Eureka Correspondence

Valuing hybrids in a downturn

Can anybody on your team tell me what might happen to hybrid securities like those issued by the big four banks if there were a market reassessment with the All Ords positioning itself at 5000 points? Obviously the equity itself is reduced by say 10%, but what happens to the value of the hybrid?

John Bone

Rosemary Steinfort’s response: The volatility of hybrids as a group has been about half that of shares over the long term. During the GFC hybrids fell heavily but lost only about 50% of what the broader share market did – and some of the downward pressure on prices was due to the illiquidity of hybrids making it harder for investors to liquidate their investments quickly. The downside for hybrids of the banks would be lower than the banks themselves – but that is because of the lower yield paid by the hybrids are considered less risky due to a higher position in the capital structure relative to shares and less upside potential.

Clarifying share recommendations

We bought shares in Xtek after reading a submission in your newsletter. Since then, the share price has dropped and activity in it non-existent. It has disappeared from your recommendations list so we feel left in the lurch and don't know whether to hold or bail out. We would appreciate your thoughts on its current position.

Name withheld

Editor’s response: Sorry about the confusion, but Xtek has never been in Eureka Report's official recommendations list. Rather, Alan Kohler conducted one of his weekly interviews with the company's chief executive at the end of May, which you can find here. The purpose of the weekly interviews is to increase awareness of relatively hidden companies in the market. Each of Eureka Report’s recommendations can be found on the official share recommendations page.

FoFA’s failures

In regards to Alan’s weekend briefing last weekend, it is clear to even good old blind Freddy that a bank is incapable of providing a comprehensive financial advisory service. You only need to look to the failure of accounting practice consolidators to realise that businesses that rely on developing relationships built on trust & integrity cannot be successfully commoditised. They will inevitably fail because the employee planner cannot develop a long-term relationship with his clients. Staff turnover is high due to a variety of reasons, not the least being tough budgets set by the banks.

Future of Financial Advice (FoFA) will never stop fraudulent behaviour driven by greed. Behaviour that was in the case of the Commonwealth Bank affair was allowed to flourish by those in charge of oversight. The biggest conflicted remuneration going on is the fees paid by funds managers to the AFSL license holders. These payments were carved out of FOFA under the previous federal government. These fees ensure these funds appear on the approved investment lists that the planner must adhere to. Apparently they are not even commissions!

How will FoFA stop another 'storm' where the client was so uninformed that they signed every page of the statement of advice and every page of every document they had to sign. That affair was fraud, not conflicted remuneration.

The Banks have been allowed to buy up virtually every insurance company and financial planning group in the country. The personal insurance, banking and investment sector is now looking like our retail sector and this is a bad deal for the consumer. We have a superannuation industry dominated by the ‘big four’ banks and the Industry super funds. The industry funds have also been actively consolidating into fewer and fewer funds. None of this is in the long term interests of the consumer or indeed our country.
Peter Medwin

Our market’s performance in 2013-14

Good morning. I’m interested to know how you have worked a 14.8% return using the All Ordinaries index for the period of 2013-14 in A big financial year for shares. I have the close on June 28, 2013 at 4775 points and the close on June 30, 2014 at 5382 points – a gain of 12.7%.
Trevor Day

David Gilmour’s response: Thanks for your question. I took my data from the closing date of July 1, 2013 until June 30, 2014 to find those numbers (what a difference a day makes!). When the data is based on the closing date of June 28, 2013, the All Ordinaries rises 12.7% with a total return of 19.3% when dividends are reinvested in the index. Thanks for bringing the error to my attention. The article has been adjusted.