OREANDA-NEWS. Fitch Ratings has affirmed LO Funds - Convertible Bond's (LOCB) 'Strong' Fund Quality Rating. The fund is managed by Lombard Odier Investment Managers (LOIM).

The affirmation primarily reflects the fund's long-established investment process, implemented in a disciplined manner by one of the largest dedicated convertible bond (CB) teams in the industry. It is also based on the fund's ability to manage capacity issues and outperform peers on a risk-adjusted basis.

KEY RATING DRIVERS

Fund Profile

LOCB is a sub-fund of LO Funds, Lombard Odier's Luxembourg SICAV, which is UCITS IV compliant. LOCB is a flagship fund for LOIM, and is the largest convertible bond fund globally, with EUR5.1bn of assets at end-May 2016. The fund was launched in December 2002 and the current investment process has been in place since December 2004.

Investment Process

The fund is actively managed in a collegiate manner among four portfolio managers (PMs), although the lead PM is ultimately responsible. Position sizing is based on the conviction levels of the PMs on issues, sectors and regions. The fund can construct synthetic instruments (typically around 10% of the portfolio on a notional basis) to create a payoff profile similar to a convertible bond using simple option strategies, although the PMs have a preference for cash convertible bonds.

Research reflects a mixed approach of top-down macro inputs combined with bottom-up fundamental and technical analysis, conducted from both equity and credit standpoints by dedicated analysts.

Liquidity and capacity are key risk considerations given the asset class and the fund size. Fund liquidity is monitored by the investment risk team using a proprietary algorithm. The capacity of the fund (currently EUR6bn) and the overall strategy are reviewed via a formal process involving LOIM's chief risk officer. The fund's investor base is well diversified.

Resources

The dedicated CB team of 10 is one of the largest and most experienced in the industry. The lead PM, N. Barazal, who has managed the fund since 2004 and has 17 years' overall investment experience, is pivotal to the strategy. She is supported by four PMs (average 20 years' investment experience) and five analysts dedicated to CBs.

The fund is supported by LOIM's infrastructure, notably an independent investment risk manager specifically involved in this fund and by LOIM's central functions. The platform is linked to Bloomberg (AIM), the fund's core front-office system for portfolio monitoring and trading.

Track Record

The fund has outperformed peers and benchmark on a risk-adjusted basis, with lower drawdowns and higher Sharpe ratios over three and five years. Its defensive profile results in better capital protection during sell-offs but also leads it to lag behind some peers with higher equity exposure when equity markets perform well. The challenge is to maintain performance given the fund's size and market liquidity.

Asset Manager

LOIM is the asset management division of the Swiss private bank Compagnie Odier SCA (AA-/Stable/F1+). The company managed EUR41.5bn at end-March 2016, including EUR7.2bn in CB funds and mandates. CB is therefore a strategic business for LOIM.

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 driver could result in a downgrade. For example, this may be manifested in a structural deterioration in the fund's performance relative to its objective and peers. Staff departures, especially of the lead PM, may cause Fitch to downgrade the rating or place it "Under Review".

Fitch considers there to be limited potential for a positive rating action due to the fund's already high rating. Fitch will monitor closely the size of the fund against LOIM's capacity limits, and assess the impact of any increase in size on future performance.