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Lux-o-rente becomes QI Global Dynamic Duration

Lux-o-rente becomes QI Global Dynamic Duration

20-01-2017 | Insight

The name Robeco Lux-o-rente will be changed to Robeco QI Global Dynamic Duration1. Not only does the new name more accurately describe the investment philosophy of the fund, it also allows investors to more easily infer the nature of the investment strategy. Portfolio manager Olaf Penninga on active duration management.

  • Olaf  Penninga
    Olaf
    Penninga
    Senior portfolio manager fixed income

Speed read

  • Over 90% of bond market returns are driven by changes in interest rates
  • A quantitative model forecasts interest rates changes
  • True active duration management: frequent maximum duration deviations

Robeco QI Global Dynamic Duration invests globally in government bonds with an investment grade rating with a focus on active duration management. As interest rates and bond prices move in opposite directions, Robeco QI Global Dynamic Duration reduces its sensitivity to changes in interest rates (its duration) when interest rates are expected to rise and increases its duration when they are expected to decline. “By actively managing the portfolio’s duration the fund can offer investors protection in weak bond markets and a substantial return in strong bond markets”, explains portfolio manager Olaf Penninga the investment strategy.

By focusing on active duration management, Robeco QI Global Dynamic Duration targets the most important driver for bond market returns. Penninga: “Robeco’s own research has shown that annual bond market returns are over 90% determined by changes in interest rates. To forecast changes in interest rates, we developed a quantitative model. It uses financial market data to capture the expectations for fundamental macroeconomic drivers of bond markets such as economic growth, monetary policy and inflation. To enhance the timing of the model we included technical and valuation indicators.”

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Well-known human behavioral biases are avoided

The investment philosophy of the fund and its new name Robeco QI Global Dynamic Duration consist of three components: ‘QI’, ‘Global’ and ‘Dynamic Duration’. ‘QI’ stands for Quantitative Investing and refers to the fund's quantitative approach to forecasting changes in interest rates. ‘Global’ refers to the global diversification of the investment portfolio of investment grade government bonds. ‘Dynamic Duration’ means that the fund dynamically adapts its duration to the interest rate forecast given by the quantitative model.

“By applying the predictions of our quantitative model in a disciplined manner, well-known human behavioral biases are avoided”, says Penninga on the ‘QI’. “This approach paid off in the second half of 2014 and early 2015, for example. There was strong consensus and irrational belief in the market that ‘interest rates could not go any lower’. However, our model clearly signaled interest rates would in fact drop even lower. The fund increased its duration and interest rates indeed declined dramatically, contrary to market expectations. We always follow the model’s signals strictly and never overrule them.”

‘By focusing on active duration management we target the main driver of bond market returns’

Truly active duration management

The Robeco QI Global Dynamic Duration portfolio consists of government bonds with an investment grade rating issued by various developed countries such as the US, Japan, Germany, the Netherlands and the United Kingdom. “We actively steer the duration of our investment in the three most important government bond markets: the US, Germany and Japan. Other bond markets are correlated to these three markets and applying the model to more than these three markets does not improve the strategy”, says Penninga.

“If the model predicts that interest rates will decline in any of the three markets we increase the duration exposure to that market by two years. If interest rates are expected to decline in another market, we increase the duration exposure to that market by another two years. The total duration of the fund can therefore be six years higher (or lower) than that of the benchmark. As the benchmark duration is currently around eight years, the fund’s duration can range from two to 14 years.”

The fund’s truly dynamic approach to duration management is shown by the fact that it has applied maximum duration deviations around 40% of the time and has been in line with index duration only 13% of the time. Penninga: “By taking pronounced active duration positions, the fund aims to reap sizeable benefits when interest rates decline and offer protection when they rise. Although the fund takes an index as a starting point, the active deviations from this index are sufficiently large to generate attractive total returns.”

Style diversifier in fixed income portfolios

Investors often choose government bonds because of their tendency to ‘cushion’ investment portfolios, as they typically perform well in equity bear markets. The aim of Robeco QI Global Dynamic Duration is to provide strong returns when interest rates decline and offer protection when they rise.

“Because of its distinguishing rules-based investment strategy, the fund can therefore be attractive for investors who wish to invest in government bonds and want to diversify this part of their portfolio, or for those who look for attractive returns on their government bond portfolio, and at the same time want to be protected against rising interest rates”, says Penninga. “On the level of bond investments in a portfolio it is a style diversifier as it has one performance driver – duration positioning – where most other government bond funds have multiple performance drivers. The quantitative model enables systematic and fundamental investing in government bonds.”

1The proposed name change of Lux-o-rente is subject to approval and will be put to the vote during an extraordinary general meeting of shareholders.

Find out more about this name change on the dedicated information page. Please visit the fund’s product page for more information on returns, the portfolio and the costs relating to Robeco QI Global Dynamic Duration.

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