Fallen Angels: The Year In Review
January 13, 2021
Read Time 4 MIN
Fallen angels1 outperformed the broad high yield2 index by 0.72% in December and by 7.89% in 2020 (14.06% vs 6.17%).3 December was a relatively quiet month in terms of downgrades, but strong from a return perspective (2.63% vs 1.91%)4 as spreads continued to tighten and ended the year slightly lower than where they started.
2020 in Review
2020 was a roller-coaster year for the high yield market. In March, we saw massive spread widening followed by downgrades from severe economic disruptions due to Covid, and the U.S. Federal Reserve (Fed) stepping in to purchase individuals bonds and ETFs, which marked the beginning of a significant spread tightening cycle.
- Fallen angel spreads ended the year below where they started, but experienced significant volatility, reaching 954bps at the widest levels in March
- Top 2020 Sectors: Telecom an Energy contributed over 50% of the 7.89% of outperformance over broad high yield5
- Top 2020 Issuers: New fallen angels contributed 84% of the outperformance over Broad High Yield6
- The top five new fallen angel contributors were Occidental Petroleum (OXY), EQT Corporation (EQT), Kraft Heinz (KHC), Cenovus and Ford – following what we wrote back in August
- Outperformance for the year was primarily explained by security selection, with positive contributions from within each sector
- Allocation effect was also significantly positive, with the overweight to Energy being the biggest contributor7
- Interest rate movements also contributed positively to outperformance. Fallen angels have a longer duration compared to the broader high yield market, on average.8 Historically, interest rate movements have not been a primary driver of long-term outperformance relative to the broader market.
Fallen Angels May Continue to Outperform in 2021
We believe fallen angels can continue to provide outperformance potential versus the broad high yield market, as they have through various credit cycles. Long-term historical returns have been explained by three primary drivers, which can have differing impacts depending on the market environment: a fallen angel technical effect, contrarian sector exposures and higher average credit quality. While 2020 was dominated by the fallen angel technical effect, we believe all three of these drivers have the potential to meaningfully contribute to returns this year. The chart below details five periods where the broad high yield spreads were below the long-term average and that fallen angels have consistently outperformed the broad market in these periods. In the current period, starting late July, fallen angels are already ahead by over 3%.
Fallen Angels Have Outperformed in Tight Spread Environments
Source: ICE Data, VanEck.
| Cumulative Total Return | |||
| Beg Date | End Date | Fallen Angel | Broad HY |
| 12/31/2003 | 11/15/2007 | 30.10 | 30.08 |
| 12/22/2010 | 7/28/2011 | 8.04 | 6.87 |
| 12/7/2012 | 8/5/2015 | 21.35 | 12.73 |
| 8/11/2016 | 3/5/2020 | 30.47 | 23.71 |
| 7/21/2020 | 12/31/2020 | 11.19 | 7.77 |
Source: ICE Data, VanEck.
2020 Overall Statistics
For the first time, the average yield to worst (YTW) of the fallen angel index dipped below 4%. The increase in duration, market value and number of issues is explained by the large number of downgrades that occurred earlier in 2020. Fallen angels are those bonds having been issued with investment-grade status and then downgraded. As a result they typically have longer dated maturity and longer duration, thus duration significantly increased from 5.92 to 6.82.
| Fallen Angel | Broad HY | |||
| 12/31/2019 | 12/31/2020 | 12/31/2019 | 12/31/2020 | |
| Yield to Worst | 5.22 | 3.80 | 5.41 | 4.24 |
| Mod. Dur to Worst | 5.92 | 6.82 | 3.03 | 3.37 |
| Full Market Value ($mn) | 110,451 | 252,730 | 1,242,189 | 1,543,269 |
| No. of Issues | 193 | 328 | 1,775 | 2,030 |
Source: ICE Data, VanEck.
A New Fallen Angel
A new issuer entered the fallen angel index at the end of December: Seagate HDD Cayman – the only Tech related fallen angel in 2020. The total amount of new fallen angels in 2020 was about $165B, with the vast majority coming in April month-end after the first wave of lockdowns in the U.S.
| Month-end Addition | Name | Rating | Sector | % Mkt Value | Price | Face Value |
| December | Seagate HDD Cayman | BB | Technology & Electronics | 1.36 | 110.25 | 3,084 |
Source: ICE Data, VanEck.
