The asset management arm of the Swiss private banking group Lombard Odier is to launch a new corporate bond fund to invest in the crossover area between investment grade and high yield debt.

Lombard Odier Investment Managers developed the aptly-named 5Bs Bond Fund to buy double or triple B-rated paper and capitalise on the fact that constrained investors are often compelled to sell bonds if their rating falls below investment grade, creating an opportunity to buy what still amounts to good quality debt at a discount. The firm also notes that there are many bonds which fall just short of investment grade but which are also good investment prospects. According to Lombard Odier’s figures, bonds straddling the investment grade and high yield sectors have delivered more superior risk-adjusted returns than either alone since 2003.

Rather than use a traditional bond benchmark which tend to give higher weightings to those companies with more debt, LOIM has developed a proprietary fundamentally-weighted index.

“The returns foregone by constrained investors, who are compelled to sell when a bond’s rating falls, become available to unconstrained investors. We aim to capture this additional return by focusing on the ‘fallen angels’ and ‘rising stars’ who are set to be upgraded to investment grade,” said Stephane Monier, chief investment officer, fixed income and currencies.