Morgan Stanley Dean Witter's nascent high yield index picked up a big backer recently when Barclays Global Inverstors' recently launched high yield index fund decided to use the MSDW index over the high-yield index from index titan Lehman Brothers. According to Thomas Sponholtz, head of fixed income product development at Barclay, "there was little choice but to use the MSDW index," given their belief that the Lehman index was simply not representative of today's junk market given the liquidity problems in the bonds underlying the Lehman offering. Sponholtz and his team compared the 200 liquid and widely held names in the MSDW HighYield Core Investible Index to the 1100 plus in the Lehman Brothers High Yield Index and concluded that the Lehman index did not replicate the market: "because many credits never trade, we had no idea where to price or value these credits."
Sponholtz, who notes that the fund is the first high yield index fund ever to be launched, reasons that customers need transparency to feel comfortable in index funds. Moreover, the fund's transaction costs will be lower given the smaller bid-ask spreads of the 200 securities. Sponholtz is careful to add that he remains an advisor to Lehman's index group and retains great respect for its offerings, many of which Barclays benchmarks its funds' against. Calls to MSDW and Lehman index officials were not returned as of press time.
