Australians turn to hybrids seeking higher yields
Australian investors have turned to hybrids as they are seeking higher yields in a low interest rate environment, according to Morningstar.
However, according to the report titled "Hybrid Handbook: Navigating the Australian Hybrid Market", hybrid securities should not be considered as a substitute for traditional fixed income or term deposits, even though they have "equity-like features". Instead, hybrids should be looked at as a separate asset class.
Apart from the higher yields, the other key benefits of hybrids included secondary market volatility and the fact that they would pay a regular distribution while displaying lower price volatility than ordinary shares. Morningstar's study also stressed that hybrids provided an additional opportunity for portfolio diversification.
On the other side, the risks typically associated with hybrids to investors included the issuer deferring on payment obligations as low level of liquidity would hinder the ability to buy or sell it and that the hybrid was not redeemed at the first call date.
Other risks included capital trigger risk where Basel banking regulation would trigger clauses requiring immediate exchange of hybrid securities into ordinary shares.
Additionally, Morningstar believed that the banks would prioritise hybrid distributions should capital levels fall into the capital conservation buffer mandated by the Australian Prudential Regulatory Authority (APRA).
Morningstar Australasia senior credit analyst, John Likos, said: "Hybrids have become the investment of choice for many Australians seeking higher yields in a low interest environment".
"We've produced this independent guide to help investors better understand the key characteristics and risks of these securities, to enable them to make more informed and confident decisions when considering making an investment."
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