R O B E C O ’ S D U R A T I O N M OD E L
B O A S T S E X C E L L E N T T R AC K R E C O R D
ON TENTH ANNIVERSARY
• Olaf Penninga, Quantitative Research
• Petra Sagel, Robeco Center of Knowledge
Robeco’s duration management model is celebrating its tenth anniversary. This proprietary model takes up
a prominent position in the management of Robeco’s fixed income portfolios. Over the past decade, it
outperformed its benchmark by a wide margin, thus benefiting the performance of Robeco’s government
bond and aggregate products .
Since the start in 1995, Robeco’s duration model outperformed in nine out of ten years and recorded an
impressive information ratio of 0.91. It has managed to perform well in periods of both rising and
declining interest rates, and in times of high and low volatility . The model’s relative performance is shown
in the figure below.
-2.5% -1.5% -0.5% 0.5% 1.5% 2.5% 3.5% 4.5% 5.5%
Figure 1. Relative performance of Robeco duration model from 1995 through 2004.
A STABLE COMPOSITION
Although over the years, the model was adjusted every now and then as a result of a continuous search for
improvement, the basics remained the same. It was constructed before the start of the Economic and
Monetary Union and proved to work in the new situation as well. Five indicators of the model’s first
January 2005 Page 1 of 2
ROBECO’S DURATION MODEL BOASTS EXCELLENT TRACK RECORD ON TENTH ANNIVERSARY
version can still be found in the model today. The duration model now bases its forecast on six indicators,
i.e. valuation, trend, mean reversion, equity market, commodity prices and a seasonal factor.
To measure a bond market’s valuation the model uses the slope of the yield curve, i.e. the difference
between long-term bond yields and short-term interest rates. A steep yield curve, with relatively high
bond yields, means that a bond market is attractively valued.
The second indicator relates to global bond markets ’ performance in a previous period. If the trend was
good then, it will probably also be good in the period to come.
If a market outperformed other bond markets in the previous period, it is likely to show relative
underperformance in the future period. The model’s third indicator is therefore the performance of a
national bond market less the average performance of global bond markets.
A good stock market performance means that investors expect higher corporate earnings. This suggests a
positive economic climate. This in turn means inflationary pressure, and therefore the potential for higher
interest rates. Rising stock markets therefore have a negative impact on the model’s forecast for bonds.
The development of commodity prices such as oil and gold is used as a measure of inflation. Rising
commodity prices therefore have a negative effect on bond markets.
Looking at a long history of bond markets, it turns out that from September through January bonds show
a markedly better performance than during the rest of the year. The indicator therefore gives a positive
signal during this period, and a negative one during the remainder of the year.
A N I MP O R T A N T R O L E I N T H E I N V E S T M E N T P R O C E S S
Robeco has awarded its duration model a key role in its fixed income investment process. It has always
been an important performance driver in all government bond – and aggregate - products and as of January
2005, its role is upgraded even further1 . Robeco Lux-o-rente’s investment strategy is entirely driven by the
model. Since the start of Robeco Lux-o-rente’s model-driven strategy in 1998, the fund has recorded an
annual outperformance of 0.8% after deduction of fee.
Robeco’s proprietary duration model is showing an excellent track record on its tenth anniversary. The
fact that the model is awarded a more prominent place in the duration management process, is expected to
enhance the performance of Robeco’s bond products even further.
For more information please refer to the note ‘Using the same tools more effectively: perfecting Robeco’s duration
management process’ issued by the Robeco Center of Knowledge in January 2005.
January 2005 Page 2 of 2