Fixed Income Factor Research Series - The Value Effect

by: FTSE Russell


A factor index is designed with the intention of capturing the return premium associated with exposure to a particular factor or set of factors in a transparent, rules-based, replicable format.

Factor indexes can be used both as benchmarks for the performance of actively managed funds and as the reference or benchmark for an index-replicating product.

The FTSE Russell global institutional smart beta survey provides a clear insight into major trends at work in recent years in awareness, popularity and use of smart beta index-based strategies.

While there are a variety of widely accepted metrics for defining and capturing the value factor in equities, there has not been nearly such a widely accepted approach for capturing the value effect in fixed income. In this paper, we demonstrate our first analysis of value in fixed income and outline our approach to it by utilizing a model-implied OAS framework to identify under- and over-valued securities. We use the US investment-grade corporate bond market to showcase the steps of our study and simulate results across various global corporate bond markets. This paper is the first in our FTSE Fixed Income Factor Series, with discussions including carry, quality, momentum and volatility to follow.