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.
The need for a specialized approach arises because there are significant differences between the liquidity of different credits - the ability to trade a bond in the desired amount at a reasonable price and within a reasonable time. No two corporate bonds are alike, and a naïve portfolio construction approach may not be enough to realize the better risk-adjusted returns of the factors.
In their latest research, ‘Implementing factor strategies in the corporate bond market’, quantitative researchers Mark Whirdy, Patrick Houweling, Frederik Muskens and Jeroen van Zundert outline how it can best be achieved. The white paper describes how Robeco’s quantitative portfolio construction framework systematically reconciles live liquidity information in the investment process.
While strategies that are tilted to factors – such as Low-Risk, Value, Momentum and Size – along with multi-factor portfolios have been around for years in equity markets, their application to corporate bonds was pioneered by Robeco. Conservative Credits portfolios tilted towards the Low-Risk factor have been offered since 2012, while the Global Multi-Factor Credits fund was launched in 2015.
“Even though there are many similarities between equities and credits, there are also important differences, particularly the liquidity of corporate bonds,” says Houweling. “Our quantitative portfolio construction framework embeds liquidity management in the implementation and systematically identifies and seizes trading opportunities as they arise.”
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