Sparinvest has a number of funds which combine investing in corporate bonds with the factor-based approach. When you invest in a corporate bond, you lend the issuer company money. By using the factor-based approach to assess the companies behind the bonds, we can deselect companies with a higher risk of default and reduce the risk that the investee companies are unable to service the bonds.
An attractive supplement to the portfolio
Corporate bonds share common features of equities and traditional bonds, and may therefore in the very low Danish interest rate environment be considered an interesting alternative or supplement to Danish government bonds and covered bonds as well as equities.
A company typically pays a higher interest on issued corporate bonds than on government bonds. At the same time, the risk is usually lower than on investment in equities. Consequently, past risk-adjusted returns on corporate bonds have often outperformed equities.
Investing in sound companies
Factor investing means that Sparinvest invests in bonds issued by companies with a lower probability of default than the reward you get for holding them. Corporate bonds are divided into Investment Grade bonds which have the highest credit ratings and High Yield bonds which have the lowest credit ratings. Sparinvest covers both types globally.
Corporate bonds explained
Typically, corporate bonds deliver a higher return, but at a higher risk than traditional Danish bonds. Several of Sparinvest's funds invest in corporate bonds. By using the factor-based approach, we can deselect companies with the highest risk of default, thus reducing the risk that the investee companies are unable to service the bonds. Bonds are selected based on fundamental analysis of the company to ensure picking companies with a low probability of default which are able to service the bonds and also offer a relatively high yield.
Factor investing provides greater investment security
When you invest in a corporate bond, you lend the issuer company money, and for investors the key to good returns is above all to ensure that the company is able to repay the loan upon maturity. Using the factor-based approach to select investee companies makes for a much safer investment with a lower risk of losing attractive excess return on investing in corporate bonds. Even if we select bonds from solid companies, the risk of price fluctuations is higher than on investment in traditional Danish government bonds and covered bonds.
Opting for undervalued and small-cap
According to this strategy, Sparinvest picks undervalued bonds, where we find that their price does not accurately reflect the company's actual state of health nor probability of default. Even the strongest and most successful companies may occasionally have to pay higher loan rates than they in fact should. For example, many small-cap companies are forced to pay a higher loan rate than large-cap companies, as even though they may be financially strong, the markets consider them more risky solely because of their smaller size.
By systematically exploiting such market imbalances, we can achieve higher returns on a long-term horizon without compromising the security behind the loan.