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Fitch Downgrades Lombard Odier's Absolute Return Bond Fund to 'Proficient'
March 8, 2017 / 4:56 PM / 9 months ago

Fitch Downgrades Lombard Odier's Absolute Return Bond Fund to 'Proficient'

(The following statement was released by the rating agency) PARIS, March 08 (Fitch) Fitch Ratings has downgraded LO Funds - Absolute Return Bond's (ARBF) Investment Management Quality Rating to 'Proficient' from 'Strong'. The fund is managed by Lombard Odier Investment Managers (LOIM). The downgrade primarily results from the departure of the three Portfolio Managers (PMs) of the fund and the re-positioning of the fund's fixed income investment approach. Specifically, since early February 2017, the fund has been managed under a systematic, risk-based approach by LOIM's multi-asset team. The repositioning and migration of the portfolio progressed smoothly and is now completed. Fitch views LOIM's systematic risk-based investment approach as disciplined, well-established and well-supported by research studies and advanced analytics. These factors underpin the "Strong" rating of LO Funds-All Roads, another fund managed under the same approach and supported by the same resources as the ARBF. Nevertheless, Fitch considers that the transfer of the ARBF to the multi-asset platform is too recent for the fund to be rated at a higher level than "Proficient". KEY RATING DRIVERS Fund Profile ARBF is a sub-fund of LO Funds, Lombard Odier's Luxembourg SICAV which is UCITS IV- compliant. ARBF is a fixed-income absolute return fund with EUR69 million of assets as of end-February 2017. The fund aims to generate returns of 2%-3% in excess of its cash benchmark over a cycle with a target volatility of 5%. Investment Process The fund now uses a risk-based approach implemented in a systematic, robust manner. The process aims to capture both traditional and alternative risk premia within a broad fixed income and foreign exchange universe. Until 1 February, the fund was managed under a discretionary approach, whereby each, now departed, PM focused on a specific book according to their skill set. Investment Resources The multi-asset group now consists of 13 investment professionals. The fund also benefits from LOIM's dedicated trading desk. The proprietary multi-asset quant platform is the core system used for portfolio construction. The platform is linked to Bloomberg (AIM), the fund's core front office system used for portfolio monitoring and trading. Risk Management Portfolio risk monitoring is detailed, accessible and available daily on the proprietary quant platform. Liquidity risk is limited in the fund, which consists mainly of liquid derivatives. Second-level risk control is provided by LOIM's independent risk management function, which uses the Barra system to independently review portfolio construction. Investment Performance The fund has fallen short of its performance objective since its launch in 2010. Nevertheless, the fund's returns do not show correlation with credit markets, as with many other fixed-income absolute return peers. The fund also tends to show lower drawdowns and smoother returns than peers. Simulated performance under the newly implemented risk-based absolute return approach is consistent with the fund's objectives. Asset Manager LOIM is the asset management division of the Swiss private bank Lombard Odier SCA (AA-/Stable/F1+). LOIM managed USD49 billion at end-June 2016, including around USD8 billion in multi-asset, risk-based strategies. RATING SENSITIVITIES The rating may be sensitive to material changes in the investment or operational processes, or resources dedicated to the fund. A material adverse deviation from Fitch's guidelines for any key rating drivers could result in a downgrade. For example, this may be manifested in significant structural deterioration in the fund's performance resulting from a model error or inadequacy, as measured by drawdown or underperformance relative to objective and peers. Fitch currently sees limited potential for positive rating action at this stage due to the recent change in portfolio management process and responsibilities. However, an upgrade could be considered if Fitch obtains evidence that the systematic, risk-based process is delivering effectively, in line with expectations for a "Strong" rating. Contacts: Primary Analyst Manuel Arrive, CFA Senior Director +33 1 44 29 91 77 Fitch France S.A.S. 60 rue de Monceau Paris 75008 Secondary Analyst Minyue Wang, CFA Analyst +44 20 7530 1406 Committee Chairperson Ralph Aurora Senior Director +1 212 908 0528 Media Relations: Rose Connolly, London, Tel: +44 203 530 1741, Email: rose.connolly@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Investment Management Quality Ratings (Assessing Active, Passive & Alternative Investment Managers, Strategies & Funds) (pub. 06 Mar 2017) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. 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