OREANDA-NEWS. Fitch Ratings has assigned LO Funds - Convertible Bond (LOCB) a 'Strong' Fund Quality Rating. The fund is managed by Lombard Odier Investment Managers (LOIM). LOCB is a sub-fund of LO Funds, Lombard Odier's Luxembourg SICAV, which is UCITS IV compliant.

KEY RATING DRIVERS

Fund Profile
The fund is a flagship of LOIM, and is the largest convertible bond fund globally, with EUR5.3bn of assets at the end of February 2015.

The fund invests in global convertible bonds, predominately those with a balanced profile, with a focus on capital preservation. The objective is to achieve 60% of equity upside, and 40% of the downside, with substantially lower volatility compared to equities over the long term. 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 amongst four portfolio managers (PMs), although the lead PM is ultimately responsible. Position sizing is based on the conviction levels of the PMs. The sector and regional preferences of the PMs also guide sizing. The fund can construct synthetic instruments 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 macroeconomic inputs (~40%) combined with bottom-up fundamental research (~60%). The fundamental research process for the fund is split into the two necessary components: equity and fixed income.

Given the asset class and the fund size, liquidity may be limited notably in stressed market conditions, making liquidity and capacity key risk considerations. 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 CRO. The investor base of the fund is well diversified.

Resources
The investment edge of the fund lies in the depth and breadth of resources supporting the investment process. The team is led by Nathalia Barazal (lead PM), who has 16 years investment experience, 12 years of those directly in convertible bonds, and has managed the fund since December 2004. She co-manages the fund alongside three experienced PMs. The dedicated convertibles team also consists of four equity analysts (three generalists and one dedicated to Asia) and one credit analyst.

The fund is supported by LOIM's infrastructure, notably two independent risk managers focused on convertibles and global equities, a global chief risk officer and LOIM's central functions.

Track Record
The fund (EUR IA share class) has returned 26.5% (net of fees) over three years, compared with the Lipper Category return of 24.5% and composite benchmark performance of 24.3%. The fund is broadly in line with the Lipper category and composite benchmark performance over five years. Fund performance has been achieved with a 1st quintile (lowest) volatility compared to peers in the Lipper category, 1st quintile (lowest) drawdown and top quintile Sharpe ratios over 1, 3 and 5 years.

Asset Manager
LOIM is the asset management division of the Swiss private bank Lombard Odier SCA (AA-/Stable/F1+). The company managed USD43bn as at December 2014, including EUR6.7bn in convertible bond assets.

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 with regards to the lead PM, may cause Fitch to downgrade or place the rating "Under Review". Fitch considers there is currently 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 (currently EUR6bn for the fund), and assess the impact of any increase in size on future performance.

Fitch's Fund Quality Ratings combine Fitch's experience in qualitative fund analysis with rankings and performance data from Lipper, a Thomson Reuters company. Fitch's Fund Quality Ratings offer an independent, forward-looking assessment of a fund's key performance and risk attributes and consistency of longer-term returns, relative to peer group or benchmarks. The ratings focus on the fund manager's investment process, key fund performance drivers, risk management, and the quality of the fund's operational infrastructure.