Smart beta
In terms of how the portfolio accesses its chosen markets, Lombard Odier has focused on a smart beta approach to bring out the risk element of each individual asset class. Blin says traditional market cap weighted indices share many of the issues of traditional asset allocation funds and the group’s approach requires assets to be measured on risk as opposed to size. With that in mind, Lombard Odier’s solutions group has produced its own range of smart beta indices and the All Roads fund largely uses these plus various derivatives to achieve its desired allocations. In developed equities for example, key factors in long-term returns are geography and sector and to get risk parity exposure, the group’s index is equally weighted across thirty ‘clusters’, ten sector baskets each in the US, Europe and Asia. “As ever, we can also shift allocations based on relative volatility, meaning we currently have more in Asian utilities for example and less in US financials,” adds Blin. “This equal risk weighting means our index is less vulnerable to market shocks than a typical market cap weighted benchmark.” As for bonds, the key risk factor is not volatility but an issuer’s ability to service its debt and potential for default.
Perfomance
While standard bond indices are determined by weight of debt in the market, and therefore skewed to countries and companies potentially in the worst financial health, Lombard Odier’s focuses on ability to repay obligations. At present, the fund is therefore underweight in US and Japanese sovereign bonds. Coming finally to commodities, risk is linked to expected shortfalls and the group’s smart beta benchmark currently has less in energy for example and more in soft commodities and industrial metals. Of course, the success of a strategy so far away from accepted wisdom will largely centre on performance and since launch, the strategy is comfortably ahead of its cash plus 5% target despite the major ‘tapering-inspired’ dip in summer. Lombard Odier has also simulated returns going back decades and All Roads is significantly above a standard distribution fund – with 60% in bonds and 40% in equities – on a total return basis looking back to the early 1970s. Meanwhile, the group has also calculated returns during various different market backdrops, highlighting its essential resilience. In the early 1980s bond bear market for example, a time of radical policy action not unlike today, the fund outperforms the index and 60/40 peers, with drawdown management the key factor. Moving to the fixed interest bull market of 2000-2003, All Roads lags the soaring benchmark but still outperforms the 60/40 counterpart due to better diversification. As for equities, the fund would have outperformed in the bull market of 1994-1997 and bear market of 2007 to 2009. Leverage was the key factor in the former and, as might be expected, drawdown management amid the latter.
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