Swedroe Talks Factors and Fixed Income

In a recent article for ETF.com, BAM Alliance director of research Larry Swedroe discusses how factor investing can apply to the bond market, even though it has been slower to gain popularity in fixed income compared to the equity market.

The article cites a study by a team at AQR Capital Management that “applied the value, momentum, carry [the tendency for higher-yielding assets to outperform lower-yielding assets] and defensive style premiums to country and maturity selection across global government bond markets and to individual issue selection across global government bond markets and to individual issuer selection across U.S. investment-grade and high-yield corporate credits.”

Swedroe summarizes the study results, which showed how applying the above-referenced style premiums “would have enhanced returns in various fixed-income markets over the past two decades.” The authors concluded, “Our empirical analysis suggests a powerful role for style-based investing in fixed income,” adding, “Style investing can be applied through long-only tilts or through long/short strategies. Both can make sense.” Study findings also show that fixed-income style investing can provide diversification benefits and potentially better returns due to low (or negative) correlations between style premiums and market premiums, as well as “low sensitivity to macroeconomic and financial market environments.”