Higher returns with market-like risk: Style diversification

Robeco’s Multi-Factor Bonds strategy applies bottom-up bond selection in credits and in government bonds, while keeping its top-down risk profile in line with the index. With this index-like risk profile, the fund is equally well positioned to outperform in risk-on and risk-off environments. Many fundamentally-managed peers use top-down allocation strategies that result in a structurally higher exposure to credit risk. These strategies tend to underperform in risk-off periods – precisely when strong performance from fixed-income strategies is required as a portfolio diversifier. Our strategy aims to outperform regardless of the environment. A peer group comparison confirms this different performance pattern. As a result, Robeco Multi-Factor Bonds can be used as a style diversifier to fundamental strategies.

Robeco QI Global Multi-Factor Bonds is the flagship fund of our Multi Factor Bonds strategy. This global bond fund aims to outperform the Bloomberg Global Aggregate index using bottom-up selection of credits and government bonds based on well-known factors like Value, Momentum, Low Risk and Quality. Our portfolio construction algorithm builds a well-diversified portfolio of these attractive bonds, with a top-down, index-aligned risk profile. It also takes sustainability measures like ESG and carbon emissions into account.

The portfolio construction process allows for flexible customization of the risk budget and the sustainability enhancements: we can run for instance mandates with a lower tracking error or a more ambitious decarbonization target. On top of this bond portfolio we implement a tactical duration overlay based on our quantitative duration strategy with a more than 25-year long live track record. This aggregate strategy thus combines performance drivers from Robeco’s long-standing quant fixed income strategies: multi-factor credits and dynamic duration.

We perform a peer group analysis to demonstrate said risk profile, whereas many peers tend to have structurally more exposure to spread risk. We compare the relative returns of Robeco QI Global Multi-Factor Bonds and those of various fundamentally managed global aggregate bond funds over the past 10 years.

Given our fund’s nearly five-year live history, we simulate its longer-term performance using the live track records and backtest results for its performance drivers. For instance, for the multi-factor credit selection we use the live results from the inception of Robeco QI Global Multi-Factor Credits in 2015, and for the period before that we use backtest results.

First of all, we estimate the credit betas of the funds. We take their monthly returns relative to the global aggregate index and regress these on the excess returns of corporate bonds. The results are shown in Figure 1. Most funds exhibit a clear positive beta; they have structurally more exposure to credit risk than the index. This can be in the form of an overweight in credits, or a bias to lower-rated credits, potentially high yield, or a combination of these. Somehow, these funds take more risk than the index. Our fund shows an estimated beta close to zero, i.e. it has similar exposure to spread risk as the global aggregate index. We deliberately target such an index-like risk profile.

Robeco’s Multi-Factor Bonds strategy applies bottom-up bond selection in credits and in government bonds. With its market-like risk profile, the fund is equally well positioned for risk-on and risk-off environments. Many fundamentally-managed peers use top-down allocation strategies that result in a structurally higher exposure to credit risk. These funds tend to underperform in risk-off periods – precisely when strong performance from fixed-income strategies is required as portfolio diversifier. And as these funds typically perform at the same time, combining two or more of these funds generates little diversification benefits. Our strategy aims to outperform both in risk-on and in risk-off periods. A peer group comparison confirms this different performance pattern. Robeco Multi-Factor Bonds can thus be used as a style diversifier to fundamental strategies. And with its ability to perform regardless of the environment, the strategy offers better diversification versus equities than funds that are over-exposed to credits.