The Great Debate UK
One of the challenges for bond investors over the coming years is how to deal with the enormous ballooning of government debt that is happening as a result of the credit crisis.
Traditionally, investors allocate funds between asset classes and require managers to manage to a benchmark. However, most indexes are based on market capitalisation: the securities with the biggest value in aggregate have the largest share of the index.
This is less than ideal in equity markets, where indexing can lead to herding by forcing investors to buy overvalued shares. But it is particularly perverse for bond investors. The countries with the largest weightings in the indices are those that have issued the most debt.