No Rising Stars in December
Performance by Sector
Autos joined the fallen angel index in 2020 when Ford was downgraded. Energy and Utility issuers were the other two industries that saw their weights increase. The average spread on Energy sector bonds, which account for 29% of the fallen angel index, tightened significantly from the elevated levels in March and April, and is now lower than the beginning of 2020. Bonds of Telecom and Energy issuers contributed almost 50%9 to the Index outperformance vs broad high yield to the YTD figure.
| Wgt (%) | OAS | Monthly TR % | |||
| 12/31/2019 | 12/31/2020 | 12/31/2019 | 12/31/2020 | 12/31/2020 | |
| Automotive | - | 10.00 | - | 274 | 1.79 |
| Banking | 11.01 | 3.64 | 208 | 215 | 1.23 |
| Basic Industry | 16.83 | 6.94 | 210 | 236 | 1.61 |
| Capital Goods | 2.09 | 3.08 | 282 | 305 | 2.20 |
| Consumer Goods | 7.27 | 12.38 | 192 | 221 | 1.49 |
| Energy | 17.35 | 28.83 | 576 | 393 | 4.46 |
| Financial Services | 0.48 | 0.92 | 528 | 263 | 1.58 |
| Healthcare | 1.46 | 0.48 | 408 | 369 | 1.00 |
| Insurance | 2.00 | 0.42 | 336 | 673 | 0.47 |
| Leisure | 2.03 | 4.85 | 204 | 372 | 1.52 |
| Real Estate | 2.96 | 3.77 | 628 | 511 | 3.19 |
| Retail | 5.99 | 3.55 | 461 | 427 | 3.23 |
| Services | 1.59 | 1.01 | 133 | 232 | 1.11 |
| Technology & Electronics | 10.09 | 4.24 | 200 | 224 | 1.70 |
| Telecommunications | 16.90 | 7.48 | 378 | 272 | 2.58 |
| Transportation | 0.63 | 1.96 | 513 | 336 | 3.77 |
| Utility | 1.30 | 6.45 | 311 | 207 | 1.01 |
| Total | 100 | 100 | 337 | 313 | 2.63 |
Source: ICE Data, VanEck.
Performance by Rating
Throughout 2020, the fallen angel index increased its exposure to higher quality bonds from 77% in the beginning of January to 95% at the end of the year. The increase in higher quality bonds was due to the record number of issuers downgraded as the economy shut down in the early part of the year. As expected, all of the issuers joined the index with BB credit ratings. For the month of December and despite the inclusion of one new fallen angel, there were no significant changes to the overall rating weight. Notably, CCC and lower-rated bonds performed best in the last few months of the year after general optimism with the vaccine announcements, but fallen angels continued to outperform the broader high yield market.
| Wgt (%) | OAS | Monthly TR % | |||
| 12/31/2019 | 12/31/2020 | 12/31/2019 | 12/31/2020 | 12/31/2020 | |
| BB | 76.67 | 94.56 | 241 | 296 | 2.58 |
| B | 16.20 | 3.96 | 433 | 470 | 2.26 |
| CCC | 7.14 | 1.14 | 1150 | 639 | 5.06 |
| CC | 0.15 | 2254 | 25.18 | ||
| C | 0.19 | 2321 | 4.06 | ||
| Total | 100 | 100 | 337 | 313 | 2.63 |
Source: ICE Data, VanEck.
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DISCLOSURES
1 Fallen angels refers to the ICE US Fallen Angel High Yield 10% Constrained Index (H0CF)
2 Broad high yield refers to the BofA US High Yield Index (H0A0), also referred as the broad benchmark.
3 ICE Data as of 12/31/2020
4 ICE Data as of 12/31/2020
5 Factset as of 12/31/2020
6 Factset as of 12/31/2020
7 Factset as of 12/31/2020
8 When interest rates fell, the value of the value of bonds with a longer duration rises more than a bond with a shorter duration.
9 Factset as of 12/31/2020
A fallen angel bond is a bond that was initially given an investment-grade rating but has since been reduced to junk bond status.
