Head of European portfolio management Marc Giesbrecht, who joined Lombard Odier in 2014 from Goldman Sachs, says: “If you look at the normal fixed-income index, it is market-cap weighted. We do not think a market-cap weighted investment approach makes sense, we would much rather call it fundamentally weighted.
“We do the weighting by looking at which industries contribute most to GDP, and the quality and fundamentals of the company. Determining our allocation that way makes us believe we generate more value than just market-cap-rated exposure.”
The weighting game
In the case of the mainstream bond market indices, the more bonds an issuer (country or company) has sold, generally the higher the weighting they have in the market-cap index.
Given this scenario, Lombard Odier’s view is that a bond investor is lending more to the most indebted countries and companies simply because of their larger volume of outstanding debt, which does not make much sense. Lombard Odier instead weights an issuer’s capacity to repay rather than its ability to borrow.
Another area where Giesbrecht differentiates the independent asset management arm of the Lombard Odier Group, which traces its history back as the oldest private bank in Geneva, is its “full flexibility to ‘on-board’ clients in different countries”.
“We have 12 booking centres across the world and we can on-board our clients in London but manage their assets in these other places.
“A family might live in London or Singapore but then the kids go and live somewhere else. We must have the flexibility as a bank to cater for these needs, to provide a holistic solution for the whole family. You have to be a one-stop shop globally.”
Giesbrecht says portfolio management at Lombard Odier is very much about sitting down with clients, many of whom are entrepreneurs, and understanding their needs from short-term goals to long-term estate planning or even philanthropy.
Portfolios also have to be managed in a fiscally efficient way, for example in the case of non-dom residents in the UK, who cannot have UK situs investments.
“They need UK reporting status funds that are distributing in order to split income and capital gains so that, when the clients are remitting the assets to the UK, they can then decide which pool they are remitting and, depending on the pool, pay either 28% or 45% tax.”
Bespoke services
While Lombard Odier does have model portfolios, with conservative, balanced and growth objectives, an off-the-shelf product is not applied to every single client.
Rather, it is very much a discussion as to how the portfolios are tailored to what the client needs.
“We have model portfolios that are implemented via funds, but also model portfolios that are a mixture of funds and direct holdings. We also offer, besides the multi asset portfolios, single asset portfolios,” he says.
The base currency for the balanced expat portfolio he talks about here is in euros, reflecting the many clients who come from France and Spain, who have a home bias in their holdings, as do other clients wherever else they are in the world.
“We define their return requirements, but also their acceptance of losses. What we then do is design a strategic asset allocation. Today, a strategic benchmark or an asset allocation for one of our balanced portfolios is about 45% in equities, about 37% in fixed income, 14% in alternatives and the rest is held in cash.
“The strategic asset allocation is constantly adapted with a tactical overlay, which currently translates into an overweight position in alternatives, such as hedge funds and infrastructure investments.
“We are at benchmark on the equity side and we are underweight in the fixed-income space. Within the fixed-income space, this underweight is very much driven by our underweight position in sovereign bond exposure.”
Giesbrecht goes on to explain how this exposure has been shaped by 10 investment convictions he has developed, summarised opposite, which are set against the backdrop of his clear view that this is a “world with high volatility and flatter returns, because of the demographics”.
“We are an ageing population, the productivity growth is not increasing as much as after, for example, World War II, and we have very high levels of debt.
“The growth that was generated before the last financial crisis was very much driven by an increase in debt levels, which, today, we have to battle with.”
