Robeco logo

Disclaimer

1. General
Please read this information carefully.

This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 2 (dealing in futures contracts); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

2. Important risk disclosures
Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:

  • Some Funds are subject to investment, market, equities, liquidity, counterparty, securities lending and foreign currency risk and risk associated with investments in small and/or mid-capped companies.

  • Some Funds are subject to the risks of investing in emerging markets which include political, economic, legal, regulatory, market, settlement, execution, counterparty and currency risks.

  • Some Funds may invest in China A shares directly through the Qualified Foreign Institutional Investor (“QFII”) scheme and / or RMB Qualified Foreign Institutional Investor (“RQFII”) scheme and / or Stock Connect programmes which may entail additional clearing and settlement, regulatory, operational, counterparty and liquidity risk.

  • For distributing share classes, some Funds may pay out dividend distributions out of capital. Where distributions are paid out of capital, this amounts to a return or withdrawal of part of your original investment or capital gains attributable to that and may result in an immediate decrease in the net asset value of shares.

  • Some Funds’ investments maybe concentrated in one region / one country / one sector / around one theme and therefore the value of the Fund may be more volatile and may be subject to concentration risk.

  • The risk exists that the quantitative techniques used by some Funds may not work and the Funds’ value may be adversely affected.

  • In addition to investment, market, liquidity, counterparty, securities lending, (reverse) repurchase agreements and foreign currency risk, some Funds are subject to risk associated with fixed income investments like credit risk, interest rate risk, convertible bonds risk, ABS risk and the risk of investments in non-investment grade or unrated securities and the risk of investments made in non-investment grade sovereign securities.

  • Some Funds can use derivatives extensively. Robeco Global Consumer Trends Equities can use derivatives for hedging and efficient portfolio management. Derivatives exposure may involve higher counterparty, liquidity and valuation risks. In adverse situations, the Funds may suffer significant losses (even a total loss of the Funds’ assets) from its derivative usage.

  • Robeco European High Yield Bonds is subject to Eurozone risk.

  • Investors may suffer substantial losses of their investments in the Funds. Investor should not invest in the Funds solely based on the information provided in this document and should read the offering documents (including potential risks involved) for details.

3. Local legal and sales restrictions
The Website is to be accessed by “professional investors” only (as defined in the Securities and Futures Ordinance (Cap.571) and/or the Securities and Futures (Professional Investors) Rules (Cap.571D) under the laws of Hong Kong). The Website is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the Website is prohibited. Persons in respect of whom such prohibitions apply or persons other than those specified above must not access this Website. Persons accessing the Website need to be aware that they are responsible themselves for the compliance with all local rules and regulations. By accessing this Website and any of its pages, you acknowledge your agreement with understanding of the following terms of use and legal information. If you do not agree to the terms and conditions below, do not access this Website or any pages thereof.

The information contained in the Website is being provided for information purposes.

Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.

4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.

5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.

Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.

6. Third party websites
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage. Third party off-site pages or websites are provided for informational purposes only.

7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.

Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.

Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.

8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.

9. Privacy
Robeco guarantees that the data of persons accessing the Website will be treated confidentially in accordance with prevailing data protection regulations. Such data will not be made available to third parties without the approval of the persons accessing the Website, unless Robeco is legally obliged to do so. Please find more details in our Privacy and Cookie Policy.

10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong.

Please click the “I agree” button if you have read and understood this page and agree to the Disclaimers above and the collection and use of your personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy and Cookie Policy, including for the purpose of direct marketing of Robeco products or services. Otherwise, please click “I Disagree” to leave the website.

I Disagree

31-08-2022 · Insight

Nowcasting growth to enrich the factors used for government bond selection

We have added a quality measure for the selection of government bonds. It is constructed using nowcasting, to capture timely signals about economic growth.

    Authors

  • Olaf Penninga - Portfolio Manager

    Olaf Penninga

    Portfolio Manager

  • Fabio Martinetti - Researcher

    Fabio Martinetti

    Researcher

Summary

  1. Innovative method to capture timely signals about economic growth

  2. Enriching the factors used for government bond selection

  3. Its low correlation with existing factors enhances performance

Our multi-factor bond strategy uses well-known factors like value, momentum, low risk and quality to select government bonds and credits with superior risk-adjusted returns. The portfolio construction algorithm aims to efficiently harvest these factor premia while keeping the top-down risk profile in line with the index and ensuring a strong sustainability profile.

We now add a quality measure for the selection of government bonds. This measure uses nowcasting to capture timely signals from the plethora of macroeconomic data that are continuously released.1

A quality measure for government bonds

Quality is widely used in equity and credit selection. It favors stocks and bonds of companies with strong fundamental characteristics like profitability. The equivalent characteristics for government bonds are country fundamentals associated with good returns from government bonds. Our research shows that the appropriate factor to consider is the quality of the macroeconomic environment for bond investors. Here, economic growth is one of the relevant fundamentals: bonds from countries with moderate growth are a better-quality investment than bonds from countries with an overheating economy.

