Merrill Lynch has launched a new series of indices tracking high yield bonds. The new High Yield Issuer Constrained Index series is designed to improve the diversification of the benchmark indices used by high yield investors.
The benchmarks run alongside to the firm’s Global, US and European High Yield Indices, but they put an additional cap on the maximum holding of any one issuer. In this way, says Merrill Lynch, they ensure that the indices avoid undue concentrations in individual companies and therefore stay well within the typical policy guidelines of investors.
“The large influx of heavily debt-laden fallen angels has significantly altered the high yield landscape and triggered the need for new benchmarks,” says Phil Galdi, managing director of the firm’s global index team. Fallen angels are the debt of companies that have been downgraded to below investment grade by the rating agencies.
The new constrained index series consists of three main groups of indices – US, European and global high yield. The US High Yield Constrained Index has the same constituents as the Merrill Lynch US High Yield Master II Index, but places a 2% cap on the allocation to any one issuer.
In constructing the European High Yield Constrained series, a slightly higher cap of 3% has been used, says Merrill Lynch, given the fact that the universe is significantly smaller than its US counterpart – roughly one twelfth of the size.
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