Systematic High Quality Corporate Fixed Income April YTD 2025 Commentary: Factors Steady the Ship in Turbulent Seas
- Systematic Active Fixed Income (SAFI) performance was resilient in April amid significant volatility across credit and equity markets, and the performance outpaced fundamental active peers.
- Both Systematic US High Quality Corporate Bond strategies outperformed their benchmarks in the first quarter.
- The Value factor drove performance in both strategies despite spread widening in March, while momentum also contributed.
Jan-Apr 2025: SAFI Portfolios Outperformed in a Challenging Environment
The resilient IG spread performance seen in 2024 and early 2025 was replaced by a volatile corporate bond market in March and April driven by uncertainty over tariff and trade policies. Risk assets have recovered since early April on the back of still-resilient economic and labor market data.
For the first quarter of 2025, the US Investment Grade Corporate Index OAS widened from 80 basis points (bps)1 to 94 bps by quarter-end, hitting wides of almost 120 bps on April 8. Despite this challenging environment for credit, performance in our SAFI portfolios held up, outperforming fundamental active peers.
Q1 2025 Strategy Performance
Our two Systematic US High Quality Corporate Bond portfolios saw strong performance in 2024 (see: SAFI 2024 Update and Review) continued to add value in Q1. Thus far, the Intermediate and Long Strategies have exceeded performance targets of 25–50 and 50–75 bps p.a.,respectively, over a full cycle, with expected tracking error volatility of 50–125 bps. For the quarter, the Intermediate strategy was up almost 10 bps, and the Long was up almost 4 bps (Figure 2).
| Intermediate (1-10Yr) Portfolio | Long (10+ Yr) Portfolio | |||||
|---|---|---|---|---|---|---|
| QTR (%) | 1 Year (%) | Since SAFI Inception (%)* | QTR (%) | 1 Year (%) | Since SAFI Inception (%)* | |
| Systematic US High Quality Corporate Bond (Gross) | 2.43 | 6.82 | 4.88 | 2.56 | 2.28 | 0.02 |
| Benchmark | 2.33 | 6.11 | 4.00 | 2,51 | 1.37 | -1.04 |
| Difference (Gross) | 0.10 | 0.71 | 0.88 | 0.04 | 0.91 | 1.06 |
| Systematic US High Quality Corporate Bond (Net) | 2.42 | 6.80 | 4.87 | 2.55 | 2.27 | 0.01 |
| Benchmark | 2.33 | 6.11 | 4.00 | 2.51 | 1.37 | -1.04 |
| Difference (Net) | 0.10 | 0.69 | 0.87 | 0.04 |
0.90 | 1.05 |
| Tracking Error Volatility | 0.23 | 0.33 | 0.39 | 0.43 | ||
| Information Ratio | 3.07 | 2.64 | 2.34 | 3.18 | ||
Source: State Street Global Advisors. As of March 31, 2025. The Systematic High Quality US Corporate Bond portfolios were converted to the SAFI investment process as December 31, 2023. Past performance is not a reliable indicator of future performance. Performance returns for periods of less than one year are not annualized. The performance figures contained herein are provided on a gross and net of fees basis. Gross of fees do not reflect and net of fees reflect the deduction of advisory or other fees which could reduce the return. *Inception Date: December 31, 2023. Fund history predates this period however it was not managed using the SAFI approach.
We note three key drivers of performance YTD. First, the value factor tends to tilt the portfolio towards bonds that are cheap on a risk-adjusted basis relative to peers. As a result, our SAFI portfolios are typically long credit risk vs. their benchmark indices, with the expectation that these spreads will narrow over time. However, in risk-off environments like that of the last few months, spreads tend to widen, and higher spreads tend to widen more. Performance during these events in our SAFI portfolios will be hurt by this long duration-times-spread (DTS) positioning. We observed this very clearly in our performance attribution.
Second, despite this cyclical detractor, the value and momentum factors both contributed to performance YTD overall, on a cumulative basis, while sentiment was flat. Importantly, the factors behaved as expected: in Q1 value was the main driver of performance, while momentum was additive during periods of volatility and spread widening, helping to “soften the edges” on the downside.
Lastly, April was a difficult month for value, while momentum contributed. Trading results were challenged by the volatile environment and wider bid-ask spreads.
Looking Ahead
Markets have calmed from their April turbulence, with IG spreads back around 100 bps. But if recent history is any lesson, there will be more policy and macro twists and turns in 2025. While credit drawdowns hurt performance overall, our SAFI portfolios have demonstrated some downside protective characteristics relative to fundamental peers in the most recent bout of volatility, which was driven by the “Liberation Day” tariff announcements. This serves as a good early proof point to the multi-faceted role that alpha factors can serve in a fixed income portfolio that seeks to outperform its benchmark in different credit environments, through the cycle.
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