Capital notes offer alternative to generate more investment income for clients
Financial advisers seeking alternatives for income-generating investments are turning to capital notes, according to data from Australia’s leading wholesale trading platform AUSIEX.
Capital notes fall into the broad category of hybrid securities, along with convertibles and preference shares. All three have been established and traded for several decades.
They are debt securities that have equity-like features and pay franked dividends, thus their increasing attraction to those investors who like or require income.
Brett Grant, head of product and trading at AUSIEX, said capital notes are a type of unsecured debt a company takes to cover short-term liabilities.
“It is important to note that as the debt is unsecured, capital notes typically pay investors a higher interest rate, as they carry more risk than term deposits. For example, hybrids generally rank behind other creditors if the company fails,” he said.
“This debt is junior to secured notes, though they are monitored by the Australian Securities and Investments Commission (ASIC) and the Australian Prudential [Regulation] Authority (APRA).”
Mr Grant added that while having the backing of well-established institutions, these investments were once considered too complex for most financial advisers’ clients.
“But as the market and investing has become more challenging, there has been increasing interest from a range of investors,” he said.
AUSIEX data shows hybrids recorded the highest traded value in December 2022 since at least 2018, more than double that of the value in the previous year.
“Financial advisers accounted for half of the demand, with much of the remainder being institutional investors,” Mr Grant said.
“Trade volume among financial advisers increased 15.7 per cent over the 2022 calendar year, compared with 2021.
“Across generations, for advised accounts, Gen X showed a significant lift in interest, with the proportion of trades increasing from 31 per cent to 37.7 per cent.”
Capital notes have been issued by a number of organisations, including Commonwealth Bank (ASX: CBA), Macquarie Bank (ASX: MQG), ANZ Bank (ASX: ANZ), Insurance Australia Group (ASX: IAG), Westpac Banking Corporation (ASX: WBC), and National Australia Bank (ASX: NAB).
“Advisers note that capital notes are also a hedge against inflation as the yield increases and interest rates rise. But of course, seek or provide professional financial advice with respect to investors’ individual requirements,” Mr Grant said.
