Popular hybrids best for experienced investors
With the RBA leaving rates on hold once again last week i, it’s fair to expect that that hybrid securities will continue to prove a popular investment with yield-hungry Australians.
Since November 2011, the banks and corporates have issued $18 billion worth of high yielding hybrid securities according to ASIC ii.
Moreover there were approximately 75,000 investors using hybrids in 2013, of which two thirds were self-managed super funds (SMSFs).
“Since the Reserve Bank started cutting the official cash rate in late 2011, hybrid securities have grown in popularity as investors search for fatter yields,” said Ron Hodge, Managing Director, InvestSMART.com.au.
“Hybrids are a relatively sophisticated investment vehicle that enables the banks and other companies to borrow from investors by combining some features of debt – like a fixed interest rate, plus characteristics typically found with shares.
“The trouble is that some hybrid securities make investors take on risks that you’d typically associate with share market investing but deliver little more than bond-like returns.”
Given the explosion of hybrids over the last few years, ASIC has reviewed the selling methods and sales processes used by issuers and are putting some protections in place to safeguard investors.
“Investor education is critical while those distributing these products need also to do the right thing,” said ASIC Commissioner John Price
“We have responded to the increased issuance and popularity of hybrids by working with issuers and their advisers, as gatekeepers, to help improve prospectus disclosure and ensure selling messages are not misleading.”
The bottom line is that hybrids are complex products, and are perhaps more suitable for experienced investors.
Hodge notes, “If you’re relatively new to investing, you’d probably be best served test driving markets via a managed fund that can provide both investment returns, income and the benefits of diversification.
“Managed funds can invest in a literally hundreds of investments across a wide range of asset classes, which is a level of diversification that would be difficult to achieve on your own.”
i http://www.rba.gov.au/media-releases/2014/mr-14-07.html
ii ASIC media release: 13-220MR ASIC continues crackdown on hybrids
Frequently Asked Questions about this Article…
Hybrid securities are investment vehicles that combine features of both debt and equity, offering fixed interest rates like bonds but also characteristics of shares. They have become popular among Australian investors, especially since the Reserve Bank of Australia started cutting the official cash rate in late 2011, as they offer higher yields compared to traditional savings options.
Hybrid securities are considered complex because they involve a mix of debt and equity features, which can expose investors to risks typically associated with the share market while often delivering returns similar to bonds. This complexity makes them more suitable for experienced investors who understand these risks.
Since November 2011, the popularity of hybrid securities has surged, with banks and corporates issuing $18 billion worth of these high-yielding investments. By 2013, approximately 75,000 investors were using hybrids, with two-thirds being self-managed super funds (SMSFs).
ASIC has reviewed the selling methods and sales processes of hybrid securities issuers to ensure investor protection. They are working with issuers and advisers to improve prospectus disclosure and prevent misleading selling messages, emphasizing the importance of investor education.
Hybrid securities are generally more suitable for experienced investors due to their complexity and associated risks. New investors might benefit more from starting with managed funds, which offer diversification and a mix of investment returns and income.
Managed funds can be a great starting point for new investors as they provide diversification across hundreds of investments in various asset classes. This diversification can be challenging to achieve independently, and managed funds offer both investment returns and income.
Investor education is crucial because hybrid securities are complex products that carry risks similar to those in the share market. Understanding these risks and the nature of hybrids can help investors make informed decisions and avoid potential pitfalls.
Investing in hybrid securities involves risks similar to those found in the share market, such as market volatility and potential loss of capital. Despite offering higher yields, they may not always provide returns that justify these risks, making them more suitable for experienced investors.
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