singaporeen
Ten years of successful factor investing in credit markets

Ten years of successful factor investing in credit markets

30-06-2022 | Insight

A decade of live track-records shows that our factor-based credit investing approach delivers improved risk-adjusted returns compared to the market. Here’s our story.

  • Patrick  Houweling
    Patrick
    Houweling
    Co-Head of Quant Fixed Income and Lead Portfolio Manager
  • Ralph Berkien
    Ralph
    Berkien
    Client Portfolio Manager

Speed read

  • Ten-year live track record shows strength of factor credits strategies
  • Systematic approach enables style diversification and more sustainability
  • Multi-factor credit selection performed well across market environments

Evidence from our ten years of live factor-based credit investing, combined with more than twenty years of research and innovation in this field, shows that our approach provides improved risk-adjusted returns relative to the market, performance resilience, style diversification and greater levels of sustainability compared to passive and fundamentally managed credit portfolios.

Our first standalone factor credit portfolio was launched a decade ago, in 2012. Today, Robeco’s factor credits capability oversees nearly EUR 5 billion in assets under management, across 15 live portfolios.

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

A history of research and innovation

Robeco has been actively researching the existence of factors in credit markets since the late 1990s. With the growth in European credit markets at the time, it was a natural step to investigate the efficacy of equity factors like value and momentum in credits, too. The research resulted in an academic publication in The Journal of Portfolio Management in 2001 titled “Successful Factors to Select Outperforming Corporate Bonds”.

A number of academic contributions followed in the subsequent period and then, in 2017, we published a ground-breaking paper which was the first to document how portfolio managers can successfully implement a multi-factor approach in their credit portfolios.1

Initially, factor-based credit selection models were used as idea generator for Robeco’s fundamental credit mandates. This changed in 2012, when we won the first external mandate for factor credits. The mandate was from an insurer, to build a conservative multi-factor portfolio that reduces the credit volatility while maintaining market-like returns.

The introduction of our first multi-factor credits strategy in 2015 and our first high yield-focused multi-factor strategy in 2018 were further milestones, followed in 2019 by a mandate to apply factor credits to both investment grade and high yield in one portfolio. This year we launched a sustainable version of the multi-factor credits flagship strategy, which contributes to the Sustainable Development Goals (SDGs) and is aligned with the Paris Agreement.

Table 1 | Launches of factor credits strategies

Tracking the live performances of our factor credit strategies

Our factor-based credit portfolios have provided superior risk-adjusted returns compared to the market. Importantly, our live portfolios have achieved results similar to those in the original empirical research, pointing to the robustness of our research as well the execution in live portfolios.

  • The Robeco Conservative Credits strategy, which is tilted to safer bonds from safer issuers, has realized 48 bps annual outperformance relative to its risk-adjusted benchmark,2 with a Sharpe ratio of 0.76 compared to 0.50 for the benchmark.
  • Robeco Global Multi-Factor Credits realized 45 bps annual outperformance, with a Sharpe ratio of 0.36 compared to 0.25 for the benchmark, and an information ratio of 0.70. In 2022 to date, which marks yet another volatile period, the strategy has outperformed by 51 bps.
  • Robeco Global Multi-Factor High Yield has lagged by 31 bps annually, with a lower Sharpe relative to the benchmark, at 0.20 vs. 0.25. The strategy lagged in 2020, but has been recovering ground since. The strategy performed in line with its benchmark over the current year to date.
  • Robeco Global Multi-Factor All Grades has outperformed by 82 bps per annum with a Sharpe ratio of 0.19 versus 0.06 for the benchmark. In 2022 to date, the strategy has outperformed by 49 bps.

Performances until the end of April 2022. The currency in which the past performance is displayed may differ from the currency of your country of residence. Due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. The value of your investments may fluctuate. Past performance is no guarantee of future results. Returns are gross of fees, based on gross asset value. All figures in EUR. In reality, costs (such as management fees and other costs) are charged. These have a negative effect on the returns shown. Robeco Conservative Credits is based on a Robeco Euro Conservative Representative Mandate and benchmarked against the risk-adjusted Bloomberg Euro Aggregate Corporates index. Robeco Global Multi-Factor Credits is based on Robeco QI Global Multi-Factor Credits IH EUR share and benchmarked against the Bloomberg Global Aggregate Corporates index (hedged to EUR). Robeco Global Multi-Factor High Yield is based on Robeco QI Global Multi-Factor High Yield IH EUR share and benchmarked against the Bloomberg Global High Yield Corporates ex Financials index (hedged to EUR). Robeco Global Multi-Factor All Grades is based on a representative mandate and benchmarked against a Custom Bloomberg Global Credit incl HY benchmark (hedged to EUR). The inception dates for each strategy are shown in Table 1.

