SWITZERLAND - Swiss firm Lombard Odier Investment Managers plans to launch a new fundamentally-weighted developed sovereign debt fund after a Swiss pension fund agreed to invest CHF1bn ($1.1bn) in the strategy.
The allocation will boost the firm's €2bn ($2.8bn) in fundamentally-weighted bond assets by nearly 50%. Officials expect the new fund, which will be open to other investors, to launch on 1 December.
Stephane Monier, the firm's fixed income chief investment officer, said the Swiss pension fund wanted a strategy similar to the fundamental developed market sovereign debt fund the firm currently offers, but had certain investment requirements. He declined to provide more details about the future fund or the name of the client.
Lombard Odier currently has €200m in assets in its existing fundamental developed sovereign debt fund.
Like its equity counterparts, which look at factors other than market capitalisation, fundamentally weighted debt indices attempt to avoid investing in the most indebted countries or companies. Instead, investors will look at alternative factors like weightings based on gross domestic product.
"You have to look at the fundamentals of the issuers," said Monier. "The issue we have with market-cap indices is that it works against investors' interest. It doesn't make sense to invest in companies that are most indebted."
Lombard Odier will generally grant a higher weighting to countries with a larger GDP, a high rate of economic growth and a high current account surplus. They may underweight countries with high public or private debt burdens, when foreign net debt increases or when the country's fiscal balance sheet deteriorates, for example.
The US, UK and France, for example, are heavily underweight the market-cap index, while Germany, Mexico, Korea and Hungary are all overweighted.
While the strategy is based around an alternative index, Monier said there needs to be an active element to adjusting the weightings in order to provide a solution for the client. He said the firm tries to add an additional 2% of performance by putting an active overlay in place.
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