The Waterside Convention 2011 - Lombard Odier

1,263 views

Published on

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
1,263
On SlideShare
0
From Embeds
0
Number of Embeds
196
Actions
Shares
0
Downloads
30
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

The Waterside Convention 2011 - Lombard Odier

  1. 1. Innovative benchmarks for Fixed Income InvestorsStéphane Monier, CIO Fixed Income & CurrenciesLombard Odier Investment ManagersAmsterdam, January 27th 2011
  2. 2. What’s broken with traditional indices? Future LOIM Research: Fundamentally weighted benchmark at a reasonable price 2011 Fundamental Concept in Fundamentally Weighted Sovereign Key Conclusions 2010 Emerging Markets Allocation Approach Fundamental indices make greater Authors: R. Arnott, S. Shepherd Authors: S. Monier, C. Caillault (LOIM) sense for less efficient markets; produce superior risk-adjusted returns with lower drawdowns in sovereign markets Fundamental Indexing Around The Fundamental indices produce higher 2009 World returns, similar volatilty; lower long-term Authors: C. Walkshäusl and S. Lobe downside risk; augment exposure to value stocks Fundamentally Flawed Indexing Notion of cap-weighting causing 2007 Author: A. Perold performance drag is false. Fundamental indexing de-facto active through investing in value stocks Cap-Weighted Portfolios are Sub- Overweighting/underweighting stocks 2006 Optimal that are priced high/low to their Author: J. Hsu fundamentals leads to sub-optimal portfolios An Examination of Fundamental Fundamental indices significantly 2005 Fundamental Indexation Indexation outperform; have superior risk-reward; Authors: J. Hsu and C. Campollo Authors: R. Arnott, J. Hsu and P. Moore outperform in bear markets* All launched by LOIM / positive / negative opinion on fundamental benchmark Please see important information at the end of the document LOIM — January 2011 — 2
  3. 3. There has to be a better way! Market Cap Indices 31 Dec 2010Pros Cons 30000• Deep liquidity • Backward looking 20000 Billions USD• Standard definition • Overweights overvalued sectors • Overweights overvalued 10000 countries • Overweights more indebted 0 countries MSCI World Citi Global FTSE RAFI Equity Govternment All World • Reliant on lagging Ratings Agencies • Higher volatility of returns • Bigger drawdowns Please see important information at the end of the document LOIM — January 2011 — 3
  4. 4. Fundamental factor approach to sovereign debtFundamental Criteria Weight Metric Relationship to weight in the base portfoliofactors focused on Size 30% GDP (PPP weighted) Larger GDP countries receive a higher relative allocationmacroeconomic Growth 10% GDP Growth (PPP weighted) Countries with a high rate of economic growth will receive a highermeasures, relative allocationforward-looking Public debt 10% Net Govt. Debt / GDP (PPP When a country increases its debt burden, its weight allocation is burden adjusted) adjusted downwardsobligations and Private debt 5% Private Debt / GDP (PPP When a country’s private sector debt burden increases, its weightsocio-economic burden adjusted) allocation is adjusted downwardsissues Foreign debt 5% % Govt. Debt held by When the ownership of a country’s government debt by foreigners ownership foreigners / Total Govt. Debt increases, its weight allocation is adjusted downwards Fiscal balance 10% Budget Deficit /GDP When a country’s fiscal balance deteriorates, its weight allocation is adjusted downwards External position 10% Current Account (PPP Countries with a high current account surplus will receive a higher adjusted) relative allocation Funded pension 10% % of pension fund policy Countries that have a relatively greater component of their future obligations obligations that are currently pension obligations funded will receive a greater weight under this funded measure Demography 5% Old age dependency ratio at Countries with a high dependency ratio will receive a lower relative a 20 years horizon allocation Political Risk 5% Misery Index (unemployment Countries with a high misery index will receiver a lower relative + inflation) allocation Please see important information at the end of the document LOIM — January 2011 — 4
  5. 5. We aim to align indices with investor’s objectivesUsing the Fundamental weight approach compared market-cap approachfundamentalapproach of debt Market-Cap Weighted Benchmark (Global) 30%sustainability rather LOIM Fundamentally Weighted Benchmark (Global) (unconstrained)than indebtedness,major countries 25% The US and Japan aresuch as the US, substantially loweredJapan, Italy and the 20% in weight The Nordic countriesUK are excluded & Switzerland are substantially 15% increased in weight 10% 5% 0% Ne str ali a Au d v ak m tria Aus l Me K y Hu en ds Bel Z T d p. and F ra y ar k xi co itze in Sw d Por p. ece A an a r ea nce y Cz urkey a De r y Ital r lan an nad lan lan rwa U N tug US gi u a Re Re nga r lan ed Jap Sp nm Ko Gre rm Ir el Po F in Ca No ech the Ge Sw Sl o Please see important information at the end of the document LOIM — January 2011 — 5
