Lehman Brothers and Salomon Smith Barney are vying for dominance in the European fixed-income indexing market. Portfolio managers are encouraging clients to switch from government bond indices to more comprehensive indices, such as the Lehman Brothers Euro aggregate indices and the Salomon Smith Barney Euro big index, London-based managers and consultants say. "The preferred aggregate indices for European fixed-income appear to be becoming the Salomon and Lehman series. It is not yet clear which, if any, of these series will become the accepted market standard in the way that, for example, the Lehman aggregate has achieved dominance for U.S. broad market mandates," says Bob Collie, director of consultants at Frank Russell Company in London. Merrill Lynch, J.P. Morgan and Morgan Stanley also have index series, but Lehman and SSB's are the most widely used, the consultants say.
The Lehman Euro aggregate and the SSB Euro big are designed to serve the same purpose and are largely the same in that they are highly liquid investment-grade indices, says Liz Ward, global head of fixed income at Frank Russell in London. The differences have less to do with the indices' constituents than the services, analytics and data the index providers offer, she added. In her experience, the SSB indices are more common, because the firm has had more history in the European market.
"[The shift to broad-based indices] is partly driven by us and partly by the clients. We've presented ourselves as a multi-asset class manager within European fixed-income and we're adding non-benchmark asset classes as well. It's a diversification story to add value while reducing risk by spreading bets across asset classes," said John De Garis, fixed-income portfolio manager at Credit Suisse Asset Management in London. CSAM uses the Lehman Euro aggregate index, "Because they were the first and we had money to manage," said De Garis.
Both firms are busily marketing their products, as well as developing new indices and analytical tools to attract new clients. Rafey Sayood, director of fixed-income research and portfolio strategy at Salomon in London, says the firm is also considering launching a euro-denominated high-yield index and a sterling-denominated equivalent. Eventually, these two will be combined with the U.S. high-yield index to create a global high-yield index, says Sayood.
Sayood claims Salomon's index products are superior because of their relevance to international institutional fund managers, their comprehensiveness, stability, replicability, accuracy and objective investment criteria for the inclusion of bonds. He also stressed Salomon's team of analysts. "The service we provide is where we distinguish ourselves," says Sayood.
From Lehman's perspective, its market dominance in the U.S. is what attracts European clients to its index products. Ravin Onakan, co-head of Lehman's index group in London, says 90% of U.S. money managers use Lehman indices. In addition, the Lehman Euro aggregate has a lower minimum size for bonds it includes, E150 million versus Salomon's minimum size of E500 million. "Our index is more a broad based index, because it can capture more of the bonds [in the market]. Essentially, at E500 million, [Salomon's] is still a government index," he says.
Investors are only beginning to understand the importance of broad-based indices, and the development of the European credit market is encouraging the shift. Onakan says he and his team are on the road promoting Lehman's index series to the top-200 European managers, hoping that if they adopt Lehman's indices, others will follow. Lehman provides an analytical tool called POINT, which enables managers to pinpoint from where their returns are coming. Lehman is also trying to get more of its research up on Bloomberg, and incorporates its index information into its strategy pieces sent to clients. The firm is also developing a global capital securities index, a pan-European universal index and a euro swap index, all of which it plans to launch shortly.