to show that they have done something. Green bonds are sometime seen as an easy one - putting 10% or 20% of green bonds in your portfolio is an easy tick in the box. A green bond has the same issuer risk. Relative value-wise, any basis points that a green bond is issued at lower than a normal bond means it’s too expensive. There is no premium, yet it’s the same issuer risk. From an economic standpoint it should be priced at least equal to the normal bond. We would rather have issuers pursue a sustainable policy instead of issuing green bonds. When we invest in green bonds we pay close attention to the possibility of green washing; we look for issuers that do what they promise and pay a good relative value. But the more you see clients wanting to tick this box by just adding green bonds to their portfolio, there is the risk of overpricing.
PI: Will returns from factor strategies improve going forward? Barron: The tech rally continues to see multi-factor underperform, but as we move through the cycle the hope is that we will see a better risk-adjusted performance from multi-factor products. The big question is are the top 10 stocks today going to be the top 10 stocks in 10 years’ time. If you are expecting a changing of the guard, then a multi-factor product may deliver something superior. Peach: Multi-factor has struggled in the past two years, but over the long term I believe it will beat the market.
A lot of multi-factor products have handsome back-tests, so we always view them with a healthy cyni- cism. Factor and multi-factor products will not outperform to the degree that the back-test say they will, but in the long term we believe they do better than their recent real-world performance. Leeuwen: It is still early days in fixed income, but if you have realistic expectations these strategies will perform well.
September 2019 portfolio institutional roundtable: Factor investing 21
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