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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 | インサイト

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.

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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:

This report is not available for users from countries where the offering of foreign financial services is not permitted, such as US Persons.

Your details are not shared with third parties. This information is exclusively intended for professional investors. All requests are checked.

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加入協会: 一般社団法人 日本投資顧問業協会