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Research highlights

Smart Credit Investing: Residual Equity Momentum
In this research note we look at the equity-momentum factor for corporate bonds. This factor helps select companies with high historical equity returns. We find strong performance for the equity-momentum factor in both investment-grade and high-yield corporate-bond markets. Our Robeco Conservative Credits and Robeco High Yield Bonds capabilities apply the insights gained into residual equity momentum in practice.

Our study provides a deeper understanding of the risk and return of equity-momentum strategies as applied to corporate bonds. Although total equity momentum is a profitable strategy, it suffers from time-varying exposures to common risk factors. The momentum strategy can be enhanced by using residual equity returns instead of total equity returns. Residual equity returns exclude returns due to factor exposures. As a result, we can boost risk-adjusted returns and reduce losses like those experienced in 2003 and 2009. Our multi-factor credit-selection models, in which equity momentum is one of the factors, benefit from this improvement. Quant Quarterly
This issue of Quant Quarterly, Robeco’s quantitative equity magazine, contains articles on Active and Core Quant emerging markets, explanations for the volatility effect and the added value of factor investing.

Combining factors in the duration model
We have recently enhanced the way we combine factors in the duration model. In this note we explain how different factors that predict bond returns are combined in the duration model. The goal is that each factor should have a similar impact on the model.

We believe in the approach to combine multiple factors into the duration model to predict government-bond returns. In addition, we want each factor to have a similar impact on the model since we cannot predict which factor will do best going forward. To improve the equal weighting of all factors over time, we have enhanced our z-score methodology. This has also improved the robustness of the model, making z-scores more adaptive to different volatility regimes in financial markets. These changes have a small positive impact on performance and lead to a small reduction of turnover. Most importantly, we have improved the balance and the robustness of the model. Smart Credit Investing: the Size Premium
In this note, we address a specific factor premium in the credit market: the size premium. We show that the size premium is strong, persistent over time, present after accounting for transaction costs, and robust against a multitude of characteristics such as sector, rating, maturity, age and leverage.

We find that the premium is not driven by credit risk, as small caps actually tend to have lower leverage than large caps. Liquidity risk partly explains the premium, since smaller issues tend to be less liquid than larger ones. We feel that the main explanation for the existence of the size premium is the tendency of fundamental managers and ETFs to primarily cover large caps and to ignore mid and small caps. Given the large weight of a relatively small number of companies in the index, this is likely to continue. We therefore do not expect the size premium to disappear in the near future. We apply our quantitative credit-selection model to cover the public small caps within Robeco’s High Yield Bonds fund. By this means we obtain effective exposure to the size premium, while our team of experienced analysts can continue to focus on the large caps.
Country Sustainability Ranking Update
In June 2013 we published our first article: “Better decisions with Country Sustainability Ranking”. This ranking provides a profile of countries based on sustainability scores from environmental, social and governance characteristics. The universe has increased from 41 to 59 countries covering the relevant developed and emerging market countries for both equity and bond investors with sufficient data available. Some of the newly added countries, which include Nigeria and Venezuela, are showing up at the lower end of the ranking, while other new countries like Hong Kong and Qatar show relatively strong sustainability profiles. The most recent data were gathered following the expansion of the universe. This update led to a number of changes in the ranking, especially at the lower end. The updated ranking with specific highlights is presented in this article.
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Contact

Marjolein van der Valk
Manager Consultant Relations
+31 102243148
m.van.der.valk@robeco.nl

mcdermott_50x48px.jpgJayne Rogers 
Senior Vice President Asia Pacific
+85 237197521
j.rogers@robeco.com