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    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, Risks linked to the use of derivatives and financial techniques and Concentration risk.

    glossary.

    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.

    USD 6 trillion

    Market value of crossover credit segment1

    BBBs

    Largest segment of credit market1

    0.55

     Better Sharpe ratio for crossovers than investment grade or high yield2

    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
    the case for crossover credit·fallen-angels effect·converging sector allocation·why us?·our strategy·investment philosophy and process·investment team

    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?

    LOIM has been managing crossover bonds since 2010, and has a long-standing track record of delivering robust returns from crossover credit strategies.

    Our experienced investment team combines multiple strengths such as fundamental credit analysis, systematic capabilities and deep expertise in crossover credit. We are committed to maximising opportunities and aim to generate attractive returns for our clients.

    Our dedicated credit analysts are specialised by sector (irregardless of rating) and follow companies across the ratings spectrum.

    We are a leader in applying this distinctive combination of systematic expertise and bespoke credit analysis to the specific BBB to BB ratings area. Our experience is well-suited to finding strong value for investors and maximising yield potential while remaining within the parameters of investment grade.

    Past performance is no guarantee of future results

    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.

    A flexible and transparent approach to continuously seek fundamentally sound bonds from sustainable issuers. We combine a systematic allocation with continuous credit monitoring to maximise yield potential without the risk of lower-rated high yield.

    The end result is a diversified and high-quality credit portfolio with an average investment-grade rating.

    Source: LOIM analysis. For illustrative purposes only;

    investment team.

    LOcom-AuthorsAM-Yung.png

    Denise Yung, CFA
    Lead Portfolio Manager
    Credit Specialist
    LOcom_AuthorsAM-Curt-Cognac.png

    Christelle Curt-Cognac
    Client Portfolio Manager

    fundamental beta.
     

    locomauthorsam-collet

    Jerôme Collet, PhD
    Senior Portfolio Manager
    Head of Beta Management

    alpha generation.

    Fundamental

    LOcom_AuthorsAM-Parker-1.png

    Ashton Parker
    Portfolio Manager
    Head of Credit Research


     

    LOcom_AuthorsAM-Reffell.png

    Caroline Reffell
    Credit Analyst

     

    Systematic

    LOcom_AuthorsAM-Maitra.png

    Anando Maitra, PhD, CFA
    Portfolio Manager
    Head of Systematic Research
    LOcom_AuthorsAM-Kull.png

    Raphael Kull, CFA
    Portfolio Manager
    LOcom_AuthorsAM-Perez.png

    David Perez, CFA
    Portfolio Manager
    Credit Analyst
    LOcom-AuthorsAM-Burckhardt.png

    Philipp Burckhardt, CFA
    Portfolio Manager
    Credit Analyst
    LOcom_AuthorsAM-Kumar.png

    Arvind Kumar
    Credit Analyst

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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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