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Multi-factor bonds: an alternative to passive fixed income

Multi-factor bonds: an alternative to passive fixed income

28-11-2018 | Visione

A growing number of investors are implementing their fixed income strategies through passive Exchange Traded funds (ETFs). But these products are far from ideal. For investors looking for a smarter solution, factor investing offers an alternative.

  • Olaf  Penninga
    Olaf
    Penninga
    Portfolio Manager

Speed read

  • Factor investing works in bond markets
  • It is possible to obtain stable alpha without taking additional risk
  • Our new multi-factor bonds strategy is designed to achieve just that

One of the main pitfalls of classic passive bond strategies is that they inevitably lag the reference index, once costs and practical implementation hurdles are taken into account. However, it is possible to design factor-based investment strategies that generate stable and attractive alpha without taking on additional risk, compared to passive strategies.

Robeco’s multi-factor bonds strategy is designed to achieve exactly that. It benefits from explicit exposures to a number of proven factors, while maintaining a market-like risk profile, similar to that of a popular broad bond index, the Bloomberg Barclays Global Aggregate Index. As a result, the strategy is able to deliver stable relative performance, while maintaining a neutral position in terms of duration, currencies and other risk measures.

Tieniti aggiornato sull'universo quantitativo
Tieniti aggiornato sull'universo quantitativo
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A smart alternative to fixed income ETFs

In this sense, our multi-factor bond solution represents a smart alternative to passive fixed income ETFs. Moreover, the rules-based and systematic nature of this global bond strategy leads to a high degree of transparency: all trades and portfolio positions are predictable and easy to explain. Derivatives are used, but only to a limited extent.

Simulations show the strategy is able to deliver attractive alpha with a low tracking error

Our simulations of the strategy’s performance over the January 2001-September 2018 period show that the strategy is able to deliver attractive alpha with a low tracking error. During that period, the strategy would have delivered an annualized outperformance of 1.0%, on average, over the Bloomberg Barclays Global Aggregate index, with little volatility regardless of the specific market environment.

Our simulations show a Sharpe ratio and an information ratio both just above 1.0. The simulated ex-post tracking error is 0.8%, consistent with our aim to design a strategy with an index-like risk profile. In light of the current low-yield environment, adding an average outperformance of nearly 1.0% to a significant improvement over the return profile of a global bond portfolio.

Building a risk-neutral portfolio with optimal factor exposures

Our approach to building multi-factor bond portfolios is to start by determining the allocation to credits and government bonds such that they offer a similar risk-return profile to that of the broader Bloomberg Barclays Global Aggregate index. Building a risk-neutral portfolio of credits and government bonds is the starting point for optimizing the factor exposures in both segments of the portfolio.

Then, we apply our proprietary multi-factor selection model to select credit bonds that offer the best exposures to the low-risk, quality, value, momentum and size factors. This credit selection model has been successfully applied in live factor investing credit portfolios since 2012 and is based on extensive empirical research.

Next, we systematically screen bonds of various maturities across the most liquid developed government bond markets to identify those that score best in terms of the value, momentum and low-risk factors. The resulting portfolio is well-diversified across corporate bonds, agencies, and Treasuries and is managed in a highly systematic way to achieve optimal exposures to the desired factors.

Read the related publication: ‘Harvesting factor premiums across global bond markets’

Disclaimer

La relazione non è consultabile da utenti di paesi in cui l'offerta di servizi finanziari esteri non è consentita, quali i soggetti statunitensi.

I dati forniti non verranno comunicati a terzi. Le informazioni sono destinate esclusivamente agli investitori professionisti. Tutte le richieste pervenute saranno verificate.

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Disclaimer

Confermo di essere un cliente professionale

Le informazioni e le opinioni contenute in questa sezione del Sito cui sta accedendo sono destinate esclusivamente a Clienti Professionali come definiti dal Regolamento Consob n. 16190 del 29 ottobre 2007 (articolo 26 e Allegato 3) e dalla Direttiva CE n. 2004/39 (Allegato II), e sono concepite ad uso esclusivo di tali categorie di soggetti. Ne è vietata la divulgazione, anche solo parziale.

Al fine di accedere a tale sezione riservata, si prega di confermare di essere un  Cliente Professionale, declinando Robeco qualsivoglia responsabilità in caso di accesso effettuato da una persona che non sia un cliente professionale.

In ogni caso, le informazioni e le opinioni ivi contenute non costituiscono un'offerta o una sollecitazione all'investimento e non costituiscono una raccomandazione o consiglio, anche di carattere fiscale, o un'offerta, finalizzate all'investimento, e non devono in alcun caso essere interpretate come tali.

Prima di  ogni investimento, per una descrizione dettagliata delle caratteristiche, dei rischi e degli oneri connessi, si raccomanda di esaminare il Prospetto, i KIIDs delle classi autorizzate per la commercializzazione in Italia, la relazione annuale o semestrale e lo Statuto, disponibili sul presente Sito o presso i collocatori.
L’investimento in prodotti finanziari è soggetto a fluttuazioni, con conseguente variazione al rialzo o al ribasso dei prezzi, ed è possibile che non si riesca a recuperare l'importo originariamente investito.

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