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Recently a new factor was added to the literature: Quality. In credits, we see Quality as a natural extension of pure Low-Risk. All our credit factor models have used Quality since inception, and have expanded its use over the years.
“Putting your research to the test is always exciting, and if it then works out well, then that’s very satisfying.” That’s how Patrick Houweling describes celebrating the first anniversary of the Global Multi-Factor Credits fund, with an outperformance chart to go with the birthday cake.
Research shows that factor investing strategies work well in corporate bonds, but actually building a portfolio requires greater care due to liquidity issues, Robeco’s quantitative experts argue in a new white paper.
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.
Investing in ETFs can be very risky, especially during periods of limited liquidity. Patrick Houweling and Victor Verberk explain why and how active management and the use of derivatives can provide both a solution and an investment opportunity.
Robeco introduced Robeco Quant High Yield Fund on March 28, 2014. By investing in credit default swap (CDS) indices, this fund offers liquid exposure to global high yield, allowing investors to tactically trade in and out of this asset category at low costs. Performance is driven by a proprietary quantitative market-timing model with a solid track record of over ten years.
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.
Ground-breaking research by Robeco that changed the way the riskiness of corporate bonds can be evaluated has celebrated its 10th anniversary. This riskiness needs to be carefully calculated as bonds issued by companies have a greater chance of defaulting than government bonds. Their returns can also be more volatile, as they are linked to the underlying performance of the company that issues the bond.
Portfolio management within the fixed income credit markets consists of various, linked steps: from company analysis and relative value assessment, to constructing a well-diversified portfolio, measuring its risk, and finally attributing the realized performance to the decisions taken. All steps require an intricate knowledge of the behavior of credit markets. At Robeco we use the ‘risk point’ framework in an integrated manner in all these steps.
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.
Introduction Recently we observe a shift towards factor investing, in which institutional investors strategically allocate their long-term investment portfolios to factor premiums.1 Well-known factors are Value, Momentum, Size and Low-Risk.
Residual Equity Momentum for Corporate Bonds
Corporate bond returns consist of two distinct components: an interest rate component, which is default-free and anti-cyclical, and a credit spread component, which is default-risky and pro-cyclical.
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.
Ibbotson’s “Stocks, Bonds, Bills and Inflation” data set is widely used because it provides monthly US financial data series going back to as early as 1926. In this data set, the “default premium” is calculated as the difference between the total returns on long-term corporate bonds and long-term government bonds.
Generating benchmark-like returns is a difficult job in the High Yield corporate bond market. High index turnover and illiquidity, i.e. high bid-ask spreads, are the main reasons why passively tracking a High Yield index comes at significant costs.