Invesco explores how factor investing drives active bond returns, arguing that much of what appears to be manager skill is actually systematic exposure to factors like value, carry, and liquidity. The paper challenges the idea that active outperformance is rare, noting over 70% of bond managers beat benchmarks, largely due to hidden factor tilts.
Risk & Reward: Research and Investment Strategies
Invesco
Evan Jaysane-Darr
Research
45 Pages
Key Takeaways
Active Outperformance Explained: Over 70% of bond managers outperformed benchmarks across 1, 3, 5, and 10-year periods, with factor exposures accounting for a significant share of excess returns.
Value Factor Impact: Bonds losing up to 10% pre-downgrade often generate positive returns post-event, illustrating how value factors systematically capture recovery dynamics.
Factor Exposure Prevalence: Analysis of 65 managers from 2007–2018 shows most portfolios load on multiple factors, with median gross active returns of 0.34% and tracking error near 1.12%.
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