Discover Insight* Fallen Angels Beta Plus Strategy

Exploiting the structural alpha opportunity from fallen angels

The BNY Mellon Efficient U.S. Fallen Angels Beta Fund aims to generate alpha with comparable risk to the benchmark by harvesting structural mispricing in the Fallen Angels market.1 The Fund follows an innovative investment approach designed to access Fallen Angels at minimal cost whilst overweighting attractive issues and avoiding those with unattractive risk-return features or material ESG issues.

1A Fallen Angel corporate bond is one that has started out as a member of the investment grade universe (typically rated BBB) but has dropped down into the high yield universe (typically rated BB).

$12+ billion in

100+ clients worldwide

100+ clients worldwide

100+ clients worldwide

100+ clients worldwide

Why Invest?

Fallen Angels offer equity-like returns at bond-like risk

U.S. Fallen Angels have produced the highest return across major market since index inception in 2004. They have consistently outperformed the broad high yield index with lower drawdown and stronger credit quality. Despite this, few dedicated Fallen Angel strategies exist. Those that do must overcome high transaction costs, low dealer inventory and a typically narrow universe to extract returns.

Annualised return vs. risk for major asset classes (Mar 2005 – Jun 2021)

How does the Fund seek to tap into this market?

The BNY Mellon Efficient U.S. Fallen Angels Beta Fund targets the full risk premium of the asset class through a dual focus on alpha capture and value preservation. The starting point is the Bloomberg Barclays US HY Fallen Angel 3% Cap TR Index. A tilt towards recent downgrades is applied in order to capture the historically higher return of this segment. Bonds with undesirable risk-return characteristics are excluded, including those exhibiting rapidly deteriorating fundamentals and older downgrades with long duration. Application of the firm’s proprietary credit model allows over and under-priced securities to be identified and weighted accordingly whilst strict investment parameters limit risk. Sourcing issues are mitigated through Insight’s innovative credit portfolio trading technology, enabling the portfolio to access a large number of bonds in one transaction and at minimal cost. Finally, negative ESG screening is applied to filter out undesirable issuers. The result is a diversified portfolio with a similar level of risk to the benchmark and a higher return target.

The Fund will measure its performance against Bloomberg Barclays US HY Fallen Angel 3% Cap Total Return Index Value Unhedged (the “Benchmark”). The Investment Manager will use the Benchmark to construct the investment universe. The Fund is actively managed and does not seek to replicate the full constituents of the Benchmark. The Investment Manager has limited discretion to invest outside the Benchmark where the relevant security meets the requirements of and is expected to be included in the Benchmark in the future. The majority of the Fund’s holdings will be constituents of the Benchmark and as a result the Fund will be similar in its currency, duration as well as sector exposures and credit quality profile, subject to investment constraints. However the Investment Manager will not seek to reflect the Benchmark’s maturity profile. The investment strategy provides similar volatility to the Benchmark over the medium to long-term.

$12+ billion in

100+ clients worldwide

100+ clients worldwide

100+ clients worldwide

100+ clients worldwide

Harvest structural mispricing

Overweight recent downgrades that trade at a discount to fair value.

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Up to 20% overweight to recent downgrades

Bonds downgraded less than 12 months ago tend to perform best and are preferred with the remaining overweight allocated to bonds downgraded within 12-24 months.

Avoid ‘falling knives’

Securities with rapidly deteriorating fundamentals are avoided.

Efficient Allocation

Exclude seasoned long spread duration bonds to avoid sub-optimal risk-return trade-off.

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Allocate to shorter maturity

Within 24+ month vintage, sell bonds with maturity >=10 years and pro-rata allocate to 1-10 year maturity.

Manage downside risk

Filter for best value securities within set parameters.

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Improve security selection

Apply Insight’s time-tested credit model to underweight expensive bonds and overweight cheap bonds.

Apply strict investment parameters

Hedge duration to index, cap issuer weight at 7% and limit CCC exposure to 10%.

Innovative and cost efficient sourcing of bonds

Circumventing the major hurdles to Fallen Angel investment.

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Utilise credit portfolio trading

Leveraging the ETF ecosystem and dealer networks to access diversified bond baskets quickly and cost efficiently.

Esg

Fully integrated

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Negative screening to filter out undesirable issuers

Insight is a long standing player in the ETF ecosystem with specific skill sets and tools to target these challenges.

Insight was an early pioneer in indexation and has unique talents to deliver Efficient Beta and is solutions-led, responding to client challenges where value can be added back to help achieve the clients’ desired outcomes.

$12+ billion in

100+ clients worldwide

100+ clients worldwide

100+ clients worldwide

100+ clients worldwide

Meet the team

$12+ billion in

100+ clients worldwide

100+ clients worldwide

100+ clients worldwide

100+ clients worldwide

Paul
Paul Benson
CFA, CAIA


Head of Efficient Beta

Manuel
Manuel Hayes
Senior portfolio manager
Stephanie
Stephanie Shu
CFA
Senior portfolio manager
Agrawak_Deepak
Deepak Agrawal
PhD

Head of Quantitative research, Efficient Beta

Fallen Angels outperform because short-term technical selling pressure overrides long-term fundamental value considerations

$12+ billion in

100+ clients worldwide

100+ clients worldwide

100+ clients worldwide

100+ clients worldwide

Resources

Fallen angels – In conversation with Insight¹ Paul Benson

Fallen angels – In conversation with Insight¹ Paul Benson

Paul Benson discusses his route to a career in fund manager and why he believes there is opportunity in fallen angels

Efficient Beta,Fallen Angels

$12+ billion in

100+ clients worldwide

100+ clients worldwide

100+ clients worldwide

100+ clients worldwide

The value of investments can fall. Investors may not get back the amount invested.

Credit Risk: The issuer of a security held by the strategy may not pay income or repay capital to the portfolio when due.

Important information

*Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Managers Limited (BNYMFM), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

CAIA® and Chartered Alternative Investment Analyst® are registered trademarks owned by the CAIA Association.

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$12+ billion in

100+ clients worldwide

100+ clients worldwide

100+ clients worldwide

100+ clients worldwide