Practical Applications of Implementing Value and Momentum Strategies in Credit Portfolios

In Implementing Value and Momentum Strategies in Credit Portfolios, from the Quantitative Special Issue 2021 of The Journal of Portfolio Management, authors Simon Polbennikov, Albert Desclée, and Mathieu Dubois (all at Barclays) explore the strategy of applying value and momentum signals to corporate bond portfolios. The authors conducted an analysis to determine whether style factor investing is a suitable strategy for investors. Because data for credit portfolios managed with systematic styles were unavailable, the authors built a simulation of portfolios net of transaction costs between 2007 and 2020. They then applied a relative value strategy and an equity momentum strategy to the simulated data. Concluding that each signal resulted in higher returns than the benchmark index, they then applied the strategies in an equally weighted composite form. The authors ultimately concluded that, net of rebalancing costs, using such styles in strategy portfolios can result in considerable returns compared to the benchmark index. However, successfully implementing them in a portfolio also requires turnover controls, identification of actively traded and liquid securities, and strategic portfolio construction relative to a benchmark. TOPICS: Performance measurement, portfolio construction, simulations, style investing