Navigating Stormy Credit Markets: Enhancing Systematic Credit Investing with Earnings Intelligence

June 6, 2022

In our latest study, we demonstrate how the risk-adjusted performance of systematic credit investing strategies can be significantly enhanced by incorporating real-time analytics from RavenPack’s Edge news, earnings call transcripts, and insider transactions which offer complementary sources of alpha.

This year is proving to be very challenging for fixed-income investors. With inflation at multi-decade highs globally, interest rates are rising rapidly with a devastating effect on bond prices.

The advent of real-time, machine-readable news over the last decade has paved the way for sentiment-based trading strategies that take advantage of media content as a reliable predictor of individual firm’s financial performance.

In our latest study, we demonstrate how the risk-adjusted performance of systematic credit investing strategies can be significantly enhanced by incorporating real-time analytics from RavenPack’s Edge news, earnings call transcripts, and insider transactions, which offer complementary sources of alpha.

We tilt the long-only U.S. investment-grade benchmark based on senior, unsecured, and liquid bonds since 2015-2022 and find :

  • When evaluated individually, Earnings News and Transcripts demonstrate complementary performance. The Earnings News strategy performs well over the short-term, with annualized returns of 105bps in excess of the annual investment-grade benchmark (left) for an effective holding period of two days, compared to 14bps for 10 days. With Transcripts, annualized excess returns are the highest at the one-week horizon (58bps compared to 27bps for News).

  • Complementing the security-selection skills, the combined Earnings Intelligence strategy outperforms the individual signals from Earnings News and Transcripts while decaying at a slower rate than News. The Earnings Intelligence strategy steadily generates benchmark-adjusted Sharpe Ratios (right) of nearly 0.60 at the three-month effective holding period (compared to 0.40 for Earnings News), while adjusted Sharpe Ratios for Transcripts improve from 0.25 to 0.50 as the holding period increases from two weeks to three months.

  • Significance tests demonstrate that sentiment-tilted portfolios statistically outperform those with random tilts, dominating zero-skill strategies at the 92% (for Earnings News and Transcripts) and 95% (for Earnings Intelligence) confidence intervals.

annualized returns image

Annualized returns (left) and Sharpe Ratio (right) in excess of the U.S. investment-grade benchmark, for long-only credit portfolios using different tilting magnitudes and signals.
Source: RavenPack, April 2022

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