Can including fallen angels enhance returns?
What is a fallen angel? In theological terms, a fallen angel is one who has rebelled and been exiled from heaven.
Fallen angel bond prices can overreact to the downgrade in the short term and often recover partially or fully within six months of the downgrade
In this article we focus on the design of a sterling fallen angel index as well as highlighting the benefits of combining it with investment grade indices.
In many cases these bonds are issued by very well-known companies who you may not necessarily associate with high yield issuers (e.g. Tesco, Telecom Italia). When a bond is downgraded (either by S&P/Moody’s/Fitch1) it often implies that the business is suffering in some shape or form, either from a weakening financial position, or a loss in revenues and/or market share that could have an impact on the issuer’s ability to service their debt. When a company’s debt is downgraded below investment grade, it no longer remains a constituent of investment grade benchmarks.
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