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.”