Listed Debt Securities Indices Performance Review
Introducing Australia Ratings Listed Debt Securities Indices
Australia Ratings is pleased to announce the creation of a family of indices that track the returns generated by debt securities traded on the ASX. The indices are based on the securities that are rated by Australia Ratings.
Rating of ASX listed debt and hybrid securities
Australia Ratings was appointed by ASX Limited to assign credit ratings to debt and hybrid securities traded on the ASX in late 2014. The appointment was made under the ASX Debt & Hybrid Research Scheme.
Over the intervening period, Australia Ratings has assigned credit ratings to most listed securities that consist of an assessment of the creditworthiness of the security issuer and an assessment of the complexity of the security. The rating assigned thus consists of both alphabetical and colour indicators.
Ratings Scale and Product Complexity Indicators (PCI)
The alphabetical indicator follows the typical rating scale of ‘AAA’, ‘AA’, ‘A’, ’BBB’ etc., and the colour indicator follows Australia Rating’s proprietary Product Complexity Indicator (PCI) scale of GREEN to RED.
A PCI of GREEN is applied to simple, senior ranking corporate bonds, while RED is used for the most complex hybrid securities, typically Basel III compliant Tier 1 Additional capital. In between, various forms of subordinated debt are allocated PCIs of BLUE, YELLOW or ORANGE.
An accumulation Indices
The family of indices created consists of individual indices following the PCI scale, and a composite index that includes all securities tracked in the individual indices. There are also sub-indices for securities that make franked and unfranked distributions.
The indices are accumulation indices with a start date of 1 January 2015. This coincides largely with the appointment of Australia Ratings under the ASX Research Scheme
The indices track security price movements and distributions since that date. And at present, are compiled at the end of each month but this will change if demand warrants it.
Included in the indices are only those securities with a call or maturity date more than twelve months off, and only those with floating rate distributions. The pre-tax equivalent value of the distribution is used when distributions are franked, and each security is volume weighted.
April 2016 Performance
Chart 1 Index movements to end of April 2016
The Blue index has been the strongest performer. This index represents the Basel II compliant subordinated debt issued by the major banks (this
subordinated debt does not include a non-viability clause).
The Green index follows but performance has been constrained by the lesser credit quality of the issuers (relative to the major banks) of these senior ranking securities.
The performance of both indices will be impacted by the relatively few securities included in each. Therefore, some volatility can be expected over time, especially as securities fall out of the index as the call or maturity dates approach.
While the price performance of constituents of the Red index has been weak in recent times, it is the consistent credit quality of the mostly bank issuers that has held the index up. The Yellow and Orange indices have been adversely impacted by idiosyncratic factors affecting some issuers.
The performance of the three indices has turned up since February, with the return of more bullish investor sentiment. Indeed, the Red index jumped by more than 2.5% in April and the Orange index increased by 1.3%.
The Yellow index was impacted by the departure of the Colonial Group subordinated notes, which are due to be called at the end of March 2017.
The combined index is influenced by the larger number of constituents in the Yellow, Orange and Red indices. The index increased by 1.8% in April.
Chart 2 Franked and unfranked sub-indices
Valuable benchmarking tool
It is expected that the Australia Ratings Listed Debt Securities indices will become a valuable performance measurement tool for both individual
investors and fund managers specialising in this part of the market.
Fund managers wishing to prove superior skill will no doubt be keen to measure their outperformance against one or more of the indices.
The indices will be published on Australia Ratings website (www.autraliaratings.com) shortly after the end of each month. Fund managers keen to use the indices for performance benchmarking should contact Australia Ratings on (03) 8080 6684.
Index data is sourced from ADCM Services.
Contact us for more information
about our listed debt securities indices.