Swiss franc bonds. It’s time for investors to rethink their investment strategy.

In the past few years, falling interest rates have been the main performance driver in the Swiss bond market, which benefited passive investment solutions in particular. But now, bond markets are drifting into uncertain waters. Interest rates currently stand at a very low level, whereas duration risk has increased significantly.

Higher risks, lower returns

The risk profile of the standard market index – the Swiss Bond Index AAA-BBB – has changed considerably over the past 10 years.  For example, the weighting of the credit segment – bonds with a rating of between A and BBB – increased from 11% in 2007 to 24% in 2017. Passive investors are exposed to a risk allocation that fluctuates over time and they need to consider – particularly today – whether the risks they are currently taking still meet their needs.

Farewell to index thinking

A rethink is necessary in order to take advantage of the opportunities in the Swiss bond market. If the turnaround in interest rates should happen and the increase in yields be confirmed, passive investment techniques will not protect investors from capital losses.

Separating alpha from beta

Challenging mainstream thinking is in our DNA and forms the foundation of our track record. We seek out market inefficiencies in order to generate excess returns - and have consistently outperformed the benchmark over ten years using this strategy¹. Identifying alpha opportunities and generating excess returns – for example in the segment below “BBB-” – requires a completely different skill set from that required to track a benchmark (beta). That is why our investment process is based on a strict separation of the two factors.

¹ Past performance is no guarantee of future performance.

Markus Thöny Head of Swiss Fixed Income Lombard Odier Investment Managers	Marco di Fante Client Portfolio Manager Lombard Odier Investment Managers	Yannik Zufferey CIO Fixed Income Lombard Odier Investment Managers	David Perez Senior Portfolio Manager Lombard Odier Investment Managers