Factor investing in corporate bond markets

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Low Risk, Quality, Value, Momentum, Size. These are well-known style factors: characteristics that can help explain differences in the risk and return of stocks and bonds. In recent years investors have started to tilt their portfolios towards factor strategies in order to take advantage of the higher riskadjusted returns, lower fees and diversification benefits that such strategies can offer.1 Initially factor investing was primarily popular in the equity domain, but investors are increasingly looking to reap the benefits of factors in other asset classes too or to implement factor investing in a multi-asset context. The same forces that make factor investing work for equities – investor behavior, market constraints and regulations – are also applicable to other asset classes. Its application in the corporate bond market is now at the forefront of factor investing’s dissemination beyond the world of equities. However, before investors strategically allocate to factors in corporate bond markets, they need to be convinced that such an approach can fulfil their needs. First, by answering questions such as: does factor investing work for credits, and what is its added value for this asset class? Second, many investors have been wary of implementing factor investing in corporate bonds because of the potential challenges that are specifically applicable to this market. For example, lower liquidity, higher transaction costs, and the additional complexity of having to choose between different bonds issued by the same entity