Aberdeen warns SMSF trustees on risky hybrids
Aberdeen Asset Management has urged SMSF trustees to be wary of some of the weak bond structures emerging in the market.
Speaking at a lunch in Sydney last week, Aberdeen senior investment manager John Manning said cheap access to capital has seen some of the complex, high risk bonds of 2006 and 2007 brought back to the market by “creative investment bankers”.
Mr Manning said many of the hybrids such as ‘pay-in-kind toggle notes’ that were around in late 2006 and early 2007 have returned under “fancy new names”.
Aberdeen head of Australian fixed income Nick Bishop said these “deeply subordinated instruments being issued by companies offer the same risk profile as equities but offer half the fully franked dividend yield”.
He said the weak bond structures are returning at a time when accessibility to these types of assets is greater than ever before.
Mr Bishop said Aberdeen is concerned there “hasn’t been [a] sufficient level of education” for SMSF trustees to go with this accessibility”.
Mr Manning said SMSF trustees can be vulnerable to these types of structures since they have “no idea what risk they’re taking on board”.
“The key challenge for the investment community today is to make sure you’re getting paid for the risk that you’re assuming,” he said.
“The focus [should be] on understanding the risk, being comfortable with the risk, before you start looking at the price of something.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.