Helen Mason

Now could be a good time for retail investors to reevaluate exposure to hybrids given their attractive valuations despite approaching their call dates, according to Helen Mason, fund manager at Schroders Australia.  

“Now could be a good time to consider selling bank hybrids as they are currently trading above par value, and they are expected to return to par value as they get closer to their call dates. That is something for investors to think about, whether now is the time to sell out and where to go to next,” Ms Mason said. 

“We believe high-quality investment grade Australian credit, issued by Australian financials and corporates are a good option. They can provide reliable returns and offer strong potential to deliver attractive income to investors, sitting somewhere between the growth and defensive buckets in portfolios. 

“Importantly, the Australian public credit market has been a significant source of alpha for institutional investors and now is a good time for retail investors to start thinking about it too, and how credit can be a substitute option for retail bank hybrids ahead of their phasing out in 2032.” 

Under changes introduced by the Australian Prudential Regulation Authority (APRA) in December, Australian banks will no longer be able to raise funding from hybrid securities, which are popular among retail investors. The market for bank hybrids, which are a combination of debt and equity, will be phased out between now and 2032. APRA’s decision is significant, particularly for retail investors who hold a large portion of the $40-billion-plus hybrid market.   

“Importantly, corporate credit has often outperformed retail hybrids over time. Australian financial and corporate credit is possibly the most attractive investment opportunity in markets today and gives you great diversification opportunities,” Ms Mason said. 

“Within this market, investors can gain access to not only international wholesale bank hybrids, but corporate hybrids and senior corporate and financial securities. It has been a long-held view of ours that investors were limiting themselves by just utilising bank hybrids, when access to a diversified pool of high-quality Australian companies has been shown to outperform the retail Tier 1 asset class.” 

According to Mason, Australian investment grade credit index is one of the highest quality in the world, and this is due to the exceptional fundamentals of the corporates that underpin the index with financials, government agencies, infrastructure and utilities sectors comprising large weights. These companies provide investors with stable look-through cash flows, often inflation-protected and generally trade with low levels of volatility. 

“Previously the minimum parcel size in public credit markets has limited retail investor access, but it now presents an opportunity for retail investors through managed funds,” Ms Mason said. 

The Schroder Australian High Yielding Credit Fund invests in corporate and financial credit across sectors, issuers, maturity, ratings grade and capital structure dimensions, including subordinated debt. It aims to deliver returns 2.5 to 3.0 per cent p.a. above the cash rate, but with less risk and volatility than equities. 

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