Well-established factors, such as Low Risk, Value, Momentum and Size, generate economically meaningful and statistically significant premiums in credit markets. However, the peculiar structure of these markets entails challenges when it comes to implementing a strategy. We spoke with Mark Whirdy of our Factor Credits team about the way Robeco addresses these issues.
“The main challenge is liquidity: specifically, being able to trade those bonds which maximize factor exposure, as indicated by the model, while keeping transaction costs under control. Unlike equities, the likelihood of finding a trading counterparty for a given amount of a particular corporate bond on any given day is much lower. In other words, credit markets lack immediacy.
This burdens the traders’ workflow. Transaction costs also differ greatly from one bond to another, and you can achieve substantial savings by trading more opportunistically. When constructing a portfolio, we need to maximize factor exposure subject to cost constraints, while complying with allocation and risk requirements.”
“A traditional fully manual investment workflow is incapable of reconciling all these elements. So we had to develop a more efficient investment process that systematically maximizes factor exposure subject to allocation and risk constraints, where liquidity management is actually embedded into the portfolio construction process itself. To achieve this, we leverage on our quantitative expertise in handling big data and drawing inference from it, as well as the expertise of our traders and portfolio managers in navigating OTC credit markets.
In practice, this means we systematically collate a large amount of trading data in real time. We measure both ‘persistent liquidity’, owing to regular two-way flows, and ‘transient liquidity’, owing to short-term dealer positioning. This enables us to only send orders which have a high probability of being executed. This systematic workflow with embedded liquidity management allows us to optimally fulfill the mandate of maximum factor exposure subject to cost constraints.”
We systematically collate a large amount of trading data in real time
“Applying factor strategies to credit markets is a relatively new practice. Robeco can actually be considered as a pioneer in this field. So, our investment process should always be able to adapt to changing market conditions. It requires close collaboration between traders, portfolio managers and quantitative analysts.
For example, when the ECB started buying corporate bonds earlier this year, we were able to promptly adapt to the new supply-side illiquidity environment. We managed to avoid going to market for paper for which the ECB would bid heavily. As our process requires close collaboration between various teams, we can position ourselves to be agile enough to identify and then adapt to market developments and new platforms that facilitate trading.”
This article was initially published in our Quant Quarterly magazine.
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 AG 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 AG 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.