Robeco launches multi-factor strategy in high yield

Robeco announces the launch of Robeco QI Global Multi-Factor High Yield. The factor investing strategy builds on Robeco’s long-term experience in harvesting factor premiums using quantitative strategies. The strategy offers balanced exposure to the low-risk, quality, value, momentum and size factors in the high yield credit market. The liquidity of individual high yield bonds is measured in real time to effectively identify trading opportunities in high-ranked bonds and to reduce trading costs.

A quantitative multi-factor model forms the basis of the strategy and determines which bonds and companies are selected for the portfolio. Human oversight is embedded in the investment process and carried out by Robeco’s fundamental analysts to check for risks outside the model’s scope. ESG analysis is also systematically incorporated into the investment process.

The strategy aims to outperform the Bloomberg Barclays Global High Yield Corporates ex. Financials benchmark with market-like volatility over a full market cycle. It will be managed by Patrick Houweling and Mark Whirdy, who currently also manage Robeco’s Multi-Factor Credit strategy, which is celebrating its three-year track record next month.

Earlier this year, Patrick Houweling and Jeroen van Zundert received a Graham and Dodd Scroll Award of Excellence for 2017 for their paper, which proved that high yield portfolios that are explicitly tilted to factors generate statistically significant and economically meaningful alpha compared to the market portfolio.

Patrick Houweling, Portfolio Manager of Robeco QI Global Multi-Factor High Yield, said: "We’ve been running factor models in credit management since 1999 and were one of the first to introduce a multi-factor credit strategy in 2015, which is celebrating its three-year track record next month. In launching this fund, we can build on long-standing experience in researching and managing factor-based strategies, which makes me confident that the strategy adds value for our clients."

Robeco is a pioneer in quantitative investing and has gained long-term experience in harvesting factor premiums through systematic quantitative strategies within and across asset classes since the early 1990s. Robeco currently has over EUR 55 billion in AUM in quantitative investment strategies, including approximately EUR 5 billion in credit factor investing strategies.


Click here for the full press release

BNY Mellon IM: Concerned about rising populism

Paul Brain, Head of Fixed Income bij Newton IM: We remain concerned about the long term implications of rising populism in Europe as it will lead to higher fiscal deficits and therefore more government supply at a time when the ECB is planning to reduce its support for markets.

That being said recent moves in Italy appear overdone and probably reflect the build-up of positions by investors prior to the elections.

From here we expect the volatility to continue but the significant yield advantage of other Euro countries could attract demand. The possibility of another election in Italy is a concern as it may allow the populist parties to gain more power. They are unlikely to pull out of the euro but the increasing lack of fiscal discipline will not go unnoticed by the Northern Europeans. This situation has gained additional significance as the EU moves to debate closer back-stop support for their banking systems.

For Spain we see little anti-EU risk but are concerned that the political situation leads to uncertainty and perhaps a stale-mate with a lack of government. Sometimes for markets this can be seen as good (budgets are not changed) so we are not expecting further significant widening of Spanish bonds over Germany (assuming Italy doesn’t deteriorate much further).

Fidelity International: Repicing risk Italy

ALBERTO CHIANDETTI Portfolio Manager, Equities and ANDREA IANNELLI Investment Director, Fixed Income at Fidelity International: Italy’s political developments have rocked both stocks and bonds. With a

technical government now in charge and new elections back on the agenda, we may not have seen the end of this adjustment yet and increased market volatility is likely to persist. With hindsight, we may

look back to the current turmoil and investor capitulation as a great buying opportunity. For now, however, it’s difficult to choose the best time to catch the proverbial ‘falling knife’.

Italy – repricing risk – FINAL.pdf

Emerging markets : beyond the dollar

Many fear the rising dollar will badly erode the price of emerging-market raw material exports, and therefore expose supposedly over-leveraged EM countries to the ravages of default, buyouts by the IMF and its brethren, and years of externally-imposed austerity.

Interest rates on the local-currency sovereign debt of EM countries have certainly reacted according to the script, with knee-jerk EM redemptions driving bond prices downward, and therefore pulling yields up.

Yields on Emerging-Market Local-Currency Sovereign Debt (5-year), 5/22/2018

Source: Bloomberg, May 18, 2018.

The challenge for investors is that the characterization of EM economies may be outdated. U.S. dollar exposure on emerging economies is much reduced, as a larger percentage of local sovereign debt is denominated in home-country currencies – leaving the currency exposure with outside investors instead of local central banks. Several major economies, including India, have moved dramatically up the value chain, exporting services much more than goods.

