Fixed income is the new frontier for factor investing. Pursuing value, momentum, quality or low volatility strategies in bond and credit markets is yet to reach the levels of popularity enjoyed on the equity side of portfolios.
This could be about to change. Pension scheme trustees are a cautious bunch and so many could already be looking to lock in the gains recorded in equities last year.
Indeed, the combined pre-tax profit of the FTSE 350 reached a record £153.8bn in 2017. Growth continued into the first three months of 2018 with dividends up 7.6% year-on-year to £16.7bn.
Bonds are the default market for those with a low tolerance for risk, but with yields on UK government debt at a 1.53%, some may be lured slightly higher along the fixed income risk spectrum.
This is where consultants need to explain the virtues of using factors in fixed income. The sales pitch is usually along the lines of: “You could beat the benchmark and pay lower fees than you would for an active manager.”
This sounds attractive, but this is a young market and youth has its teething problems.
Factor investing is based on economic and corporate fundamentals, but some investors point to a lack of data in this market, especially at the issuer level. There is clearly some way to go before the level of academic and broker research on factors in the debt and credit markets reach parity with the equity markets. The investors and consultants we brought together to discuss this topic also pointed to problems finding the right people to design factor strategies. It appears that you cannot simply replicate in fixed income what works in equities. This is a market that has to be approached in a new way and it will take time to boost its popularity. Fixed income is the next challenge for the factor investing industry.Download to read more