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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 has the potential to 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 more than USD 5 billion in assets under management, across 15 portfolios.

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”.1

A number of academic contributions followed in the subsequent period and then, in 2017, we published what we believed to be a ground-breaking paper which was the first to document how portfolio managers can successfully implement a multi-factor approach in their credit portfolios.2

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 with the objective of 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.3 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

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. 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 continue to 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.

1 Hottinga, van Leeuwen and van Ijserloo, 2001, “Successful Factors to Select Outperforming Corporate Bonds”, Journal of Portfolio Management, Vol. 28, No. 1, pp. 88-101.
2 Houweling, Van Zundert, 2017, “Factor Investing in the Corporate Bond Market”, Financial Analysts Journal, Vol. 73, No. 2, pp. 100-115.
3 These are UCITS funds which are neither offered to nor available for US investment. This information is offered for the limited purpose of giving the reader context in which to assess Robeco's experience in investing in multi-factor credits.