risks.

The following risks may be materially relevant but may not always be adequately captured by the summary risk indicator and may cause additional loss: Credit risk, Liquidity risk and Concentration risk.

glossary.

Fallen Angels Recovery

rethink high yield investment.

Our Fallen Angels Recovery strategy offers investors attractive risk-adjusted return potential from high yield investing, throughout market cycles. We do this by taking a global, research-driven, and importantly an active approach.

BB +

average rating

$200 bn

investment universe

article 8

SFDR classification

philosophy.

By investing in fallen angels, namely bond issuances which are downgraded from Investment Grade ("IG") to High Yield ("HY"), we believe these can offer a more favourable risk/return profile than standard HY bonds– both during market recoveries and in more benign markets.

90% of the strategy’s universe is rated BB, which we believe to be a credit sweet spot for value. When downgraded, fallen angels tend to offer higher spreads than BB rated peers due to forced selling pressure.

Much of a fallen angel’s value is influenced by this selling pressure as a bond’s downgrade nears, accelerating when that date hits, but often recovering within a two-year period. It is typically these market overreactions that we seek to exploit, looking to deliver convex high-yield exposure.

In economic slowdowns, such as that potentially expected in the coming months, downgrades can be more frequent, leading to increased fallen-angels supply and creating more investment opportunities for our experienced credit analysts to uncover.

why invest?

opportunity in
overreaction

credit’s sweet spot

through the cycle returns

favourable risk-adjusted returns

perfect timing?

universe.

Through active credit management, our focus is on exploiting the ‘valuation over-reaction’ of bonds on their way to being downgraded to HY.

By identifying and exploiting inefficiencies at issuer and issue level through systematic top-down Lombard Odier Investment Management (LOIM) research, we seek to unearth these opportunities.

Further supported by bottom-up contribution by credit analysts to enhance returns, we then look to avoid so-called ‘falling knives’ and reduce credit risk.

opportunity in overreaction.

Our Fallen Angels Recovery strategy looks to exploit ‘valuation overreaction’ to downgrades.

LOIM research shows that upon downgrade from investment grade, fallen-angel spreads are typically significantly higher than BB rated peers, and offer better risk-adjusted returns that all other ratings categories including IG, BBB, BB and HY. Price recovery tends to occur within a two-year period, not just in market crises, but also in more regular market environments.

Source : LOIM March 2023. For illustrative purposes only. Past performance is not a guarantee of future results. Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document.

credit’s sweet spot.

We see far better risk-adjusted return characteristics for long-term outperformance and income potential within BB ratings bracket – more so than any other rating category.

Historically, BB credit outperforms all ratings buckets including the lower rated B buckets from the perspective of credit returns - almost three times larger than its nearest investment-grade rating bucket (BBB).

BBs exhibit higher spread returns than Bs, despite lower spreads. This is thanks to the substantially lower default risk in BBs versus Bs and, hence, reduced default-linked losses. The ultimate outcome is substantially higher excess returns relative to spread levels, and therefore risk levels.

While a multitude of factors contribute to the outperformance of BBs, both in absolute returns and relative to their spreads, a dominant driver is the outperformance of fallen angels.

Source : LOIM March 2023. Past performance is not a reliable indicator of future returns

through the cycle.

In searching for higher potential returns, the fund combines LOIM’s leading market research and analysis, in-depth fundamental credit analysis, systematic capabilities and crossover experience. Sustainability is also fully embedded in our investment decisions.

The result – a convex high-yield strategy which tends to outperform other HY in a recovery but fall less in a negative credit market or during more challenging market cycles.

favourable risk-adjusted returns.

Fallen angels tend to outperform all ratings-based indices, with significant outperformance potential in a recovery but still with outperformance potential in benign markets.

Our research shows a similar average yield for fallen angels when compared with high yield, but with better average returns reflecting price over-reaction on downgrade and the subsequent pull to par effect.

Fallen angels have also demonstrated better risk-adjusted returns.

Source : LOIM March 2023. Past performance is not a guarantee of future results. Awards and ratings may vary without notice. Yields are subject to change and can vary over time.

perfect timing?

Fundamentals are widely expected to catch up with the deterioration in sentiment seen this year, creating strong potential for greater supply of fallen angels.

An uptick in fallen angels supply usually leads to strong future credit performance in both absolute and relative terms and greater alpha potential. Fundamental analysis to separate fallen angels from falling knives will remain critical.

In 2022, we saw a strong repricing of fixed income assets including fallen angels. Valuations are now starting to look compelling. While we believe markets might remain volatile, we think we have seen the larger part of the move.

investment team.

	Ashton Parker Lead Portfolio Manager Head of Credit Research
	Jérôme Collet Senior Portfolio Manager Head of Beta Management

	Anando Maitra Portfolio Manager Head of Systematic Research
	Denise Yung Portfolio Manager Crossover Credit

Find out more about our Fallen Angels Recovery fund, including share classes.

more information

insights.

more insights

get in touch.

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important information.

This document is a Corporate Communication and is intended for Professional Investors only. This document is a Corporate Communication for Professional Investors only and is not a marketing communication related to a fund, an investment product or investment services in your country. This document is not intended to provide investment, tax, accounting, professional or legal advice. This document is issued by Lombard Odier Asset Management (Europe) Limited (hereinafter the “Company”).

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risks.

Fallen Angels Recovery

rethink high yield investment.

philosophy.

why invest?

universe.

opportunity in overreaction.

credit’s sweet spot.

through the cycle.

favourable risk-adjusted returns.

perfect timing?

investment team.

insights.

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get in touch.

important information.