EUROPE - Swiss asset manager Lombard Odier is in talks with pension funds across Europe to launch a new fundamentally weighted, developed sovereign debt fund, having already secured CHF1bn (€810m) from a local pension scheme.

The new vehicle aims to invest in government bonds issued by developed or emerging countries that offer good government and private debt to GDP ratios, as well as good prospects in terms of economic growth.

Stéphane Monier, chief investment officer of fixed income at Lombard Odier, told IPE: "As opposed to fundamentally weighted indexes, a capitalisation-weighted approach does not serve investors' interests.

"All bond indices that are currently used under such a strategy calculate weightings based on the volume of debt alone.

"As a result, they oblige investors to lend an amount of capital proportional to the amount of debt the country issuing the bond is facing, which means investors will have to lend to issuers who have the highest level of debt."

Monier argued that, in the case of Greece, the country had a debt ratio of 2.7% when the euro was launched in 1999.

In June 2010, when Greece was pushed out of the indices due to its credit downgrade, the country's debt ratio had already jumped to 5.5%.

The fund will therefore focus on investments in Scandinavia, Switzerland and some emerging countries.

In terms of return on investment, Monier expects the fundamental benchmark to outperform the market cap approach by 3% a year on a unhedged basis and by 70 basis points on a hedged basis.

He added: "The interest of such a strategy is to be found in the performance provided and most especially in the risk-adjusted performance.

"Fundamentally weighted strategies usually provide a good protection on the down side."

Lombard Odier, which secured CHF1bn from a Swiss pension fund, is now in talks with several other schemes in Switzerland, Benelux, France, Italy and Scandinavia to expand the vehicle. 

The fundamentally weighted developed sovereign debt fund is expected to be launched on 1 December this year.

In June, the €6.3bn German pension fund Bayer-Pensionskasse announced it was currently considering the creation of an alternatively weighted equity portfolio such as fundamentally weighted or minimum variance indices.

However, the pension fund's chief financial officer, Stefan Nellshen, stressed that these solutions mitigated, rather than eradicated, the risk of extreme losses and did not preclude the need for downside risk overlays.