The Latest Insights on Systematic Strategies for Investing in Credit

Systematic Investing in Credit is the latest book of cutting-edge research in credit markets written by the Quantitative Portfolio Strategy (QPS) Group at Barclays Research.

The book starts with empirical evidence that credit, as an asset class, has consistently outperformed a risk-matched combination of equities and Treasuries. A detailed analysis explains the sources of this advantage.

Credit portfolio construction was for decades, and often still is, an index-centric process subjecting managers to index rules and constraints. Barclays QPS Group proceeds by discussing the performance cost of these constraints and ways to exploit resulting inefficiencies to outperform indices.

Next they present their research on the performance implications of bond portfolio characteristics – both traditional ones such as coupon level and maturity distribution and others that came into focus more recently such as ESG scores.

The following part of the book is dedicated to the increasingly popular factor investing in credit. They discuss their original value and momentum models (the latter based on the momentum of the equity of a given issuer) as well as the issuer size factor. They analyze optimal ways of combining the factor signals in a portfolio considering turnover limits and trading costs in a practical implementation.

Finally, they focus on the newest trend in credit investing – the applications of equity market data and methodologies in credit portfolio construction.

Investors will learn:

• How to capitalize on index inefficiencies.
• How to analyze implications of portfolio characteristics (ESG, Coupon, Maturity)
• How to systematically apply factor investing in credit (Value, Momentum, Size)
• How to use equity-related data and methodologies to enhance credit portfolio performance

ARIK BEN DOR, PHD, is a Managing Director in Barclays QPS and Head of Quantitative Equity Research. He joined QPS in 2004 at Lehman Brothers. Arik oversees research in equities, rates, credit, and hedge funds. Arik co-authored two books and published over a dozen articles in leading industry journals. He is on the editorial boards of the Journal of Portfolio Management and Journal of Fixed Income. Arik holds a PhD in finance from Kellogg School of Management.

ALBERT DESCLÉE is a Managing Director in Barclays QPS based in London and is responsible for its European activities. He advises investors on fixed income and multi-asset portfolio construction. Albert joined Barclays in 2008 from Lehman Brothers. Prior to this, he worked at Salomon Brothers in London. Albert graduated from the Catholic University of Louvain (Belgium) and obtained an MBA from INSEAD.

LEV DYNKIN, PHD, is the Founder and Head of Quantitative Portfolio Strategy (QPS) Group at Barclays Research. Lev and QPS joined Barclays in 2008 from Lehman Brothers where they had been a part of Global Research since 1987 and helped launch the Lehman fixed income indices. For over a decade, QPS has been top ranked in its category in the Institutional Investor Research survey. Lev and QPS co-authored three books: A Decade of Duration Times Spread (DTS), Barclays, 2015; Quantitative Credit Portfolio Management, Wiley, 2011; and Quantitative Management of Bond Portfolios, Princeton University Press, 2007.

JAY HYMAN, PHD, is a Managing Director in Barclays QPS. He advises clients on portfolio management relative to traditional benchmarks or liabilities, risk budgeting, style analysis, cost of constraints, sufficient diversification, and index replication. Jay has co-authored three books with QPS colleagues. He joined Barclays in 2008 from Lehman Brothers where he worked in quantitative research since 1991. Jay holds a PhD in Electrical Engineering from Columbia University.

SIMON POLBENNIKOV, PHD, is a Managing Director in Barclays QPS. He is responsible for empirical research of all quantitative aspects of the investment process including systematic strategies and investment styles in fixed income, benchmark customization, tactical allocation, and hedging. Simon joined Barclays in 2008 from Lehman Brothers. Simon holds a PhD in empirical finance from Tilburg University, Netherlands.

Acknowledgments ix

Foreword xv

Preface xvii

Introduction xix

Part One Investing in Credit vs. Investing in a Combination of Treasuries and Equities

Chapter 1 Can a Combination of Treasuries and Equities Replace Credit in a Portfolio? 3

Part Two Capitalizing on Index Inefficiencies Fallen Angels: Index Liquidation

Chapter 2 Fallen Angels: Characteristics, Performance, and Implications for Investors 81

Chapter 3 Fallen Angels: Capacity, Transaction Costs, and the Bond-CDS Basis 127

Chapter 4 Introducing the Fallen Angel Reversal Scorecard 163

New Issuance: Index Inclusion

Chapter 5 Issuance Dynamics and Performance of Corporate Bonds 191

Chapter 6 The Value of Waiting to Buy: Inclusion-Delay Investment-Grade Corporate Indices 215

Chapter 7 Concessions in Corporate Bond Issuance: Magnitude, Determinants, and Post-Issuance Dynamics 239

Performance Cost of Investment Constraints

Chapter 8 “Try-and-Hold” Credit Investing 265

Chapter 9 Effect of Rating-Based Stop-Loss Rules on Performance 303

Part Three Performance Implications of Portfolio Characteristics

Chapter 10 Coupon Effects in Corporate Bonds: Pricing, Empirical Duration, and Spread Convexity 333

Chapter 11 Maturity Dependence of Corporate Bond Excess Returns 355

Chapter 12 ESG Investing in Credit 369

Part Four Factor Investing in Credit Value Investing

Chapter 13 Relative Value Investing in Credit Using Excess Spread to Peers 413

Chapter 14 Long-Horizon Value Investing in Credit Using Spread per Unit of Debt-to-Earnings Ratio 435

Momentum Investing

Chapter 15 Equity Momentum in Credit 483

Chapter 16 Corporate Sector Timing Using Equity Momentum 515

Size Effect

Chapter 17 Issuer Size Premium in Credit Markets 527

Combining Factor Strategies

Chapter 18 Integrating Systematic Strategies into Credit Portfolio Construction 563

Chapter 19 OneScore: Combining Quantitative and Fundamental Views in Credit 597

Part Five Using Equity-Related Data, Dynamics, and Instruments

Chapter 20 Does the Post-Earnings-Announcement-Drift Extend to Credit Markets? 613

Chapter 21 Equity Short Interest as a Signal for Credit Investing 653

Index 691