RT Journal Article
SR Electronic
T1 Factor Investing in Credit
JF The Journal of Index Investing
FD Institutional Investor Journals
SP jii.2020.1.085
DO 10.3905/jii.2020.1.085
A1 Harald Henke
A1 Hendrik Kaufmann
A1 Philip Messow
A1 Jieyan Fang-Klingler
YR 2020
UL https://pm-research.com/content/early/2020/04/15/jii.2020.1.085.abstract
AB This article investigates the application of factor investing in corporate bonds. The authors analyze five different long-only factor investment strategies (Value, Equity Momentum, Carry, Quality, Size) within the USD investment grade and high yield market. These factors can explain a significant part of the cross-sectional variation in corporate bond excess returns. Combinations of the single factors turn out to be superior in risk-adjusted terms. Because the correlations between the single factors are low, a combined multi-factor signal benefits from diversification among the factors. A signal blending strategy is particularly suitable for active approaches targeting high alpha. This strategy leads to alphas up to 1.27% within investment grade and 5.90% within high yield. In contrast, a portfolio blending strategy is better aligned with more passive approaches, targeting low turnover and low tracking error.TOPICS: Factor-based models, style investing, performance measurementKey Findings• The authors find a strong positive relationship between Value, Equity Momentum, Size, Carry and Quality and future returns for USD denominated corporate bonds.• Due to the attractive correlation structure of the single factors, a multifactor strategy enhances the risk return profile even further.• The authors’ multifactor strategy leads to alphas up to 1.27% (5.90%) in IG (HY) even after transactions costs are taken into account.