Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 403

The fascinating bank hybrid journey of the last year

This time last year we were scrambling to figure out how best to explain the hybrid market’s performance. From 2 March 2020 to the close of business on 23 March 2020 the broader market, as represented by Elstree Hybrid Index declined by a material 15.7%. By the month’s end the index had managed to claw its way back such that it was down, over the month, by a relatively pedestrian 6.2%.  

Wow, that was some 12-month period!

On the 12-month anniversary of the biggest drawdown since the GFC, it's an interesting time to reflect.

Most risk markets, hybrid markets included, bottomed on or around 23 March before rallying strongly on coordinated government and central bank intervention. The rally that ensued produced extraordinary return outcomes – we might even go so far as to say ‘ridiculous’ return outcomes.

Over the year to end 31 March 2021 the hybrid market as represented by the Elstree Hybrid Index returned 13.32%. This compares (now) with an expected hybrid market return of cash +3% (i.e. 3%). Investors certainly should not expect those hyper-inflated return outcomes again any time soon. The chart below shows the returns on individual hybrids (vertical axis) and the standard deviation (horizontal axis). We’ve also shown the Elstree Hybrid and All Ordinaries Accumulation indices.

What does this tell us?

  • Almost everything did well but the non-major bank hybrids did best with many producing around 30% returns.
  • Volatility was relatively subdued given the return outcomes. Pretty much everything went up in a straight line.
  • If you produced the same chart but started it at 28 February 2020, you would get different outcomes with hybrids still producing an acceptable return and risk profile with equities displaying more risk and less return.

What were the fascinating days?

  • The hybrid market’s worst day was a -6.1% decline on 23 March 2020. This was the day that the NAB announced that they were converting their maturing NABPB hybrid into shares via a VWAP (Volume Weighted Average Price) agreement with UBS. This ‘option’ is present in almost every hybrid document and it allows the issuer to raise $1-$2 billion of equity capital without the usual complexities. In this instance investors received their $100 (for the note) and then the NAB ‘on sells’ the note to UBS and NAB then issues ordinary shares to UBS. The market erroneously interpreted the cleansing statement issued by NAB to mean that the maturing NABPB holders would not get $100 and instead would receive NAB shares at an estimated 30% premium to the last traded price. Investors sold everything including equities. NABHA fell 12%, AMPPB fell 11% while the broader equity market declined by just under 6%.
  • The hybrid market’s best day was a mere two days later on 25 March 2020 resulting in a 3.8% return. This was the day investors realised they had sold for the wrong reasons and bought back the stocks they had sold. The market had a net gain of 3.9% for that week.

Probably the biggest lesson is that many investors don’t understand the structures, and in a crisis, everyone panics first and thinks later.

 

Campbell Dawson is an Executive Director of Elstree Investment Management, a boutique fixed income fund manager. The Elstree Enhanced Income Fund delivered 18.7% in the 12 months to end March 2021. This article is general information and does not consider the circumstances of any individual investor.

 

  •   14 April 2021
  • 2
  •      
  •   

RELATED ARTICLES

What now for SMSFs and hybrids?

The end of the strong US dollar cycle

Today’s case for floating rate notes

banner

Most viewed in recent weeks

Noel Whittaker’s take on the budget

Marketed as a fix for inequality and housing affordability, the latest budget instead delivers a tangle of tax changes that leave everyday Australians worse off.

Australia has no death duties. Technically.

Australia may not levy formal death duties, but a growing web of tax measures is quietly shaping what wealth passes between generations. Now, the 2026 budget adds another layer.

Welcome to Firstlinks Edition 662 with weekend update

The debate over the budget is increasingly shaped by frustration and perceptions of unfairness, rather than clear-eyed assessment of policy outcomes.

How to minimise tax with a will

Inheritance tax implications in Australia may surprise some, as poor estate planning without proper wills or trusts can lead to costly tax bills and delays for beneficiaries.

Testamentary trusts post-budget: Estate planning, tax reform and the ‘death tax’ debate

Proposed Budget changes to taxation are casting new uncertainty over testamentary trusts, prompting closer scrutiny of estate planning structures and the real implications of reforms still taking shape.

Back to the future - Why indexing CGT is a good idea

A return to indexation of capital gains would be a fairer way to compensate households for the effects of inflation than the current discount. Importantly, it opens the door to future, broader reforms to stop the taxation of inflation.

Latest Updates

Investment strategies

Choose your hedges wisely… and often

A new market regime is exposing the fragility of static hedges. With correlations shifting and safe havens flipping, investors must rethink diversification and adopt more adaptive tools to protect capital.

Investment strategies

Yields take centre stage again

The Australian credit landscape is shifting. Yields are rising, issuance is strong and spreads continue to tighten. Income is re‑emerging as the dominant driver of returns, though pockets of risk may be building beneath the surface.

Investment strategies

The grass is always greener: Rethinking Australian vs global equities

Australia's once‑dominant sharemarket is losing ground as others surge ahead, prompting investors to question home‑bias instincts. Meanwhile, the US market appears attractive. Is it time to revisit your global equity allocation?

Investment strategies

Stop asking if there's a stock market bubble. Ask this instead.

Markets continue to push onwards despite valuations looking stretched by historical standards. Bubble talk is rampant, however investors may be focusing on the wrong thing. The real story sits deeper than the headlines.

Taxation

The GST cannot stop inflation

Raising the GST when inflation jumps sounds clever on paper, until we examine how it may play out in practice. What is pitched as a simple inflation fix can lead to a sharp turn in the wrong direction for prices.

Shares

Why SpaceX is coming to your super fund

SpaceX’s blockbuster debut is grabbing headlines, but the real story for Australian investors is much quieter. Giant listings eventually filter into super funds and ETFs, subtly reshaping portfolios long before most realise.

Taxation

Is the government being honest with us about its business CGT changes?

The government’s assurances on small‑business concessions don’t withstand the scrutiny. Token carve‑outs and a lack of credible rationale for CGT changes may reshape how Australia rewards long‑term value creation. 

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.