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Diversifying credit portfolios with multi-factor strategies

Outlooks & Research

BNP Paribas Asset Management
 

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Combining multi-factor investing with traditional active credit management offers investors scope to benefit from diversification.

  • Over the past decade the use of multi-factor investing in corporate bonds has increased significantly. Better access to corporate bond datasets along with extensive research have enabled managers to develop robust factor-based strategies.
  • Our research highlights the low correlation between multi-factor investing and traditional active management in corporate debt. In combination the two strategies help improve the overall risk-return ratio of an investment. Over the long term they diversify the incremental returns.
  • A multi-factor strategy should thus be considered as a strong diversifier in the credit asset class with the ability to reduce risks and drawdown. This diversification benefit has again been apparent during the COVID-19 crisis.

As growing numbers of institutional and wholesale investors implement factor-based strategies or consider doing so, this short study highlights the diversification benefits of including multi-factor investing in an allocation to corporate bonds.

For in-depth insights into the benefits of combining multi-factor investing with a conventional approach to managing corporate debt, read:


Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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