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There is strong empirical evidence for the existence of low risk, value, momentum and size factor premiums in the corporate bond market.
We provide empirical evidence that the Size, Low-Risk, Value and Momentum factors have significant risk-adjusted returns in the corporate bond market. By combining these factors in a multi-factor portfolio, drawdowns and tracking error vs. the market are reduced, while the higher return and Sharpe ratio are preserved.
Factor investing has been successfully applied to equity markets. It can also work in the corporate bond market and can generate substantial premiums. An interview with portfolio manager and researcher Patrick Houweling.
Most academic studies on factor investing are about equities. Patrick Houweling and Jeroen van Zundert show that factor investing also works for bonds. How has their research paper been used to create a fund?
Interest in factor investing – investing in systematic sources of return – is rapidly increasing. Up to now most investor interest in this area has been focused on equities. But what are the possibilities for applying it to credits?
Although most factor research focuses on the equity market, the concept and benefits of factor investing apply equally well to the corporate bond market. A smart way of investing is combining the factors into a multi-factor credit portfolio in order to diversify across factors.
Research by Robeco and academic researchers shows that a low-risk anomaly exists in credit markets: low-risk credit portfolios earn higher risk-adjusted returns than high-risk portfolios over a full market cycle.
Insurers need to have higher capital buffers against risk if Solvency II comes into place, forcing many to rethink the investments they are in. A potential solution lies in credits with a lower risk profile – as the clock starts ticking for investors to act.
In this Research Note we show that low-risk credits had superior risk-adjusted excess returns over the past 20 years.1 By selecting low-risk bonds from low-risk issuers, investors would have earned credit-like returns at substantially lower risk.
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