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Systematic Active Fixed Income: A Straightforward Guide to the SAFI Investment Process

SAFI (the “Strategy”) employs a quantitative approach to alpha generation that is both rules based and data-driven.

16 May 2025 5 min read

Nataliya Ivanova

Senior Client Portfolio Manager

David Patrick Furey

Global Head of Portfolio Strategists, Fixed Income, Cash and Currency

What follows is an excerpt of the piece; download the full document here.

SAFI: A Modern Approach to Fixed Income Investing

Quantitative signals in the form of factor scores are used to drive security selection, while the Strategy also seeks to maintain structural risk alignment with the underlying benchmark. In this way, the Strategy seeks to generate alpha, predominantly from security selection. This approach ensures not only a high consistency in the security selection decision, but also does this rapidly and at scale, essentially evaluating thousands of securities simultaneously to identify and harness alpha potential. Furthermore, with the ability to integrate sustainability considerations such as climate into the security selection decision, SAFI can deliver this attractive alpha potential while aligning with any client-specific sustainable investment preferences and objectives.

Our systematic, factor-based approach has been applied to identify investment opportunities across the full credit spectrum from investment grade to high yield. The approach capitalizes on the much improved pricing transparency and frequency of today’s credit markets, that has been facilitated by the improvements in electronic trading. A systematic approach, being both quantitatively driven and rules based, is different from the majority of existing active fixed income strategies, which are highly qualitative and rooted in fundamental analysis. These differences in approach drive very different outcomes in the form of differentiated return streams, and this is one of the key attractions of systematic strategies. It is not just the level of alpha they can potentially generate, but it’s the way in which it is generated, which has shown to provide attractive manager diversification benefits for investors.

The quality of the factor research is a critical element underpinning any quantitative approach, and that is why we at State Street Global Advisors have partnered with arguably one of the most experienced and respected quantitative research teams in fixed income, namely Barclays Quantitative Portfolio Strategy (QPS). Each day, Barclays QPS provides us with factor scores delivered through custom systematic strategy indices that we combine with our expertise in precise portfolio construction and efficient implementation. As a result, we believe that we have an unrivaled combination that can convert this robust theory into practice through portfolios that are constructed to generate attractive yet differentiated return streams.

Through this collaboration with Barclays QPS (see: Introduction to Barclays QPS), State Street Global Advisors combines its own robust portfolio management and execution expertise with advanced factor research to offer a comprehensive suite of systematic active strategies.

The Backbone of the Strategy

The SAFI investment process and alpha generation is underpinned by three key signals, or factors:

Quantitative Signals Can Identify Outperformance Opportunities in Fixed Income

Identified Signal	Purpose	Economic Rationale
Value (Excess Spread Over Peers)	Identifies underpriced risk	This signal identifies bonds that are cheap relative to their peers* after adjustments for structural and fundamental features such as industry, rating, quality, and maturity have been made. By analyzing a wide array of securities, the relative value signal identifies bonds that are mispriced. In essence, ESP helps to pinpoint underpriced risk.
Momentum (Equity Momentum in Credit)	Identifies attractive names with strong equity-implied sentiment and protects against value traps	Momentum focuses on trends in the equity price of the underlying issuer. Bonds of issuers with strong equity price momentum are expected to outperform and are scored higher. Research confirms the lead-lag relationship between equity and bond prices, making EMC an informative early signal for the bond’s future performance. Importantly, combining equity momentum with the value signal enhances accuracy by mitigating the risk of being exposed to value traps, which occur when bonds trade cheaply relative to peers for good economic reasons.
Sentiment (Equity Short Interest)	Screens out high-risk issuers aggressively shorted by sophisticated investors	This signal identifies issuers with significant short interest in their equity. Certain sophisticated investors, such as hedge funds, express negative views on companies by taking sizable short positions in their equity. Companies with significant short interest, therefore, have potential downside risks and are best excluded from credit portfolios. We use this sentiment indicator to screen out issuers that are actively shorted by investors.

* Peer group categories such as sector, rating and maturity control for systematic risk.

Source: State Street Global Advisors, Barclays QPS, as of March 20, 2025.

By systematically applying informative signals to identify mispriced securities, SAFI aims to implement portfolios that are poised to outperform standard benchmarks in a consistent, unbiased and structured manner.

Learn More

Our new piece details the investment process behind SAFI and explains how it puts proven, data-driven factors to work to generate alpha. The piece summarizes the SAFI investment process, explains the alpha factors that drive credit returns, and provides insights into the integration of climate criteria.

Download the Piece

The Investment Process in Steps

The Strategy employs a systematic, algorithmic approach to evaluate all securities in the investment universe based on their exposure to each factor. It aims to maximize exposure to those factors in an efficient and practical way.

Signal Generation

Signals for the three factors—value, momentum and sentiment — are delivered daily by Barclays QPS for each bond in the benchmark through custom systematic strategy indices. Each bond in the investment universe receives four scores: one for each factor and a composite score.¹

The performance contributions of each signal vary over time due to differences in their characteristics and behaviors. The value signal is the primary contributor to active risk during “normal” market environments, while the momentum signal plays an important complimentary role (both in terms of risk and alpha during periods of heightened volatility). In contrast, the sentiment (ESI) signal, which is predominantly used to screen out issuers with high short interest, has a relatively small contribution at the overall portfolio level compared to value or momentum. This is because few names in the corporate index are actively shorted by equity investors at any one time. Excluding these issuers is an effective way to limit downside risks.

