OREANDA-NEWS. March 30, 2015. Fitch Ratings has affirmed LO Funds - Absolute Return Bond's (ARBF) 'Strong' Fund Quality Rating. The fund is managed by Lombard Odier Investment Managers (LOIM).

KEY RATING DRIVERS

Fund Profile
ARBF is a sub-fund of LO Funds, Lombard Odier's Luxembourg SICAV which is UCITS IV- compliant. Launched in July 2010, ARBF is a fixed income absolute return fund with EUR429m of assets as of February 2015. The fund aims to generate returns of 2%-3% in excess of its cash benchmark over a cycle with a target volatility of 5%. The fund invests both long and short, across developing and emerging markets, predominantly in cash bonds and derivatives.

Investment Process
The portfolio consists of a macro book (run by two co-lead portfolio managers (PMs)) to reflect the team's top-down views, combined with four sub-portfolios that are run independently by four individual PMs. Each of the four PMs has a specialised area of investment.

The fund's flexibility to dynamically allocate risk between alpha drivers is a key differentiator to peers. Risk budgets are allocated to each book, in terms of volatility limits and stop-loss limits (rolling over a range of time periods), and are monitored by LOIM's independent risk team to limit fund drawdown.

Resources
The global fixed income and macro team consists of seven members. The lead PM, Gregor Macintosh, has run the fund since inception and has 20 years' investment experience. The co-lead PM, Grant Peterkin, joined LOIM in March 2013, with 17 years' experience. In early 2014, two emerging market FX and rates micro books (each focusing on a separate continent) were merged into one emerging market macro fundamental book. The previous two PMs left LOIM, and the emerging market micro book is now run by Roper Strype. He has significant experience in managing global macro funds.

The fund is supported by LOIM's infrastructure, notably two independent investment risk managers specifically involved in this fund and by LOIM's central functions, including IT and middle office.

Track Record
The fund (EUR IA share class, net of fees) has returned 2.4% over three years to end-February 2015, compared with 5.2% for the Lipper Global Absolute Return EUR Low category and 6.5% for EONIA + 200bps. The performance of the fund since inception has been predominately driven by the macro risk book. Relatively poor performance in 2013 and 2014 has been mostly caused by the fund's short credit positioning.

The fund has recently amended its return target to cash + 2%-3% from cash + 4%. The fund has aimed to generate returns of around 2% in excess of inflation. Historically, inflation expectations also have been around 2%. The absolute return target has been lowered in part to reflect current economic conditions. Fitch believes this is a more appropriate target given the risk guidelines the fund adheres to.

Asset Manager
LOIM is the asset management division of the Swiss private bank Lombard Odier SCA (AA-/Stable/F1+). The company managed USD47bn as at end-December 2014, including USD2.1bn in absolute return products. The infrastructure is well suited to the investment process.

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 as measured by drawdown, excessive volatility or underperformance relative to objective and peers.

After a relatively poor 2013 and 2014, any further deterioration in the fund's performance compared with its objective and peers will put downward pressure on the fund's rating. Fitch considers there is currently limited potential for a positive rating action due to the fund's already high rating.

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.

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