BlackRock fund looks to manage sovereign risk

BlackRock Australia has unveiled the BlackRock Global Screened Government Bond Fund, which aims to mitigate the risk associated with US and European sovereign debt.

The fund will seek to provide investors with the returns of the global sovereign bond market before fees, withholding taxes, and the cost of currency hedging. 

A rigorous screening method will be applied, based on BlackRock's Sovereign Risk Index (BSRI).

The BSRI separates risks into four categories: the fiscal health of a country and the likelihood it will default; the external financial position of a country (ie, how leveraged it is to macroeconomic trade and policy shocks around the world); the health of a country's financial sector; and the ability and willingness of a country to pay its debts.

BlackRock Australia head of fixed income Steve Miller said the "turbulence in major debtor countries" in the US and Europe meant that institutional investors were looking to manage the effect of increasing risk in fixed income portfolios.

The BSRI identified the sovereign credit risks of 44 developed and emerging markets between January 2005 and July 2011, said Miller. The index also identified the financial problems in Italy "well before financial markets came to a similar conclusion", he added.

"The outlook for many countries' government debt remains troubling. It is especially difficult to be optimistic about the prospects for tackling Europe's deep fiscal problems. Legislatures and governments seem paralysed," Miller said.

The fund's benchmark is a customised index based on the Barclay's Capital Global Treasury Index (hedged to Australian dollars), which applies a 10 per cent cap to individual issuers and a 30 per cent cap to Eurozone issuers.