The combination of decent-by-comparison credit profiles and their cast aside status helps make fallen angels a potentially potent value proposition. As Rodilosso notes, when corporate bonds are downgrade to junk from investment-grade status, many portfolio managers are forced to sell those bonds to keep their funds entirely allocated to investment-grade issues. [Spotlight on Fallen Angel Bonds]
ANGL and its holdings do, however, have sensitivity to interest rates.
“While currently yielding less than original issue high-yield bonds, mainly as a result of a relatively higher rated credit composition, a portfolio of fallen angels presents an interesting value proposition given the trends listed above. It should also be noted that, on average, fallen angels currently have higher interest rate sensitivity, a factor which contributed to their outperformance versus the broad high-yield bond market year-to-date 2014,” said Rodilosso.
ANGL has a modified duration of 5.61 years compared to an effective duration of four years on HYG. ANGL’s duration to worst is 5.55 years with a spread duration of 5.68 years, according to Market Vectors Data.
Chart Courtesy: Market Vectors
Tom Lydon’s clients own HYG.