A ‘hybrid’ security essentially combines elements of debt securities (like bonds) and equity securities (like shares). Hybrids typically pay a high yield either fixed or floating rate until a certain date.
Hybrids do include the possibility or eventuality of conversion into shares, and so they sit somewhere in between bonds and shares with regards to risks and potentially returns.
However, while the current rapidly rising interest rate environment has led to selling in many shares, it has been a boon to the hybrid market. Many investors should now consider whether it is worth adding hybrids to their investment portfolio.
Hybrids are priced to mature on their next call date. Still, their maturity can be extended, or they can be converted into shares depending on whether there are difficult financial circumstances and/or as determined by APRA. This is one of the risks of owning Hybrids.
Using a mathematical formula, the price of listed hybrids can be converted into a yield to the likely next call date. Applying this formula to the Australian market shows that many hybrids outside of the big-four banks are currently yielding 6.5 or even 7 percent per year including franking:
Looking solely on the hybrids of the big four banks, there are many attractive yields being offered as well:
These yields have risen with the lift in interest rates, and so have provided some protection against rising rates to their investors.
In addition to the attractive yields, the prices of these hybrids have been a lot less volatile than the movements in shares across the past twelve months. Suggesting that hybrids have recently offered a better risk adjusted return compared to shares.
Several major financial institutions are also expected to issue new hybrids in the coming months and these new issues are frequently offered at very attractive prices.
Our advisers at TradersCircle and Emerald Financial are working on providing more content and advice services regarding ASX listed hybrids. If this is something you are interested in, please contact us below, at our email: email@example.com, or on 03 8080 5788.