Presenting LO Funds – Fallen Angels Recovery
FOR PROFESSIONAL INVESTORS ONLY
After being downgraded from investment grade to high yield, research shows fallen angel spreads are typically much higher than their BB-rated peers.
In this Fund in Five, managers Ashton Parker and Anando Maitra, explain what fallen angels are and why investors may want to consider them in their portfolios.
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No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment. RWC Partners Limited is authorised and regulated by the Financial Conduct Authority.
Fallen angels are bond issuances that have been downgraded from investment grade to high yield, but which typically remain strongly undervalued relative to their peers.
Around 90% of the fund’s investment universe is rated BB, which the managers believe to be a “sweet spot” for value.
“When bonds migrate from investment grade to high yield there is often an overreaction, which drives risks and returns,” says Anando Maitra. “It is this overreaction, which we call the fallen angel phenomenon, that we seek to exploit as it can lead to abnormal returns.”
LOIM research shows upon downgrade from investment grade, fallen angel spreads are usually significantly higher than BB rated peers, and typically offer better risk-adjusted returns that other ratings categories including Investment Grade, BBB, BB and High Yield.
Price recovery tends to occur within a two-year period, not just in market crises, but also in more regular market environments.
Presenting LO Funds – Fallen Angels Recovery
Asset class
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IMPORTANT
INFORMATION
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FOR PROFESSIONAL INVESTORS ONLY
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According to LOIM, active management is imperative to maximising the potential of fallen angels.
“Through active credit management, our focus is on exploiting the ‘valuation over-reaction’ of bonds on their way to being downgraded to high yield,” says Ashton Parker.
By identifying and exploiting inefficiencies at the issuer and issue level through systematic top-down research, the managers seek to unearth these opportunities.
Further supported by bottom-up contribution by credit analysts to enhance returns, the strategy aims to avoid so-called falling knives (bonds that continue to fall) and reduce credit risk.
Presenting LO Funds – Fallen Angels Recovery
IMPORTANT
INFORMATION
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Process
FOR PROFESSIONAL INVESTORS ONLY
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Anando Maitra says there are two main differentiators of the strategy versus its peers: the asset class it invests in and the investment approach it adopts.
“Ultimately we are a high yield strategy so our peers are high yield, but we would also consider other fallen angel strategies to be our peers,” he says. “This is a contrarian high yield strategy, which is different from active high yield which tends to be more pro-cyclical.”
“Falling angels is not about investing in falling bonds, it is more about identifying falling sectors and then capturing this distressed premium in the strategy,” says Maitra.
Sustainability is also fully embedded into the strategy’s investment decisions.
Presenting LO Funds – Fallen Angels Recovery
IMPORTANT
INFORMATION
NEXT
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Differentiator
FOR PROFESSIONAL INVESTORS ONLY
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Presenting LO Funds – Fallen Angels Recovery
IMPORTANT
INFORMATION
NEXT
4
Team
FOR PROFESSIONAL INVESTORS ONLY
The LOIM Fallen Angels Recovery strategy is overseen by Yannik Zufferey, CIO for fixed income at LOIM and is lead managed by Parker, who is also head of credit research. Zufferey and Parker are supported by a dedicated investment team comprised of Maitra, who is also head of systematic research at LOIM, Jerome Collet and Denise Yung.
“Anando’s team has a systematic approach of simply overweighting fallen angels, which is based on over 20 years of research,” says Parker. “My team is responsible for identifying the falling knives with the aim of avoiding those, so the two team’s responsibilities are split very clearly.”
Maitra adds the two teams also collaborate with many of the research teams across LOIM, including the sustainable research team.
“We also call upon credit analysts from across the firm, including the Asian fixed income teams who focus on emerging markets, and the equity analysts because there is always a spillover between equity and credit risk,” Maitra says.
c.100
Issuers
BB+
Average rating
c.$200BN
Investment universe
Source: LOIM as at 30/09/2023.
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While the LO-Funds Fallen Angels Recovery Fund was only launched in November 2021, Maitra says LOIM have been running dedicated fallen angel mandates since 2018 and have been familiar with the asset class for close to 13 years.
“The one thing we find about fallen angels is that in benign periods the asset class behaves like a conservative high yield strategy because it’s largely made up of BB-rated bonds,” he says.
Maitra says this was reflected in performance in 2022, when the strategy outperformed the high yield benchmark by being more conservative.
Parker adds: “We are seeing an increase in the number of fallen angels which is offering us a larger opportunity set and the potential of greater long-term risk-adjusted returns.”
Presenting LO Funds – Fallen Angels Recovery
IMPORTANT
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Track record
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