And where are we going?
Right now, the future of the corporate hybrid market hangs in the balance. There are signs that it is becoming more institutionalized; the rating agencies’ publication of their equity treatment for different structures gave it a new legitimacy last year. In January 2006, the new corporate hybrids were included in the iBoxx indices, giving them a further boost to be considered a new asset class. The leading investment banks that run their own well-followed bond and credit indices, including some investment banks that are not shareholders in iBoxx, have also added the hybrids. “That means we have to look at them. They are part of our universe,” says Peter Sass, director of DWS.
Raphael Robelin, fund manager at BlueBay Asset Management, calculates that hybrids have an impact on overall bond index performance far beyond their market size, contributing up to 6% of the investment-grade bond index-weighted beta. Owning them might indeed be risky but, he says, “if you decide you don’t like them, not owning them now brings its own risk of relative underperformance”. That helps to keep institutions thinking about the market, but there’s a limit to what index inclusion on its own can achieve.