switzerlanden
Robeco launches Multi-Factor High Yield strategy

Robeco launches Multi-Factor High Yield strategy

05-06-2018 | Insight

Today Robeco is launching its latest factor investing strategy. This strategy complements its high yield range and broadens the scope of its existing multi-factor approach in the global corporate bond markets. The strategy is not new, as it has been used since 2005 to manage a sub-portfolio of the fundamental high yield bond strategy. It is also very similar to Robeco’s successful Global Multi-Factor Credits strategy which focuses on the investment grade market but has some high yield allocation too. It is therefore a logical step to extend this approach to the high yield market and open it up to a wider range of investors.

  • Patrick  Houweling
    Patrick
    Houweling
    Portfolio Manager
  • Mark  Whirdy
    Mark
    Whirdy
    Quantitative Credit Portfolio Manager

Speed read

  • Systematic approach to ensure balanced factor exposure in high yield
  • Embedded liquidity management for effective implementation and low trading costs
  • Attractive diversifier for investors in traditional high yield or passive strategies

Robeco QI Global Multi-Factor High Yield is an innovative strategy that applies a systematic approach to offer balanced exposure to the low-risk, quality, value, momentum and size factors in the global high yield corporate bond market. A quantitative multi-factor model forms the basis of the strategy. Before buying any bond, credit analysts perform a final check to identify additional risks that are beyond the scope of the model. In a market where some bonds trade only once a month or even less, liquidity management forms a crucial part of the investment process. Performance versus the market is driven by issuer selection alone – the portfolio’s credit market, duration and FX exposures are kept in line with those of the benchmark.

‘Systematic approach to efficiently harvest factor premiums in the high yield market’

Solid track record in credit factor investing

The Quant Credit team has spent the last two decades refining Robeco’s approach to deliver a superior risk-return profile in its factor-based credit strategies. The factor definitions that are applied in academic research have been enhanced to reduce unrewarded risks and to include information that extends beyond the bond markets, to further improve the factors’ risk-return profiles. In-house research shows that all factors deliver higher returns and higher risk-adjusted returns than the market and that they tend to exhibit low mutual correlations in terms of outperformance.

In Robeco QI Global Multi-Factor High Yield the investment universe is the Bloomberg Barclays Global High Yield Corporates ex Financials Index. For each bond in that index a score is calculated for each factor and then combined to give a total multi-factor score, to ensure the resulting portfolio has balanced exposure to all factors. This total score determines the attractiveness of each bond. The exception is the size factor which is incorporated later in the portfolio construction phase by equally weighting all the issuers.

Fundamental checks

Although the buy and sell decisions are primarily based on the signals given by the multi-factor ranking model, portfolio managers and fundamental credit analysts play an important role too. They identify additional risks that lie beyond the scope of the quantitative model and that are more difficult to quantify, such as geopolitical risks, litigation risks, ESG risks or events that could have an impact at corporate level, like mergers or acquisitions, split-ups, leveraged buyouts and activist shareholder activity. If anything negative emerges from this analysis, they can overrule the model and opt not to invest in a bond, or sell an existing portfolio holding, regardless of the model’s score. They also ensure that the parent company guarantees the bonds of the issuing entity, as it is essential to ensure that the correct accounting and equity data are fed into the model.

Stay informed on Credit investing with monthly mail updates
Stay informed on Credit investing with monthly mail updates
Subscribe

Liquidity management crucial in high yield

Bonds that the model selects may not be available in the market, simply because they do not trade enough. To overcome this hurdle, a methodology was developed to measure the liquidity of individual bonds in real time. The system collects liquidity information from a variety of sources, including trading systems and pre-trade transparency platforms. When combined, this information gives an estimate of the available trading volume for each specific bond allowing transactions to be selected that are more likely to be executed successfully.

This quantitative framework enables a well-diversified, equally-weighted portfolio of at least 150 unique companies to be constructed, selecting bonds with strong multi-factor model scores that fit the risk and allocation constraints, something that would not be feasible using a purely manual approach.

Backtesting was carried out on the Global Multi-Factor High Yield strategy for the period 1994 to 2017. In the backtest we simulate the availability of individual bonds, so that more liquid bonds have a higher chance of ending up in the portfolio, and take transaction costs into account. The backtest results were very satisfactory: the strategy earned a higher return than the benchmark, with a similar volatility and thus generated a higher Sharpe ratio. The target outperformance of the strategy is 150 bps per year, to be earned over a full investment cycle.. The strategy’s preference for lower-risk bonds issued by safer, higher-quality firms means that investors should expect this strategy to show stronger performance in bear markets than in bull markets for high yield.

Robeco QI Global Multi-Factor High Yield brings factor investing to high yield markets and offers clients who invest in traditional high yield strategies a means to diversify their exposure and generate alpha in a different way. Liquidity challenges are overcome by embedded liquidity management in the investment process to ensure effective low-cost execution. The strategy can be an attractive alternative to passive investors due to its attractive fees, transparent and rules-based approach and because it has a higher Sharpe ratio than a passive market-tracking portfolio.

For more on Robeco’s quant high yield bond strategies, also read ‘A late-cycle approach to high yield’.

Subjects related to this article are:
Logo

Important legal information

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 ACOLIN Fund Services AG, Affolternstrasse 56, 8050 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/RobecoSAM 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/RobecoSAM 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.

I Disagree