Staying on track with multi-factor credits in a tough market environment

Over the past twelve months, during which geopolitical events and rising inflation have resulted in the most negative market returns seen in many years, Robeco QI Global Multi-Factor Credits continued to show the merits of diversification. The strategy outperformed the global credit index by about 0.2% over this period.^{1 ,2} By contrast, the average global credit fund in the peer group underperformed the index by about 0.6%.

The strategy’s steady outperformance over time, in combination with its diversifying ability, strong sustainability profile and lower fees, confirms its unique position within a universe of active and passive funds, making it an attractive core holding in a multi-manager portfolio.

The recent period has been one of the most challenging market environments for fixed income investors in decades. Since the Russian invasion of Ukraine in February 2022, market sentiment has been very bearish. Inflation has soared to levels last seen in the early 1980s, interest rates have increased to the highest level in 10 years, and credit spreads have doubled over the last twelve months. This is a tough environment for any active credit manager; it could also raise the question whether a systematic approach is able to cope with these challenges.

From Morningstar Direct, we obtained the returns of 20 global credit funds over the live period of Robeco QI Global Multi-Factor Credits (July 2015 to August 2022). The peer group includes funds from well-known asset managers. As Morningstar reports net returns, we add back fees to approximate the gross returns. We calculate the outperformance versus the Bloomberg Global Aggregate Corporates Index for each fund and each month.

Figure 1 shows the results over the last 12 months, where we have anonymized the external funds. It shows the outperformance of each of the 21 funds versus the benchmark. We observe that the majority of the funds, 14 out of 21, underperformed the benchmark, with seven funds underperforming by more than -1% and the worst fund lagging the benchmark by more than -2%. Our multi-factor credits fund, on the other hand, outperformed by 0.2%, which places the fund ex aequo in the top three, with only two other funds showing higher outperformance over this period. The average fund underperformed the benchmark by -0.6%.

The recent strong performance of Robeco QI Global Multi-Factor Credits is no coincidence, as demonstrated by its live track record since July 2015. ^2,4 Since inception, the strategy outperformed its benchmark in 17 out of 28 quarters (61%), 10 out of 14 half-years (71%), and five out of six calendar years (83%). The tracking error of the strategy is among the lowest in the peer group.

Furthermore, the risk of the strategy is very similar to that of the benchmark: its volatility was 5.24% over its live track record versus 5.46% for the benchmark, and its beta was close to 1 (0.95). In contrast, 17 out of 21 funds in the peer group had a volatility above the benchmark and a beta above 1. The benchmark-like risk of Robeco QI Global Multi-Factor Credits is an integral part of the investment process.

Moreover, we observe that the fee of the Robeco multi-factor strategy, defined as the ongoing charges for the institutional share class, ⁵ is among the lowest in its peer group. This shows that the strategy is attractively priced between passive and traditional active strategies.

Style diversification

The strategy’s systematic investment process yields another advantage for clients that already invest in actively managed corporate bond portfolios: it offers style diversification by generating alpha with a differentiating approach compared to its peers.

To quantify this style diversification, we calculate the correlation between the performances of our multi-factor strategy and the 20 fundamentally managed global credit funds in the peer group introduced above. We calculate the pairwise correlation between a fund’s monthly outperformances and each of the 20 other funds. Then, we calculate the average of these correlations for every fund.

The results are shown in Figure 2. With an average outperformance correlation of -9%, Robeco QI Global Multi-Factor Credits scores best of all funds. It is the only fund with a negative correlation, which is much lower than the +40% average for the other funds. So, indeed, our multi-factor fund is a strong diversifier relative to fundamentally managed funds.

A systematic incorporation of sustainability

Robeco QI Global Multi-Factor Credits promotes various environmental and social characteristics.⁶ Firstly, it applies exclusion criteria related to products and business practices that Robeco believes are detrimental to society. Examples include manufacturers of tobacco or controversial weapons, and companies involved in thermal coal, oil sands or arctic drilling. And if a company in the portfolio is in breach of international standards, such as the OECD Guidelines for Multinational Enterprises, it will become part of Robeco’s Enhanced Engagement program in which the reported shortfalls are addressed.

Moving beyond exclusions and enhanced engagement, the strategy commits to providing investors with a lower environmental footprint than its benchmark in terms of its carbon emissions, water use and waste generation. In addition, the strategy commits to being exposed to less ESG risk than the reference index.