At Robeco we have a long history in credit, having been investing in corporate bonds since the 1970s. Today, we run an extensive range of fundamentally managed credit portfolios that are all based on in-depth research and a contrarian outlook. We also offer our clients a number of quantitative credit strategies.
Ever since we began running dedicated credit strategies in the 1990s, our portfolios have been grounded in in-depth fundamental research and – most importantly – a contrarian investment style. Basing our decisions on our own research rather than being swayed by public opinion or the market consensus has been instrumental in enabling us to achieve steady outperformance.
One of the main premises of our credit investment philosophy is that corporate bond investors tend to exhibit herd mentality. The result is that they often crowd into the same positions. We seek to avoid such crowded trades, reducing the risk that we will get trapped in an illiquid position should the market’s preference reverse.
In fact, poor liquidity is one of the main challenges facing credit investors today. Our contrarian investment style can help us to deal with illiquidity while seizing opportunities at the same time. It enhances our risk-adjusted return potential as we seek to buy after a market sell-off and take risk off the table when a bubble appears to be approaching.
Our contrarian approach has also been instrumental in our credit portfolios’ ability to limit drawdowns over the years. For example, our high yield strategy did relatively well in the crises of 2001, 2008 and 2015, outperforming our benchmark and market participants who had taken on too much risk in the run-up to these sharp downturns. The focus on the long term, avoidance of downside risk, and contrarian investment stance have been instrumental in this respect.
But a successful contrarian investment style is only possible with the in-depth research capabilities necessary to back up our in-house investment theses. Our Credit team consists of 30 investment professionals with hands-on credit experience across full market cycles, so they know when to invest and what to avoid. What’s more, we have adopted a career analyst model, providing our analysts with the opportunities and resources to fully develop the research skills, global sector expertise and knowledge of issuers that are vital if they are to pinpoint the very best investment opportunities.
There are lots of opportunities to outperform in the corporate bond markets, but to manage a corporate bond portfolio successfully there are two main points to remember. First, it’s vital to be able to take on the right level of risk at the right time. And second, good credit management isn’t about selecting a few of the best-performing bonds – it’s much more important to build a well-diversified portfolio that avoids the losers.
The first stage of our process is to determine the optimal amount of exposure to take to the credit markets based on our view of the market cycle. Understanding the global macroeconomic backdrop is essential in defining our expectations for the various classes of corporate bond, so the thorough top-down assessment of the credit markets we perform is essential to maximize the returns our clients receive.
A top-down view may be vital, but it’s bottom-up issuer selection that is the most important driver of our credit portfolios’ returns. Credit selection starts off with our analysts taking into account five different variables at each company they analyze. They look at its:
From there, our portfolio managers go on to select the most attractive bonds for inclusion in our portfolios.
Robeco is well known as an early adopter of innovative strategies and investment techniques. As well as our pioneering DTS (duration times spread) risk management technique, our innovative approach to credit has seen us launch the first high yield fund in Europe, incorporate ESG as an integral part of our credit investment processes, and develop a range of factor-based quantitative credit strategies.
We’re high-yield pioneers. We were early to spot the potential of high-yield credit. Back in 1998, Robeco became the first asset manager to launch a high yield bond fund in continental Europe. The fund’s current manager, Sander Bus, has been involved in running it ever since. It wasn’t until the mid-2000s that high yield really gained traction among European investors, but since then this global fund’s assets under management have grown strongly and we have gone on to launch a similar fund focusing on European high-yield credit.
We’ve also been among the leaders when it comes to incorporating ESG analysis in our credit investment processes. In fact, ESG is a vital part of our approach because credit investing is all about avoiding the losers – companies that can’t meet their obligations. By considering ESG factors, such as corporate governance, we can spot early warning signs that traditional financial analysis might miss. As early as 2010, we launched a sustainable credit fund that aims to minimize its environmental footprint as well as maximizing returns.
Also read: Six ways to improve the sustainability of credit portfolios
We need to be able to measure the true risk of our portfolios – historically, one of the biggest challenges facing credit investors. Back in 2004 we developed an innovative method to do so based on the observation that the product of a bond’s credit spread and its duration – its DTS – accurately predicts its future volatility. Now widely used throughout the industry, our DTS technique has found its way into all aspects of how we manage our credit portfolios at Robeco and has been pivotal in our success in this field.
Bonds with a long duration are more volatile than those with a short duration. Also, bonds with a high spread are more volatile than those with a low spread. To make a good assessment of the real risk of a bond we need to consider both aspects. This concept is the foundation of our credit risk model.
We run quant credit as well. In addition to our fundamental credit range we provide our clients with access to two quantitative, factor-based strategies: one that invests in low-risk corporate bonds, and a multi-factor credit strategy that exploits four proven factors. The benefits of factor investing are well known among equity investors, but far fewer people are aware of its potential in the corporate bond markets. We’ve published studies that shows that factor investing works well for credit, and has the scope to produce strong long-term risk-adjusted outperformance of the broad market.
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