Benchmark-Driven Investments in Emerging Market Bond Markets: Taking Stock

IMF Working Papers, September 25, 2020

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Paper reviews the role of benchmark-driven investments in EM local bond markets.
Provides an overview of how key EM bond benchmark indices are constructed, how they affect the behavior of investment funds, and the likely implications for capital flows and policy-making.
Several methods are presented suggesting that the amount of assets benchmarked against widely followed EM local-currency bond indices have risen fivefold since the mid-2000s to around $300 billion.
Review suggests that the benefits of index membership may be tempered by portfolio outflow risks for some countries because benchmark-driven investments may increase the importance of external factors at the expense of domestic factors, raising the risks of outflows unrelated to recipient country fundamentals.
Some countries may be disproportionately exposed to these risks, reflecting the way the indices are constructed.

Estimated rise in assets benchmarked against widely followed EM local-currency bond indices: fivefold since the mid-2000s.
Estimated total assets benchmarked: around $300 billion.
Paper length: 34 pages.
Publication date: September 25, 2020.
Series: Working Paper No. 2020/192.
Issue: 192.
Volume: 2020.
DOI: https://doi.org/10.5089/9781513557588.001.
Stock No: WPIEA2020192.
ISBN: 9781513557588.
ISSN: 1018-5941.

Presents several methods to estimate the amount of assets benchmarked against EM local-currency bond indices.
Examines construction of key EM bond benchmark indices and how index construction can influence country exposure to benchmark-driven flows.
Analyzes implications for investment fund behavior and capital flow dynamics.

Membership in widely followed EM bond indices can bring benefits (e.g., increased demand for local-currency debt) but may also produce portfolio outflow risks for some countries.
Benchmark-driven investments can raise the importance of external factors relative to domestic fundamentals, potentially leading to outflows unrelated to recipient country fundamentals.
Some countries face disproportionate exposure to these risks due to index construction features.

Subject: Balance of payments, Bonds, Capital flows, Emerging and frontier financial markets, Financial institutions, Financial markets, Mutual funds, Securities markets.
Keywords: benchmark index, benchmark-driven investment, benchmarks, Bonds, Capital flows, Emerging and frontier financial markets, Global, investment, investor, investor base, J.P. Morgan emerging market bond Index, J.P. Morgan government bond index-emerging markets, JPMorgan, Mutual funds, portfolio choice, push and pull, Securities markets, surprise Index, WP.

By Serkan Arslanalp, Dimitris Drakopoulos, Rohit Goel, Robin Koepke.
Publication type: IMF Working Papers.
Publication title: Benchmark-Driven Investments in Emerging Market Bond Markets: Taking Stock.
Format availability: Download PDF and More Formats on IMF eLibrary indicated on the landing page.

IMF Working Paper No. 2020/192 (September 25, 2020).