Some multi-factor corporate bond investing strategies have outperformed their benchmarks over the last five years. Using a systematic approach that considers factors such as credit quality and valuations, these strategies can demonstrate resilience across various market conditions.
Investors in corporate bonds have faced a myriad of challenges over the past five years, from economic uncertainty and heightened volatility to shifting monetary policy and inflation.
A review of our multi-factor credit strategy
How might a multi-factor credit strategy perform in this environment? Does it deliver sustained outperformance across market environments in line with the claims of academic research?
To partly answer this question, we looked at the yearly performance of our own sustainable euro multi-factor corporate bond strategy, which has been live since January 2018. The strategy aims to generate around 50bp of annualised excess returns before fees, while maintaining the same risk profile as its benchmark, with bond selection the single source of performance.
2019: A strong year for the credit market and the strategy
Markets and particularly credit did well in 2019, with the benchmark (ICE BAML Euro Corporate) showing a greater than 5% excess credit return (versus US Treasuries). Demand for corporate bonds surged as investors sought higher yields in a low-interest-rate environment. These market conditions typically suit the most aggressive/high-beta investors. Our beta-1 multi-factor portfolio (Euro multi-factor corporate bond) also did well.
| Benchmark OAS Dec-2018 | Benchmark OAS Dec-2019 | Benchmark OAS change | Benchmark total return (A) | Benchmark credit return (B) (performance in excess of Treasuries) | Sustainable Euro multi-factor corporate bond strategy gross return (C) | Excess return (C-A) |
| 153 | 95 | -58 | 6.25% | 5.28% | 6.80% | 0.55% |
Note: OAS = option-adjusted spread. Source: BNP Paribas Asset Management; Feb 2024
2020: Resilience in highly volatile credit markets
Markets saw extremes in 2020: in February, the US stock market reached (then) record highs before a broad sell-off a few weeks later. The corporate bond benchmark saw a pandemic-related crash in the first quarter, followed by a robust rally, ending up in positive territory for the year.
This was a real-life stress test for our strategy. It had a positive return versus the benchmark in the first quarter, which we believe illustrated the robustness of portfolio construction and the benefits of a balanced style exposure.
| Benchmark OAS Dec-2019 | Benchmark OAS Dec-2020 | Benchmark OAS change | Benchmark total return | Benchmark credit return | Euro MF Corp. gross return | Excess return |
| 95 | 93 | -2 | 2.65% | 1.58% | 2.93% | 0.28% |
Source: BNP Paribas Asset Management; Feb 2024
2021: Inflation and the central banks as the main drivers
Credit markets and bonds generally struggled in a year characterised by rising inflation, a bumpy economic recovery, and the start of tighter monetary policy.
These market conditions were not ideal for a systematic bond selection approach as the lack of dispersion across issuers limited opportunities to earn alpha. Still, the strategy posted a positive performance relative to its benchmark.
| Benchmark OAS Dec-2020 | Benchmark OAS Dec-2021 | Benchmark OAS change | Benchmark total return | Benchmark credit return | Euro MF Corp. gross return | Excess return |
| 93 | 98 | +5 | -1.02% | 0.73% | -0.92% | 0.10% |
Source: BNP Paribas Asset Management; Feb 2024
2022: Worst year in decades amid high inflation
Corporate bond markets had to adjust to central banks tightening policy in response to inflationary pressures. Bond yields rose.
Dispersion among issuers returned as investors became more selective.
Our multi-factor strategy did relatively well in these conditions.
| Benchmark OAS Dec-2020 | Benchmark OAS Dec-2021 | Benchmark OAS change | Benchmark total return | Benchmark credit return | Euro MF Corp. gross return | Excess return |
| 98 | 167 | +69 | -13.95% | -1.56% | -13.38% | 0.57% |
Source: BNP Paribas Asset Management; Feb 2024
2023: A good year for credit
Despite numerous challenges, from the collapse of US regional bank SVB, to persistently high interest rates and geopolitical tensions, economies proved resilient.
Multi-year highs in corporate bond yields made them attractive to investors and credit markets did well, with the euro investment-grade benchmark posting its highest credit return since 2019.
Our multi-factor strategy recorded the fifth consecutive year of outperformance relative to its benchmark.
| Benchmark OAS Dec-2020 | Benchmark OAS Dec-2021 | Benchmark OAS change | Benchmark total return | Benchmark credit return | Euro MF Corp. gross return | Excess return |
| 167 | 136 | -31 | 8.01% | 3.65% | 8.34% | 0.33% |
Source: BNP Paribas Asset Management; Feb 2024
Note: Benchmark is ICE BAML Euro Corporate index. Strategy is sustainable Euro multi-factor corporate bond. Source: BNP Paribas Asset Management; Feb 2024.
Conclusion
Over the past five years, market conditions have varied significantly, making this an interesting period over which to assess the performance of systematic investment strategies.
We believe the recurring outperformance of our euro multi-factor strategy in such a dynamic market environment is a compelling illustration of the robustness of our approach and its effectiveness in delivering sustained outperformance.
Disclaimer
