Factor investing in bonds should focus on two additional factors
EDHEC-Risk Institute aims to widen the concepts of factor-investing in bond markets by encouraging investors to focus on the two factors that help explain fraction of differences over time in bond returns, the ‘level’ or ‘slope’ of the yield curve.
According to the institute’s paper, produced as part of the Amundi research chair on “ETF, Indexing and smart beta investment strategies”, it would be possible to build duration-timing strategies that were economically superior to bearing unconditional duration risk.
“Demand from investors to apply factors to the fixed income asset class is growing rapidly, opening a new phase for the industry,” Bruno Taillardat, head of smart beta & factor investing at Amundi.
“Since factor-based solutions are not yet as developed on this side as they are on equities, we are delighted to support the EDHEC-Risk Institute with this new academic research, to drive investors’ education, better understand factor investing in fixed income and build the right investment solutions.”
In order to do so, the concept of factor-investing in bond markets needs to be broadened and it would be equally important for investors to analyse risk factors that drive these universes as well as finding whether they attracted compensation or not and examining bond return predictability, the paper said.
Additionally, after analysing whether it was possible to identify strategies which, after transaction costs, could generate excess returns by taking relevant signal-based level or slope bets when investing in a real US coupon bonds universe, the authors of the report came to three major conclusions and confirmed:
- long-term bonds appeared to offer a higher unconditional excess return over short-term rates, known as the bond risk premium
- a conditional version of a carry strategy based upon a time-varying exposure to the level of the yield curve could generate up to 200 basis points of excess performance, and
- a conditional version of a flattener strategy based upon a time-varying exposure to the slope of the yield curve could generate economically-significant additional performance, even though such excess performance is limited in implementation by the presence of leverage constraints
Amundi ETF, Indexing and Smart Beta business line provided solutions for institutional investors and distributors.
Recommended for you
Platinum Asset Management has put its two closed-end funds under strategic review in a bid to reduce the share price discount to pre-tax NTA and maximise shareholder value.
In the latest Meet the Manager profile, Money Management speaks with Michael Skinner, founder and managing director at Blackwattle Investment Partners.
Perpetual has seen AUM rise 6 per cent in the last quarter but the departure of a longstanding JOHCM fund manager led to outflows of $2.2 billion from his strategy.
Global fixed income fund Bentham Global Opportunities has been added to several major platforms, enabling it to be accessed more easily by financial advisers.