High yield bonds may be subject to greater risk of loss of income and principal and are likely to be more sensitive to adverse economic changes than higher rated securities.
Please note that VanEck may offer investments products that invest in the asset class(es) included herein.
This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed in this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.
The information herein represents the opinion of the author(s), but not necessarily those of VanEck, and these opinions may change at any time and from time to time. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any discussion of specific securities/financial instruments mentioned in the commentary is neither an offer to sell nor a recommendation to buy these securities. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only.
ICE BofAML US High Yield Index (H0A0, “Broad HY Index”), formerly known as BofA Merrill Lynch US High Yield Index prior to 10/23/2017, is comprised of below-investment grade corporate bonds (based on an average of various rating agencies) denominated in U.S. dollars.
ICE US Fallen Angel High Yield 10% Constrained Index (H0CF, Index) is a subset of the ICE BofA US High Yield Index and includes securities that were rated investment grade at time of issuance.
ICE Data Indices, LLC and its affiliates (“ICE Data”) indices and related information, the name "ICE Data", and related trademarks, are intellectual property licensed from ICE Data, and may not be copied, used, or distributed without ICE Data's prior written approval. The licensee's products have not been passed on as to their legality or suitability, and are not regulated, issued, endorsed, sold, guaranteed, or promoted by ICE Data. ICE Data MAKES NO WARRANTIES AND BEARS NO LIABILITY WITH RESPECT TO THE INDICES, ANY RELATED INFORMATION, ITS TRADEMARKS, OR THE PRODUCT(S) (INCLUDING WITHOUT LIMITATION, THEIR QUALITY, ACCURACY, SUITABILITY AND/OR COMPLETENESS).
All investing is subject to risk, including the possible loss of the money you invest. Bonds and bond funds will decrease in value as interest rates rise. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
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DISCLOSURES
1 Fallen angels refers to the ICE US Fallen Angel High Yield 10% Constrained Index (H0CF)
2 Broad high yield refers to the BofA US High Yield Index (H0A0), also referred as the broad benchmark.
3 ICE Data as of 12/31/2020
4 ICE Data as of 12/31/2020
5 Factset as of 12/31/2020
6 Factset as of 12/31/2020
7 Factset as of 12/31/2020
8 When interest rates fell, the value of the value of bonds with a longer duration rises more than a bond with a shorter duration.
9 Factset as of 12/31/2020
A fallen angel bond is a bond that was initially given an investment-grade rating but has since been reduced to junk bond status.
High yield bonds may be subject to greater risk of loss of income and principal and are likely to be more sensitive to adverse economic changes than higher rated securities.
Please note that VanEck may offer investments products that invest in the asset class(es) included herein.
This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed in this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.
The information herein represents the opinion of the author(s), but not necessarily those of VanEck, and these opinions may change at any time and from time to time. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any discussion of specific securities/financial instruments mentioned in the commentary is neither an offer to sell nor a recommendation to buy these securities. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only.
ICE BofAML US High Yield Index (H0A0, “Broad HY Index”), formerly known as BofA Merrill Lynch US High Yield Index prior to 10/23/2017, is comprised of below-investment grade corporate bonds (based on an average of various rating agencies) denominated in U.S. dollars.
ICE US Fallen Angel High Yield 10% Constrained Index (H0CF, Index) is a subset of the ICE BofA US High Yield Index and includes securities that were rated investment grade at time of issuance.
ICE Data Indices, LLC and its affiliates (“ICE Data”) indices and related information, the name "ICE Data", and related trademarks, are intellectual property licensed from ICE Data, and may not be copied, used, or distributed without ICE Data's prior written approval. The licensee's products have not been passed on as to their legality or suitability, and are not regulated, issued, endorsed, sold, guaranteed, or promoted by ICE Data. ICE Data MAKES NO WARRANTIES AND BEARS NO LIABILITY WITH RESPECT TO THE INDICES, ANY RELATED INFORMATION, ITS TRADEMARKS, OR THE PRODUCT(S) (INCLUDING WITHOUT LIMITATION, THEIR QUALITY, ACCURACY, SUITABILITY AND/OR COMPLETENESS).
All investing is subject to risk, including the possible loss of the money you invest. Bonds and bond funds will decrease in value as interest rates rise. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.