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Jyske Capital's multi-factor credit funds gain traction abroad -- but not as quickly as the lead fund manager had hoped

In 2012, Jyske Capital developed a multi-factor model to assist its credit fund managers in their hunt for alpha. Although frequent trips to Sweden and Germany in the past two years have started to attract inflow, this has not happened as quickly as Head of Corporate Credit had hoped. However, he is still optimistic, as the risk premia in corporate bonds are underexploited compared to the more mature equity market.

(left-right) Jyske Capital's corporate bond team Mikael Venø Munksgaard, Martin Nybye Sørensen and Michael Holte Christensen. Photo: PR / Jyske Capital

When trying to lure Swedish and German investors into his global high yield fund and European investment grade fund based in Silkeborg, Denmark, Head of Corporate Credits at Jyske Capital, Martin Nybye Sørensen, has two key arguments: the funds have achieved annualized excess returns of 1.2 percent since 2012, relative to their benchmark.

The secret to the performance, or at least half of it, is an internally-developed multi-factor model, he says to AMWatch.

The model identifies bonds from the corporate spectrum with specific characteristics through quantitative measurements, using the factor styles of value, momentum and quality.

The high yield strategy has started to attract inflow from Sweden and Germany after two years of frequent trips to build brand awareness and explain the model. This increase in capital has, however, not happened as quickly as the Danish fund manager had initially hoped.

"When we present our multi-factor approach in corporate credits to potential investors, they are interested because it has been shown to be consistent and reliable in generating roughly 25 basis points of alpha in each quarter," he explains, highlighting that it has been easy to arrange meetings with potential investors in the two foreign markets and in Denmark.

Jyske Capital currently manages roughly EUR 1.2 billion in its global high yield offering across various Denmark-based funds, Jyske SICAV in Luxembourg and discretionary mandates.

Underexploited risk premia

The high yield strategy has generated an annualized excess return of 1.17 percent, according to the head of credits. As mentioned, roughly half of the alpha stems from the multi-factor model, which was developed in 2012 and has not changed since, he explains.

When asked why a carry style is not part of the model, he says that the answer lies in the empirical data.

"If you only invest in bonds with a higher yield, you tend to have a less attractive return because of larger draw downs in volatile markets," the former Nordea fund manager replies.

"We use options theory to assess what fair value spreads are on a given bond. We use financial records on gearing, volatility data and expected default if there's a default. A company has one equity but a company can issue more than 100 bonds in various currencies and with different duration and subordination."

Martin Nybye Sørensen, Jyske Capital Head of Corporate Credits

The model gives more than 13,000 bonds a score between 0 and 100 and, according to Nybye Sørensen, bonds with the highest scores have consistently outperformed bonds with lower scores in various market cycles. The other half of the alpha is generated through the qualitative portfolio assessment afterwards, he claims.

"This includes refusing to trade, despite signals from the model," he explains. "We never thought of our model as a portfolio engine and we can have companies were the model reduces their score simply because the credit spread tightens. This is not the same as divesting if there's nothing wrong with the company. This saves transaction costs compared to a fully automatic system," he says.

According to Nybye Sørensen, factor strategies are significantly harder to implement in corporate bonds because of, for instance, low liquidity compared to listed equities.

"On the positive side, however, the risk premia in corporate bonds are underexploited compared to the more mature equity market. Hence, the relative return potential is likely higher," he says.

Can you document this claim?

"Our model has performed better than the market for many years, picking the best bonds in 85 percent of all months. Since 2012, we have created annualized excess returns of 1.2 percent in both high yield and investment grade portfolios with information ratios of 1.1 and 2.1 respectively, which I believe is a good indication."

You don't think that a quantitative equity fund manager would be able to show similar results?

"No, I don't believe so, because factors are priced more correctly in equities. Our results have been consistent since 2012, indicating that this might not be priced into credit markets because not that many asset managers do this. I think we will see factor style approaches become as integrated in credits as they are in equities, but this will most likely be 5 - 10 years down the road," he says.

Change in sentiment

Even though Nybye still believes there will be some years before risk premia investing becomes mainstream in credits, he has noticed a change in sentiment over the past 12 months: More asset managers have started to look into systematic investing within corporate credits.

One of the reasons why factor-style investing is not as widely used in credits is because the market is not as mature as it is in equities, where investors have utilized factor techniques for decades, he says. Another reason, he points out, is because it is very data intensive to develop a model.

"We use options theory to assess what fair value spreads are on a given bond. We use financial records on gearing, volatility data and expected default if there's a default," he says, adding:

"A company has one equity but a company can issue more than 100 bonds in various currencies and with different duration and subordination," he says, adding that Jyske Capital operates with roughly 300 data points for each bond and that the team feeds its multifactor models data from many different data sources.

In the fall of 2019, the team won a tender to manage a US high yield strategy on behalf of domestic and bank-owned asset manager Bankinvest. Jyske Capital changed this investment universe from US to global.

Alongside Nybye Sørensen, the corporate bond portfolio management team consists of fund managers Michael Holte Christiensen and Mikael Venø Munksgaard.

Jyske Capital, which is the asset management arm of Jyske Bank, has EUR 21.5 billion in assets under management.

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