Lombard Odier Investment Managers (LOIM) has launched the Fallen Angels Recovery strategy in Taiwan as the firm continues to broaden its product offering in Asia.
The strategy is LOIM’s latest offering in Taiwan, following the launch of its Asia Value Bond (AVB) strategy in the local market last year. The AVB offering has resonated well with clients in Taiwan looking to increase their fixed income allocation, the firm says.
Fallen Angels Recovery seeks to invest in bonds that have been downgraded from investment grade to high yield within the global fixed income universe. According to LOIM research, the price of fallen angel bonds, at the time of their downgrade, is generally lower than that of similarly rated peers, but recovers over the next six to 24 months.
As such, the bonds offer a unique opportunity for active investors who have conducted rigorous fundamental analysis to satisfy themselves that the companies’ credit quality will not continue to deteriorate.
Research by the Swiss asset manager finds that the credit spreads of issues downgraded from investment grade are significantly higher than their BB-rated peers: fallen angels rated BB+ have a 290bp excess spread over peers just after the downgrade.
The bonds generally recover within a two-year period. They offer better returns and Sharpe ratio than investment grade, BBB, BB and high yield regardless of the market cycle. Fallen angels have seen an 8.8% annualized performance as against 6.7% for high yield with the Sharpe ratio at 0.8 and 0.54 respectively.
Outperforming peers
Total returns (USD hedged) – 2004-2024
Source: LOIM
Looking ahead to the second half of 2024, LOIM expects the impact of high interest rates and lower disposable incomes to adversely affect credit quality, particularly those in the consumer cyclical sectors. This could lead to an increased supply of fallen angels, which could present more opportunities for investors.
Since its inception in 2021, the strategy has gained strong interest from investors and currently holds assets under management of US$360 million, LOIM says,
“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 for clients,” says Yannik Zufferey, chief investment officer, core business, at LOIM.
“Our market-leading investment team, which combines fundamental credit analysis and systematic capabilities, is committed to capturing these opportunities. We are pleased to now offer this strategy and potential attractive returns to clients in Taiwan.”
Navigate Investment Consultant will continue to act as the master agent for LOIM’s investment strategies in Taiwan, distributing them to institutional, wholesale, and individual clients.
