Factors and corporate bonds: Single- and multi-factor approaches to corporate credit
Investors have increasingly turned to equity factors as building blocks for their stock portfolios as a way to measure performance, analyze risk exposures or seek enhanced returns. In recent years, some investors have sought to extend a factor framework to fixed income. But these efforts by and large have not been successful, as equity and fixed-income investors have not been speaking a common language.
In this paper, we harmonize the concept of factor investing to include corporate bonds. We discuss portfolio-construction methods that have demonstrated characteristics of corporate-credit factors efficiently in the past, while preserving the investability of hypothetical portfolios. The factors we consider are value, low size, quality, momentum, carry and low risk, given their homogeneity within stocks and bonds. This paper also addresses several questions on fixed-income factor investing that have been posed to us by institutional investors.
Hitendra D. Varsani, Executive Director, Equity Core Research
Vipul Jain, Vice President, Equity Factor Research
Rohit Mendiratta, Senior Associate, Data Science Research