How do we weight world bonds?
In most global indices for government bonds, individual countries are weighted on the basis of the national debt of the country in question. In contrast, OLZ determines the weighting of government bonds of individual countries on the basis of an efficiency criterion (risk-return criterion).
In our OLZ Efficient World® Bond strategy we weight government bonds of individual countries in the minimum variance portfolio, which has an efficient risk-return profile. Depending on whether you wish to include the domestic market in the optimization or not, we put together a worldwide bond portfolio (including domestic currency) or a foreign currency bond portfolio (excluding domestic currency). We predict the necessary data to be entered for optimization (variance-covariance matrix) using GARCH models.
This provides the investor with the following advantages:
An efficient international diversification of interest risks
and a true diversification of your share portfolio.
The above-mentioned correlation matrix shows that investing in long-term government bonds (hedged against exchange rate risks) results in a much better diversification across from equities than hedge funds or investments in real estate do.
Investments are principally placed in long-term government bonds via futures contracts (on government bonds). Apart from achieving significant savings in costs, this enables foreign currency risks to be significantly reduced in that the collaterals are deposited in the desired reference currency. Our streamlined cost structure has a decisive influence on performance precisely in the field of bonds. All OLZ Efficient World® Bond strategies are available either with (hedged) or without (unhedged) protection against exchange rate risks (partly as institutional funds or a direct mandate).