Capturing the state of the economy

To select high-quality government bonds we thus want to compare the state of the economy across countries. There are some challenges to gaining timely data on the state of the economy, though.

The official data series for economic growth is GDP, a comprehensive measure of economic activity. The drawback of this series is that, for most markets, it is updated only quarterly, with a publication lag of at least a month. Moreover, the data is prone to substantial revisions. This means that a bond selection process in early July would either use first-quarter data, showing which economies were growing strongly four to six months previously, or would need to be delayed by a few weeks until the publication of the first estimates of second-quarter growth – and maybe even longer as these numbers might be revised later on.

Fortunately, many macroeconomic data series are released more frequently and with a shorter publication lag than GDP. However, these indicators typically relate only to specific parts of the economy. To get the full picture of the overall economy, it is necessary to combine several data series.

For this we use nowcasts, daily estimates of current growth based on a wide variety of data series. In early July, many data series give information about May, and some already for June; survey data can shed some light on what could be expected in July. This is an advantage compared to the traditional GDP numbers: by combining data series that are updated faster and more frequently, one can create a comprehensive measure of activity that leads the latest published GDP data by up to several months.

Capturing growth as quickly as possible

To ensure that the nowcast reflects changes in activity as quickly as possible, one further step is taken. As mentioned, the nowcast combines data from several data series. However, one does not have to wait for all data series to be published. When early data releases point to a slowdown in some parts of the economy, the linkages between different parts of the economy can be used to infer what this likely means for parts of the economy for which data has not been published yet.

A true nowcast uses a model of the relationships between these parts of the economy – a dynamic factor model – to ensure that all information is extracted from a data release: not only the explicit information about that part of the economy, but also the implicit information about related parts of the economy.

Figure 1 | Correlation to GDP-based rankings for nowcast, with and without dynamic factor model, 2008-2022

Figure 1 | Correlation to GDP-based rankings for nowcast, with and without dynamic factor model, 2008-2022

Source: Robeco

In our Multi-Factor Bonds strategy, we use the nowcast to differentiate between bonds from different countries, based on economic growth in these countries. Figure 1 shows how well we can rank countries based on growth, using the nowcasts available one to three months before the release of the official GDP growth numbers. To show the added value of the dynamic factor model, we compare the nowcast to a similar combination of data releases that doesn’t use a dynamic factor model. The ranking based on the nowcast correlates better with the ranking based on GDP growth than the ranking produced without the dynamic factor model. The ranking produced with the nowcast, three months before the GDP publication, is as accurate as the ranking produced without the dynamic factor model one month later.

Performance

Nowcasting can thus be used to get timely information on the state of the economy. But is this enough to select government bonds with superior risk-adjusted returns? To answer this question, we performed historical backtests. Ideally, we would only use nowcasts that had actually been published at that point in time, but these have a limited history. We therefore extend our dataset by using nowcasts that are carefully reconstructed. As this process requires a large variety of economic indicators, with their exact historical publication dates, there are limits to how far back in time one can go, and the backtest is therefore fairly short.

Figure 2 | Cumulative performance of government bond selection based on nowcast, 2008-2022

Figure 2 | Cumulative performance of government bond selection based on nowcast, 2008-2022

Source: Robeco

Figure 2 shows the cumulative performance of a long-short portfolio based on the nowcast. This portfolio has long positions in bonds from countries where growth is moderating and short positions in bonds from countries where the economy is heating up. The portfolio is rebalanced monthly.

We find that the nowcasts generates attractive risk-adjusted returns. Furthermore, this performance is largely uncorrelated with the factors we already use for government bond selection. It thus adds value to our multi-factor government bond selection. Out of prudence, we add this new quality measure with a somewhat lower weight than other measures, to reflect the shorter history over which we can assess its performance. For other factors we have much longer backtests, extending beyond 200 years. For deep-sample evidence on the existence of value, momentum and low-risk factors, please refer to Factor Investing in Sovereign Bond Markets: Deep Sample Evidence.

Conclusion

Bonds from countries experiencing moderate growth are a better-quality investment than bonds from countries with an overheating economy. To select high-quality government bonds, we thus want to capture differences in economic growth. Nowcasting allows us to do so in a timely manner.

Selecting government bonds based on this quality measure generates attractive risk-adjusted returns. Its performance is largely uncorrelated to that of the other factors. It thus adds value to our multi-factor government bond selection.

Footnote

1 This article is based on a more detailed paper by the same authors, entitled “Nowcasting growth: quality in bond selection”, July 2022.


Important information

The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong. This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions. The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.