Style Investing in Fixed Income

//, Academic Research Insight/Style Investing in Fixed Income

Style Investing in Fixed Income

Style Investing in Fixed Income

  • Jordan Brooks,Diogo Palhares, Scott Richardson
  • Journal of Portfolio Management, Special Issue 2018
  • A version of this paper can be found here
  • Want to read our summaries of academic finance papers? Check out our Academic Research Insight category.

What are the Research Questions?

The paper investigates this issue by answering the following research questions:
  1. Can common robust risk premia (value, momentum, carry and defensive) enhance returns in Fixed Income investing?
  2. Do style-based Fixed Income portfolios present diversifying potential?
  3. Is a long/short implementation necessary to reap these benefits?

What are the Academic Insights?

By applying style premiums to country and maturity selection across global government bond markets and to individual issuer selection across U.S. corporate credits, the authors find the following:

  1. YES- The analysis performed (over the 1996-2017 sample) shows that all style premia present positive Sharpe ratios for government and corporate bonds. An equal-weight combination of the four styles improves the results even further*
  2. YES- Not only correlations among the four styles show that the combination of all of them is a superior portfolio implementation. The authors analyze the correlations of each FI style to three market premiums (credit, ERP and bond term premium) and to four equity styles (value, momentum, size, and quality). The results show that the combination of the four fixed income styles have no exposure to market risk premiums or equity styles**.
  3. NO- The analysis shows that long only tilts are value-additive. However, the authors note that a long-short implementation provides a better diversification.

Why does it matter?

Despite the size of the fixed income market (as of December 2017, the Bloomberg Barclays Global Aggregate Index contains IG debt amounting to $45 trillion), there is not much empirical evidence on the cross-sectional determinants of excess returns. This study contributes to this evidence and shows that traditional risk premia investigated in other asset classes (value, momentum, carry and defensive) could enhance returns in fixed income investments.

For further academic insights on this topic, check out the following two studies:

Israel et al. (2018)

Brooks and Moskowitz (2017)

*Results in this paper don’t account for transaction costs. The authors acknowledge this fact and direct the readers to the Israel et al. (2018) paper which shows how results are robust to transaction costs.

**Results on diversification are related to a long/short implementation of factors

The Most Important Chart from the Paper

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index.



Style investing has become part of the investing nomenclature for equity markets. To date, despite the massive size of fixed-income markets, little research has examined the efficacy of style-based investing in fixed income. In this article, the authors summarize a common style-based framework for capturing excess returns for both government and corporate bonds. Importantly, from an investor perspective, these style-based excess returns are highly diversifying with respect to the classic risk premiums in fixed-income markets (i.e., term premium and credit risk premium) and exhibit low macroeconomic sensitivities.

  • The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).
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Elisabetta Basilico, PhD, CFA
Dr. Elisabetta Basilico is a seasoned investment professional with an expertise in "turning academic insights into investment strategies." Research is her life's work and by combing her scientific grounding in quantitative investment management with a pragmatic approach to business challenges, she’s helped several institutional investors achieve stable returns from their global wealth portfolios. Her expertise spans from asset allocation to active quantitative investment strategies. Holder of the Charter Financial Analyst since 2007 and a PhD from the University of St. Gallen in Switzerland, she has experience in teaching and research at various international universities and co-author of articles published in peer-reviewed journals. She and co-author Tommi Johnsen are currently writing a book on research-backed investment ideas. You can find additional information at Academic Insights on Investing.
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