SMSFs warned on risk of hybrids

Hybrid securities should not be categorised with investment grade bonds since they are positively correlated with equities and designed to protect banks, says the chief executive of a bond exchange.

Australian Corporate Bond Company (ACBC) chief executive Richard Murphy told SMSF Adviser there is not much difference between hybrid securities and equities in terms of risk.

“I suspect a great number of SMSFs are probably treating them as fixed income, which is not appropriate from an asset allocation point of view,” said Mr Murphy.

“You really want to allocate into assets where one asset isn’t correlated with the other, because otherwise you have all your eggs in one basket when things go pear-shaped for equities.”

Mr Murphy said that unlike investment grade bonds, which are negatively correlated with equities, hybrid securities tend to track the equity markets and therefore do not offer the same diversification.

“When the GFC happened, the corporate bond index went up in value, so in other words, bond prices increased because people moved out of equities in the panic of the GFC and into the safety of bonds.”

While some of the older-style hybrids tend to be more debt-like, all of the new-style ones tend to be much more like equities, particularly with some of the recent regulation imposed on banks regarding capital requirements.

“When equities go south badly, hybrids follow them down because their job is to protect the banks, not to protect your portfolio,” said Mr Murphy.

“So if equities fall 20 per cent to 30 per cent because there’s trouble afoot in the equity market, hybrids would fall as well because that’s them doing the job they were designed for.”

promoted stories

SUBSCRIBE TO THE SMSF ADVISER BULLETIN

Strategy