Investors are dissatisfied with corporate bond indices currently on offer, mainly due to their instability of risk exposure, EDHEC-Risk Institute has said based on analysis of industry reactions to its previous study on these indices.

The survey, entitled Reactions to ‘A Review of Corporate Bond Indices: Construction Principles, Return Heterogeneity, and Fluctuations in Risk Exposures’, found that only 41 per cent of respondents were satisfied or very satisfied with corporate bond indices.

Furthermore, between 64 and 80 per cent agreed or strongly agreed that the instability of the indices’ interest rate risk exposure is problematic, while 45 per cent agreed or strongly agreed that bond issuers and investors have conflicting interests when it comes to the duration of corporate bonds. While derivative instruments can form a solution to this instability, only 57 per cent of respondents can use derivatives for such purposes, leaving the other 43 per cent with no tools to manage the instability problem.

Two-thirds of respondents also marked the instability of credit risk exposure as problematic, with only a third having the ability to use derivatives to manage instability.

Almost half of the respondents believe there is a direct trade-off between an index’s risk factor stability and its investability, and the institute said that the various issues identified for corporate bond indices may be one of the reasons for the current relative unpopularity of passive investing in corporate bonds.

In a statement, it said: “As corporate bond indices should allow investors to achieve specific objectives, particularly in managing defined risk factors, it will be increasingly important for index providers to construct indices using methods that account for the stability of these risk factors. We observe unfortunately that the new forms of corporate bond indices do not take this dimension into account."

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