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Harvesting factor premiums across global bond markets

Harvesting factor premiums across global bond markets

18-02-2020 | Insight

Robeco has combined the latest innovation in quantitative research with its long-standing expertise in credits factor investing.

  • Olaf  Penninga
    Olaf
    Penninga
    Portfolio Manager
  • Martin Martens
    Martin
    Martens
    Head of Quant Allocation Research
  • Patrick  Houweling
    Patrick
    Houweling
    Head of Quant Credits

Speed read

  • Robeco launches a factor investing fund for aggregate fixed income 
  • Applying factors to government bonds is a recent development
  • Portfolio enhancements ensure a high degree of sustainability 

The application of factors to government bonds is the most recent development in the field of quantitative investing. Having originated in the 1970s with application to equities, factor investing moved to the realm of credits during the 1990s. With the ability now to apply factors to government bonds, too, it means that factor investing within fixed income has been extended from nearly a third of the asset class to over 75% coverage. 

Robeco has combined this latest innovation in quantitative research, much of it driven by its own researchers, with its long-standing expertise in credits factor investing (read our white paper, ‘Factor investing in government bonds’). The result is the newly launched Robeco QI Global Multi-Factor Bonds fund.

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A new approach within quantitative investing

Factor investing traditionally has focused on companies, whether within equity or credit markets. The shift to government bonds requires quants investors to define how to apply well-known factors like value in the context of government bonds – a new approach which to date has less coverage in academic research than equity factors. And yet, given the long data history for government bonds globally, there is plenty of useful data which makes this a viable avenue for factor investing.

Robeco QI Global Multi-Factor Bonds is one of the very first factor investing funds for aggregate fixed income that offers balanced exposure to five proven factors: low-risk, quality, value, momentum and size.

It follows a systematic, evidence-based strategy that enables it to achieve alpha without reliance on a specific market environment. The outperformance, which is measured against the Bloomberg Barclays Global Aggregate index, is accomplished through optimal exposure to proven factors in government bonds and credits. 

A risk-neutral approach that offers style diversification

The advantage of such a rules-driven approach is that it efficiently allows for risk-neutral portfolio construction, in the sense that the fund’s strategic risk profile is similar to that of the benchmark. At the same time, the fund can be tilted to an overweight or underweight duration positioning in a tactical way.

Due to portfolio enhancements that range from ESG integration and engagement to exclusions, the strategy ensures a high degree of sustainability.

The highly systematic nature of this solution serves as a style diversifier within an existing fixed income allocation. Adding the fund to a multi-manager portfolio therefore improves diversification and strengthens its risk-return profile.

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