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.
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.
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.
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.
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.
Please read this important information before proceeding further. It contains legal and regulatory notices relevant to the information contained on this website.
The information contained in the Website is NOT FOR RETAIL CLIENTS - The information contained in the Website is solely intended for professional investors, defined as investors which (1) qualify as professional clients within the meaning of the Markets in Financial Instruments Directive (MiFID), (2) have requested to be treated as professional clients within the meaning of the MiFID or (3) are authorized to receive such information under any other applicable laws. The value of the investments may fluctuate. Past performance is no guarantee of future results. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency.
In the UK, Robeco Institutional Asset Management B.V. (“ROBECO”) only markets its funds to institutional clients and professional investors. Private investors seeking information about ROBECO should visit our corporate website www.robeco.com or contact their financial adviser. ROBECO will not be liable for any damages or losses suffered by private investors accessing these areas.
In the UK, ROBECO Funds has marketing approval for the funds listed on this website, all of which are UCITS funds. ROBECO is authorized by the AFM and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.
Many of the protections provided by the United Kingdom regulatory framework may not apply to investments in ROBECO Funds, including access to the Financial Services Compensation Scheme and the Financial Ombudsman Service. No representation, warranty or undertaking is given as to the accuracy or completeness of the information on this website.
If you are not an institutional client or professional investor you should therefore not proceed. By proceeding please note that we will be treating you as a professional client for regulatory purposes and you agree to be bound by our terms and conditions.