The strategy involves creating long-only portfolios based on senior U.S. high-yield corporate bonds, selecting issuers based on factors such as size, value, profitability, and investment, with monthly rebalancing.
ASSET CLASS: bonds | REGION: United States | FREQUENCY:
Monthly | MARKET: bonds | KEYWORD: Corporate Bond
I. STRATEGY IN A NUTSHELL
The investment universe consists of senior U.S. high-yield corporate bonds meeting minimum size, fixed coupon, and ≥1-year maturity requirements. Four factors—size (shares × price), value (book-to-market equity), profitability (EBT ÷ book equity), and investment (change in total assets)—are used to rank issuers. Portfolios are formed by selecting the top and bottom 10% for each factor. A long-only, equal-weighted multi-factor portfolio combines these selections, with monthly rebalancing.
II. ECONOMIC RATIONALE
By applying equity factor insights to the high-yield bond market, the strategy captures company-level characteristics predictive of future returns. Combining size, value, profitability, and investment factors reduces tracking error and drawdowns while enhancing risk-adjusted returns. Equal-weighted multi-factor portfolios outperform market indices in Sharpe ratio, demonstrating that factor-based approaches improve bond portfolio performance without increasing volatility.
III. SOURCE PAPER
Extending Fama–French Factors to Corporate Bond Markets [Click to Open PDF]
Bektić Demir; Wenzler Josef-Stefan; Wegener Michael; Schiereck Dirk; Timo Spielmann
<Abstract>
The explanatory power of size, value, profitability and investment has been extensively studied for equity markets. Yet, the relevance of these factors in global credit markets is less explored although equities and bonds should be related according to structural credit risk models. We investigate the impact of the four Fama–French factors in the U.S. and European credit space. While all factors exhibit economically and statistically significant excess returns in the U.S. high yield market, we find mixed evidence for U.S. and European investment grade markets. Nevertheless, we show that investable multi-factor portfolios outperform the corresponding corporate bond benchmarks on a risk-adjusted basis. Finally, our results highlight the impact of company level characteristics on the joint return dynamics of equities and corporate bonds.
IV. BACKTEST PERFORMANCE
| Annualised Return | 6.61% |
| Volatility | 11.27% |
| Beta | N/A |
| Sharpe Ratio | 0.59 |
| Sortino Ratio | N/A |
| Maximum Drawdown | -41.76% |
| Win Rate | N/A |
