Already very popular in equity markets, factor investing is now catching on in other asset classes too, in particular for corporate bonds. Recently-awarded research by Patrick Houweling and Jeroen van Zundert on this topic confirms Robeco’s position at the forefront of this trend.
For many years, factor investing research remained mostly focused on equities, both in academia and in the financial industry. This is now changing as more and more evidence emerges to show that factor investing works for other asset classes as well. As a result, it is becoming an increasingly popular option for a broader range of investors, particularly in corporate bonds.
As a pioneer in this field, Robeco has long been seeking evidence to prove the existence of factors beyond the equity markets. In a groundbreaking paper1 published in 2017 in the Financial Analysts Journal edited by the CFA Institute, Patrick Houweling and Jeroen van Zundert, from Robeco’s quant credits team, were the first to document how portfolio managers can successfully implement a multi-factor approach in their credit portfolios.
This article has now been selected by the CFA Institute to receive a Graham and Dodd Scroll Award of Excellence for 2017. This award recognizes excellence in research and financial writing while honoring Benjamin Graham and David L. Dodd for their enduring contributions to the field of investment analysis. Previous winners include well-known names from the academic and investment management community, such as William Sharpe, Fischer Black, Cliff Asness, Peter Bernstein and Roger Ibbotson.
“We are very happy with winning this prestigious award, as it acknowledges both the academic quality and the practical relevance of our research,” says Patrick Houweling, head of quant credits at Robeco. “Our quant credit research team is among the happy few that have been able to access and analyze large historical data sets on individual corporate bonds for a relatively long period of time. This gives us an extremely valuable edge and has resulted in pioneering research.”
‘This prestigious award acknowledges both the academic quality and the practical relevance of our research’
In their paper, Patrick Houweling and Jeroen van Zundert show that corporate bond portfolios which are explicitly tilted to size, low risk, value and momentum generate statistically significant and economically meaningful alpha compared to the market portfolio. These results are robust also when transaction costs are taken into account, alternative factor definitions and portfolio construction settings are used, and when the construction of the factor portfolios is based on a subsample of liquid bonds.
Furthermore, the correlations between individual factors are low. Therefore, combined multi-factor portfolios benefit from diversification across factors, leading to both lower tracking error and higher information ratios than for single-factor portfolios.
Our research on factor investing in credit markets forms the basis of the factor credit strategies we have been offering since 2012. In total, Robeco currently manages approximately EUR 5 billion in credit factor investing strategies.
“Our research and live track records show that explicitly targeting factor premiums in the corporate bonds market clearly adds value for investors,” says Jeroen van Zundert, researcher quant credits. “This award only reinforces our commitment to pursue high-quality research to further enhance the investment strategies we offer our clients.”
1P. Houweling and J. van Zundert, ‘Factor Investing in the Corporate Bond Market’, Financial Analysts Journal, 2017, Vol. 73, No. 2.
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