  6. 6. Superior performance using fundamental weightsGlobal Sovereign Comparison of performance (EUR unhedged) 30.4.2001 – 20.1.2011Fundamental Bond 200Index LOIM Fundamentally Weighted Benchmark (Global) 175 Market-Cap Weighted Benchmark (Global) 150Back-tested using 125OECD countries 100 75 2001 2003 2005 2007 2009 Comparison of performance (EUR hedged) 30.4.2001 – 20.1.2011 175 LOIM Fundamentally Weighted Benchmark (Global) Hedged 150 Market-Cap Weighted Benchmark (Global) Hedged 125 100 75 2001 2003 2005 2007 2009 Please see important information at the end of the document LOIM — January 2011 — 6
  7. 7. Superior risk-return characteristics as wellGlobal Sovereign Comparison of risk characteristics (EUR unhedged) 30.4.2001 - 20.1.2011Fundamental BondIndex Annual Ann. Excess Annualised Sharpe Ratio VaR 95% Expected Maximumunconstrained Return Return Volatility 1 day Shortfall DrawdownBack-tested usingOECD countries LOIM Fundamental Approach (unhedged) 5.56% 2.21% 4.59% 1.21 -0..44% -0..64% -6.68% Market Cap Weighted Approach 3.36% 5.75% 0.58 -0..54% -0..78% -8.25% Comparison of risk characteristics (EUR hedged) 30.4.2001 - 20.1.2011 Annual Ann. Excess Annualised Sharpe Ratio VaR 95% Expected Maximum Return Return Volatility 1 day Shortfall Drawdown LOIM Fundamental Approach (Hedged) 4.98% 0.41% 2.09% 2.38 -0.25% -0.29% -3.64% Market Cap Weighted Approach 4.56% 2.71% 1.68 -0.27% -0.38% -4.72% Please see important information at the end of the document LOIM — January 2011 — 7
  8. 8. Fundamental process works for other productsEmerging Local Annual returns (%) 20 Annual volatility (%) 30Fundamental Index 17.2 25 23 22 15Back-tested using 20 13.0 18.1Eurozone countries: 16.9 15.2 14.7 14.2 10 9.1 15 8.6 12.7 12.9 7.7 8.0 7.6 12.1 7.3Exclusion Criteria 10 5.8 4.9 7.9 4.5 4.8110% - Net Govt. Debt / 6.3 5 4.1 4.1GDP 5200% - Private Debt / GDP 0.4 0 0 -5 -5.2 -5 Fundamentally -10 Weighted Benchmark JPM GBI-EM -15 Global Diversified -10 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 2008 2009 Fundamentally Weighted Market-Cap Benchmark Average Annual Returns 10.7% 13.7% Average Annual Volatility 5.9% 10.4% Average Sharpe Ratio 1.74 1.26 Max Drawdown -14.5% -27.4% Please see important information at the end of the document LOIM — January 2011 — 8
  9. 9. Fundamental process works for other products5B’s – combining Industry weight breakdown (vs. market-cap 5B index)BBB and BB-rated 40%issuers 35.0% 35%Back-tested using 30% 28.0% Fundamentally Weighted BBB-BBEurozone countries: Market Cap Weighted 25% BBB-BBExclusion Criteria110% - Net Govt. Debt / 20% 17.0%GDP 15.0%200% - Private Debt / GDP 15% 11.0% 10.0% 10.0% 10% 8.0% 8.0% 7.0% 7.0% 7.0% 6.0% 6.0% 5.0% 4.0% 4.0% 4.0% 5% 3.0% 3.0% 0% Utilities & Oil Consumer Products Chemicals & Health TMT &Transportation Capital Goods Autos & Aerospace Retail & Services Basic Industry Non-Bank Financials Banking Please see important information at the end of the document LOIM — January 2011 — 9
  10. 10. Key FindingsWide investment • Fundamental indices produce better results with large investmentuniverse preferred universe and multiple currenciesUnhedged indices • Fundamental indices have their performance improved by unhedgedoutperform currency exposureEmerging • Global fundamental indices allocate greater weight to emergingeconomiespreferred economies due to fundamental economic strengthEurozone countries • Eurozone fundamental indices exhibit minimal performance differential,benefit from future but are expected to outperform if Eurozone volatility increasesvolatilityCorporates in • Corporate fundamental indices allocate a stable weight to industry sectorsstable sectors overtime, avoiding increasing weight to sectors that are gearing uppreferred Please see important information at the end of the document LOIM — January 2011 — 10
  11. 11. Current fundamental indexed products Global Government Bond Fund Emerging Local Currencies and Bonds 5B Bond Fund Hedged or Unhedged Hedged or Unhedged Hedged or UnhedgedFund Details Fund Details Fund DetailsBenchmark: Benchmark: Benchmark:LOIM – Fundamental Weight Driven LOIM – Fundamental Weight Driven LOIM – Fundamental Weight DrivenLaunch Date: Launch Date: Launch Date:16th December 2010 12th January, 2010 1st December 2010Available Currencies: Available Currencies: Available Currencies:EUR, CHF (unhedged, hedged) USD, EUR, CHF (all unhedged) EUR, CHF (hedged)Soon available: AuM: Comments:USD, CHF (dynamically hedged) USD 747m as at the 7th of January 2011 • Active risk budget to take advantage ofComments: Comments: market opportunities (TE Target: 3%)• Active risk budget to take advantage of • Active risk budget to take advantage of market opportunities (TE Target: 2.5%) market opportunities (TE Target: 5%) S. Croce, Head R. Geiger, CRM H. De Rouw, CRM(Switzerland, France, Italy) (Switzerland, Germany, Austria) (Belgium, Netherlands, Luxembourg) Please see important information at the end of the document LOIM — January 2011 — 11

×