Global multi-factor credits as a style diversifier

Robeco QI Global Multi-Factor Credits (GMFC) offers balanced exposure to the low-risk, quality, value, momentum and size factors in the global investment grade credit market. For clients that already invest in actively managed credit portfolios, this factor-based strategy offers style diversification. The table below summarizes the main style differences between a multi-factor approach and a fundamental approach to credit investing.

The difference between the two approaches should result in a low correlation between the performance of a multi-factor portfolio and a fundamentally managed portfolio. To support this claim, we obtained the returns of 25 global credit funds from Morningstar Direct over the 2-year live period of GMFC (July 2015 - June 2017). This peer group includes funds offered by well-known providers such as BlueBay, HSBC, Invesco, JP Morgan, PIMCO, Russell, and Schroders. As Morningstar reports net returns, we added back fees to approximate the gross returns.

For each fund and each month, we calculated the gross outperformance of the EUR-hedged share class versus the Bloomberg Barclays Global Aggregate Corporates index (also EUR-hedged). Next, we calculated the pairwise correlation between a fund’s outperformance and each of the 25 other funds. Finally, we calculated the average of these 25 correlations for every fund. Figure 1 shows the results. We have anonymized the funds.

GMFC has the lowest average correlation with the other funds: ¬ 27%, whereas the average is +32%. It is therefore a diversifier versus fundamentally managed funds. Figure 2 provides more detail by listing the outperformance correlations of GMFC with each of the other funds. The correlations range from -75% to +14%.

We also calculated the average outperformance correlation over a 5-year period by increasing the strategy’s 2-year live period with 3 prior years of back-tested performance. 10 of the 25 funds have a 5-year track-record. Over the July 2012-June 2017 period, GMFC had a -39% average outperformance correlation, compared with +28% for the average fund.

The fact that GMFC has a negative correlation is good from a diversification perspective. What is even better is that this low correlation is accompanied by an above-average return and a low volatility. Figure 3 shows the Sharpe ratio of each fund over the 2-year sample period. GMFC’ Sharpe ratio is among the highest. The high Sharpe ratio is driven by a volatility that is among the lowest in the peer group, and a return that is above-average. The lower volatility results from the fund’s exposure to the low-risk and quality factors, while the higher return is driven by the value, momentum and size factors. The three funds with higher Sharpe ratios all accomplished it with the ‘opposite’ risk-return profile: their returns are among the highest, while their volatility was above average. These funds are more expensive than GMFC.

We also calculated the information ratios of all funds. GMFC’ information ratio of about 0.6 is above average due to a somewhat below-average tracking error and an above-average outperformance.

Finally, we provide some additional information on the funds. Figure 4 lists the ongoing charge of each fund’s institutional share class, which is the harmonized cost calculation method for UCITS funds. The ongoing charge of GMFC is the second-lowest. The fund is priced between passive and traditional active strategies.

Figure 5 shows the sustainability score of each fund, as calculated by Morningstar using Sustainalytics data. Again, GMFC has one of the highest scores, resulting from sustainability integration in the investment process. One of the funds with a higher score is a thematic sustainability fund.