Rather than starting with a return target, the multi-strategy funds start with a client’s tolerance to risk and potential drawdowns. Lombard Odier then builds a risk budget based on the average loss that a portfolio would experience in the worst year out of 20.
Back to the 1970s
On top of this, the bank adds its own economic analysis since the 1970s showing that on average just two years in every five are favourable for equities, another two years are in what is described as a deceleration phase, with the fifth year in an inflationary period where commodities are favoured.
Stéphane Monier, chief investment officer of Lombard Odier’s European private banking business, adds: “However, traditional capital-allocation approaches (say 40% equity; 60% bonds) can create excessive exposure to equity risk. That may perform well in a growth environment, but suffers in the remaining downturns or inflationary phases.”
As a result of different asset classes performing in different parts of the cycle, the portfolios – the LO Selection Vantage 1500 and LO Selection Vantage 3000 – are built combining external managers as well as Lombard Odier’s own strategies giving exposure to developed and emerging equities, sovereign bonds, corporate bonds and commodities.
The external managers are chosen using strict criteria including a three-year track record and pre-determined liquidity measures.
Reduce portfolio risk
The Vantage 1500 strategy targets an expected return of cash plus 2-4% with an expected shortfall of 5% and a maximum volatility target of 3.5%.
Vantage 3000 targets a return of cash plus 5-7% with an expected shortfall of 10%, a volatility target of 7% and a maximum leverage of 1.8 times. Both approaches have an expected Sharpe ratio of 0.7.
Monier says: “Traditional approaches can over-expose investors to equity risk and may not be dynamic enough to cope with today’s markets. By balancing risk with a diversified approach, we aim to keep clients’ portfolios balanced and not expose them to more risk than they’re willing to take.”