Demonstrated style diversification

The live track-records of the various factor-based credit strategies show a further important benefit: low correlations with traditional actively managed credit portfolios. A peer group study (conducted in 2021) that analyzed the live period of Robeco QI Global Multi-Factor Credits found that its relative returns have a -23% correlation, on average, with the relative returns of fundamental global credit managers.

Figure 1 | Average outperformance correlation among global credit strategies

Source: Morningstar Direct, Bloomberg, Robeco. Period: July 2015-June 2021. GMFC = Robeco QI Global Multi-Factor Credits (EUR-hedged) live track-record. B to U are 20 anonymized global credit strategies (all euro hedged). Outperformance is calculated vs. Bloomberg Global Aggregate Corporates (euro hedged). The currency in which the past performance is displayed may differ from the currency of your country of residence. Due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. The value of your investments may fluctuate. Past performance is no guarantee of future results. Performance gross of fees, based on gross asset value. In reality, costs (such as management fees and other costs) are charged.

This means that incorporating a factor-based credit strategy into a multi-manager pool of fundamentally managed portfolios adds valuable diversification benefits. See our article “Multi-Factor Credits: Continued style diversification after Covid-19 crisis” for more information.

Innovating in the realm of sustainable investing

The systematic nature of factor credit portfolios means they lend themselves well to sustainability integration. And, indeed, sustainability has been a key consideration in our factor credit strategies since inception, and our approach has continued to evolve over time.

Credit analysts have assessed ESG risks in our factor-based credit portfolios since these strategies were launched in 2012, as part of human oversight of the systematic investment process. In 2013, we started supporting client-based exclusion lists, and have been applying Robeco’s Sustainability Inside exclusion list since 2015.

A further step was taken in 2016, with the decision to ensure that the average ESG scores of our strategies are better than those of the benchmarks. Carbon emission constraints were introduced to the portfolios in 2020. Similar constraints on water use and waste generation have been applied since 2021.

Outlook

There is a growing body of research on factor investing in credit markets, from academia, brokers and index providers, while new competitors are entering the market. These developments are similar to what we saw in equity markets several years ago and augur well for a proliferation of factor investing in credit markets.

We believe the ability of factor-based credit portfolios to integrate multiple sustainability dimensions at the same time will further accelerate the adoption of systematic, factor-based portfolios.

Our aim is to maintain our leading position with a continued focus on research, innovation and sustainability. We will continuously look for ways to improve existing factors and explore new types of data sources and techniques, including natural language processing and machine learning. The launch of the new RobecoSAM QI Global SDG & Climate Multi-Factor Credits is testimony to our desire to stay ahead by introducing innovative strategies that contribute to a more sustainable future and at the same time deliver attractive risk-adjusted returns for our clients.

1 Houweling, Van Zundert, 2017, “Factor Investing in the Corporate Bond Market”, Financial Analysts Journal, Vol. 73, No. 2, pp. 100-115.
2 As a result of the lower risk of Conservative Credits compared to its benchmark, the strategy usually outperforms in bearish credit markets and underperforms in bullish credit markets. To neutralize this effect, we use a risk-adjusted benchmark for performance analysis. This risk-adjusted benchmark has the same degree of interest rate risk and credit risk as the portfolio.

Important information

This information is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation.
The contents of this document have not been reviewed by the Monetary Authority of Singapore (“MAS”). Robeco Singapore Private Limited holds a capital markets services license for fund management issued by the MAS and is subject to certain clientele restrictions under such license.
An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.

Logo

Important Information

Warning/Important note: This website contains information which is only available to qualified investors as defined below. If you are not a qualified investor, please click “I Disagree” to leave the website.

