Robeco, The Investments Engineers

Euro Government Bonds

Applying an active and adaptive approach to euro government bonds

Key points

  1. Contrarian approach based on fundamental and quantitative research to analyze markets

  2. Diversified portfolio drivers: country allocation, duration, yield curve, and relative value opportunities

  3. Fully integrated ESG to enrich fundamental analysis and act as an early indicator

Bond markets are inefficient. Robeco has the capability and process in place to identify and exploit this inefficiency. We believe euro government fixed income returns are dominated by risk cycles and regime shifts. By researching these debt dynamics intensively, we can understand where the market consensus might be underestimating the chance of major structural shifts. These shifts describe structural changes in markets that have operated in one particular valuation zone for a long period of time. By adopting a contrarian approach to markets and focusing on value we believe we can exploit inefficiencies over the cycle.

In addition, fixed income markets are segmented as a result of various factors such as mandate restrictions across investor types and organizational rigidities. This can lead to dislocations and changes in relationships between sectors. This offers active investors opportunities to improve returns and reduce risk. 

Alpha drivers

Euro Government Bonds uses four sources of return to reach the alpha target over the cycle:  

Country allocation
01

Country allocation

Risk profile and spread outlook for the individual countries is evaluated against the differences in yield. This results in overweight and underweight positions on a country level.

Duration management
02

Duration management

The aim of duration management is to profit from changes in interest rates.

Yield curve positioning
03

Yield curve positioning

Whereas duration decisions anticipate a parallel shift in the yield curve, yield curve positions aim to anticipate steepening or flattening twists in the yield curve.

Relative value
04

Relative value

Government-related bonds typically offer a somewhat higher yield than comparable government bonds, partly because of their lower liquidity.

Our approach

The four steps in our investment process:

Step 1

We apply our research framework to all the aspects that drive markets. The team looks at the economic cycle, monetary and fiscal policy, discusses its strategies and sets strategic positioning in the quarterly meetings.

Step 2

We decide which issues we like best, and these are then combined in a model portfolio.

Step 3

The portfolio managers assess risk across the four sources of return mentioned earlier: country allocation, duration, yield curve and relative value.

Step 4

The final step is portfolio implementation. The Fixed Income Portfolio Engineering and Trading team implements the model portfolio into client portfolios and performs trading cost analysis.

Team

The Euro Governments Bonds strategy is managed by two portfolio managers who are fully accountable for performance and responsible for the portfolio risks and the sourcing of ideas. They are part of the Global Macro team, which consists of experienced portfolio managers, economists, strategists and macro analysts. In addition to a formal meeting cycle to accommodate a structured approach to the investment process, the portfolio managers cooperate on a daily basis with the other team members. The team is further supported by and embedded in a broader Robeco framework of sustainability, trading and quant specialists. 

Sustainability

This strategy promotes, among other characteristics, environmental and/or social characteristics, which can include exclusionary screening, ESG integration, ESG risk monitoring and active ownership. It is classified as Article 8 under the EU Sustainable Finance Disclosure Regulation. 

The strategy uses two frameworks for incorporating sustainability: Country Sustainability Ranking framework and Green Bonds 5-step eligibility process. 

In order to get a clear view on ESG-related country risks, we have developed a proprietary Country Sustainability Ranking framework. Ranking is based on country data that we find most relevant for government bonds, such as quality of governance and political risks. This framework summarizes, from an investor perspective, the most important risks and strengths on a country-by-country basis. 

The Robeco Fixed Income team has developed a proprietary Green Bond Assessment framework to substantiate the green credentials of bonds under consideration for investment. This framework is in line with the most recent regulatory developments on sustainable finance and is applied to government bonds. 

Ingredients

01

Core solution

A central investment of a long-term portfolio

02

Research-driven

A true understanding of the topic has been in our DNA since the start

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