Portfolio Construction

Our rules-based portfolio construction is guided by three main principles:

Optimal portfolio exposure to the factors
Control for unintended risks relative to the benchmark index
Execute efficiently

Securities are selected based on their exposure to factor scores, with the portfolio optimized to balance potential returns against risk constraints while ensuring effective execution with low transaction costs. The less liquid portion of index constituents are excluded from the eligible universe based on bond-level liquidity analytics such as traded volumes and bid-offer spreads.²

The investor’s specific objectives and constraints are incorporated in this process. This includes any desired sustainability exclusions, metrics and targets. The liquidity-filtered universe is fed into our proprietary portfolio construction and analytics framework, which produces a model portfolio that maximizes the overall composite factor score subject to the designated constraints.

These constraints ensure portfolio alignment to client investment guidelines as well as to the various exposures and allocations of the reference benchmark, so that factor-based security selection — and not structural differences from the benchmark — is the key driver of excess returns.

Key Benefits of SAFI

For prospective investors, SAFI offers several compelling advantages:

Strong Alpha Potential: Systematic application of proven signals has demonstrated strong and consistent excess returns over benchmarks with relatively low risk usage, leading to high information ratios.
Diversification: The demonstrated low correlation of active returns from our systematic credit strategies with traditional fundamental active credit strategies offers attractive diversification benefits, while maintaining the risk characteristics of the benchmark index.
Transparent, Disciplined Process: The rules-based methodology provides consistency in security selection decisions that can be applied at scale across broad investment universes.
Reduced Human Bias By relying on data-driven insights, systematic approaches remain objective and transparent, and avoids the influence of emotional or cognitive biases in investment decisions.
Sustainability Integration Incorporating sustainability screening aligns investment decision-making with global sustainability goals, appealing to socially responsible investors.

Our systematic credit strategies represent a relatively new and sophisticated investment approach that is built upon quantitative rigor that can also integrate sustainable investment practices. By embracing the transparency of the approach, the diversification benefits of the results, along with the integration of sustainability, SAFI offers a compelling proposition for investors seeking to invest actively and responsible in their fixed income portfolios today.

Footnotes

Disclosure

Marketing Communication

ssga.com

State Street Global Advisors Worldwide Entities

All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.

The views expressed are the views of Nataliya Ivanova and David Furey through March 31, 2025, and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward- looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected.

SSGA uses quantitative models in an effort to enhance returns and manage risk. While SSGA expects these models to perform as expected, deviation between the forecasts and the actual events can result in either no advantage or in results opposite to those desired by SSGA. In particular, these models may draw from unique historical data that may not predict future trades or market performance adequately. There can be no assurance that the models will behave as expected in all market conditions. In addition, computer programming used to create quantitative models, or the data on which such models operate, might contain one or more errors. Such errors might never be detected, or might be detected only after the Portfolio has sustained a loss (or reduced performance) related to such errors. Availability of third-party models could be reduced or eliminated in the future.

Diversification does not ensure a profit or guarantee against loss.

Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.

Barclays is not affiliated with State Street Global Advisors Funds Distributors, LLC.

Barclays Index License Disclaimer

Barclays Bank PLC has licensed certain systematic strategy indices to State Street Global Advisors that incorporate quantitative signals developed by Barclays’ Quantitative Portfolio Strategy (QPS) Research team.

Neither Barclays Bank PLC (“BB PLC”) nor any of its affiliates (collectively “Barclays”) is the issuer or producer of the products referenced herein and Barclays has no responsibilities, obligations or duties to investors in such products. The Barclays Indices referenced herein (collectively, the “Indices”), together with any Barclays indices that are components of such Indices, are trademarks owned by Barclays and, together with any component indices and index data, are licensed for use by State Street Global Advisors as the producer of the products referenced herein (the “Product Provider”). The Indices are used by the Product Provider in connection with the management of the products referenced herein, but the Indices are not used by the Product Provider as the benchmark for such products, including as defined under Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds.

Barclays’ only relationship with the Product Provider in respect of the Indices is the licensing of the Indices, which are administered, compiled and published by BB PLC in its role as the index sponsor (the “Index Sponsor”) without regard to the Product Provider or the products referenced herein or investors in such products. Additionally, State Street Global Advisors as Product Provider may for itself execute transaction(s) with Barclays in or relating to the Indices in connection with such products. Investors acquire such products from the Product Provider and investors neither acquire any interest in the Indices nor enter into any relationship of any kind whatsoever with Barclays upon making an investment in such products. The products referenced herein are not sponsored, endorsed, sold or promoted by Barclays and Barclays makes no representation regarding the advisability of such products or use of the Indices or any data included therein.

Barclays shall not be liable in any way to the Product Provider, investors or to other third parties in respect of the use or accuracy of the Indices or any data included therein.

Barclays has engaged Bloomberg Index Services Limited as the official index calculation and maintenance agent of the Indices, which are owned and administered by Barclays. Bloomberg Index Services Limited does not guarantee the timeliness, accurateness, or completeness of the calculations of the Indices or any data or information relating to the Indices. Bloomberg Index Services Limited makes no warranty, express or implied, as to the Indices or any data or values relating thereto or results to be obtained therefrom, and expressly disclaims all warranties of merchantability and fitness for a particular purpose with respect thereto. To the maximum extent allowed by law, Bloomberg Index Services Limited, its affiliates, and all of their respective partners, employees, subcontractors, agents, suppliers and vendors (collectively, the ‘protected parties’) shall have no liability or responsibility, contingent or otherwise, for any injury or damages, whether caused by the negligence of a protected party or otherwise, arising in connection with the calculation of the Indices or any data or values included therein or in connection therewith and shall not be liable for any lost profits, losses, punitive, incidental or consequential damages.

Past performance is not a reliable indicator of future performance.

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State Street Global Advisors, One Iron Street, Boston, MA 02210.

7964604.1.1.GBL.INST

Exp. Date: 03/31/2026

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