Crossover credit: a sweet spot

Enhancing an investment-grade strategy with BBB to BB rated corporate bonds

 

We believe crossover bonds can improve potential returns for an investment-grade strategy, without incurring the more pronounced risk of lower-rated high yield.1 Our crossover credit strategy aims to enhance yield by prudently selecting corporate bonds rated BBB to BB, while retaining an average investment grade rating.

1 There can be no assurance that the Sub-Fund’s investment objective will be achieved or that there will be a return on capital or that a substantial loss will not be incurred.

1 Source: Source: LOIM, Bloomberg Barclays Indices (31.01.2001 – 31.12.2023). Past performance is not a guarantee of future results. For illustrative purposes only. Ratings are subject to change.
2 Source: Bloomberg Barclays Indices, in EUR Hedged. As of 31.07.2023.

the case for crossover credit.

Crossover corporate bonds offer investors an alternative to traditional options in fixed income. By encapsulating investment grade bonds and the best quality high-yield bonds, the crossover space can deliver an enhanced, investment-grade portfolio.

Crossover credit assets tend to feature the most favourable characteristics from both investment-grade and high-yield debt. Crossover risk is usually closer to that of investment grade, but returns tend to be better than investment grade.

In addition to a higher yield potential than investment grade, the corporate crossover segment also offers:

  • A better balance between duration and credit risk than the investment grade universe
  • A tendency to improve credit quality relative to other ratings categories
  • Lower default and drawdown risk than high yield

Source: LOIM analysis of default and drawdown on crossover debt. Past performance is not a guarantee of future returns.

fallen-angels effect.

Fallen angels are bond issuances that have been downgraded from investment grade to high yield. Essentially, these company ratings have dipped just below investment grade yet display strong recovery prospects and an attractive valuation proposition: that’s why we call this the sweet spot in crossover credit.

Research into the fallen-angel phenomenon has highlighted persistently superior returns, which can usually be attributed to these assets being strongly undervalued relative to their rating peers at the time of the ratings downgrade. This typically fuels outperformance in the 24 months after the downgrade. Fallen angels have also been shown to deliver the highest returns of all rating categories, both from a total return and credit excess return perspective.

Therefore, an important driver of returns for crossover bonds can be attributed to the so-called fallen-angels effect.

converging sector allocation.

For the crossover segment to act as a suitable surrogate for investment grade, sector allocation must be similar because large differences in the sector mix can lead to very different performance patterns over time.

While historically there were areas of difference between crossover and investment grade universes, sector allocations have converged in the last two decades; it is now possible to build a diversified investment grade-rated portfolio from crossover assets. 

why us?

our strategy.

We believe adding crossover bonds to an investment-grade strategy offers the best of both worlds: improved returns with limited risks.

Our high-conviction portfolios are actively managed, aiming to generate higher risk-adjusted return potential compared with traditional investment-grade benchmarks, while retaining an average investment grade rating.

We approach investing in the crossover universe differently: prudently selecting bonds in the BBB to BB ratings area. The way we rethink fixed-income investing helps us to embed a greater margin of safety into investments.

Assessing extra-financial factors, such as sustainability, further helps mitigate risk. We do this by favouring companies with better business practices and those we believe are more resilient to the challenges created by the transition to a more sustainable economic model.

investment philosophy and process.

investment team.

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Denise Yung, CFA
Lead Portfolio Manager
Credit Specialist

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Christelle Curt-Cognac
Client Portfolio Manager

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Jerôme Collet, PhD
Senior Portfolio Manager
Head of Beta Management

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Ashton Parker
Portfolio Manager
Head of Credit Research

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Caroline Reffell
Credit Analyst

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Anando Maitra, PhD, CFA
Portfolio Manager
Head of Systematic Research

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Raphael Kull, CFA
Portfolio Manager

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David Perez, CFA
Portfolio Manager
Credit Analyst

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Philipp Burckhardt, CFA
Portfolio Manager
Credit Analyst

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Arvind Kumar
Credit Analyst

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Crossover bonds: tilting to income and quality
investment viewpoints Fixed Income
investment viewpoints Fixed Income Global Crossover

Crossover bonds: tilting to income and quality

This third insight about crossover corporate bonds rated BBB to BB looks at how they could provide income and quality for fixed income investors.

Crossover bonds: strong fundamentals and the BB boost
investment viewpoints Fixed Income
investment viewpoints Fixed Income Global Crossover

Crossover bonds: strong fundamentals and the BB boost

This second insight about crossover corporate bonds rated BBB to BB considers the segment's strong fundamentals, favourable valuations and regulatory drivers.

Crossover bonds: a replacement for investment grade
investment viewpoints Fixed Income
investment viewpoints Fixed Income Global Crossover

Crossover bonds: a replacement for investment grade

This first insight in a series about crossover bonds rated BBB to BB considers why they offer investors a large and liquid alternative to investment-grade debt.

Are corporate credit markets at once-in-a-generation yields?
investment viewpoints Asset Management
investment viewpoints Asset Management Fixed Income Investment strategies DC DB Banks Wholesale Official institutions Third party asset managers Geronne Independants Institutional Consultants Insurance Fund of funds Endowments GFIO Crossover Asia value bonds

Are corporate credit markets at once-in-a-generation yields?

The corporate bond selloff has left high-quality yields at compelling levels for long-term investors, in our opinion.

Volatility brings credit opportunities as solvency remains stable
investment viewpoints Asset Management
investment viewpoints Asset Management Fixed Income Investment strategies Crossover DC DB Banks Wholesale Official institutions Third party asset managers Geronne Independants Institutional Consultants Insurance Fund of funds Endowments

Volatility brings credit opportunities as solvency remains stable

Even as volatility is on the rise from the current supply-side shock in the market, what credit opportunities lie hidden for investors?

Alphorum: think fallen angels for attractive high-yield convexity
investment viewpoints Asset Management
investment viewpoints Asset Management Fixed Income Investment strategies Crossover DC DB Banks Wholesale Official institutions Third party asset managers Geronne Independants Institutional Consultants Insurance Fund of funds Endowments

Alphorum: think fallen angels for attractive high-yield convexity

Analysing the performance of fallen angels, we find they can generate high-yield convexity – an attractive characteristic for credit portfolios.

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