Investing "blindly" in fallen angel high yield credits would have yielded better results than traditional high yield investing, according to head of global high yield at Royal London Asset Management Azhar Hussain, who has been selectively adding to recently downgraded names in the energy sector amid the ongoing coronavirus crisis.
Hussain, who noted that investors should "always be selective when buying" and to buy anything blindly is "never a great thing", explained that widespread credit rating downgrades since the start of the year has presented opportunities for the £2.2bn AUM Royal London Global High Yield Bond fund.
He explained: "Historically, the data shows that if you blindly buy fallen angels, you would have probably done better than regular high yield market investing.
"Most of these companies that get downgraded are quite different from the typical companies and structures we invest in. They are usually much larger, they are much bigger capital structures, they can be more complex and they usually have many more avenues of financing.
"We welcome these companies coming down as long as they remain good credits. They are not going to be credits which very quickly cannot survive in a tougher time."
Hussain added that a potential "big problem" for the high yield market is too many fallen angels entering at one time and causing a credit crunch "à la 2008".
However, this was avoided thanks to "rapid" policy action from the US Federal Reserve removing the tail risk and allowing the market "to find its own solutions".
One of the opportunities Hussain has bought is Occidental Petroleum, "a huge energy company whose bonds were trading at recovery value when they came down to the high yield market".
"The company has lots of liquidity, it has lots of non-core assets it can sell, it has lots of things it can do," he explained.
Elsewhere, the manager has selectively added to other energy names, a sector he was "pretty significantly underweight" prior to the crisis, along with the telecom and media sectors which he described as "core" to the strategy.
In contrast, Hussain has sold out of some gaming credits which "rallied markedly" and have returned to their pre-Covid levels, along with cinema credits whose "strong rallies" are "perhaps not reflecting the fact that these credits are not going to go back to the pre-Covid period in terms of earnings for some time".
The Royal London Global High Yield Bond fund, which Hussain co-manages alongside Stephen Tapley, has returned 4.5% and 17.7% over three and five years respectively, compared to an average return of 3.9% and 15% over the same time periods, according to data from FE fundinfo.