“Bond indices are constructed to give the biggest weight to the most heavily indebted countries and companies, as well as countries where populations are shrinking dramatically,” Seaman told FSA.
To determine heavily indebted countries, Seaman uses data on net foreign assets (NFA) -- the value of the assets that country owns abroad, minus the value of the domestic assets owned by foreigners (chart below).
NFA is expressed in terms of percent. A negative NFA percentage measures the extent of a country's indebtedness and he limits portfolio exposure to countries with an NFA that is better than minus 50%.
Examples of countries with a negative NFA, as measured by the firm, are Portugal, Greece and Spain. In addition, the working population in these economies is expected to drop 30% by 2050.
On the flipside, there are countries that are wealthier and have rapidly growing populations above the world average. Examples of such countries are in the Middle East, such as Saudi Arabia, Qatar and the United Arab Emirates, Seaman said.