Richard Murphy
A recent survey by Australian Corporate Bond Company (ACBC) at the SMSF Association Conference in February has highlighted confusion over the classification of hybrids.
The survey showed almost half of respondents (47%) classified hybrids as fixed income or were unsure how to classify them.
Richard Murphy, co-founder and CEO of ACBC, said that while hybrids may have some fixed income features, they are not defensive when it comes to shielding portfolios against equity downturns. When equity prices fall, hybrids tend to behave more like equities.
This view is supported by John Likos, Head of Australian Credit Research at Morningstar who recently commented, “The increasingly issuer-friendly terms contained in hybrids suggest they shouldn’t be included in the defensive fixed income part of a portfolio.”
Nearly half of survey respondents (47%) considered regular income the number one priority for their clients for 2016. This was followed by accumulating wealth for retirement (28%). Capital stability was close behind, with almost a quarter of respondents (23%) identifying this as their client’s key priority.
“Given the current environment of low returns and market volatility, it’s no surprise to see investors focusing on regular income and capital stability. Senior bonds, unlike hybrids, have been able to consistently deliver income as well as capital stability in difficult markets” Mr Murphy said.
To help guide investors and advisers, ACBC has developed an educational factsheet on understanding hybrids and how they compare to corporate bonds.