Bridging the gap between quantitative and fundamental approaches
Thursday 03 October 2019
News, Fixed income
Bonds market faced low rates since many years. And they probably won’t rise up soon.
Clients’ needs for diversification and current market conditions (in addition to low rates, i.e. increase of bonds issuers) drove the path towards new solutions engineering. “Listening to our clients, observing the market and experiencing our econometric models were keys when building this new range” says Jean-Marie Dumas, Head of Fixed Income solutions at Amundi. “High yield laid behind us. We had to provide a serious alternative to traditional judgmental fixed income strategies” he adds.
Using both traditional and alternative risk factors
The working paper “Traditional and alternative factors in investment grade corporate bond investing”1 highlights that factor investing in the credit space remains more of a marketing proposition than an innovative investment strategy when tests are performed on proposed alternative risk factors disregarding their interaction with traditional risk factors (duration-times-spread, liquidity and duration). Nevertheless, by amending specifications for new alternative risk factors in the Investment Grade corporate bond market and integrating them alongside traditional risk factors into a multi-factor framework, investors can benefit from a unique approach to factor investing.
The investment philosophy is clear: combining pure systematic rules-based strategies with long-dated models embedded in Amundi’s Fixed Income team fundamental bond picking. Each month, the team rebalances bond portfolios if appropriate. “Yes, we add a human touch in the pipe, necessary to better control portfolio turnover and optimise performance. When you deal with rules-based models, you have to be sure that prices reflected in the model match market prices. The final portfolio is the pragmatic translation of what the model is saying” Jean-Marie Dumas reckons.
Two different investment approaches
The new range of systematic rules-based strategies relies on two legs. A factor-investing approach and a model-driven investing approach.
The model-driven investing approach is similar to quantitative strategies –i.e. identify a regular-alpha pattern- but the goal is different: “The difference with strategies we saw 15 years ago, is risk management. The trade allocation varies between carry and spread tightening; it is a risk parity approach first” explains Jean-Marie Dumas.
The factor-investing approach offers both Value and Multi-factors funds. ”Alternative factors are trendy in the market; every asset manager is keen to use them, and often play many factors at the same time” says Jean-Marie Dumas. “We decided not to bring face to face traditional factors to alternative ones. Instead, we asked: how to use alternative factors as a complementary feature to the traditional ones? Which factors would bring additional interest to our fixed income portfolios?” he explains.
A long-term position for a plain servicing experience
The 2008 crisis significantly changed the paradigm for fixed income investing. Prior to it, European institutional investors were able to rely on sovereign core and peripheral debt to fulfil their return expectation. Now with quantitative easing program, integrating alternative risk factors into a traditional bond investing approach will be critical for investors trying to capture the entirety of bond return.
“Talking about investment grade credit means capturing very small market movements over long time periods, so crunching a big amount of data. Not all asset managers have the knowledge and experience to handle data quality management,” says Jean-Marie Dumas.
Talking about horizon, a long-term position is favoured: “We have designed a range which is consistent over time with a long-term investment horizon. We can play opportunistic factors if they better explain the market trends and only if they generate alpha but it does not constitute our global approach. We are disciplined on our models buildings and portfolio intentions which is the result of a collegial work, research and analyses” concludes Jean-Marie Dumas.
[1] Traditional and alternative factors in investment grade corporate bond investing, a study dated as of March 2019 by Mohamed Ben Slimane, Marielle de Jong, Jean-Marie Dumas, Hamza Fredj, Takaya Sekine and Michael Srb and available on research-center.amundi.com
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