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Outperforming corporate bonds indices with factor investing

Outlooks & Research

Raul LEOTE DE CARVALHO
 

The coronavirus pandemic has led to a massive price correction in all risk assets, including corporate bonds. And yet, in the middle of such uncharted territory, multi-factor corporate bond investment strategies have largely proven resilient and could perform well relative to their benchmark.

Corporate bonds, just as other risk assets, have undergone a brutal correction due to a sharp rise in risk aversion among investors as well as sector-specific or company-specific concerns. Yet this ‘uncharted territory’ is also an interesting out-of-sample case study to assess the behaviour and robustness of investment strategies, in particular, quantitative strategies such as multi-factor investment approaches.

For those who remain invested in corporate bond markets, multi-factor strategies can be an attractive solution.

They should continue to prove resilient to credit events due to their robust portfolio construction and the inclusion of quality and low-risk criteria in their selection of issuers.

And – as described in our paper ‘Outperforming corporate bond indices with factor investing’ – multi-factor strategies can usually generate significant alpha when the recovery comes.

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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