The flip side of the GDP promise is that there are problems in using the strategy passively, says Stuttard. He questions the sustainability of GDP levels in countries with aging populations, such as Japan and Italy, or where economies have been boosted by a rise in leverage; e.g., Spain, Ireland, perhaps the U.K. and the U.S. And, he says, there generally has been more volatility in GDP-weighted (emerging market concentrated) countries than in market-cap weighted countries. Oversight is needed.
Shepherd also has doubts about how well the strategy can work with corporate bonds. "It's not a natural fit," he says. How would markets compare Ford to GM or GE bonds for fund comparisons, he proposes. The solution, he believes, after working on the question since January of 2010, would be to use corporate sales, the cash flow, to judge the book value of the assets, on the assumption the cash would go toward a company's debt service. "But then it'd be very company specific," he notes.