2.43% 2.51% 2.26% 2.26% 2.27% Thailand 1.33% 1.33% 1.19% 1.18% 1.10% 1.20% 1.33% United Kingdom 4.76% 4.76% 4.85% 4.96% 5.03% 5.06% 4.93% United States 30.80% 30.80% 30.40% 29.60% 28.60% 27.40% 26.00% 11
5 Bond Selection For all local currency indices, the number of bonds selected from a country is depending on the market capitalization of the eligible bond universe. A maturity profile is used to select the bonds. 5.1 Maturity Profile and Market Classification 5.1.1 Maturity Profile The existing PIMCO Global Advantage Indices restrict the number of securities per category and currency. A similar approach is used for the PIMCO GLADI Government. For markets of less than $ 500 billion, the number of bonds selected is limited to 15. The following maturity bands are used in the selection: 1-5 years 5-10 years 10-15 years 15-20 years 20+ years For markets of $ 500 billion or more, the number of bonds selected is 50. The following maturity profile issued: 1-3 years 3-5 years 5-10 years 10-15 years 15-20 years 20+ years If more bonds are eligible than the maximum number permitted, the bonds are selected according to the maturity profile of the overall debt. The profile calculates the share of each maturity band and selects the number of bonds from each segment accordingly. Bonds, whose original maturity is no more than 1 year longer than the maturity band they currently belong to, are preferred, with the largest bonds selected first. 5.1.2 Market Classification The $ 500 billion threshold is applied once a year on 31 October. The following data is used to calculate the USD market size of each country: The local currency market size of total eligible universe as of 30 September The average FX rate of the last 3 month-ends (31 July, 31 August and 30 September) to calculate the USD bond market size. 5.2 Bond Selection for Emerging Markets Only fixed rate non-callable central government debt with a minimum local currency equivalent of $ 100 million qualifies. Both bullet bonds and sinking funds with a minimum time to maturity of 12 months (18 months at issuance) are eligible. 5.3 Bond Selection for Developed Markets 12
Only non-callable fixed rate or zero coupon bullet bonds are eligible for the index. The bond must be issued in the local currency of the issuing country. The amount outstanding is currency specific. All bonds must have a minimum remaining time to maturity of at least one year on the membership selection date. The table below shows the minimum amount outstanding for bonds applying in each market: Table 5: Amount outstanding for developed market bonds Market Currency Local currency cut-off (bn) Australia AUD 2 Canada CAD 2 Denmark DKK 10 Eurozone EUR 2 Japan JPY 200 New Zealand NZD 2 Norway NOK 10 Sweden SEK 10 Switzerland CHF 1.5 United Kingdom GBP 2 United States USD 2 13
6 PIMCO Global Advantage Government Customized Indices Customized versions of the PIMCO Global Advantage Government Bond Index are derived by excluding certain countries or maturity segments from the indices. 6.1 Maturity Indices For a maturity index, all countries from the PIMCO Global Advantage Government Bond Index are GDP-weighted according to the weights within the overall PIMCO Global Advantage Government Bond Index. If there is no qualifying debt from any country the following rule applies: A substitute bond from the country is selected provided that the time to maturity of the substitute is no more than two years outside the maturity bucket. If more than one substitute is available then the substitute with maturity closest to the maturity band is selected. In the event that two substitutes have the same maturity difference to the band, the substitute with the longer time to maturity is selected. If no substitute is available, the country is excluded from the index with its weight being redistributed across the remaining countries from the same region. For countries and regions they belong to, please see Table 2. At each subsequent quarterly GDP reset it is checked if qualifying bonds or substitutes are available and if the latter holds true, the country is re-included into the index. No country is added to the index on a rebalancing date other than a quarterly reset date, even if eligible bonds become available. Table 6: List of PIMCO Global Advantage Government Maturity Indices Index name PIMCO Global Advantage Government 1-3 Years Bond Index PIMCO Global Advantage Government Eurozone 1-3 Years Bond Index PIMCO Global Advantage Government 1-5 Years Bond Index PIMCO Global Advantage Government Eurozone 1-5 Years Bond Index 6.2 Indices with a Number of Individual Countries Excluded If a country or several countries are excluded from the index, the countries are removed from the corresponding PIMCO Global Advantage Index and their weight is redistributed across all remaining countries Table 7: List of PIMCO Global Advantage ex-country Indices Index name PIMCO Global Advantage Government ex-japan Bond Index PIMCO Global Advantage Government ex-uk Bond Index PIMCO Global Advantage Government ex-us Bond Index PIMCO Global Advantage Government 1-5 Years ex-japan Bond Index 14
7 Calculations All calculations follow the PIMCO Global Advantage Index rules. 8 Price Fixing Times The index is calculated using end-of-day closing prices for each country. Closing times differ from country to country. Table 8 lists closing times for each country in the index. All indices are calculated twice daily at London and New York closes. The standard index FX fixing is the London close with WM/Reuters FX spot and forward rates calculated at 4 pm London time. The US close is calculated with the WM/Reuters FX rates from 4 pm New York time. The daily index values are published and disseminated at 10.30 pm New York time Monday thru Friday. Table 8: Price fixing times for all countries in PIMCO Global Advantage Index Region Country Currency Time Time zone United States United States USD 1500 EST Austria EUR 1615 London Belgium EUR 1615 London Finland EUR 1615 London France EUR 1615 London Germany EUR 1615 London Eurozone Greece* EUR 1615 London Ireland EUR 1615 London Italy EUR 1615 London Netherlands EUR 1615 London Portugal EUR 1615 London Spain EUR 1615 London Asia-Pacific Japan JPY 1500 JST Australia AUD 1630 Sydney Canada CAD 1600 EST Switzerland CHF 1615 London Denmark DKK 1700 London Other Industrials United Kingdom GBP 1615 London Norway NOK 1600 London New Zealand NZD 1600 New Zealand Emerging Markets Sweden SEK 1515 London Brazil BRL 1700 (1800 DST) Brazil Chile CLP 1600 (1700 DST) Chile Colombia COP 1300 COT Czech Republic CZK 1600 London Egypt EGP 1400 Egypt Hong Kong HKD 1600 HKT Hungary HUF 1600 London Israel ILS 1630 Israel Malaysia MYR 1700 MYT 15
Discontinued from January 2009 Mexico MXN 1530 Mexico City Peru PEN 1215 PET Poland PLN 1600 London Russian Federation RUB 1730 Moscow Singapore SGD 1700 Singapore Slovakia SKK 1615 London South Africa ZAR 1700 South Africa South Korea KRW 1500 Korea Taiwan TWD 1330 Taiwan Thailand THB 1700 Thailand 16