Tag Archives: Bloomberg

Europe Must Act Now to Avoid a Default, Buiter Says

Willem Buiter, chief economist at Citigroup Inc., discusses Europe’s sovereign-debt crisis, the exposure of banks to the region and the role of the European Central Bank in resolution of the crisis. He speaks with Tom Keene on Bloomberg Television’s

Buiter says what everyone inherently knows, but can’t say outloud, that “time is running out… I think we have maybe a few months — it could be weeks, it could be days — before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy which would be a financial catastrophe dragging the European banking system and North America with it. So they have to act now.”

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Arnott Makes Fundamental Bond Index

Bloomberg recently did a profile of Rob Arnott, the father of fundamental indexing.

Arnott, whose Research Affiliates Fundamental Index, or RAFI, provided the foundation for the first ETF based on an fundamental index, the PowerShares FTSE RAFI US 1000 Portfolio (PRF) and others, is now working on making fundamental indexes for bonds.

Instead of valuing stocks based on price, as in a market-cap weighted index like the S&P 500, the fundamental index uses fundamental metrics such as cash flow, book value, sales and dividends to determine a companies valuation.

According to Bloomberg, the PowerShares FTSE RAFI US 1000 Portfolio posted annualized returns of 5.3% from its inception on Dec. 19, 2005, through May 9, beating the 3.2% return of the Vanguard 500 Index Fund, which tracks the S&P 500.

The new bond indexes will measure a borrower’s health, such as GDP, assets available to service debt, a nation’s land mass and energy consumption. PowerShares last year began using Arnott’s bond index in the PowerShares Fundamental High Yield Corporate Bond Portfolio (PHB). It returned 8.9% from Aug. 2 to May 9 vs. the 11.7% gain in the SPDR Barclays Capital High Yield Bond ETF (JNK). Let’s see how it does now that junk bonds appear to be peaking.