Important Information - Lombard Odier IM Fundamentally Weighted Indices

Statement as at 30 November 2018

LOIM Global Corporate & Euro Corporate Indices – Stability of the regional allocation


Today the market based adjustment at regional level for the metric X is made by using the formula shown below

WEI = (X-Min(X)) / sum(X-Min(X))

As we only allocate only between 3 regions- USD, EUR & GBP, the formula can create instability in our allocation results.  To limit this instability for the regional market based adjustment, we will now apply the following formula:

WEI = X / sum(X)

Effective 1st of December 2018, this improvement in the regional allocation formula is incorporated in the LOIM Index Methodology document in section 3.3.2 Valuation Factor – formula (20) and in section 3.3.3 Liquidity Factor – formula (22).


3.3.3 Valuation Factor

(Formula 20)

Original formula:

1 original formula.png

Improved formula:

2 improved formula.jpg


3.3.3 – Liquidity Factor

(Formula 22)

Original formula:

3 original formula.png

Improved formula:

4 improved formula.jpg


Statement as at 31 October 2018 

LOIM Global Government Bond & Emerging Market Local Currency Indices – re-inclusion of Turkey 


In August, the LOIM strategy team flagged the heightened risk of the introduction of capital controls in Turkey and as a consequence the country was removed from all LOIM Fundamental Sovereign Indices as of 31 August. 

Some of the key concerns that triggered the downgrade in the investment view on Turkey have developed favourably over the past couple of months. To regain investor confidence the Turkish authorities announced a number of credible policy moves on the monetary as well as on the fiscal side.

The central bank of the Republic of Turkey (CBRT) confounded market expectations on 13 September when it hiked the repo rate by 6.25% to 24%. The consensus was for a 3.25% hike. By dramatically surpassing expectations the CBRT managed to alleviate some of the long-standing concerns with respect to its independence and ability to contain inflation expectations. Subsequently, on 20 September the government conveyed a constructive stance when it detailed its economic plan. The revised macro-economic targets, in particular the reduced growth and current account deficit projections signalled a more disciplined fiscal stance.  We expect these steps will significantly narrow the current account deficit and contain the country’s external financing needs. The latest currency account numbers suggest the rebalancing of the economy is already underway. At the October IMF meetings the Turkish finance minister and the CBRT governor stated that as long as the stringent policy stance is maintained any request for an IMF program is unlikely at this point.

With respect to the banking sector the finance minister indicated that the government stands ready to provide a backstop if needed to mitigate the debt rollover risk. Separately, the release of US pastor Brunson eased geopolitical tensions with the US. 

In the context of these developments, the LOIM strategy team reassessed the risk of capital controls in Turkey and now judges that this risk has come down sharply compared to August. Consequently, the Index Oversight Committee (IOC) has approved the re-inclusion of Turkey in all LOIM Fundamental Sovereign Indices as of 31 October. However, Turkey is a market that went through intense turmoil and remains highly volatile. Therefore, a penalty capping will apply similar to the mechanism that is in place for countries that have a recent history of defaulting. Turkey will be reintroduced into the indices gradually with a reduced fundamental weight. 50% of its fundamental weighting at first inclusion date, 75% after one year and 100% after two years.  


statement as at 31 August 2018


A series of dramatic interest rate hikes by the central bank in Turkey (CBRT) in Q2 2018 as well as the simplification of the monetary policy framework failed to reassure investors. The ineffectiveness of the CRBT is due to a multitude of factors, in our view. The monetary policy action was delivered only grudgingly and it took intensifying market pressure for the CBRT to act. The independence of the CBRT, or the lack thereof, is a long-standing concern. Market confidence in the ability of the CBRT to contain inflation expectations and to halt the slide in the Turkish Lira (TRY) took a fresh hit in July when President Erdogan’s son-in-law was appointed as finance minister. The developments since the re-election of President Erdogan in June signal that political interference is set to deepen and threatens the autonomy of the CBRT further. The relentless market-unfriendly public stance of President Erdogan as well as the US sanctions against two Turkish ministers that were announced in August accelerated the downward spiral in market sentiment in August.

The LOIM Investment Strategy team has held a negative view on Turkey since the start of the year, predicated in part on the CBRT inaction in the face of a credit-fueled overheating of the economy. In their latest Investment viewpoint: “Turkey in turmoil – what lies ahead?” the team highlights that “the prospect of capital controls now begin to seem a real possibility”. The developments since the June elections are at the core of that latest downgrade in the investment view on Turkey.

In this context, the LOIM Index Oversight Committee (IOC) has taken the following course of action. As of 31 August 2018, Turkey will be removed from our LOIM Fundamental Sovereign Indices.  Subsequently, the membership of Turkey in our LOIM Sovereign Indices will be reconsidered at every hard rebalancing.


statement as at 31 October 2017.

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


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.

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.


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.

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.

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.

important information.

This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393

Lombard Odier Investment Managers (“LOIM”) is a trade name.

This document is provided for informational purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This document does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipients exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM.  The contents of this document are intended for persons who are sophisticated investment professionals and who are either authorised or regulated to operate in the financial markets or persons who have been vetted by LOIM  as having the expertise, experience and knowledge of the investment matters set out in this document and in respect of whom LOIM has received an assurance that they are capable of making their own investment decisions and understanding the risks involved in making investments of the type included in this document or other persons that LOIM has expressly confirmed as being appropriate recipients of this document. If you are not a person falling within the above categories you are kindly asked to either return this document to LOIM or to destroy it and are expressly warned that you must not rely upon its contents or have regard to any of the matters set out in this document in relation to investment matters and must not transmit this document to any other person. This document contains the opinions of LOIM, as at the date of issue. The information and analysis contained herein are based on sources believed to be reliable. However, LOIM does not guarantee the timeliness, accuracy, or completeness of the information contained in this document, nor does it accept any liability for any loss or damage resulting from its use. All information and opinions as well as the prices indicated may change without notice. Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.

Source of the figures: Unless otherwise stated, figures are prepared by LOIM.

No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Asset Management (Europe) Limited prior consent. In the United Kingdom, this material is a financial promotion and has been approved by Lombard Odier Asset Management (Europe) Limited which is authorised and regulated by the Financial Conduct Authority.

© 2019 Lombard Odier IM. All rights reserved