Clearly there’s trouble in some economies, including Argentina, Turkey, Russia and Brazil. But those challenges are country-specific, and in at least one case (Argentina) appears to have met its match in the currency markets.

Investors who do their homework focus on opportunities as well as the risk; when a central bank takes a stand and has the firepower to make it stick, a 20% yield on a 5-year government bond could very well be an opportunity for incremental return rather than merely an indicator of risk.

Robeco: Fact/Fiction – SI does not have enough data to work

In her new ‘Fact/Fiction’ column Masja Zandbergen, Head of ESG integration at Robeco, addresses the myth that there is not enough data available to prove that sustainability investing works. According to her, the problem isn’t really in finding data, but knowing how to process it.

“Within the investment industry, virtually all asset managers and banks now have their own in-house sustainability teams to collect data and then use it as part of their investment processes. Robeco uses the annual Corporate Sustainability Assessment (CSA) and twice-yearly Country Sustainability Ranking (CSR) produced by sister company RobecoSAM.

“The CSA is a questionnaire sent to more than 4,000 listed companies around the world, including the 2,500 largest. It asks between 80 and 120 industry-specific questions that directly relate to the companies’ operations. For the last collection in 2017, some 60 industries were represented, with more than 600 data points per company.

“This proprietary research underpins much of the ESG integration work conducted at both Robeco and RobecoSAM. And because it has systematically assessed the ESG performance of large listed companies since 1999, RobecoSAM now owns one of the world’s most comprehensive databases of financially material sustainability information.”

Fact or fiction -SI does not have enough data to work – May 2018.pdf

Janus Henderson: Are investors too fearful?

Nick Maroutsos and Daniel Siluk, fixed income portfolio managers at Janus Henderson Investors, discuss the prospects for markets and whether inflation and a flattening of the yield curve are causes for concern:

“Pessimists point to the flattening of the US yield curve as a potential cause for concern. Historically, when the curve inverts and 10-year Treasury yields are below 2-year Treasury yields it has signalled a recession and been a good indicator of a pick-up in defaults in corporate bond markets. The lack of a positive term spread is essentially saying the market is gloomier about longer-term economic prospects than it is about the near term. In April 2018, this differential (commonly notated as 2s10s) fell to less than half a percentage point (50 basis points). The mid to late 1990s, however, showed that the 2s10s can flirt with going negative for several years without there being a recession. The question is whether the US Fed will push ahead with all of their projected rate rises if they think it will lead to an inverted yield curve.”

Graph: US Treasury 10y minus 2y yield differential and the US high yield default rate

Source: FRED, Federal Reserve of St. Louis, Moody’s US trailing 12 month default rate, 31 March 1978 to 31 March 2018.

Access the article in its entirety via the attached PDF.


Week Ahead

Next week markets will focus on US inflation rate, Michigan consumer sentiment, JOLTs job openings, and producer and foreign trade prices. Elsewhere, the Bank of England will be deciding on monetary policy. Other important releases include: UK industrial production, construction output and trade balance; Germany industrial production and foreign trade; China inflation, producer prices and external trade; and Australia business and consumer morale.

The US will release updated figures for inflation rate; the preliminary estimate of Michigan consumer sentiment; JOLTs job openings; producer and foreign trade prices; consumer credit change; NFIB Business Optimism Index; IBD/TIPP Economic Optimism; the government’s budget statement; and the final reading of wholesale inventories.

In the UK investors will turn their attention to Bank of England’s policy meeting, at which the central bank is expected to keep rates on hold on the back of poor economic data and Brexit worries. The country’s industrial production, trade balance, construction output and Halifax house prices will also be watched. Elsewhere in Europe, markets will focus on: Germany industrial output, foreign trade and factory orders; France industrial production; Italy retail trade and industrial output; and Switzerland, Sweden and Ireland inflation rates.

In China important data to be released include inflation and producer prices, trade balance and monetary indicators. Meanwhile in Japan analysts are eyeing the publication of household spending, alongside current account, average cash earnings and leading indices.

In Australia key data to watch for will be Westpac consumer confidence and NAB business confidence.

Other important releases include: Canada employment figures and house price index; Brazil and Mexico inflation rates; Indonesia, Hong Kong and the Philippines first quarter GDP growth rates; New Zealand, Malaysia and the Philippines interest rate decisions; and India industrial production.

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