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Thursday, 21 October 2021
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Bank hybrids produced excellent returns in the last year and the biggest lesson from March 2020 is that many investors don’t understand the structures, and in a crisis, they panic first and think later.
The GFC provided asset managers with a source of behavioural data they could only dream of. However, no amount of modelling can capture the full panic that some investors experience.
Hybrids deliver returns comparable with equities over the long term with less volatility, which makes the risk-adjusted return and lack of correlation to equities an attractive characteristic in a diversified portfolio.
Amid the many strategies proposed to overcome Labor's franking policy if adopted, often overlooked is building a portfolio of the right types of bonds and hybrids as an alternative source of income.
While property and equity markets remain expensive by historical standards, yields achievable relative to risk remain strong in the hybrid market, notwithstanding recent upticks in price.
Almost every hybrid has a unique structure, and some of the conversion terms, especially following a ‘loss absorption’ event, are as ugly as a cane toad. Billions have been issued recently as investors search for income.
The increases in margins on Australian listed hybrids are prompting investors to ask whether the returns finally match the risks. Hybrids come in many forms so watch the finer details.
The Bank Bill Swap Rate (BBSW) is an important metric in many markets. It’s used as the benchmark for hybrids, FRNs and billions of dollars of loans and bonds.
With the current low interest rates, many investors are building exposures to hybrids unaware of the risks. Check the warnings of legendary investor, Ben Graham, and consider if hybrids can withstand a downturn.
Demand for bank hybrids paying margins of 3% above the Bank Bill Rate remains strong, although there is little sign that underlying interest rates will increase any time soon.
Until recently, institutional investors did not buy many bank hybrids, leaving issue size and margins subject to retail demand. But retail investors, including SMSFs, no longer have the market to themselves.
The search for yield has driven retail investors into billions of dollars of hybrids that could not be sold to wholesale investors at these levels. Is the full picture being told to the retail market?
The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?
We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.
The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?
Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.
With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.
It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.