{"id":57289,"date":"2023-02-02T03:16:00","date_gmt":"2023-02-02T03:16:00","guid":{"rendered":"https:\/\/www.quoniam.com\/article\/2022-2023-recession-copy\/"},"modified":"2023-02-09T10:52:53","modified_gmt":"2023-02-09T10:52:53","slug":"credit-factor-effects-2022","status":"publish","type":"post","link":"https:\/\/www.quoniam.com\/en\/article\/credit-factor-effects-2022\/","title":{"rendered":"Credit Factor Effects 2022: How did systematic factors perform in the challenging environment?"},"content":{"rendered":"\n
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Introduction<\/h5>\n\n\n\n

The year 2022 was recorded in history as the year with the worst total returns in investment grade credit ever measured. While ten-year rates in the US and Germany rose by between 2.5 and 3 percentage points, credit spreads widened likewise with a moderate 40 basis points increase in the US and a larger 72 basis points widening in Europe.<\/p>\n\n\n\n

As we have shown last year<\/a>, fundamental credit managers tend to underperform in periods of rising spreads, although large rate moves have the potential to compensate performance if they adopt meaningful duration positions on the right side. Indeed, the majority of funds recorded negative relative performance last year, in particular for global credit. But how did systematic credit factors work in this challenging environment?<\/p>\n\n\n\n

Factor investing and methodology<\/h5>\n\n\n\n

Systematic factors are signals that are associated with risk premia. A value factor, for example, invests in undervalued bonds expecting that the market corrects their mispricing over time. Likewise, factors like momentum (bonds of companies that have an above-average trend in their equities), quality (bonds with strong balance sheets) and carry (bonds with high spreads\/steep credit curves) are used in many factor strategies.<\/p>\n\n\n\n

When these factors or factor combinations are incorporated into the construction of credit portfolios, we speak of credit factor investing or systematic credit investing. Most systematic strategies use a combination of the individual factor signals, with different factors and factor weights across approaches, to create a so-called multi-factor signal as the main return forecast in the portfolio construction process. In the analysis below, we use academic factor portfolios without consideration of real-world restrictions like transaction costs, illiquidity or limits on sector or country exposures. With the exception of the carry factor, where values may vary strongly between bonds of different maturities of the same company, we use one synthetic five-year bond per issuer to avoid large differences in interest rate or spread duration between factors. The portfolios, however, will have differences in their credit risk as measured by DTS. This, however, is part of the factor characteristics, as carry, for example, is inherently riskier than momentum or quality.<\/p>\n\n\n\n

Every month, at the close of the last trading day, the portfolio invests equally weighted in the top 20% of the respective signal at benchmark spreads and then keeps the portfolio holdings constant for one month. The factor performances should therefore not be understood as indicators of performance potential as real-world frictions and costs inevitably lead to return slippage. Still, comparison across years and strategies helps draw conclusions on factor performance in 2022. The multi-factor signal is as defined by Quoniam.<\/p>\n\n\n\n

How did factors perform in 2022?<\/h5>\n\n\n\n

The graphs below show the monthly factor performances of the above-mentioned factors. Panel A shows results for Euro investment grade (IG) credit, panel B for global IG credit.<\/p>\n<\/div><\/div>\n\n\n\n

Figure 1: Factor Performance 2022<\/h5>\n\n\n\n
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Panel A: Euro IG Credit<\/figcaption><\/figure>\n\n\n\n
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Panel B: Global IG Credit; source: Quoniam Asset Management<\/figcaption><\/figure>\n\n\n\n
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The numbers for Euro IG give some interesting insights into the events of 2022:<\/p>\n\n\n\n