Lombard Odier Investment Managers (LOIM) has expanded its fixed income franchise with the launch of Fallen Angels Recovery, a high conviction strategy that invests in companies that have fallen down the ratings spectrum, and yet display strong recovery prospects and an attractive valuation proposition.
The Fallen Angels Recovery strategy launched on 30 November 2021 and has assets under management of $86 million (as at 31 December 2021).
Fallen angels are bond issuances that have been downgraded from investment grade to high yield, but which are strongly undervalued relative to their rating peers. Using a high conviction and research-driven approach, the Fallen Angels Recovery strategy attempts to offer attractive ‘through the cycle’ risk-adjusted returns for investors and provides strong market exposure to a recovery, whilst limiting exposure to a sell-off.
The strategy builds upon LOIM’s market leading research into the fallen angel phenomenon, which has shown persistently superior returns over the last sixteen years. In fact, fallen angels have delivered the highest returns of all rating categories both from a total return and credit excess return perspective over that period.
The strategy’s investment approach combines alpha and beta management to mitigate risks and drawdowns, whilst exploiting bottom-up opportunities. Approximately 100 holdings, of which around 90% are BB rated, are selected based on fundamental analysis of the issuer, with sustainability embedded throughout the investment process.
Fallen Angels Recovery is overseen by Yannik Zufferey, chief investment officer for fixed income and managed by Ashton Parker, lead portfolio manager and head of credit research. Mr Zufferey and Mr Parker are supported by an investment team comprised of Jerome Collet, Anando Maitra and Denise Yung.
Mr Zufferey, said: “At LOIM we have a long-standing track record in delivering robust returns from crossover credit strategies, and we believe our Fallen Angels Recovery strategy represents a similarly compelling investment opportunity. An initial look at the historical performance of fallen angels versus other corporate credit segments is extremely promising, and our research shows persistently superior risk-adjusted returns for fallen angels over the last sixteen years.
“Our market leading investment team, which combines fundamental credit analysis, systematic capabilities and crossover experience, is committed to capture these opportunities and generate attractive returns for our clients.”
It should be noted that fallen angel credits are more of a feature of the European bond market than its US equivalent, with the latter containing companies that are set up to be highly leveraged and thereby high yield or ‘junk’ status. Many fund managers like triple B rated bonds as this is the last rung of investment grade and offers a decent risk versus reward balance for many.