Important Information - Lombard Odier IM Fundamentally Weighted Indices

statement as at 31 October 2017

LOIM Emerging Local Currency Index – Inclusion of Argentina and new methodology “Historic Default Penalty Capping”

Rationale :

Improved fundamental weighting due to ongoing economic reforms driven by President Macri over the last two years.

  • Argentina has re-opened after years of isolation, reducing subsidies and import tariffs, while freeing up its exchange rate, thus regaining access to international capital
  • Government has backed the central bank in its fight to reduce inflation
  • Improved gross domestic product in 2017
  • Reduction of country’s poverty rate

New Methodology

While Argentina is eligible for inclusion into the index and meets the fundamental weight criteria, the LOIM Index Oversight Committee feel it necessary to impose a weighing cap to reflect the country’s history of default, most recently in 2014.  Therefore, we plan to introduce new methodology to be applied for any country which has a recent default. 

Historic Default Penalty Capping Methodology

For the LOIM Fundamental Emerging Local Currency Index, there is a specific process by which countries that have a recent history of defaulting are introduced to the index following an initial review period and with the approval of the LOIM Index Oversight Committee.  Any country that is eligible for inclusion into the index and that meets the fundamental weight criteria, but has a recent history of defaulting, are included into the index gradually with a reduced fundamental weight.  50% of its fundamental weighting at first inclusion date (either April or October hard rebalance points), 75% after 1 year and 100% after 2 years.  Any country entering the index will only reach 100% of its fundamental weighting after a two-year inclusion period.

LOIM Global Government Bond Index – Inclusion of Portugal 

Rationale :

Improved fundamental score due to reduction in debt and improved unemployment rate in 2017.

Portugal will enter the index on 1 November 2017 with a weight of 1.5%

statement as at 31 may 2017.

LOIM Global Corporate Index – Inclusion of REITS (Real Estate Investment Trust) into the Utilities sector.

Rationale:
REITS are not financial companies, rather they are non-financial corporates with a specific structure that has led them to be classified under Non-Bank Financials. They report like Non-Financials, and as such we struggled to obtain data in financial methodology format, therefore they were excluded from the LOIM Index, even though they were included in the investible universe. Initially this had little impact as very few REITS were issuing bonds, however this has now changed significantly over the last few months. It is therefore necessary to revise the index methodology to accommodate the inclusion of REITS.

Most bond issuing REITS are property companies (generally commercial or residential property letting, not construction) and share a number of characteristics with utility companies:

  • High degree of earnings visibility given their long term custom relationships
  • Capital intensive, large fixed asset base
  • High leverage (high debt/low ebitda)
  • Require long term funding with little likelihood of repaying debt without asset sales
  • Domestic operations, therefore subject to domestic economy and regulatory regimes
  • Significant economies of scale

Therefore, we will include REITS in the Utility Sector of the LOIM Global Corporate Index from 31 May 2017.

statement as at 30 November 2016.

LOIM Corporate Bond Indices - Change to Local Market allocation methodology - Replace Yield to Maturity with Average Credit Spread in the Valuation calculation.

The Corporate Index local market allocation is based on three pillars:

  • Economic Size: Measured with GDP (PPP)
  • Liquidity: Measured with the average bid/ask spread of each local market
  • Valuation: Measured with the average yield to maturity average credit spread of each local market

We propose to replace average yield to maturity with average credit spread as the valuation measure in the calculation of Local Market allocation.

Rationale:

The purpose of the strategy is to offer a fundamental corporate allocation between local markets, sectors and issuers to mitigate credit default risk, and not to offer a fundamental allocation between currencies. This is why most investors consider this strategy in its hedged version. As unhedged yield to maturity does mean much in the hedged context we suggest it’s more appropriate to consider Average Credit Spread, instead of Yield to Maturity, in the Valuation pillar. Average Credit Spread is already employed in the valuation adjustment at sector and issuer level, within the current LOIM corporate bond index methodology.

statement as at 30 October 2016.

Slovakia and Switzerland will be added to the ‘LOIM Global Government Index’ as part of the upcoming index rebalance scheduled at the end of October 2015.

Rationale:
The original construct of ‘LOIM Global Government Index’ historically excluded Slovakia and Switzerland. Given Slovakia and Switzerland are part of the eligible universe defined for the index (i.e., Organization for Economic Co-operation and Development (OECD)), and meet all the necessary fundamental criteria for index inclusion, going forward these two countries will be added to the ‘LOIM Global Government Index’ effective November 1st 2015.

Slovakia will be added to the ‘LOIM Euro Government Index’ as part of the upcoming index rebalance scheduled at the end of October 2015.

Rationale:
The original construct of ‘LOIM Euro Government Index’ historically excluded Slovakia. Given Slovakia is part of the eligible universe defined for the index (i.e., Organization for Economic Co-operation and Development (OECD) countries that are also member of European Monetary Union(EMU)), and meets all the necessary fundamental criteria for index inclusion, going forward Slovakia will be added to the ‘LOIM Euro Government Index’ effective November 1st 2015.