The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.
The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.
Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is Robeco Switzerland AG, Josefstrasse 218, 8005 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.
Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/Robeco Switzerland product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/Robeco Switzerland offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.
This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.
The Value factor has been exploited for decades by equity investors and academic research shows it can also be applied to fixed income, in particular to government bonds. But this requires more than a basic selection process based on individual value measures.
From a practical point of view, investing in value government bonds means precisely defining the value concept for this kind of security. At Robeco, we believe it can be seen as the sum of the yield and the capital gains over time, minus the currency hedging costs.
A value strategy focusing on government bonds will look for the best issuer countries and the most attractive maturities based on this measure of value. However, our backtests show that allocating naively according to value may lead to highly volatile performance.
Using market data from JP Morgan, covering a period from January 1985 to May 2016 for a sample of seven issuer countries and six maturity buckets, we simulated the returns of a ‘generic’ value strategy. Every month, this strategy would have invested half of its holdings in bonds of the best country and the other half in the best maturity of each country.
We compared its returns with those of a reference index investing in all 42 country-maturity combinations according to the bond market capitalization. Our calculations showed that the ‘generic value’ portfolio would have achieved higher but much more volatile excess returns than the index. The main reason is that the best maturity is often the longest maturity.
To address this issue, we designed a ‘smart’ value selection process. The idea is that investing only in the best country-maturity combination according to its value measure would maximize exposure to this factor, but would also mean ignoring risk and trading costs.
Meanwhile, being forced to buy at least one maturity bucket from each country would guarantee some diversification but may also lead to suboptimal exposure to the value factor. That is the case, for example, when a particular country only has bond maturities with poor or negative value measures.
In the long-run, investors can benefit from the bond risk premium and double it by exploiting the value factor
Our bond selection process seeks to find a balance between value, risk and costs. These three aspects are managed at portfolio level, leaving enough flexibility to select high value bonds. The starting point is to maximize the value exposure minus a penalty for transaction costs. Only when the increase in the value exposure exceeds these costs will the trade be executed.
To manage the risk, we require the portfolio duration to equal that of the market cap weighted portfolio of our universe. We also make sure that the portfolio is invested in at least two countries and four maturities, to ensure a minimum level of diversification.
Backtests using the dataset mentioned above show this ‘smart value’ approach efficiently harvests the value premium for government bonds. We calculate that, on average, this premium is 0.9% per annum. In the long-run, an investor can therefore not only benefit from the bond risk premium, which is also estimated at 0.9% per annum, but he can also double it by exploiting the value factor.
For investors who consider government bonds as a diversifier for equities there is also good news. In the seven worst equity drawdowns since 1990, Robeco smart value returned 4.5% compared to 4.1% for the reference index. Hence besides the diversification offered by safe bonds, the value premium also contributed 0.4% per drawdown.
This article was initially published in our Quant Quarterly magazine.
This report is not available for users from countries where the offering of foreign financial services is not permitted, such as US citizens and residents.