Investors can no longer rely on credit agencies to give effective insights on government bonds in the wake of the global debt crisis according to recent research from Omega Global Investors.
It found that many of the healthy countries for sovereign investing were not included in the benchmark.
Mathew McCrum, Omega's joint head of investments said that although investors had been wary of bonds and questioned their return and risk profiles, "ironically during the global debt crisis, government bonds have been one of the best performing asset classes."
"You can't just rely on credit ratings agencies – I think they've been quite slow to react," he said.
Japan, with possibly the highest global debt levels according to McCrum, makes up 34 per cent of the benchmark. He said if investors simply invested in benchmark weights, they would have quite large exposures to potentially 'bad' countries for sovereign investing.
But investors could gain returns of 10 per cent and more for very low risk, in terms of volatility, from investing in government bonds in places like Scandinavia, Australia and New Zealand, according to McCrum.
Omega's research expanded its Omega financial Health Rating which looked at a government's ability to repay debt and also their willingness. It took heed of additional factors such as the bonds cost based on ten-year yields, length as judged by average maturity, and momentum as assessed by six month changes in net debt to GDP.
McCrum said the debt of highly indebted nations acted as their insurance policy. Factoring in net debt levels and average maturity highlighted the risk to investors of that debt maturing during the crisis, he said.
"If you stay away from the highly indebted nations with bad political risk and low maturity with high interest costs, you can get a better outcome.
"If you include in that universe non-benchmarked countries that are very sound, low debt to GDP, elongated debt profiles, and are politically stable then there are some excellent returns there," he said.