By clicking on "I agree", I declare that: 

  • I am a qualified investor as defined under 1
  • I have read and understood the Terms and Conditions and Disclaimers as described under 2

1 - This website may only be accessed directly or indirectly by the following persons in Singapore:

1) “institutional investor” under section 304 of the Securities and Futures Act (Cap.289)(“SFA”), which means:
(i) the Government; (ii) a statutory board as may be prescribed by regulations made under section 341 of the SFA; (iii) an entity that is wholly and beneficially owned, whether directly or indirectly, by a central government of a country and whose principal activity is (A) to manage its own funds; (B) to manage the funds of the central government of that country (which may include the reserves of that central government and any pension or provident fund of that country); or (C) to manage the funds (which may include the reserves of that central government and any pension or provident fund of that country) of another entity that is wholly and beneficially owned, whether directly or indirectly, by the central government of that country; (iv) any entity (A) that is wholly and beneficially owned, whether directly or indirectly, by the central government of a country; and (B) whose funds are managed by an entity mentioned in sub-paragraph (iii); (v) a central bank in a jurisdiction other than Singapore; (vi) a central government in a country other than Singapore; (vii) an agency (of a central government in a country other than Singapore) that is incorporated or established in a country other than Singapore; (viii) a multilateral agency, international organisation or supranational agency as may be prescribed by regulations made under section 341 of the SFA; (ix) a bank that is licensed under the Banking Act (Cap.19); (x) a merchant bank that is approved as a financial institution under section 28 of the Monetary Authority of Singapore Act (Cap.186); (xi) a finance company that is licensed under the Finance Companies Act (Cap.108); (xii) a company or co-operative society that is licensed under the Insurance Act (Cap.142) to carry on insurance business in Singapore; (xiii) a company licensed under the Trust Companies Act (Cap.336); (xiv) a holder of a capital markets services licence; (xv) an approved exchange; (xvi) a recognised market operator; (xvii) an approved clearing house; (xviii) a recognised clearing house; (xix) a licensed trade repository; (xx) a licensed foreign trade repository; (xxi) an approved holding company; (xxii) a Depository as defined in section 81SF of the SFA; (xxiii) an entity or a trust formed or incorporated in a jurisdiction other than Singapore, which is regulated for the carrying on of any financial activity in that jurisdiction by a public authority of that jurisdiction that exercises a function that corresponds to a regulatory function of the Authority under this Act, the Banking Act (Cap.19), the Finance Companies Act (Cap.108), the Monetary Authority of Singapore Act (Cap.186), the Insurance Act (Cap.142), the Trust Companies Act (Cap.336) or such other Act as may be prescribed by regulations made under section 341 of the SFA; (xxiv) a pension fund, or collective investment scheme, whether constituted in Singapore or elsewhere; (xxv) a person (other than an individual) who carries on the business of dealing in bonds with accredited investors or expert investors; (xxvi) the trustee of such trust as the Authority may prescribe, when acting in that capacity; or; (xxvii) such other person as the Authority may prescribe.

2) “relevant person” under section 305(1) of the SFA, which means:
(i) An accredited investor; (ii) a corporation the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; (iii) a trustee of a trust the sole purpose of which is to hold investments and each beneficiary of which is an individual who is an accredited investor; (iv) an officer or equivalent person of the person making the offer (such person being an entity) or a spouse, parent, brother, sister, son or daughter of that officer or equivalent person; or (v) a spouse, parent, brother, sister, son or daughter of the person making the offer (such person being an individual).

3) any person who acquires the units [in a collective investment scheme] as principal if the offer is on terms that the units may only be required at a consideration of not less than $200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of units in a collective investment scheme, securities, securities-based derivatives contracts or other assets, and if the following condition is satisfied: (i) the offer is not accompanied by an advertisement making an offer or calling attention to the offer or intended offer; (ii) no selling or promotional expenses are paid or incurred in connection with the offer other than those incurred for administrative or professional services, or by way of commission or fee for services rendered by any of the persons specified in section 302B(1)(d)(i) to (vi) of the SFA; and (iii) no prospectus in respect of the offer has been registered by the Authority or, where a prospectus has been registered (A) the prospectus has eAccxpired pursuant to section 299 of the SFA; or (B) the person making the offer has before making the offer 1. informed the Authority by notice in writing of its intent to make the offer in reliance on the exemption under this subsection; and 2. taken reasonable steps to inform in writing the person to whom the offer is made that the offer is made in reliance on the exemption under this subsection.

