What is Efficient Fixed Income Beta?
Efficient beta is often known as “smart beta”. It focuses on capturing market inefficiencies which may arise when not all parties in the market have the same information. It is important to first identify those inefficiencies. Those with more information likely have greater benefit.
Discover Fallen Angels
The market for fallen angels is young. A 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).
Fallen Angels could have better total and risk-adjusted returns, less volatility and favorable risk characteristics relative to the broad high yield universe. Investors who want to exploit the potential of a company to recover from a temporary decline might consider fallen angels.
A closer look into the asset class
Investment universe is expanding as downgrades of investment grade bonds continue…
Downgrades of investment grade bonds to fallen angels continue quickly. Through September 30 2020, $179.6 billion, across 43 companies and comprising over 230 bonds, has been downgraded. This figure already exceeds the full calendar years of 2009 ($103 billion) and 2005 ($149 billion), the largest years for fallen angel creation.
The chart below shows that the US fallen angels sector could offer favourable returns per unit of risk relative to certain types of bonds and equities.
Annualised return vs. risk for major asset classes (Mar 2005 – Jun 2020)
Source: Mellon, Bloomberg. Performance calculated in USD. EM Local Currency Debt = GBI-EM Global Diversified Index. EM Hard Currency Debt = JP Morgan EM Bond Index (EMBI Global Diversified Index). U.S. Fallen Angels = Bloomberg Barclays Fallen Angel 3% Cap Index, US Agg = Bloomberg Barclays US Agg Total Return Index, US Munis = Bloomberg Barclays Municipal Bond Index, US High Yield = Bloomberg Barclays US Corporate High Yield Index, Global Agg Credit = Bloomberg Barclays Global Aggregate Bond Index, EM Equity = MSCI Emerging Markets Index, US Small Cap = Russell 2000® Index, US Large Cap = S&P 500® Index.
iFixed income refers to those types of securities that pay investors fixed interest ie Bonds.
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