4) Or otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

If you are not any of the types of persons described above, you are not authorized to enter this website and you should leave this website immediately.

2 Terms and Conditions
You acknowledge that you have read these Terms and Conditions (“Terms”) prior to accessing the website located at www.robeco.com/sg (“Website”) and you agree to be bound by the Terms.  If you do not agree to all of the Terms, you are not an authorised user and you should not use the Website. The Website is owned by Robeco Singapore Private Limited (company registration number: UEN. 201541306Z), which is licensed by the Monetary Authority of Singapore (“MAS”) pursuant to the Securities and Futures Act (Cap.289) (“SFA”) of Singapore, and is managed by Robeco Singapore Private Limited and/or its affiliates (collectively, as “Robeco”). The Website is intended for and should be accessed by institutional investors or accredited investors (as defined under Section 4A of the SFA) of Singapore.  The Website is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject the Robeco to any registration or licensing requirement within such jurisdiction.  It is your responsibility to observe all applicable laws, rules and regulations of any relevant jurisdiction. The content contained in the Website is owned by Robeco and/or its information providers and is protected by applicable copyrights, trademarks, service marks, and/or other intellectual property rights.  You may not copy, distribute, modify, post, frame or link the Website, including any text, graphics, video, audio, software code, user interface, design or logos.  You may not distribute, modify, transmit, reuse, repost, or use the content of the Website for public or commercial use, including all text, images, audio and/or video.  Robeco may terminate your access to the Website for any reason, without prior notice. Neither Robeco, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from the access of the Website.  You agree to indemnity and hold Robeco, its associates, directors, officers or employees harmless against any and all claims, losses, liability, costs and expenses arising from your use of the Website due to violation of the Terms. Robeco reserves the right to change, modify, add or remove any parts of the Terms at any time and for any reason.  The Terms shall deemed to be effective immediately upon posting. The Terms shall be governed by, and shall be construed in accordance with, the law of Singapore.

Disclaimers
The Website has not been reviewed by the MAS. Accordingly, the Website may not be accessed directly or indirectly to persons in Singapore other than (i) to an institutional investor under Section 304 of the SFA, (ii) to a relevant person pursuant to Section 305(1), or any person pursuant to Section 305(2), and in accordance with the conditions specified in Section 305, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. 

Nothing in the Website constitutes tax, accounting, regulatory, legal or investment advice.  The Website is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation or for the purpose of soliciting any action in relation to Robeco’s businesses, or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorised or to any person to whom it is unlawful to make such an offer and solicitation. Any reproduction or distribution of information from the Website, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited.  By accessing to the Website, you agree to the foregoing.  

The funds referred to in the Website are for information only.  It is not a recommendation or investment advice, nor does it mean the funds is suitable for all investors.  The contents of the website is not reviewed by the MAS.  Any decision to participate in the funds should be made only after reviewing the sections regarding investment considerations, conflicts of interest, risk factors and the relevant Singapore selling restrictions.  You should consult your professional adviser if you are in doubt about the stringent restrictions applicable to the use of the Website, regulatory status of the funds, applicable regulatory protection, associated risks and suitability of the funds to your objectives.

Any decisions made based on the information contained in the Website are the sole responsibility of yours.  Any investments made or to be made shall be with your independent analyses based on your financial situation and objectives.  The investments and strategies contained in the Website may not be suitable for all investors and are not guaranteed by Robeco.  

Investment involves risks and may lose value.  Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future.  The value of your investments may fluctuate.  Past performance is no indication of current or future performance.  The Website may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies and such projection or forecast is not indicative of the future.  The information contained in the Website, including any data, projections and underlying assumptions are based upon certain assumptions, management forecasts and analysis of information available on an “as is” basis and without warranties of any kind, whether express or implied, and reflects prevailing conditions and Robeco’s views as of the date published or indicated, and maybe superseded by subsequent events or for other reasons.  The information contained in the Website are accordingly subject to change at any time without notice and Robeco are under no obligation to notify you of any of these changes.  Robeco expressly disclaims all liability for errors and omissions in the information presented in the Website and for the use or interpretation by others of information contained in the Website.

Robeco Singapore Private Limited holds a capital markets services licence for fund management issued by the MAS and is subject to certain clientele restrictions under such licence.  An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.

I Disagree